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PaperclipPerfector  1yr ago (text post)   26880 thread views

Culture War Roundup for the week of September 4, 2023

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When I think of a bank I think of a company that makes money either by lending money or by investing and providing other financial services.

And this is indeed what Airlines do. They sell credit services and benefits directly and administer their own mini-financial system as a main activity.

Transportation is not just a secondary activity, it's actually a loss leader. They consistentlyt lose money on operating plane trips to the tune of a few cents per seat and the disclosures we got during covid's loan season show the loyalty programs are worth more than the total market capitalization of the airlines which implies the transportation sides of the business have negative value.

For example if a bank offers a free toaster to anyone who opens a savings account that doesn't make KitchenAid a bank.

But what if KitchenAid started selling free toaster vouchers to banks for more than their market price? What if financial instruments started getting valued in those vouchers? What if there was an exchange rate for different voucher types? What if this was the main way they make any money?

The real magic here is in the fact they sell miles from their loyalty programs to other companies (like AA to Hertz) so they get the incentive benefits. These are sold at a markup, and the customer pays back the balance by flying. Given these miles are printed from nothing, they look very much like loans. Actually it's not quite from nothing, it's from the future expectation of the ability to fly, which is not really that different from the future expectation to redeem your money from a fractional reserve bank.

This makes the airline a sort of central bank of their own service backed currency that can, and does, adjust the value by controlling the supply and redeem rate. And importantly, this currency isn't taxed so it's possible to create weird tax free financial instruments using these, in a way that's really not dissimilar to how cryptocurrencies work today.

The real magic here is in the fact they sell miles from their loyalty programs to other companies (like AA to Hertz) so they get the incentive benefits. These are sold at a markup

I think that's a smart evolution of the business, although I wouldn't say there's any particular magic in this step either. This still falls under the universal logic of IOU issuance: anyone can issue their own IOUs (printed from nothing) and decide both what it takes to get one and what the redemption value will be.

I guess what moves it to feel more 'bank-like' is that the airlines take tracking accounts in their database very seriously, compared to less serious bearer punch-cards for free Subway sandwiches or whatever. And flights are more universally desirable, compared to more subjective businesses. Maybe I will use Hertz instead of Avis if it's giving me $X towards my next flight on my usual airline, but for some reason if they were partnered with Mcdonalds reward points, it would take a lot more than $X to move the needle.

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