AA in talks about preferring Citigroup over Barclays

American Airlines is in talks to Citigroup its exclusive credit card partner, which replaces the competing issuer Barclays from a partnership that dates back to the airline's acquisition of US Airways in 2013, people familiar with the negotiations said.

According to people familiar with the card, American has been working with banks and card networks for months on a new long-term agreement aimed at consolidating its business under a single issuer and increasing revenue from its loyalty program.

Talks are ongoing and the timing of an agreement, which requires regulatory approval, is unknown, said the people, who asked not to be identified and said the process was confidential.

Banks' co-branding agreements with airlines, retailers and hotel chains are some of the most hotly contested negotiations in the industry. While they secure the issuing bank millions of loyal customers who spend billions of dollars annually, the details of the agreements can make a big difference in how profitable the arrangement is for both sides.

Big brands have been negotiating harder in recent years, demanding a bigger share of interest and fee revenue, for example. Meanwhile, banks have been pulling back or getting out of the business altogether as rising credit card losses, tight scrutiny from the Consumer Financial Protection Bureau and higher capital costs have led to thin margins.

Airlines rely on card programs to stay afloat. They earn billions of dollars each year from banks in exchange for miles that customers earn when they use their cards. These partnerships have been critical during the pandemic, when demand for travel dried up but consumers continued to spend and earn miles with their cards. Airlines have said that growth in card spending has far outpaced that of passenger revenue in recent years.

Although American claims to have the largest loyalty program, it has been delta there, which received nearly $7 billion in payments from its American Express credit card partnership last year, compared to $5.2 billion for American.

“We continue to work with all of our partners, including our co-branded credit card partners, to explore ways to enhance the products and services we offer our mutual customers and to add even more value to the AAdvantage program,” American said in a statement.

It is still possible that objections from U.S. regulators, including the Transportation Department, could further delay or even derail a deal between American Airlines and Citigroup, but the current agreement, which also includes Barclays, would remain in place, a person familiar with the matter said.

If the deal between American and Citigroup goes through, it would be the end of an unusual partnership in the credit card world.

Most brands agree on a single issuer, but when American merged with US Airways in 2013, the company kept longtime issuer Citigroup on board and brought on board US Airways' card partner Barclays.

American renewed both partnerships in 2016, giving each bank specific channels to market its cards. Citi was allowed to promote its cards online, through direct mail and in airport lounges, while Barclays was limited to advertising on board airplanes.

When the business relationship came up for renewal again last year, Citigroup had a good chance of prevailing over the smaller Barclays.

Citigroup, led by CEO Jane Fraser since 2021, has the more profitable side of the AA business; its clients tend to spend much more and have lower default rates than Barclays clients, one of the people said.

Any new deal is likely to last seven to 10 years, which would give Citigroup time to recoup the costs of transferring the Barclays clients and other investments, the person said. Banks typically make the most money from such agreements in the second half of the contracts.

With this and other major partnerships, Fraser has pushed Citigroup to set bigger goals and improve the profitability of its credit card business, people familiar with the deal said.

“We are always actively working with our partners, including American Airlines, to look for opportunities to jointly enhance our customers' products and create shared value and growth,” a Citigroup spokesperson told CNBC.

Meanwhile, Barclays executives told investors earlier this year that they wanted to diversify their co-branded card portfolio beyond airlines, including through additional partnerships with retailers and technology companies.

Barclays declined to comment for this article.