At a certain size, every business becomes a bank - stable businesses usually get more marginal return from optimizing their capital structure than actual product development.
"Directly"? Isn't the point that they get to invest the money their customers add to their cards, for whatever time Starbucks hold it? That some customers also fail to redeem the balance is for them a bonus, but not what the "Starbucks is a bank" comment addresses.
They're definitely making money: You pay them the full amount of the gift card upfront, in exchange for coffee later. That's an interest-free loan to Starbucks, and these have a monetary value these days!
> They "make" money when you leave a balance on the card.
In many US states, the money interestingly goes to the state in the end when unused, under a common law doctrine that doesn't exist in many other countries:
In that case, there is no breakage income for the gift card issuer, but the interest free loan, together with people's tendency to spend higher total amounts at the same merchant when using gift cards, still makes them an amazing deal to the issuer.
I suspect that there's also a non-negligible benefit being exploited in the form of differences in subjective value between gifter and giftee: In a nutshell, the gifter spends more money than they normally would at a store they frequent, or viewed from the giftee's perspective, they spend "money" at a company they normally wouldn't.
As someone who has studied financial crashes extensively, I agree with you but worry that we lack the regulations. All these bank-ish companies offering credit cards are having impacts on the money supply (every loan they issue becomes an asset somewhere), and at some point their interconnections with the financial system are going to become a risk. I assume most to all fund their loans with money market borrowing, for example.
Then there's the broader question of whether this is good for productivity. If every company is a financial company, who actually makes tangible stuff?
When you triple the money supply every couple years what's a few extra trillion here and there?
/s
Hyperinflation is coming, the kind that will be THE central issues for everyones life for awhile. When it happens it won't be these guys fault. I would not blame airlines and home Depot credit cards for the coming hyperinflation, just a symptom of its approach.
What makes you think hyperinflation is coming? If anything, inflation seems to have peaked and is now starting to fall. The only way I can see hyperinflation happening is if there’s another major conflict, climate change causes some major simultaneous disasters, or some kind of black swan event like another pandemic. Of course, individual countries might see hyperinflation if they’re mismanaged (e.g Argentina right now) but I can’t see it happening globally except in the cases listed above.
> If anything, inflation seems to have peaked and is now starting to fall.
Before folks make comments about currency still inflating (gerund), let us stipulate that the noun "Inflation" is a positive rate and the rate has recently decreased. Let us all be thankful that there exists some amount of inflation which in a broad sense reflects a growing and dynamic world (how closely remains to be seen) as opposed to deflation.
How does hyperinflation even work in a country like the United States, in an age like ours?
If you needed a wheelbarrow of cash to buy break at the bakery, it was still true that there was a tiny downward pressure from the baker in that the bread would eventually rot, so he might as well sell it now if they were just shy of the asking price.
If everyone's buying household goods off of Amazon, their pricing algorithm will never be even that much forgiving.
When it last happened here, many workers were still being paid in cash as soon as the timeclock whistle went off on Friday. Now everything's direct deposit, but not necessarily instantaneous. At my last job, the funds were released at midnight that payday, but with the current job for some reason they're not released until the morning (business open, I imagine).
Are people going to starve, because they have the wrong bank and the money's not there for several hours before everyone else's and it has lost too much value?
What do you mean when you say these companies are offering credit cards? Aren't those cards still managed by Visa, Mastercard, AMEX, or Discover? My understanding is that they're just running the rewards system and putting their name on the card.
Visa and Mastercard just operate the network, they do not control the funds or take on any credit risk. Amex and Discover do operate as lenders, and also operate the network.
Right, but what's the risk to the financial system paulusthe was talking about above in an airline partnering with Chase and Mastercard to to offer a credit card? The lender in all cases isn't going to be the airline, right?
Here we go! What’s next on the “X is a bank” bingo card?
Here’s what you all get wrong about this: if I can’t withdraw, it’s not a bank. Points are just prepaid assets and services that you may or may not be able to ever receive. Bank money does not simply “expire” (it can be used for fees however)
It's marketing. The dumber and more obnoxious something is, the better it is, because people talk about it. Just look at your own comment - as much as you dislike the name, it's you who brought up X/Twitter into the conversation, reminding us about the brand at this time and place. The name is working as intended.
It's a shorthand way of saying 'industry X has become completely financialiized' ie it makes more money from financial shenanigans than providing the product or service recorded on it's business registration.
This understates things, perhaps, as it's unclear whether it captures the financialization of non-finance sectors. (e.g. auto leasing, and what the article in the OP describes.)
Needless to say, this is historically unusual. And you don't need to go very far back in time to find a period where manufacturing was 25% of GDP and FIRE just 10%.
Real estate has ballooned everywhere and I wonder what the real GDP growth is without it, since it should be a basic service everyone gets and the real value offered in many cases doesn't contribute anything to actual progress.
"Just a bank" doesn't fly airplanes. It may own them, but it doesn't fly them. "Just a bank" doesn't sell tickets. Doesn't have a department that finds lost luggage. Etc.
But "airlines are financialized now" doesn't capture eyeballs in the same way.
> "Just a bank" doesn't fly airplanes. It may own them, but it doesn't fly them.
I don't know. Big companies sometimes do silly stuff - even if this day it's mostly outsourced to marketing agencies. It wouldn't surprise me to learn that some bank somewhere is operating a de-facto airline for some reason that somehow makes them money...
The banks either did this themselves or had a company that did it for them. They physically flew checks to the city of the bank they were written on, because flying the plane was cheaper than one day's interest on a billion dollars worth of checks.
This stopped, IIRC, back in the 1990s, once electronic settlement got fast enough.
It may be used as a shorthand for saying that, but it is completely wrong and lazy. Yes these companies are doing some advanced funding and rewards stuff. No that doesn't make you a bank.
"What is a bank?
A bank is a financial institution that is licensed to accept checking and
savings deposits and make loans. Banks also provide related services such as
individual retirement accounts (IRAs), certificates of deposit (CDs),
currency exchange, and safe deposit boxes.
There are several types of banks including retail banks, commercial or
corporate banks, and investment banks."
Notice how none of that is to do with how much money is made from financial shenanigans vs products and also there is no mention of running loyalty programs etc.
Every time there is one of these articles ("Starbucks is just a bank" was another recent offender) it's worth actually referring to the definition of a bank and reminding yourself that unless the article is in The Economist, the FT or the WSJ, the journalist themselves probably has absolutely no idea what a bank is, or does.
What about the term “airline”? You’d be surprised how well it describes what an airline does.
Yes big companies have big financial and treasury functions. Maybe that’s surprising to some folks, but not to anyone who’s actually worked in any kind of industry. Trying to fund your activities is one of the most important parts of any business and companies who get really good at that even sometimes find ingenious ways to make it generative of PNL in and of inself. That doesn’t make them banks or financial institutions.
My favourite example was one a friend told me that he had learned at business school doing an MBA. They did a study on Bailey’s Irish Cream (the liqueur). It came about apparently because there were big government subsidies to support dairy farmers and support Irish whiskey producers. So the farmers and distilleries where producing far more than they could sell in order to collect the subsidies. The genius inventor of Bailey’s came up with the business idea of getting the producers of cream and whiskey to pay him to take their excess inventory which he then turned into the liqueur which he sold for a profit. So he had a manufacturing business where he was getting paid by every part of his own supply chain.
No they are not central banks. Central banks issue a currency and sovereign debt on behalf of some nation and are generally responsible for the financial regulation, fiscal and monetary policy and financial stability of that sovereign nation.
That really is nothing whatsoever to do with what an airline does.
> Another London-based analyst said: “[Porsche] is a hedge fund investing in just one stock [Volkswagen].”[0]
> Because of its heavy reliance on Volkswagen's manufacturing capabilities, Porsche knew it had to increase its control [of Volkswagen] to mitigate the risk of its production being affected. Porsche used debt to start buying Volkswagen shares on the open market. [1]
> All of the options-trading Porsche takes part in relates to its stake in VW, which it has built up from scratch over two years. Porsche used the options to hedge against the likelihood of VW’s shares rising after its interest was made public: they did, from about €40 to almost €180. [0]
They wanted to buy a chunk of VW. After they started doing so, they hedged against the stock price so that they wouldn't get screwed if the price of VW popped. Then the price of VW popped, and their options paid out big time. That doesn't make them a hedge fund, it just make them competent (and somewhat lucky).
> In short, SkyMiles is no longer a frequent-flier program; it’s a big-spender program.
This is probably how frequent-flier programs should have been run in the first place. Airline don't care that you fly alot, they care that you are a profitable customer.
That means business customers and the wealthy will still be their main clients. This just means they lose the churners and the price sensitive bargain hunters, which almost every airline would be happy to trade away for more business customers.
It's a win for the airline as they keep their core customers happy as their rewards won't change and they'll lose the unprofitable customers who used their rewards programs alot without spending much.
> A 2020 analysis by the Financial Times found that Wall Street lenders valued the major airlines’ mileage programs more highly than the airlines themselves. United’s MileagePlus program, for example, was valued at $22 billion, while the company’s market cap at the time was only $10.6 billion.
This looks alot like car companies whose leasing arms became more profitable than their manufacturing arms for part of the 2000s.
But wallstreet loves companies that they can easily value and this "conglomerate" style business has been out of favour for a while now.
Sooner or later some airlines will spin out their rewards business into a separate company to get the maximum valuation from it. Just like how deregulation lead to the consolidation of airlines, I wouldn't be surprised to see only a couple of rewards programs that every airline uses in a decade.
As usual PE will be the winner. I'd bet Blackstone or Apollo will roll up multiple programs into one or two uber rewards/credit card programs that are spun out into public companies. VISA and Mastercard won't care who owns them. As long as it drives more credit card usage, they'll be on board.
> deregulation lead to the consolidation of airlines
Explain. I see a handful of identical mega corps with a government protected monopoly (regulations + access to airports). Hasn't regulation increased consolidation to share the cost of compliance?
Like the pork barrel shops in the airport, why is this a private business at all?
I presume they are referring to the airline deregulation act of 1978. There used to be dozens of regional airlines whereas now we notably have 3-4 giant corporations after decades of aggressive mergers and acquisitions.
You’d be surprised but there are still regional airlines. This is because a company like delta franchises some routes basically. You might go on a delta flight and ride on a delta plane, but the operating company is some almost unheard of regional one.
I’d guess also you wouldn't have to handle the maintenance end of these smaller planes eg. your bombardiers and what have you if you’ve spun off all those flights
GP is referring to the deregulation of the late 1970s. Before that, there were a large number of smaller regional airlines in the US, that have since mostly disappeared.
>I see a handful of identical mega corps with a government protected monopoly (regulations + access to airports)
I see the opposite: new, brightly-colored airlines seem to pop up every year, each offering substantially the same thing: sub-$100 direct tickets to Florida (and probably other) destinations from low- and mid-tier airports. And they're all catering to the people who these rewards programs are shedding.
There is an opportunity cost to letting that money sit and not work, and therefore companies trade use of money now for a gain later (lending money or investing).
The more successful, the larger the pile of money and more likely to look bankish.
Due to technology, the old use case of banks is mostly obviated. There is no technical reason everyone should not just have an electronic money account at the Fed itself for receiving and sending money. And earn the federal funds rate directly rather than have it go through a middleman who is basically just operating a database.
And lending does not have much to do with receiving people’s cash deposits.
>There is no technical reason everyone should not just have an electronic money account at the Fed itself for receiving and sending money.
Yet you complete leave out the non-technical reason why that's a terrible idea.
Systemic Single-Point of Failure, extreme vulnerability political exploitation, no robustness or process/partition based discorrelation to stave off or slow down financial contagion.
Robustness is entropic. It uses more energy, but gains in it's ability to remain up in the face of a myriad of quantifiable stimuli instead of falling apart at the slightest touch.
All eggs in one basket is a bad idea. No one makes a good enough basket.
>That means business customers and the wealthy will still be their main clients.
I think you're grossly overestimating the fallout from this. I am the aforementioned business customer. Literally the only way you'd ever hit the dollar amounts they're looking for is flying multiple times across the Atlantic paying full fare business class - which I don't do. But I do fly multiple times a month across the continental US. Previously I would book Delta regardless of price for both business and personal travel due to status. They've made it basically unobtainable unless you're paying full fare first class on every flight AND booking your cars and hotel through them.
Going forward I'll just book the cheapest flight available and drop their card. They will be losing at minimum 10s of thousands a year in profit from my travel and card spend alone.
Merchant credit card fees are at most 3%. I doubt airlines pocket a big portion of their branded cards’ fees as profit, and I would bet they get less than even 1%. The vast majority of the fee probably goes to the banks and card networks.
Even assuming 1%, for an airline to lose $10,000 in profit, you would have to be spending $10,000 / 0.01 = $1M per year on that credit card.
And if you are spending a minimum of $1M on your credit card per year, I doubt you are spending your time optimizing “miles” and “points”.
I assume there are lots of smart people working at airlines that can work out which of their policies earn and lose money, especially now that all the competition is minimal except on the most popular routes.
I imagine they meant the airline as a whole is losing out on the $10s of thousands due to lost loyalty resulting from removing convenience. Not just the 1%, but the whole spend is lost.
In that case, airlines have sub 5% profit margins, so $10,000 / 0.05 = $200k spend on flights before the airline comes close to earning $10k in profit.
> especially now that all the competition is minimal except on the most popular routes.
I guess airlines are betting sufficient passengers have no better option, and I would bet that too. I cannot remember the last time I got to pick an airline without heavily inconveniencing myself and wasting tons of hours with extra stops. Even a busy airport like Newark, you are basically flying United for 90% of destinations if you want to get there in the shortest amount of time with the fewest stops.
You're generalizing to the overall population, but "tw04" already said he was leaving the airline, so I guess he's determined that alternatives do exist and aren't that inconvenient.
True but moreso than your average business, airlines are dependent on the revenues from the customers at the margins. In the short term, the plane needs to fly whether it's full or not. Even the lowest fare customer brings in more revenues than the added costs of flying them. It's the fixed costs that need to be spread across a plane full of passengers in order to make it all profitable.
An airline like Delta will adjust but there will be pain for them in the short term and pain for customers in the medium and long term with fewer, more expensive flights. All of this assumes these changes actually lead to customers changing their behavior rather than simply saying they will.
Huh? Citation? Delta's profit margin last quarter was 12%, and that's a horrible way to calculate per-ticket profit. When I'm spending $1200 on a ticket to fly 500 miles round trip on a flight that's packed, they're making a LOT more than 12% on that ticket.
Did you actually bother to verify those links? They're wildly inaccurate. It claims Delta is making $50B/quarter??? They make roughly $13B/quarter. Your very first link claims Delta's profit margin 6/20/23 is 5.36% - it was 11.72% per their earnings report. 12/31/22 - claims 2.61%, it was 6.17%. Garbage in, garbage out.
And again, that doesn't address the fact their net profit margin has literally 0 relation to their profit margin on MY TICKET which is CONSIDERABLY higher than 11.72% on average.
And page 63/64, it seems like Macrotrends is using “net income/loss” row and the “total operating income” row, and Google is also using the same, so not sure why the quarterly figures are different. Macrotrends does look erroneous here.
>And again, that doesn't address the fact their net profit margin has literally 0 relation to their profit margin on MY TICKET which is CONSIDERABLY higher than 11.72% on average.
Yes, the delta bosses are not considering the profit margin from your specific flights, but assuming the vast majority of their business is flights where their airline miles come into play, then I figured it is a good assumption that, on average, losing a flight costs them the around the same profit margin.
Of course it is possible they lose so many flights that it cuts into their fixed costs, but I assume they are smart enough to make those calculations.
The allocation of profits down to specific activities depends on the allocation of revenues and expenses amongst activities, and all such allocations are inherently arbitrary. They depend on the stories we tell.
I worked with accounting enough to know that it is unable to provide a proper analytical framework for social or economic problems. Or, as Lenin put it, "For practical work, we need to have figures ... But we will defer the verification of the accuracy of the figures, the estimated percentage errors, etc., to a later period.”
The macrotrends graphs are clearly labeled TTM (trailing twelve months), and seem accurate to me cross-checking just a few Delta measures against published financials.
>Even assuming 1%, for an airline to lose $10,000 in profit, you would have to be spending $10,000 / 0.01 = $1M per year on that credit card.
I think you missed the part where they're losing ALL of my business, including dozens of flights a year.
>I assume there are lots of smart people working at airlines that can work out which of their policies earn and lose money, especially now that all the competition is minimal except on the most popular routes.
I assume they think customers with lots of miles banked won't go through the effort of dropping them entirely. I think they're wrong.
When you're losing customers that have million miler+ status, you've made a pretty poor decision.
I guess we will have to let it play out and see. I’ll take the bet that the same airlines that exist today will be there earning the same measly profit margins in 10 years (except JetBlue, which may not be around).
10 years ago there was USAirways and Continental, and Northwest a little before that. Reduced competition buoys the remaining survivors, but the history of bankruptcies in the industry certainly lends quite a bit of doubt towards your assumption.
The assumption is that as they become fewer, the ones that remain gain staying power. Which is why I excepted JetBlue since they could get sold or fail, I think they are hoping their Spirit purchase goes through.
Crazy to think JetBlue wanting Spirit. I remember when JetBlue started, their goal was to provide a better experience than all the other airlines. It is really a cutthroat business. Virgin Airlines had to be folded into Alaska too.
I think in many cases they are just buying routes/gates. If the airports are maxed out in gates how is the company supposed to grow? And a company that doesn’t grow is a “bad” company, or at least management doesn’t get paid as well for high profitability/low growth it seems
> I assume they think customers with lots of miles banked won't go through the effort of dropping them entirely. I think they're wrong.
I agree with you on this. Nobody who flew Delta did it for the value of SkyPesos anyway. The airline miles on Delta have historically had the lowest value among US major carriers and that hasn't gotten any better, so frankly I have no issue giving up my miles. I flew Delta for better hard product and a better set of co-brand + FF perks. By changing the latter, the difference on the former is mostly ameliorated, and the miles are basically meaningless. At most a skypeso is worth maybe 1 cent. A million skypesos is only worth $1k in EV, and that's being generous. A one-time cost of $1k that isn't even a fully realized loss (I can always use the miles later without seeking status) is nothing compared to the betrayal of the program changes.
Mostly agreed, but still ... I used to fly United/American from PHL to LHR all the time because .. well, its a hub city and I lived there and they were the best deals and had convenient departure times for the transatlantic crossing.
Then I moved to New Mexico, and found that Delta was the obvious choice for getting to London from here. And OMFG ... the difference in the product was just spectacular. Seats. Food. Movies. Uniforms. Air quality (not kidding). Probably will still use them when I do this journey.
Domestic flights it's a big difference, but for international flights if you're in Polaris at the front of the bus, United is actually better than Delta, although the United food is pretty horrid even in Polaris. The best news though is with United you can fly Turkish Airlines, Lufthansa, or Singapore Airlines on United. Singapore Airlines has the best business class hard product in the world. United and their partners also heavily operate 787s, which are great for noise and air quality.
United domestic routes are disgusting though. Most of the planes are falling apart CRJs without IFE and WiFi, and if they do have WiFi they charge you for it, and the domestic United staffers are not good. I would put United service quality on-par with Spirit or Frontier. Easily the worst in the big 3.
That said, I'd still rather develop status on United, take directs, and then fly Polaris full-fare or Singapore Airlines biz class for my personal / international trips now that Delta has made these changes to the medallion program.
> I think you're grossly overestimating the fallout from this.
Really, I think if anything I might be underestimating the fallout from this in that I don't see it being an issue at all and I think most airlines will follow with the same changes in the future.
SkyMiles MQDs (flight spend, basically) is only 12K/yr for Platinum and 20K/yr for Diamond now, rising to 18K/yr and 35K/yr next year. IMO, the current thresholds, despite being higher than last year, are still too low, resulting in over-crowded lounges and difficult upgrades for their most frequent fliers.
Even next year's thresholds are not that high if you're crossing the continental US multiple times per month and are surely less than the flying you're doing on Delta if the loss of your business represents "10s of thousands a year in profit".
Delta's gross margin percentage is roughly 25%. For them to lose just 2 10 thousands in profit on you, you'd be spending $80K with them and doing so would continue to easily qualify you for Diamond, whereupon you'd get more reliable upgrades and service from them due to fewer people making Diamond each year.
I'm a little torn. I've never had a problem with spend, but there have been years where I didn't hit my MQMs, and just to make status, I'd fly a trans-pacific. It's giant waste for everyone involved, so I'm glad to not have to do that anymore.
I can spend $35k on flights, but I can also fly private for about the same amount, excluding most trans-oceanic. So I'm not sure what I'm going to do about next year. I'm not sure if it's really worth it. It's a weird calculus. To hit the number, it's basically buying a bunch of F/J fares. If I'm already doing that, I don't care about upgrades.
Since I lost all my status during COVID I changed my approach: no frequent flyer programs, far fewer flights, and only ever book first class.
No more worrying about upgrades, middle seats, air-ragers, and all it took was a little more money.
Of course now sometimes I fly on airlines I’ve never heard of whereas previously, I had taken exclusively American for my last 200 or so legs. I think the effects of shaking up these programs will be to make consumers like me much, much less brand sensitive.
That's the nature of financialized business, isn't it? Since they're only gaming the numbers, there isn't anything of substance happening when they spin out rewards this year, and reacquire it the next.
Keeping in mind this was really made for business flyers who enjoy the benefits of the miles personally for a ticket paid by the employer. I guess the switch creates an incentive for those travellers to go for the more expensive flight, not sure how that will go with employers.
To be honest the whole approach always felt like some form of corruption/kick back to me. You give an incentive to the employee that is dissociated from the interest of their employer.
> You give an incentive to the employee that is dissociated from the interest of their employer.
This is mitigated by the employer setting rates, per-diem, rules on what seats you can purchase, etc. and the employer can't use the points from the frequent flyer program anyway. If there's, say, a $50 fare difference and that causes an employee to choose a more expensive flight (because the comparable flights are comparable) because they get points it's fine and basically an added benefit. In consulting for example that's a stated benefit in employee handbooks.
Of course that's not to say employees of companies can't go against the interest of their employer here, but it's up to the employer to set guidelines and for the employee to follow them.
>and the employer can't use the points from the frequent flyer program anyway
This isn't always true. Some employers insist you book through their internal travel department or use their corporate FF accounts, which kick all the mileage and hotel night benefits to them. It's not common, fortunately, but it does happen.
Some of those companies have discovered that those travel departments are a profit center and so they can make more money by booking the most expensive economy seat.
Yep I was just going to say I'm flying and staying in a hotel for a conference next month and although I have loyalty programs with the airline and the hotel I am getting zip for those because I had to book through my employer's travel system.
As someone who has employed many people that need to fly a lot I encourage it. Frequent travel can lead to quick burnout because of the constant stress of being in an unfamiliar place and interfacing with people you don’t know. It’s important to add as much consistency as possible to these experiences. So airlines and hotels bring the same help a lot. You don’t have to think about it and the subconscious mind is not at stress about it. You can focus on your work.
There’s indirect benefits to the business as well since they’ll be first to be put on a flight after cancellations, can get guaranteed lodging in areas that sell out often, and can use their points to upgrade making their trip nicer.
So it’s unwise to chase that as an employer. Let them get points and be comfortable and use them to take the family somewhere.
Exactly - traveling for work can be fun for a year or two, but once the novelty wears off it's just tiring and stressful. Having preferred status with airlines and hotels makes things much more bearable, and all the miles that you rack up can be spent on the occasional trip with your partner, who has to endure you being away from home so often.
Even as much as knowing there will be a bottle of water in your room or what type of meals will be served on your flight make a huge difference. It’s one less thing to think about. There’s a lot of these types of things and being a regular is important. I’m grateful I did my turn of it when SPG was still a thing. Damn they treated us well.
> the constant stress of being in an unfamiliar place
Is this a thing for most people?
Being in an unfamiliar place is one of my greatest joys. I am never more relaxed than my first day in a new city where I know absolutely nothing, and turning each new corner is a revelation.
Many government-type travelers are obligated to go with the cheapest airfare that’s reasonable. I know folks who take 5:30am Delta flights so they can get loyalty benefits while obeying those rules, but these new spending levels makes gaining status that way impractical.
I've been a United "Global Services" customer for years. How to you reach this level? Spend! The threshold--which they don't publish--is around $75K/year spend gets you into it, adjusted a bit for region and VIPs.
>This is probably how frequent-flier programs should have been run in the first place. Airline don't care that you fly alot, they care that you are a profitable customer.
Wow, okay, big jump here buddy. What happened to being profitable and actually committed to offering a core competent service to customers?
Airlines are sub 5% profit margin businesses, with huge risk factors.
As the joke goes, “how do you become a millionaire? Start with a billion dollars and buy an airline”.
It is only recently the airline business has had steady positive years, due to consolidation, and even then, COVID hit and almost wiped them out were they not bailed out.
Source that they are they ignoring their core competency?
Modifying a rewards programs should require a very miniscule portion of ann airline’s available labor hours, and aligning rewards to be proportionate to profitability seems like a common sense business move.
5% margins? Becoming banks? Scarce innovation in the space? Lack of cleanliness on airplanes? How depressed every other attendant seems to be these days? The safety issues we’re seeing with counterfeit parts?
That they should spend more money and lower profit margins even more? Or that they should increase prices so that they can spend more money to improve the things you listed?
Surely, airline employees are more knowledgeable about how much customers are willing to pay than non airline employees.
Banks are the convergent evolutionary endstate of business, much like crabs are observed to be somewhat of a hobby of Nature in terms of the end state of evolution of many crustacean species. Or the capacity to send email is the evolutionary end state of software. Or politics is the end state of most fotms of online rhetorical discourse.
There is one step, and it is bank (Past a particular threshold).
They should be broken up to increase competition. European (and asian) airlines provide better service at lower cost. The US airlines get bailed out every 10 years and so there is no incentive for them to improve their companies at all.
Yes, often. It has been the same experience (satisfactory), except some have newer planes. Avoid buying the lowest tier pricing (stick to economy, or whatever has free carry on and lets you pick a seat).
I end up paying roughly $50 per hour of flight plus or minus, and it’s been consistent for my adult life (15+ years). Which is surprising considering inflation.
The only problems I have with flying are TSA and airport runway congestion itself.
If you're flying at all, it's likely you are going to be spending some amount of money. In reality, it would be wildly unlikely that a person could afford a $200 ticket and not a $300 one with proper planning.
It's really about the whole expereince. Once I'm on the airplane, it's usually pretty OK. The security anal exam and general airport experience of modern-day air travel is what makes it unpleasant and is largely not the airlines' doing.
But yeah I agree, if it's less than 6 hours I'll almost always just drive.
The points business is already being separated from the airlines; some of the “best” travel cards you can get like Chase Sapphire are not cobranded with one airline, but use a more generic points system that can convert to miles/points in many loyalty programs.
> deregulation lead to the consolidation of airlines
Assuming you're talking about the 1978 deregulation, I don't think that's the cause. Starting around about the same time (maybe under Reagan?) the US basically stopped enforcing the anti-trust laws that are on the books. This has led to mergers across the board, not just for the airlines.
some airlines have already done this, having fully owned subsidiaries. consider Lufthansa and their "Miles and More" subsidiary.
that said, I doubt airlines will ever fully relinquish control over their loyalty programs - they are too critical to the core business and offer a 'secret sauce' of differentiation to what is an otherwise commoditized product (i.e. flying from point A to B).
> That means business customers and the wealthy will still be their main clients.
I am both of those things, have held status with Delta for a number of years along with a co-brand credit card that I run $60k-$100k/yr through. I typically take 15-20 trips per year, and when I'm /not/ flying on business I only fly first class/Delta One. The new program means where formerly I was always PM/DM each year in status, I would be lucky to hit GM without greatly changing my spending habits, and the lounge changes massively devalued even carrying a co-brand card. I live in a competitor's hub (Denver) and chose Delta over the competitors specifically because of better quality of hard product, better on time rates, and a good co-brand program with Amex (who I'm a loyalist for).
I am actively investigating alternatives, and at this point am likely to cancel my Delta Amex (I'm keeping my Amex Plat of course) and switching to the United Club Infinite card as my primary travel card / credit card. Delta makes more money from their co-brand relationship with Amex now than they do from operating flights, and they're losing both of my business because of these changes.
Business travelers almost only get booked into economy/main cabin in the US, because of corporate policies and no health and safety regulations in the US requiring higher tiers of service for long flights (EU residents generally get booked into business for transatlantic flights for healthy and safety reasons, DVT is no joke). Being able to maintain status off a reasonable amount of travel and co-brand spend so I get upgraded into FC on business flights and can buy FC with some perks on personal flights is the core value proposition of airline frequent flyer programs. Delta just killed that for their core customer base. To be clear, I had already bought 6 Delta One tickets for next year, and I haven't even booked my end-year trips yet. I purchased 7 Delta One tickets this year and 6 domestic First Class tickets, I'm also on track to run $90k through my co-brand card this year.
They're losing a not inconsequential amount of business with my departure to United, which when they're finished will have over 100k sqft of lounge space in the Denver airport, plus a Polaris lounge, and offers unlimited lounge access with their top-tier cobrand card and I can attain status even /easier/ than the /current/ medallion program, much less the new one. With this change the only advantage Delta gives me for having to eat a connection on every domestic flight to go through SLC/ATL/LAX/JFK, is that they have free wi-fi on board. That's great, I guess, but I hardly ever even use it, I'd rather unplug and read a book while I'm in the air. The hard product is marginally better on domestic Delta flights, but Polaris is actually better than Delta One anyway, and United has better international partners in Star Alliance, like Singapore Airlines, than Delta does (although I do love KLM).
I find the changes in the medallion program to be incredibly short-sighted, and I am expecting it to backfire horribly. Delta built a lot of brand loyalty with travelers. People like me who will choose Delta over anyone else even though I'm in a non-hub location and it implies always eating a connection, partly because the Sky Clubs were high quality lounges, broadly available even in non-hub sites, and they had a solid FF program w/ good co-brand perks. They've just lost most of their advantage except their operational quality, which also has taken a nosedive post-pandemic. Explain to me why I would choose Delta over United, when I live in a United hub and get can get better perks on the co-brand card, for someone who can afford to pay for multiple full-fare business-class international tickets a year?
I was never quite at the level of spend that you were reaching, usually straddling silver/gold medallion with my own travels, but my use cases and takeaway are the same as yours: realistically, this change means I have no reason to prefer Delta on brand loyalty grounds for either business or personal travel. On domestic travel, I'd occasionally mix airlines for scheduling reasons regardless. But what this really means is I'll no longer prioritize getting in those long haul international flights on Delta or a partner airline because it helped secure status.
Its stunning to me that these changes have managed to alienate so many people across the spectrum. Its not just the higher barrier to entry for the lowest tier that is earning complaints. The value of the miles earned was always much less important to me than the value of the occasional upgrades the status provided, or very occasionally the special support phone lines.
Perhaps the reality for the program really is that only the "whales" matter. We certainly see that play out all over the software industry. But if that's the case, it sure changes my porpoise-sized travel habits. My loyalty will now be to Amex moreso than an individual airline.
You and I seem similar in travel and Delta medallion status.
I'll enjoy my last year with GM in 2024 I guess.
Of the options I have for BOS <> SFO, Delta still probably has the best hard product offering there. But this is definitely changing my dogged loyalty. I'll be trying Alaska soon enough. Not sure I'll ever do United again...
>Sooner or later some airlines will spin out their rewards business into a separate company to get the maximum valuation from it.
Isn't this effectively what we have with Chase, Amex, Capital One, and Citi? Each earns points that can be used directly or transferred to airlines and hotels.
And then as further evidence, Avios points can already be used across several airlines (BA, Iberia, Aer Lingus, Qatar, and soon Finnair). Not to mention the ability to book flights on different airlines with miles sometimes (eg booking Delta from KLM).
>Isn't this effectively what we have with Chase, Amex, Capital One, and Citi? Each earns points that can be used directly or transferred to airlines and hotels.
Not really. Those companies aren't sellers of points, they horse trade the interchange fee. They're basically giving away a portion of their revenue just to stay competitive.
If I have the monopoly of buying miles from airlines at 1c/mile and then sell them to co-branded credit card companies for 1.3-1.5c, what I have is a fucking license to print money.
The only issue with this system is the credit card fees being shared by non-card users. This is why the government needs to find a no fee alternative, or at least make it mandatory to charge a fee on card users to cover the costs.
> They make more money from mileage programs than from flying planes—and it shows.
I spend 15 minutes of my time trying to find where is shows but I couldn't. All I can see is you get points from spending money and the difference now is, people get less points and perks.
For de-regulating? Sure. But it shows that market capitalism is actually the problem, and governments are to blame for not managing, harnessing, and policing it stringently.
Dunno why you're getting downvoted from this. All that deregulation did increase America's GDP, but at the cost of income inequality and lack of real wage growth for most.
If you're lucky enough to get into a profession for upper-middle class people, you'll be in good shape (like most of the people on this forum). Most people don't make it. Perhaps that's where the downvotes come from, is the tendency of people to think subconsciously, "I did it; everyone else can too, it's not that hard".
Yeah, that's the problem. This is a deregulation that we can't even pretend caused any of those ills. It's kind of dumb to try to lump it in with the ones for which there's a case.
I thought this was going to be about over-leveraging. Aka banks loaning out more than they have. Aka airlines overbooking seats on a flight in hopes people don't show up. I saw 6 people told there is not enough space for them on a recent flight.
I remember when I was younger when planes didn’t fill completely. You’d have so much room. You always prayed your seat mate didn’t show up. Times have changed for sure
> Consumers now charge nearly 1 percent of U.S. GDP to Delta’s American Express credit cards alone.
$269 billion, if true. Amex normally charges more than other credit cards. Let’s say 4%, so they’d gross $10 billion in fees. That’s… that’s a whole lot of money for a single card.
Keep in mind that the $10B in fees isn't profit - some half of that goes to Delta as miles for the users, and some proportion of it actually keeps the network operating.
>Is this a good deal for the American consumer? That’s a trickier question. Paying for a flight or a hotel room with points may feel like a free bonus, but because credit-card-swipe fees increase prices across the economy—Visa or Mastercard takes a cut of every sale—redeeming points is more like getting a little kickback. Certainly the system is bad for Americans who don’t have points-earning cards. They pay higher prices on ordinary goods and services but don’t get the points, effectively subsidizing the perks of card users, who tend to be wealthier already.
It sounds like their actual issue is CC fees, so why not write about that? Why not demand congress institute fee maximums or something? Meanwhile, I still don't understand what the actual harm is in airlines being "quasi-banks", other than these fees which are not set or managed by airlines.
>what the actual harm is in airlines being "quasi-banks"
The word "air" in "airline" implies that the main purpose of the business is to move passengers and freight via aircraft. If the main purpose of the business is to generate credit card swipe fees it will probably not do a good job at moving passengers and freight through the air since that part of what it does doesn't generate most of the profits. And we've seen this already with the onerous fees and packed planes that are the standard model now ... because each airline has a captive population that flies it because that is where their points are.
Are the fees because of lock-in from credit card points, or are they just airlines squeezing as much money out of customers as possible? I'm not convinced it's the former in the slightest. It's also worth noting that much of these onerous fees and cramped accommodations are not applied to their high mileage customers who by your logic are the most locked in.
Every time the subject of credit card rewards and the associated credit card fees come up, there is a suggestion that maybe this is a hidden and unfair tax on the economy that we ought to eliminate. This is arguably a fair point. But in practice I don't believe that we will see the prices go down by 2/3% if we regulate these fees like the EU did. The only thing that will disappear is the rewards. So in my opinion a net positive for the sellers that will be able to effortlessly increase their margins but a small negative for the consumer.
It's been funny to me that the mileage calculations oftentimes have no tie to the trip mileage--I'm a civilian pilot and often track the flight via foreflight. I'm a frequent filer on United, and I've often wondered the crazy math they come up with to get the number of 'miles' I earned--as the article says I think its purely based off of dollars now despite United also having 'premier qualifying points' which is directly tied to dollars spent.
PQP used to be tied to miles ( with adders for business/first) so miles were used for status and points. Now, except for lifetime miles, it’s all just dollars.
Here is the thing. Often, when travelling for work, the company pays for the flight, but the traveler get the points, the traveler can then use the points for personal travels.
Maybe the frequent flyer programs are worth more than the business of flying planes, but without business travel expenses, my guess is that you wouldn't have these bank-like frequent flyer programs. As the article mentions, these are just kickbacks.
You're correct, but (IMO) it's such a weird stance for the IRS to take. In response to "is X taxable income?" for almost all values of X, it seems like the IRS's answer is yes, if non-trivial amounts of money are involved.
You sell a couple of items on eBay, yeah it's fine not to report that as income. But if you sell tens of thousands of dollars worth of stuff on eBay the IRS would see that as taxable income.
Your kid has a savings account with a hundred bucks in it and they earn a few dollars interest - not taxable! You keep $100k in a savings account and earn thousands in interest, yep the IRS gets notified and you pay taxes on it.
You earn a handful of frequent flier miles this year after a couple of trips home to see Grandma? Nah, that's not taxable. But if you travel multiple times per week for work and accrue tens of thousands of dollars worth of flier miles that you get to keep? Not taxable income for some reason. shrug
> You earn a handful of frequent flier miles this year after a couple of trips home to see Grandma? Nah, that's not taxable.
Those would never be taxable, as you paid for the miles. When a company sends you a rebate check for an item you bought for personal consumption or when you buy a gift card, it's also not taxable income as it's in exchange for [post-tax] money that you paid.
> But if you travel multiple times per week for work and accrue tens of thousands of dollars worth of flier miles that you get to keep? Not taxable income for some reason.
The IRS alludes in their policy statement to the complexity as being the reason to not treat it as income. If I flew for work for a decade and accrued a bunch of miles and redeemed them only later, in what year would they be taxable? If I mixed personal and business travel in earning miles, what portions would be taxable and when? If the miles are subject to a substantial risk of forfeiture, that would usually be treated the same as other possible future income which is still subject to a risk of forfeiture (which is to say: not be taxed until that risk has collapsed to zero).
And it’s small potatoes mostly. Leaving aside airline status-which would be impossible to value even my 50K miles per year pre-pandemic (some of it personal) would only be worth $500 or so at a penny per mile.
> Those would never be taxable, as you paid for the miles
Good point.
> If I flew for work for a decade and accrued a bunch of miles and redeemed them only later, in what year would they be taxable?
The year you redeem them I would think. Just like you don't recognize typically recognize investment gains until you actually sell and receive those gains. It'd be nonsensical to tax me on fake airline bucks for an airline that might be out of business later this year, or might devalue their points. The (as I would see it) taxable benefit occurs when I successfully redeem those fake airline bucks for a real, valuable service.
> If I mixed personal and business travel in earning miles, what portions would be taxable and when?
Seems like you'd need to maintain separate accounts, so when you redeem them you say, "yeah I'm using 20k points from my personal account and 30k from my employer-paid perk account, knowing I'll be taxed on the current value of the 30k taxable points".
Overall it does seem like a PITA, it's just funny to me because "this is too much of a pain to deal with so let's ignore it" doesn't seem like something the IRS usually says. I suppose overall the issue must be (as another commenter put it) "small potatoes" to the IRS.
Without business travel expenses the airline industry would also be a fraction of its size and personal air travel would be much more expensive.
Companies have on occasion tried to claw back frequent flier points from employees. Those policies were not popular personally I have zero issue with people who fly a lot getting a minor perk for a lifestyle I suspect many people here would absolutely hate.
If you got rid of business passengers, you'd have to increase rates to get the same profit, sure, but I suspect competition would keep prices low. The reason business rates are higher is because big businesses don't look too closely at prices and better service is seen as a little perk for employees.
I’ve seen somewhat higher numbers but I’m still surprised it’s that low if only because many business travelers travel so much more. It’s the rare person who travels 50K miles per year for pleasure and that’s not a typical company employee for many positions but it’s by no means an outlier.
Business travel, especially sales, also involves a lot of last minute booking and changes and those are expensive on both many planes and long distance trains. But, yes, at most companies you can’t just book business but you can always plead better schedule and also avoid economy basic sort of torture.
AFAICT, cash rewards to an individual on expenses reimbursed by a company are taxable as income. Non-cash rewards are a bit of a gray area that the IRS believes to be taxable, but is currently agreeing to not pursue for the time being.
It's insanely smart to reward business travelers personally based on how much their company spends. A lot of people working for big companies are completely price insensitive, and might in fact choose a worse and more expensive flight if it means they get to accrue more miles.
The ability to accrue miles/points/whatever for yourself is considered one of the offsetting perks of having to travel a lot of work. So strong reward programs for frequent business travelers is indirectly a product or service being offered by the airlines to companies that employ business travelers, which employers implicitly pass along to travelers as a form of soft compensation.
You have it backwards. Airlines aren't paying customers and companies are paying the payment forward to their employees. Employers are paying their employees and funneling it through airlines.
At a deeper level airlines and business travelers have no real business relationship. Employers are buying a service, airlines are selling a service. Business travelers are the "cargo" that airlines are shipping. Businesses pay airlines to ship this cargo. Airlines have no relation to the cargo.
Employers also pay the cargo (their employee) a wage. But they funnel part of that payment wage through airlines via miles. It's not much different than company sponsored health care, but it's company sponsored vacation/personal travel. It's an employer benefit, but not treated as one.
I think we're saying the same thing. What I was trying (poorly) to say is that the airlines offering the employers the ability to compensate their employees is indirectly a service that airlines offer to employers.
At my current employer, it is quite difficult to get a new supplier approved into the system, so any time you need to acquire something for work that is not from one of the usual places it is nearly impossible.
Someone must have spotted the opportunity, because we have one particular supplier who is approved, and basically you send them a list of what you want from whatever store/supplier/etc., and they send back a quote for the item(s) which is just the retail price plus a 10% markup. You order the item(s) from this approved supplier, and they just order it from the original source and have it shipped to you. A huge portion of the things that we needed to get for day-to-day usage ended up being ordered through them (software, lab equipment, hardware debuggers, etc).
Seems like a great gig if you can pull it off. Most likely this is just a 1-person outfit where they spend 30 minutes a day placing orders and generating quotes then just take their 10% of everything. I've always wondered if this business was started by someone who formerly worked in the procurement department and added themselves as a supplier before leaving.
I saw a similar business, which was run by someone with a severe physical handicap. Orders with them could basically get around most purchasing card or procurement issues, and they added a percentage. Seemed like a really nice business.
This might be a win-win. They may earn 10% on every order going through them, but they also do the paperwork and probably take some degree of liability off your employer. Middle-men aren't always a problem.
They're also almost certainly enabling the company to float 30-90 days, which itself has some value (suppliers often give you a discount for paying within 30 days).
This isn't new at all. Why do you think those big companies have company "boxes" at major sporting stadiums? its certainly not so their rank and file employees can enjoy the game.
> “reward business travelers personally based on how much their company spends”
Shouldn’t this be taxed as income?
A portion of the money paid by company A to company B goes directly to the employee of company A. It would be taxable if A paid its employee directly, so what difference does it make if there’s a benefit program operated by B in the middle?
The guidance is from 2002. The airline reward programs have changed in the meantime. As the original article notes:
”In short, SkyMiles is no longer a frequent-flier program; it’s a big-spender program.”
So I wonder if the IRS might come to feel that rewarding spend is different from rewarding miles flown. Unlike air miles, the benefit to the employee is in direct proportion to the money spent by their employer.
> So, where do cash-back reward programs fit in? It varies. If a cash-back reward is credited directly to your credit card account, then the income is generally considered a nice rebate that comes with the benefit of using the card. If you actually receive a cash-back check directly, though, it gets a little trickier: It probably also would be considered a type of rebate, but it could technically count as income.
> IRS does not say cash back rewards from credit card spend is taxable income
No, it's just a rebate/discount made directly to the purchaser. For tax purposes, if they buy something for $100 and get a $2 cash back, it just means they spent $98.
It's very different when there's a third party - employee - involved. The "reward" is going to someone who never spent any money, and so generally would be considered taxable compensation to them. OF course, regulatory exceptions in the tax code are nothing new, and it seems like this might need to be re-visited soon.
As a government employee, I'm pretty jealous. All our spending has to go through a credit card with no perks, rewards, or identifiable appeal, presumably because it makes the data harvesting easier. And you have to identify on the front end whether each thing is a valid expense so you know which card to use, rather than just filing relevant line items in a claim on the back end. The only good thing about the government travel cards is that they're physical objects, so you can sometimes lose them and then get to fall back on a card that does something for you.
It has to be taxed as income according to recent court rulings in Germany. Alternatively, any earned bonuses can be used for the benefit of the company, eg for The next travel.
This is how it works in my country (Sweden). Everything that provides any sort of personal benefit to an employee is taxed as ”benefit tax” which simply increases the taxable income. Very few exceptions exist for small yearly gifts, health benefits and a few other things.
The stated reasons is patriotism. The real reason is that the military buys a lot of airline tickets and the military member gets to choose from a list of flights from a variety of airlines.
It’s similar to tipping, once one guy starts doing it all the others look like assholes unless they start doing it too. A similar phenomenon happens sometimes in drive-through coffee shops: someone will pre-pay for the coffee of the person behind them in line, then that person is informed that a stranger paid for their coffee. There is then a social expectation to do the same thing for the next person in line to keep the chain of anonymous “charity” going. Nobody wants to be the asshole that breaks the chain. It’s certainly an odd phenomenon, but many people love it.
> It's insanely smart to reward business travelers personally based on how much their company spends.
I wonder how long it will take the IRS to catch on and see this as a taxable benefit. It's like if significant business spending was done on Discover cards that paid its signer personally. Since it's been going on for years, maybe there is an exception written in law?
Speaking of taxes, the guy who bought a billion yogurt cups to earn trillions of miles donated the yogurt and received a tax benefit:
Sales, architects, consultants at my company (all the frequent fliers) lost their shit when we mandated the use of corporate cards for all travel.
"Earning enough points to take my family on a free vacation each year is compensation for the time I'm gone"... "My wife and I get upgraded most trips we take because of this benefit"...
Actual tone-deaf quotes at a time when we were laying people off (not to mention that corporate cards had been around for a while and had been 'encouraged'. And most other managers had already mandated their use.
It's a perk. But when it's a perk only some people get, or get more of, you can't expect too much sympathy from everyone else when it's taken away.
They aren't comparing their situation to others within the company, but rather to individuals at other companies for whom this perk is widely available.
Back when I was in consulting, I used to think of it as a perk (as did many of my peers). Once the travel started to wear on my personal life, I ran the numbers and discovered the miles and points I was earning equated to only around $200-300 per month in cash equivalent value.
It's really surprising to me how intensely some people will pursue relatively worthless airline miles. I suppose if you're going to be traveling anyway, you might as well pick them up. But if you have the choice, it's not really worth the trade-off.
Yeah, I hate traveling for work, and if I could pick I wouldn't do it. Worse, I hate keeping track of every receipt and expensing every little thing post work travel.
This is exactly why I'm often confused about cuts to these kinds of programs from companies. The downside of people frustrated with the cut cannot be worth it from a monetary perspective. Even if you reduced how many raises you were going to give out, I think people would care less than "I no longer get upgraded for flying"
It’s disingenuous to call it a “perk”. It’s not the same as having office coffee or a ping pong table at the office.
Having to travel a lot is a known disadvantage of having one of these jobs. The ability to accrue miles or do in-lieu travel is touted as an offsetting factor for this. It’s literally mentioned as a part of the compensation package at places like job fairs or in interviews. In my past consulting job (and on places like r/consulting), people would literally calculate the dollar value of the miles/status you can accrue and would use it to compare compensation packages.
Losing this “perk” is more akin to having commission pay be a big part of your compensation, but then being told you’ll no longer get commission. It’s a material difference to what you expect to be paid.
While the ability to accrue miles for miles traveled wasn't removed, I'll bet that that's the only thing 'offered' in the employment documents (typically the handbook).
I'd challenge anyone to find an employee handbook that specifically references expense reimbursement in this context. Indeed, ours has always said "corporate cards should be used whenever possible". This was just changing to more forceful language.
> Is this a good deal for the American consumer? [...] Certainly the system is bad for Americans who don’t have points-earning cards. They pay higher prices on ordinary goods and services but don’t get the points, effectively subsidizing the perks of card users, who tend to be wealthier already.
It’s not just a reward for the business travelers. My previous consulting company actually would want us to book our preferred airlines (even if they were more expensive, but only within a certain range) because in the event of an issue with the flight, the perks to rebook or get free checked bags etc actually saved the company/client money.
I saw this for real when traveling with a coworker when they had status and I didn’t. One of our flights was delayed, leading to me being stranded overnight and have to get the company to pay an additional $300 to stay in a hotel, while my statused coworker was rebooked with priority on a flight home due to their status.
Even Amtrak, a government train service with no competitors, has a rewards program.
The part of the equation that I think the article is missing is that air travel is an industry with an extremely high level of substitute options. Rewards programs are there to try and combat the fact that their products are 100% interchangeable and create some level of loyalty.
Yes, they're also a convenient financial instrument, but I'm personally failing to see how that's a problem requiring intervention. Even with these programs as a profit center, airlines are overall some of the lowest profit margin businesses you can find. There aren't many travelers out there who have much justification to be upset about the prices they pay to fly when the airline is only making single-digit percentage profit off their flight.
The article, in my opinion, was too zealous about advocating for reinstatement of a style of regulations that I don't think makes a lot of sense for consumers or the airlines. It's well-understood that fares decreased and service volume increased after the Airline Deregulation Act was passed. Many aspects of the defined routes and fares setups of the Civil Aeronautics Board actively stifled competition by preventing competition from entering routes and fixing prices.
> The Civil Aeronautics Board decided which airlines could fly what routes and how much they could charge.
Doesn't that sound kind of awful? This would be like your local health department regulating the precise recipe of each meal served at a restaurant, going above and beyond regulating health and safety practices.
The article acts like the airline industry is just 100% devoid of regulations, but that isn't at all true. For example, airlines are required to advertise the tax-inclusive airfare, required to refund fare plus penalty in cash in the event of bumping overbooked customers, and obviously long list of safety regulations, and numerous other requirements.
> The part of the equation that I think the article is missing is that air travel is an industry with an extremely high level of substitute options
That's the entire point of a free market. Obtaining perfect competition. If you are producing a product that cannot be easily substituted then you shouldn't get to have a fully free market. Customer lock-in is the opposite of the concept and benefit of a free market.
Second, and industry with high startup costs, extreme barriers to entry, limited access to fixed resources (airport runways), and is of strategic importance to a country will always be regulated. Airlines will never be left to die (like for example the NFT market) - and we saw this during the 2008 period. And if you're going to socialize loses and have govt as your back stop there are rules you have to adhere to to ensure customer benefit.
I have to disagree that airlines have extreme barriers to entry. Yes they are a capital intensive industry but starting an airline is actually pretty simple and there are seven national scale airlines that have been founded since 1980 in the United States and are still operating today.
To start an airline all you have to do is lease planes and gates and hire an interchangeable labor force. You don’t have to develop any technology outside of your reservation system, no factories, no research and development.
An example of a recent airline startup is Breeze Airways.
> The part of the equation that I think the article is missing is that air travel is an industry with an extremely high level of substitute options. Rewards programs are there to try and combat the fact that their products are 100% interchangeable and create some level of loyalty.
I agree - but thought of it a different way.
Delta has a reputation among frequent flyers for having the best operations of any domestic carrier. AKA, if you need a flight that gets there on time, Delta is your best bet.
So, I expect these changes to their frequent flyer program (which pretty much all frequent flyers have reacted to with universal hate) are a recognition of that. AKA, we're offering a good product, so why should we be generous with our mileage/reward program.
Delta were already regarded as having one of the least valuable award points of any program.
As to why the changes are so hated, take this example.
Imagine you're flying economy 1x a month from Los Angeles to Amsterdam on Delta. Each flight would cost around $800, and earn you 11,120.
Under the current program, you could have Silver Medallion halfway through your 3rd trip, Gold by your 5th and Diamond by the end of the year.
(Some caviats that you wouldn't make it that far without a waiver for MQD spend you could get with a credit card).
Under the new program, it'd take you 7.5 months to earn Silver, and you'd never make it past Gold Medallion flying that same route every month.
Is "All businesses eventually become financialized" the business equivalent of Zawinski's Law[0]? "Every program attempts to expand until it can read mail. Those programs which cannot so expand are replaced by ones which can."
Key point: airlines are more powerful than normal banks - they are central banks, with complete control of the money (point) supply. On the trilemma [0], they chose to control the exchange rate (points to flight value) and have an independent monetary policy (how many points to issue to flyers or other buyers).
When fliers realize points-miles are a fool’s errand, they will simply ignore them and go back to only considering price, flight time, number of stops, and customer service.
Points-miles are a way for airlines to lock and keep their customer base while treating their customers like cattle.
While this article is about credit cards and miles, the moment I realized they were banks was when I learned that most airline's fleets are leased. Since maintenance and planes are so expensive, lots of airlines lease a fleet with support contracts from places like GE Capital. From an MBA perspective, it makes sense, but it is such a weird concept to me that you don't own such a pivotal part of your business.
It makes perfect sense if you realize that the airline execs are maximizing their bonuses for the next quarter or four, and not optimizing for the health of the company for the next 10 years. Being stuck with a company and losing a job if the company goes bankrupt is for losers like us, not for those who will leap off with the golden parachute and land another cushy job somewhere with their "years of experience driving growth and providing value to the shareholder".
Executives build the company that the investors want them to build.
By far, the biggest costs of running an airline are the planes and the fuel. But the investors don't want to bet on the value of physical planes, nor do they want to bet on the price of oil. If they wanted to place those bets, they'd just invest in Boeing or Exxon. Instead, they usually want to bet that one airline will perform better than her competitors over the next year or so.
So, airline executives lease their fleets and buy tons of oil futures. This gives them a better shot of hitting their targets even if the price of oil skyrockets, it makes their fleet easier to scale up or down according to demand, and it makes their stock more attractive to investors who want more predictable performance.
> Executives build the company that the investors want them to build.
Assuming they're mindless drones of the faceless "investors" with no free will or intent of their own.
> But the investors don't want to bet on the value of physical planes, nor do they want to bet on the price of oil. If they wanted to place those bets, they'd just invest in Boeing or Exxon.
You're putting the cart before the horse since that's a choice by the exec. If they wanted to derisk themselves they could as well hedge by buying puts on Boeing or calls on Exxon.
Overall, who decides what a good business is? Unfortunately, that's come down to a gang of Wall Street suits who would much rather punish good businesses for not catering to their attention span deficient trading/gambling habits. We would much rather have some jack of all trades making business decisions based on their next year's bonus/chalet/yacht rather than people who depend on those businesses (customers and employees), so of course we get to this state.
From that perspective every large company is a bank. This is part of the reason everyone wants a subscription business. Not only do shareholders love recurring revenue, but so do lenders. In essence every business is a investment bank that has a few investment available that are closed to everyone else (the core business).
This... makes sense? Airlines provide air transport services, and the actual "hardware" is pivotal but not integral to their core business. Airlines are much more than just "flying planes" — there's route planning, crew management, fuel pricing and forecasting, regulatory and legal compliance, operational logistics, landing/takeoff slot allotment, customer service, marketing, etc. that the airline is responsible for.
Think of Netflix using AWS. Digital content delivery is obviously crucial to their business (DVD deliveries aside) but it's not vital that they own their own servers — they're first and foremost a video streaming service, not a CDN datacenter business.
There are also various types of leases [1], commonly "wet" or "dry", which are analogous to managed/unmanaged/raw metal cloud services.
Something that is non-obvious in this space is that some of this can be down to tax treatments and asset depreciation.
In a nutshell, when you buy an asset you can depreciate the value of the asset over the working life of the asset and in many tax jurisdictions (my knowledge/experience comes from the UK and US asset financing industry) offset that depreciated amount against profits, in the year the asset depreciates.
This means that you can essentially offset capital expenditure against tax, which is good business.
But if you don't make enough profit through the use of the asset at the right time, you end up losing the benefit.
But there exist large companies that make lots of profit, such that they can always offset the depreciation. And so _they_ can buy the asset, use the depreciation against their profits and then lease the asset to you. They might even be able to do this at a rate that ends up _being cheaper than you actually owning the asset_, depending on circumstances.
Most tech companies lease their hardware too. OpEx is always better than Capex.
I mean AWS is the obvious example, that's basically leasing your hardware. But even companies with on-prem data centers lease most of that gear. It's way better for cash flow to make monthly payments than an up front one.
What I'm not understanding is how it's more profitable to involve a 3rd party company, who will be taking their costs and adding a profit margin, rather than doing it all in-house?
If it costs on average $X/month to maintain a plane, then the maintenance company is going to charge you $(X+Y)/month, where Y is a decent profit margin. Certainly you'd save money by not involving the third party, right?
Or are these companies happy to pay it because that $Y also covers risk of a sudden expensive repair?
But it isn't like they can make money from their mile program if they didn't fly planes so their business is still completely dependent on providing this service. So despite most of their money being made there I still wouldn't call it a bank unless it can be extracted from their core business and survive. Which it can't.
The article mentions that due to consolidation there are only 4 major airlines in the US and they are very aligned in their prices and policies thus giving little choice to US consumers.
Doesn't that mean there's an opportunity for someone to start a new airline that could compete with the big 4 by offering better prices or more lenient policies?
Demand for flights is clearly very high right now; perhaps there's an entrepreneurial opportunity here?
Thoughts?
That sounds like Virgin America 20 years ago and I think it worked out well for them and for consumers. They had really cheap, reasonable flights, and they forced everyone else to put entertainment in the seat backs. I really miss their silly purple lighting and lounge music when you boarded.
There's almost a dozen other national-ish airlines and a few dozen regional and commuter airlines, but it's hard to compete with the big ones because they can't offer the same number of routes. I fly JetBlue whenever I can because I'm tall and they have the best legroom, but about half my trips end up on other airlines because JetBlue doesn't fly everywhere. But people who fly a lot and use Delta or United can travel virtually anywhere without ever having to go "out of network". The smaller airlines can capture the people who frequently take a small number of routes, but the best customers are always going to gravitate towards an airline they can use a much as possible to maximize status and rewards.
Not exactly. Airlines (in my view) are not a perfectly competitive industry: there are extremely high setup costs and barriers to entry. It would be very very difficult for a newcomer to compete with the established ones, at least in the US.
There are tons of airlines. I can often have my choice of airlines to fly to a particular city, nonstop, within a given hour. Where's the lack of choice? Economy tickets range from cheap to very cheap, unless you need to fly somewhere like Guam. Renting cars and booking places to stay are both significantly more expensive pieces of traveling. As long as that's true, it's hard to justify flights getting that much cheaper... unless you're flying a family of 6+, in which cases you're part of a small market.
Sure. Try out this miles thing everybody here is chatting about. Amex rewards. A few months of spending for the average HN audience will get you a free flight or an upgrade on one. I recommend saving them up for an upgrade on an international flight
There isn’t a perfect one for everybody. Choose based on transfer partners and benefits you like. I’ve also heard capital one is great. But you can safely skip any Bank of America or Wells Fargo ones.
I generally agree with the article's premise and conclusions, but the lead in is not true:
> They make more money from mileage programs than from flying planes—and it shows.
Delta reported 5% of its revenue came from its loyalty programs in 2022 (2.5B of 50B according to 2022 10k). Although in the June annual shareholder meeting, it expected >6.5B in AMEX remunerations in 2023 with a long term goal of 10B.
American Airlines may have been closer to 10% (4.5B of 49B according to 2022 10k). I can't quickly find any public data on it's long term goals.
Both still well short of "more money" than from flying planes.
I don't know the details of the industry but that is revenue ignoring expenses. Presumably it is orders of magnitude more expensive to fly the planes than manage a rewards system.
I expect the author is saying that if your split each up into profit, the profit is greater on the rewards program than the flying part.
The points are not "free" to airlines, though. (Without looking at every airlines 10k, at least one mechanism is to): Account for them as a liability on the balance sheet as "deferred revenue." They then recognize the revenue when the points are redeemed, meaning they incur the same blended Cost per Available Seat Mile (CASM) as a purchased ticket. That's in addition to the significant costs of managing a loyalty program (IT, Partnerships, Legal, etc.)
They had a huge outage for over a week that left people stranded over xmas.
> More than 16,700 Southwest flights were canceled and 2 million passengers stranded between December 20 to 29, scuttling holiday plans and leaving mountains of unclaimed baggage nationwide.
613 comments
[ 2.8 ms ] story [ 498 ms ] threadStarbucks is another good example of one that does (with gift cards instead of points); Amazon might be another.
Starbucks does not get to keep unredeemed balances indefinitely in most US states!
Regardless, the underlying point remains. They'll profit from the float until whatever it is they have to do happens.
> They "make" money when you leave a balance on the card.
In many US states, the money interestingly goes to the state in the end when unused, under a common law doctrine that doesn't exist in many other countries:
https://en.wikipedia.org/wiki/Escheat
In that case, there is no breakage income for the gift card issuer, but the interest free loan, together with people's tendency to spend higher total amounts at the same merchant when using gift cards, still makes them an amazing deal to the issuer.
I suspect that there's also a non-negligible benefit being exploited in the form of differences in subjective value between gifter and giftee: In a nutshell, the gifter spends more money than they normally would at a store they frequent, or viewed from the giftee's perspective, they spend "money" at a company they normally wouldn't.
Then there's the broader question of whether this is good for productivity. If every company is a financial company, who actually makes tangible stuff?
/s
Hyperinflation is coming, the kind that will be THE central issues for everyones life for awhile. When it happens it won't be these guys fault. I would not blame airlines and home Depot credit cards for the coming hyperinflation, just a symptom of its approach.
Before folks make comments about currency still inflating (gerund), let us stipulate that the noun "Inflation" is a positive rate and the rate has recently decreased. Let us all be thankful that there exists some amount of inflation which in a broad sense reflects a growing and dynamic world (how closely remains to be seen) as opposed to deflation.
If you needed a wheelbarrow of cash to buy break at the bakery, it was still true that there was a tiny downward pressure from the baker in that the bread would eventually rot, so he might as well sell it now if they were just shy of the asking price.
If everyone's buying household goods off of Amazon, their pricing algorithm will never be even that much forgiving.
When it last happened here, many workers were still being paid in cash as soon as the timeclock whistle went off on Friday. Now everything's direct deposit, but not necessarily instantaneous. At my last job, the funds were released at midnight that payday, but with the current job for some reason they're not released until the morning (business open, I imagine).
Are people going to starve, because they have the wrong bank and the money's not there for several hours before everyone else's and it has lost too much value?
Here’s what you all get wrong about this: if I can’t withdraw, it’s not a bank. Points are just prepaid assets and services that you may or may not be able to ever receive. Bank money does not simply “expire” (it can be used for fees however)
Again, X is the dumbest possible name for aything, I will never user it, just call it Twitter if you have to.
No one is saying X, the platform formerly know as Twitter, is a bank.
This seems to describe a lot of sectors of the economy, unfortunately
Legal services alone are about 3% of GDP.
This understates things, perhaps, as it's unclear whether it captures the financialization of non-finance sectors. (e.g. auto leasing, and what the article in the OP describes.)
Needless to say, this is historically unusual. And you don't need to go very far back in time to find a period where manufacturing was 25% of GDP and FIRE just 10%.
"Just a bank" doesn't fly airplanes. It may own them, but it doesn't fly them. "Just a bank" doesn't sell tickets. Doesn't have a department that finds lost luggage. Etc.
But "airlines are financialized now" doesn't capture eyeballs in the same way.
I don't know. Big companies sometimes do silly stuff - even if this day it's mostly outsourced to marketing agencies. It wouldn't surprise me to learn that some bank somewhere is operating a de-facto airline for some reason that somehow makes them money...
The banks either did this themselves or had a company that did it for them. They physically flew checks to the city of the bank they were written on, because flying the plane was cheaper than one day's interest on a billion dollars worth of checks.
This stopped, IIRC, back in the 1990s, once electronic settlement got fast enough.
Notice how none of that is to do with how much money is made from financial shenanigans vs products and also there is no mention of running loyalty programs etc.
Every time there is one of these articles ("Starbucks is just a bank" was another recent offender) it's worth actually referring to the definition of a bank and reminding yourself that unless the article is in The Economist, the FT or the WSJ, the journalist themselves probably has absolutely no idea what a bank is, or does.
Yes big companies have big financial and treasury functions. Maybe that’s surprising to some folks, but not to anyone who’s actually worked in any kind of industry. Trying to fund your activities is one of the most important parts of any business and companies who get really good at that even sometimes find ingenious ways to make it generative of PNL in and of inself. That doesn’t make them banks or financial institutions.
My favourite example was one a friend told me that he had learned at business school doing an MBA. They did a study on Bailey’s Irish Cream (the liqueur). It came about apparently because there were big government subsidies to support dairy farmers and support Irish whiskey producers. So the farmers and distilleries where producing far more than they could sell in order to collect the subsidies. The genius inventor of Bailey’s came up with the business idea of getting the producers of cream and whiskey to pay him to take their excess inventory which he then turned into the liqueur which he sold for a profit. So he had a manufacturing business where he was getting paid by every part of his own supply chain.
If the answer is no, then they are not a bank.
A bank doesn't need to fly planes to be in business
That really is nothing whatsoever to do with what an airline does.
"Porsche yesterday revealed it earned three times as much money from trading derivatives as it did from selling cars"
https://foreignpolicy.com/2007/11/14/porsche-makes-more-mone...
> Another London-based analyst said: “[Porsche] is a hedge fund investing in just one stock [Volkswagen].”[0]
> Because of its heavy reliance on Volkswagen's manufacturing capabilities, Porsche knew it had to increase its control [of Volkswagen] to mitigate the risk of its production being affected. Porsche used debt to start buying Volkswagen shares on the open market. [1]
> All of the options-trading Porsche takes part in relates to its stake in VW, which it has built up from scratch over two years. Porsche used the options to hedge against the likelihood of VW’s shares rising after its interest was made public: they did, from about €40 to almost €180. [0]
They wanted to buy a chunk of VW. After they started doing so, they hedged against the stock price so that they wouldn't get screwed if the price of VW popped. Then the price of VW popped, and their options paid out big time. That doesn't make them a hedge fund, it just make them competent (and somewhat lucky).
[0]https://foreignpolicy.com/2007/11/14/porsche-makes-more-mone... [1]https://dailyinvestor.com/world/10426/incredible-story-of-ho...
This is probably how frequent-flier programs should have been run in the first place. Airline don't care that you fly alot, they care that you are a profitable customer.
That means business customers and the wealthy will still be their main clients. This just means they lose the churners and the price sensitive bargain hunters, which almost every airline would be happy to trade away for more business customers.
It's a win for the airline as they keep their core customers happy as their rewards won't change and they'll lose the unprofitable customers who used their rewards programs alot without spending much.
> A 2020 analysis by the Financial Times found that Wall Street lenders valued the major airlines’ mileage programs more highly than the airlines themselves. United’s MileagePlus program, for example, was valued at $22 billion, while the company’s market cap at the time was only $10.6 billion.
This looks alot like car companies whose leasing arms became more profitable than their manufacturing arms for part of the 2000s.
But wallstreet loves companies that they can easily value and this "conglomerate" style business has been out of favour for a while now.
Sooner or later some airlines will spin out their rewards business into a separate company to get the maximum valuation from it. Just like how deregulation lead to the consolidation of airlines, I wouldn't be surprised to see only a couple of rewards programs that every airline uses in a decade.
As usual PE will be the winner. I'd bet Blackstone or Apollo will roll up multiple programs into one or two uber rewards/credit card programs that are spun out into public companies. VISA and Mastercard won't care who owns them. As long as it drives more credit card usage, they'll be on board.
Explain. I see a handful of identical mega corps with a government protected monopoly (regulations + access to airports). Hasn't regulation increased consolidation to share the cost of compliance?
Like the pork barrel shops in the airport, why is this a private business at all?
https://airandspace.si.edu/stories/editorial/airline-deregul...
Big companies have just figured out that scale and vertical integration kills everyone smaller.
I see the opposite: new, brightly-colored airlines seem to pop up every year, each offering substantially the same thing: sub-$100 direct tickets to Florida (and probably other) destinations from low- and mid-tier airports. And they're all catering to the people who these rewards programs are shedding.
Every successful company eventually becomes a bank. See also Apple.
The more successful, the larger the pile of money and more likely to look bankish.
Due to technology, the old use case of banks is mostly obviated. There is no technical reason everyone should not just have an electronic money account at the Fed itself for receiving and sending money. And earn the federal funds rate directly rather than have it go through a middleman who is basically just operating a database.
And lending does not have much to do with receiving people’s cash deposits.
Yet you complete leave out the non-technical reason why that's a terrible idea.
Systemic Single-Point of Failure, extreme vulnerability political exploitation, no robustness or process/partition based discorrelation to stave off or slow down financial contagion.
Robustness is entropic. It uses more energy, but gains in it's ability to remain up in the face of a myriad of quantifiable stimuli instead of falling apart at the slightest touch.
All eggs in one basket is a bad idea. No one makes a good enough basket.
I think you're grossly overestimating the fallout from this. I am the aforementioned business customer. Literally the only way you'd ever hit the dollar amounts they're looking for is flying multiple times across the Atlantic paying full fare business class - which I don't do. But I do fly multiple times a month across the continental US. Previously I would book Delta regardless of price for both business and personal travel due to status. They've made it basically unobtainable unless you're paying full fare first class on every flight AND booking your cars and hotel through them.
Going forward I'll just book the cheapest flight available and drop their card. They will be losing at minimum 10s of thousands a year in profit from my travel and card spend alone.
Even assuming 1%, for an airline to lose $10,000 in profit, you would have to be spending $10,000 / 0.01 = $1M per year on that credit card.
And if you are spending a minimum of $1M on your credit card per year, I doubt you are spending your time optimizing “miles” and “points”.
I assume there are lots of smart people working at airlines that can work out which of their policies earn and lose money, especially now that all the competition is minimal except on the most popular routes.
> especially now that all the competition is minimal except on the most popular routes.
I guess airlines are betting sufficient passengers have no better option, and I would bet that too. I cannot remember the last time I got to pick an airline without heavily inconveniencing myself and wasting tons of hours with extra stops. Even a busy airport like Newark, you are basically flying United for 90% of destinations if you want to get there in the shortest amount of time with the fewest stops.
An airline like Delta will adjust but there will be pain for them in the short term and pain for customers in the medium and long term with fewer, more expensive flights. All of this assumes these changes actually lead to customers changing their behavior rather than simply saying they will.
https://www.macrotrends.net/stocks/charts/DAL/delta-air-line...
https://www.macrotrends.net/stocks/charts/UAL/united-airline...
https://www.macrotrends.net/stocks/charts/AAL/american-airli...
https://www.macrotrends.net/stocks/charts/ALK/alaska-air/pro...
https://www.macrotrends.net/stocks/charts/LUV/southwest-airl...
https://www.macrotrends.net/stocks/charts/HA/hawaiian-holdin...
https://www.macrotrends.net/stocks/charts/JBLU/jetblue-airwa...
https://www.google.com/finance/quote/DAL:NYSE
And again, that doesn't address the fact their net profit margin has literally 0 relation to their profit margin on MY TICKET which is CONSIDERABLY higher than 11.72% on average.
https://s2.q4cdn.com/181345880/files/doc_financials/2022/q4/...
And page 63/64, it seems like Macrotrends is using “net income/loss” row and the “total operating income” row, and Google is also using the same, so not sure why the quarterly figures are different. Macrotrends does look erroneous here.
>And again, that doesn't address the fact their net profit margin has literally 0 relation to their profit margin on MY TICKET which is CONSIDERABLY higher than 11.72% on average.
Yes, the delta bosses are not considering the profit margin from your specific flights, but assuming the vast majority of their business is flights where their airline miles come into play, then I figured it is a good assumption that, on average, losing a flight costs them the around the same profit margin.
Of course it is possible they lose so many flights that it cuts into their fixed costs, but I assume they are smart enough to make those calculations.
The allocation of profits down to specific activities depends on the allocation of revenues and expenses amongst activities, and all such allocations are inherently arbitrary. They depend on the stories we tell.
I think you missed the part where they're losing ALL of my business, including dozens of flights a year.
>I assume there are lots of smart people working at airlines that can work out which of their policies earn and lose money, especially now that all the competition is minimal except on the most popular routes.
I assume they think customers with lots of miles banked won't go through the effort of dropping them entirely. I think they're wrong.
When you're losing customers that have million miler+ status, you've made a pretty poor decision.
Crazy to think JetBlue wanting Spirit. I remember when JetBlue started, their goal was to provide a better experience than all the other airlines. It is really a cutthroat business. Virgin Airlines had to be folded into Alaska too.
https://www.cnbc.com/2017/10/18/branson-says-alaska-air-was-...
I agree with you on this. Nobody who flew Delta did it for the value of SkyPesos anyway. The airline miles on Delta have historically had the lowest value among US major carriers and that hasn't gotten any better, so frankly I have no issue giving up my miles. I flew Delta for better hard product and a better set of co-brand + FF perks. By changing the latter, the difference on the former is mostly ameliorated, and the miles are basically meaningless. At most a skypeso is worth maybe 1 cent. A million skypesos is only worth $1k in EV, and that's being generous. A one-time cost of $1k that isn't even a fully realized loss (I can always use the miles later without seeking status) is nothing compared to the betrayal of the program changes.
Then I moved to New Mexico, and found that Delta was the obvious choice for getting to London from here. And OMFG ... the difference in the product was just spectacular. Seats. Food. Movies. Uniforms. Air quality (not kidding). Probably will still use them when I do this journey.
United domestic routes are disgusting though. Most of the planes are falling apart CRJs without IFE and WiFi, and if they do have WiFi they charge you for it, and the domestic United staffers are not good. I would put United service quality on-par with Spirit or Frontier. Easily the worst in the big 3.
That said, I'd still rather develop status on United, take directs, and then fly Polaris full-fare or Singapore Airlines biz class for my personal / international trips now that Delta has made these changes to the medallion program.
In good times, airlines rarely profit 10%. I'm guessing it averages closer to 5%.
Are you spending $200k+ on flights per year?
Otherwise, they aren't missing $10k+ in profit.
Really, I think if anything I might be underestimating the fallout from this in that I don't see it being an issue at all and I think most airlines will follow with the same changes in the future.
Even next year's thresholds are not that high if you're crossing the continental US multiple times per month and are surely less than the flying you're doing on Delta if the loss of your business represents "10s of thousands a year in profit".
Delta's gross margin percentage is roughly 25%. For them to lose just 2 10 thousands in profit on you, you'd be spending $80K with them and doing so would continue to easily qualify you for Diamond, whereupon you'd get more reliable upgrades and service from them due to fewer people making Diamond each year.
I can spend $35k on flights, but I can also fly private for about the same amount, excluding most trans-oceanic. So I'm not sure what I'm going to do about next year. I'm not sure if it's really worth it. It's a weird calculus. To hit the number, it's basically buying a bunch of F/J fares. If I'm already doing that, I don't care about upgrades.
No more worrying about upgrades, middle seats, air-ragers, and all it took was a little more money.
Of course now sometimes I fly on airlines I’ve never heard of whereas previously, I had taken exclusively American for my last 200 or so legs. I think the effects of shaking up these programs will be to make consumers like me much, much less brand sensitive.
Air Canada spun out aeroplan, and then years later re-acquired it.
To be honest the whole approach always felt like some form of corruption/kick back to me. You give an incentive to the employee that is dissociated from the interest of their employer.
This is mitigated by the employer setting rates, per-diem, rules on what seats you can purchase, etc. and the employer can't use the points from the frequent flyer program anyway. If there's, say, a $50 fare difference and that causes an employee to choose a more expensive flight (because the comparable flights are comparable) because they get points it's fine and basically an added benefit. In consulting for example that's a stated benefit in employee handbooks.
Of course that's not to say employees of companies can't go against the interest of their employer here, but it's up to the employer to set guidelines and for the employee to follow them.
This isn't always true. Some employers insist you book through their internal travel department or use their corporate FF accounts, which kick all the mileage and hotel night benefits to them. It's not common, fortunately, but it does happen.
There’s indirect benefits to the business as well since they’ll be first to be put on a flight after cancellations, can get guaranteed lodging in areas that sell out often, and can use their points to upgrade making their trip nicer.
So it’s unwise to chase that as an employer. Let them get points and be comfortable and use them to take the family somewhere.
Is this a thing for most people?
Being in an unfamiliar place is one of my greatest joys. I am never more relaxed than my first day in a new city where I know absolutely nothing, and turning each new corner is a revelation.
Wow, okay, big jump here buddy. What happened to being profitable and actually committed to offering a core competent service to customers?
As the joke goes, “how do you become a millionaire? Start with a billion dollars and buy an airline”.
It is only recently the airline business has had steady positive years, due to consolidation, and even then, COVID hit and almost wiped them out were they not bailed out.
Modifying a rewards programs should require a very miniscule portion of ann airline’s available labor hours, and aligning rewards to be proportionate to profitability seems like a common sense business move.
That they should spend more money and lower profit margins even more? Or that they should increase prices so that they can spend more money to improve the things you listed?
Surely, airline employees are more knowledgeable about how much customers are willing to pay than non airline employees.
Shouldn’t
Be
Banks
There is one step, and it is bank (Past a particular threshold).
https://www.investopedia.com/terms/f/financialization.asp
https://en.m.wikipedia.org/wiki/Carcinisation
https://www.catb.org/jargon/html/Z/Zawinskis-Law.html
Those observations aside, I do agree with your rough rhetorical position.
Have you flown on an airplane in the last 10 years? I'd rather drive 15 hours to Florida than deal with the fucking airlines
I end up paying roughly $50 per hour of flight plus or minus, and it’s been consistent for my adult life (15+ years). Which is surprising considering inflation.
The only problems I have with flying are TSA and airport runway congestion itself.
Easy to say when you have money
I jest, but which airlines have you been on? I've enjoyed my airline experiences more now than in the past flying Delta, American, United.
But yeah I agree, if it's less than 6 hours I'll almost always just drive.
Assuming you're talking about the 1978 deregulation, I don't think that's the cause. Starting around about the same time (maybe under Reagan?) the US basically stopped enforcing the anti-trust laws that are on the books. This has led to mergers across the board, not just for the airlines.
that said, I doubt airlines will ever fully relinquish control over their loyalty programs - they are too critical to the core business and offer a 'secret sauce' of differentiation to what is an otherwise commoditized product (i.e. flying from point A to B).
I am both of those things, have held status with Delta for a number of years along with a co-brand credit card that I run $60k-$100k/yr through. I typically take 15-20 trips per year, and when I'm /not/ flying on business I only fly first class/Delta One. The new program means where formerly I was always PM/DM each year in status, I would be lucky to hit GM without greatly changing my spending habits, and the lounge changes massively devalued even carrying a co-brand card. I live in a competitor's hub (Denver) and chose Delta over the competitors specifically because of better quality of hard product, better on time rates, and a good co-brand program with Amex (who I'm a loyalist for).
I am actively investigating alternatives, and at this point am likely to cancel my Delta Amex (I'm keeping my Amex Plat of course) and switching to the United Club Infinite card as my primary travel card / credit card. Delta makes more money from their co-brand relationship with Amex now than they do from operating flights, and they're losing both of my business because of these changes.
Business travelers almost only get booked into economy/main cabin in the US, because of corporate policies and no health and safety regulations in the US requiring higher tiers of service for long flights (EU residents generally get booked into business for transatlantic flights for healthy and safety reasons, DVT is no joke). Being able to maintain status off a reasonable amount of travel and co-brand spend so I get upgraded into FC on business flights and can buy FC with some perks on personal flights is the core value proposition of airline frequent flyer programs. Delta just killed that for their core customer base. To be clear, I had already bought 6 Delta One tickets for next year, and I haven't even booked my end-year trips yet. I purchased 7 Delta One tickets this year and 6 domestic First Class tickets, I'm also on track to run $90k through my co-brand card this year.
They're losing a not inconsequential amount of business with my departure to United, which when they're finished will have over 100k sqft of lounge space in the Denver airport, plus a Polaris lounge, and offers unlimited lounge access with their top-tier cobrand card and I can attain status even /easier/ than the /current/ medallion program, much less the new one. With this change the only advantage Delta gives me for having to eat a connection on every domestic flight to go through SLC/ATL/LAX/JFK, is that they have free wi-fi on board. That's great, I guess, but I hardly ever even use it, I'd rather unplug and read a book while I'm in the air. The hard product is marginally better on domestic Delta flights, but Polaris is actually better than Delta One anyway, and United has better international partners in Star Alliance, like Singapore Airlines, than Delta does (although I do love KLM).
I find the changes in the medallion program to be incredibly short-sighted, and I am expecting it to backfire horribly. Delta built a lot of brand loyalty with travelers. People like me who will choose Delta over anyone else even though I'm in a non-hub location and it implies always eating a connection, partly because the Sky Clubs were high quality lounges, broadly available even in non-hub sites, and they had a solid FF program w/ good co-brand perks. They've just lost most of their advantage except their operational quality, which also has taken a nosedive post-pandemic. Explain to me why I would choose Delta over United, when I live in a United hub and get can get better perks on the co-brand card, for someone who can afford to pay for multiple full-fare business-class international tickets a year?
Its stunning to me that these changes have managed to alienate so many people across the spectrum. Its not just the higher barrier to entry for the lowest tier that is earning complaints. The value of the miles earned was always much less important to me than the value of the occasional upgrades the status provided, or very occasionally the special support phone lines.
Perhaps the reality for the program really is that only the "whales" matter. We certainly see that play out all over the software industry. But if that's the case, it sure changes my porpoise-sized travel habits. My loyalty will now be to Amex moreso than an individual airline.
I'll enjoy my last year with GM in 2024 I guess.
Of the options I have for BOS <> SFO, Delta still probably has the best hard product offering there. But this is definitely changing my dogged loyalty. I'll be trying Alaska soon enough. Not sure I'll ever do United again...
Isn't this effectively what we have with Chase, Amex, Capital One, and Citi? Each earns points that can be used directly or transferred to airlines and hotels.
And then as further evidence, Avios points can already be used across several airlines (BA, Iberia, Aer Lingus, Qatar, and soon Finnair). Not to mention the ability to book flights on different airlines with miles sometimes (eg booking Delta from KLM).
Not really. Those companies aren't sellers of points, they horse trade the interchange fee. They're basically giving away a portion of their revenue just to stay competitive.
If I have the monopoly of buying miles from airlines at 1c/mile and then sell them to co-branded credit card companies for 1.3-1.5c, what I have is a fucking license to print money.
> They make more money from mileage programs than from flying planes—and it shows.
I spend 15 minutes of my time trying to find where is shows but I couldn't. All I can see is you get points from spending money and the difference now is, people get less points and perks.
For de-regulating? Sure. But it shows that market capitalism is actually the problem, and governments are to blame for not managing, harnessing, and policing it stringently.
If you're lucky enough to get into a profession for upper-middle class people, you'll be in good shape (like most of the people on this forum). Most people don't make it. Perhaps that's where the downvotes come from, is the tendency of people to think subconsciously, "I did it; everyone else can too, it's not that hard".
Go back to the 70’s before regulation when the government enforced minimum fares.
Air travel has gotten much cheaper and far more accessible to lower income people.
That sounds like a win for deregulation.
$269 billion, if true. Amex normally charges more than other credit cards. Let’s say 4%, so they’d gross $10 billion in fees. That’s… that’s a whole lot of money for a single card.
It sounds like their actual issue is CC fees, so why not write about that? Why not demand congress institute fee maximums or something? Meanwhile, I still don't understand what the actual harm is in airlines being "quasi-banks", other than these fees which are not set or managed by airlines.
The word "air" in "airline" implies that the main purpose of the business is to move passengers and freight via aircraft. If the main purpose of the business is to generate credit card swipe fees it will probably not do a good job at moving passengers and freight through the air since that part of what it does doesn't generate most of the profits. And we've seen this already with the onerous fees and packed planes that are the standard model now ... because each airline has a captive population that flies it because that is where their points are.
"Any sufficiently advanced technology ends up regulated as a bank" or similar
United's appears that way for typical tickets on United/United Express metal as well: https://www.united.com/ual/en/us/fly/mileageplus/earn-miles/...
Here is the thing. Often, when travelling for work, the company pays for the flight, but the traveler get the points, the traveler can then use the points for personal travels.
Maybe the frequent flyer programs are worth more than the business of flying planes, but without business travel expenses, my guess is that you wouldn't have these bank-like frequent flyer programs. As the article mentions, these are just kickbacks.
You sell a couple of items on eBay, yeah it's fine not to report that as income. But if you sell tens of thousands of dollars worth of stuff on eBay the IRS would see that as taxable income.
Your kid has a savings account with a hundred bucks in it and they earn a few dollars interest - not taxable! You keep $100k in a savings account and earn thousands in interest, yep the IRS gets notified and you pay taxes on it.
You earn a handful of frequent flier miles this year after a couple of trips home to see Grandma? Nah, that's not taxable. But if you travel multiple times per week for work and accrue tens of thousands of dollars worth of flier miles that you get to keep? Not taxable income for some reason. shrug
Those would never be taxable, as you paid for the miles. When a company sends you a rebate check for an item you bought for personal consumption or when you buy a gift card, it's also not taxable income as it's in exchange for [post-tax] money that you paid.
> But if you travel multiple times per week for work and accrue tens of thousands of dollars worth of flier miles that you get to keep? Not taxable income for some reason.
The IRS alludes in their policy statement to the complexity as being the reason to not treat it as income. If I flew for work for a decade and accrued a bunch of miles and redeemed them only later, in what year would they be taxable? If I mixed personal and business travel in earning miles, what portions would be taxable and when? If the miles are subject to a substantial risk of forfeiture, that would usually be treated the same as other possible future income which is still subject to a risk of forfeiture (which is to say: not be taxed until that risk has collapsed to zero).
Good point.
> If I flew for work for a decade and accrued a bunch of miles and redeemed them only later, in what year would they be taxable?
The year you redeem them I would think. Just like you don't recognize typically recognize investment gains until you actually sell and receive those gains. It'd be nonsensical to tax me on fake airline bucks for an airline that might be out of business later this year, or might devalue their points. The (as I would see it) taxable benefit occurs when I successfully redeem those fake airline bucks for a real, valuable service.
> If I mixed personal and business travel in earning miles, what portions would be taxable and when?
Seems like you'd need to maintain separate accounts, so when you redeem them you say, "yeah I'm using 20k points from my personal account and 30k from my employer-paid perk account, knowing I'll be taxed on the current value of the 30k taxable points".
Overall it does seem like a PITA, it's just funny to me because "this is too much of a pain to deal with so let's ignore it" doesn't seem like something the IRS usually says. I suppose overall the issue must be (as another commenter put it) "small potatoes" to the IRS.
Those miles seem to me to be close enough to securities that I'm not sure why the same rules don't apply to them.
Companies have on occasion tried to claw back frequent flier points from employees. Those policies were not popular personally I have zero issue with people who fly a lot getting a minor perk for a lifestyle I suspect many people here would absolutely hate.
If you got rid of business passengers, you'd have to increase rates to get the same profit, sure, but I suspect competition would keep prices low. The reason business rates are higher is because big businesses don't look too closely at prices and better service is seen as a little perk for employees.
Business travel, especially sales, also involves a lot of last minute booking and changes and those are expensive on both many planes and long distance trains. But, yes, at most companies you can’t just book business but you can always plead better schedule and also avoid economy basic sort of torture.
At a deeper level airlines and business travelers have no real business relationship. Employers are buying a service, airlines are selling a service. Business travelers are the "cargo" that airlines are shipping. Businesses pay airlines to ship this cargo. Airlines have no relation to the cargo.
Employers also pay the cargo (their employee) a wage. But they funnel part of that payment wage through airlines via miles. It's not much different than company sponsored health care, but it's company sponsored vacation/personal travel. It's an employer benefit, but not treated as one.
For my next business, I'll personally pay companies' decision makers to choose me as a supplier.
Hell, why stop there? I'll also pay politicians and judges to rule in my favor!
What you describe is one end of the spectrum (and probably illegal). But the line between that and good old discounting isn't very wide.
discount -> p&l -> budget -> bonus
Now you're getting it!
Someone must have spotted the opportunity, because we have one particular supplier who is approved, and basically you send them a list of what you want from whatever store/supplier/etc., and they send back a quote for the item(s) which is just the retail price plus a 10% markup. You order the item(s) from this approved supplier, and they just order it from the original source and have it shipped to you. A huge portion of the things that we needed to get for day-to-day usage ended up being ordered through them (software, lab equipment, hardware debuggers, etc).
Seems like a great gig if you can pull it off. Most likely this is just a 1-person outfit where they spend 30 minutes a day placing orders and generating quotes then just take their 10% of everything. I've always wondered if this business was started by someone who formerly worked in the procurement department and added themselves as a supplier before leaving.
or golf trips, fancy dinners, etc.
Shouldn’t this be taxed as income?
A portion of the money paid by company A to company B goes directly to the employee of company A. It would be taxable if A paid its employee directly, so what difference does it make if there’s a benefit program operated by B in the middle?
The guidance is from 2002. The airline reward programs have changed in the meantime. As the original article notes:
”In short, SkyMiles is no longer a frequent-flier program; it’s a big-spender program.”
So I wonder if the IRS might come to feel that rewarding spend is different from rewarding miles flown. Unlike air miles, the benefit to the employee is in direct proportion to the money spent by their employer.
https://www.investopedia.com/ask/answers/110614/are-credit-c...
> So, where do cash-back reward programs fit in? It varies. If a cash-back reward is credited directly to your credit card account, then the income is generally considered a nice rebate that comes with the benefit of using the card. If you actually receive a cash-back check directly, though, it gets a little trickier: It probably also would be considered a type of rebate, but it could technically count as income.
No, it's just a rebate/discount made directly to the purchaser. For tax purposes, if they buy something for $100 and get a $2 cash back, it just means they spent $98.
It's very different when there's a third party - employee - involved. The "reward" is going to someone who never spent any money, and so generally would be considered taxable compensation to them. OF course, regulatory exceptions in the tax code are nothing new, and it seems like this might need to be re-visited soon.
That would be the equivalent of the airline situation.
As a government employee, I'm pretty jealous. All our spending has to go through a credit card with no perks, rewards, or identifiable appeal, presumably because it makes the data harvesting easier. And you have to identify on the front end whether each thing is a valid expense so you know which card to use, rather than just filing relevant line items in a claim on the back end. The only good thing about the government travel cards is that they're physical objects, so you can sometimes lose them and then get to fall back on a card that does something for you.
Families with children are also allowed to board early, because they slow down the boarding process otherwise.
I wonder how long it will take the IRS to catch on and see this as a taxable benefit. It's like if significant business spending was done on Discover cards that paid its signer personally. Since it's been going on for years, maybe there is an exception written in law?
Speaking of taxes, the guy who bought a billion yogurt cups to earn trillions of miles donated the yogurt and received a tax benefit:
https://www.snopes.com/fact-check/pudding-on-the-ritz/
"Earning enough points to take my family on a free vacation each year is compensation for the time I'm gone"... "My wife and I get upgraded most trips we take because of this benefit"...
Actual tone-deaf quotes at a time when we were laying people off (not to mention that corporate cards had been around for a while and had been 'encouraged'. And most other managers had already mandated their use.
It's a perk. But when it's a perk only some people get, or get more of, you can't expect too much sympathy from everyone else when it's taken away.
They aren't comparing their situation to others within the company, but rather to individuals at other companies for whom this perk is widely available.
It's really surprising to me how intensely some people will pursue relatively worthless airline miles. I suppose if you're going to be traveling anyway, you might as well pick them up. But if you have the choice, it's not really worth the trade-off.
I'd take a company card any day.
Having to travel a lot is a known disadvantage of having one of these jobs. The ability to accrue miles or do in-lieu travel is touted as an offsetting factor for this. It’s literally mentioned as a part of the compensation package at places like job fairs or in interviews. In my past consulting job (and on places like r/consulting), people would literally calculate the dollar value of the miles/status you can accrue and would use it to compare compensation packages.
Losing this “perk” is more akin to having commission pay be a big part of your compensation, but then being told you’ll no longer get commission. It’s a material difference to what you expect to be paid.
I'd challenge anyone to find an employee handbook that specifically references expense reimbursement in this context. Indeed, ours has always said "corporate cards should be used whenever possible". This was just changing to more forceful language.
> Is this a good deal for the American consumer? [...] Certainly the system is bad for Americans who don’t have points-earning cards. They pay higher prices on ordinary goods and services but don’t get the points, effectively subsidizing the perks of card users, who tend to be wealthier already.
It's the economics of "scrip". https://www.investopedia.com/terms/s/scrip.asp
I saw this for real when traveling with a coworker when they had status and I didn’t. One of our flights was delayed, leading to me being stranded overnight and have to get the company to pay an additional $300 to stay in a hotel, while my statused coworker was rebooked with priority on a flight home due to their status.
The part of the equation that I think the article is missing is that air travel is an industry with an extremely high level of substitute options. Rewards programs are there to try and combat the fact that their products are 100% interchangeable and create some level of loyalty.
Yes, they're also a convenient financial instrument, but I'm personally failing to see how that's a problem requiring intervention. Even with these programs as a profit center, airlines are overall some of the lowest profit margin businesses you can find. There aren't many travelers out there who have much justification to be upset about the prices they pay to fly when the airline is only making single-digit percentage profit off their flight.
The article, in my opinion, was too zealous about advocating for reinstatement of a style of regulations that I don't think makes a lot of sense for consumers or the airlines. It's well-understood that fares decreased and service volume increased after the Airline Deregulation Act was passed. Many aspects of the defined routes and fares setups of the Civil Aeronautics Board actively stifled competition by preventing competition from entering routes and fixing prices.
> The Civil Aeronautics Board decided which airlines could fly what routes and how much they could charge.
Doesn't that sound kind of awful? This would be like your local health department regulating the precise recipe of each meal served at a restaurant, going above and beyond regulating health and safety practices.
The article acts like the airline industry is just 100% devoid of regulations, but that isn't at all true. For example, airlines are required to advertise the tax-inclusive airfare, required to refund fare plus penalty in cash in the event of bumping overbooked customers, and obviously long list of safety regulations, and numerous other requirements.
That's the entire point of a free market. Obtaining perfect competition. If you are producing a product that cannot be easily substituted then you shouldn't get to have a fully free market. Customer lock-in is the opposite of the concept and benefit of a free market.
Second, and industry with high startup costs, extreme barriers to entry, limited access to fixed resources (airport runways), and is of strategic importance to a country will always be regulated. Airlines will never be left to die (like for example the NFT market) - and we saw this during the 2008 period. And if you're going to socialize loses and have govt as your back stop there are rules you have to adhere to to ensure customer benefit.
To start an airline all you have to do is lease planes and gates and hire an interchangeable labor force. You don’t have to develop any technology outside of your reservation system, no factories, no research and development.
An example of a recent airline startup is Breeze Airways.
I agree - but thought of it a different way.
Delta has a reputation among frequent flyers for having the best operations of any domestic carrier. AKA, if you need a flight that gets there on time, Delta is your best bet.
So, I expect these changes to their frequent flyer program (which pretty much all frequent flyers have reacted to with universal hate) are a recognition of that. AKA, we're offering a good product, so why should we be generous with our mileage/reward program.
Delta were already regarded as having one of the least valuable award points of any program.
As to why the changes are so hated, take this example.
Imagine you're flying economy 1x a month from Los Angeles to Amsterdam on Delta. Each flight would cost around $800, and earn you 11,120.
Under the current program, you could have Silver Medallion halfway through your 3rd trip, Gold by your 5th and Diamond by the end of the year.
(Some caviats that you wouldn't make it that far without a waiver for MQD spend you could get with a credit card).
Under the new program, it'd take you 7.5 months to earn Silver, and you'd never make it past Gold Medallion flying that same route every month.
[0] https://en.wikipedia.org/wiki/Jamie_Zawinski#Zawinski's_Law
Key point: airlines are more powerful than normal banks - they are central banks, with complete control of the money (point) supply. On the trilemma [0], they chose to control the exchange rate (points to flight value) and have an independent monetary policy (how many points to issue to flyers or other buyers).
[0] https://en.wikipedia.org/wiki/Impossible_trinity
Points-miles are a way for airlines to lock and keep their customer base while treating their customers like cattle.
By far, the biggest costs of running an airline are the planes and the fuel. But the investors don't want to bet on the value of physical planes, nor do they want to bet on the price of oil. If they wanted to place those bets, they'd just invest in Boeing or Exxon. Instead, they usually want to bet that one airline will perform better than her competitors over the next year or so.
So, airline executives lease their fleets and buy tons of oil futures. This gives them a better shot of hitting their targets even if the price of oil skyrockets, it makes their fleet easier to scale up or down according to demand, and it makes their stock more attractive to investors who want more predictable performance.
Assuming they're mindless drones of the faceless "investors" with no free will or intent of their own.
> But the investors don't want to bet on the value of physical planes, nor do they want to bet on the price of oil. If they wanted to place those bets, they'd just invest in Boeing or Exxon.
You're putting the cart before the horse since that's a choice by the exec. If they wanted to derisk themselves they could as well hedge by buying puts on Boeing or calls on Exxon.
Overall, who decides what a good business is? Unfortunately, that's come down to a gang of Wall Street suits who would much rather punish good businesses for not catering to their attention span deficient trading/gambling habits. We would much rather have some jack of all trades making business decisions based on their next year's bonus/chalet/yacht rather than people who depend on those businesses (customers and employees), so of course we get to this state.
Think of Netflix using AWS. Digital content delivery is obviously crucial to their business (DVD deliveries aside) but it's not vital that they own their own servers — they're first and foremost a video streaming service, not a CDN datacenter business.
There are also various types of leases [1], commonly "wet" or "dry", which are analogous to managed/unmanaged/raw metal cloud services.
[1] https://en.wikipedia.org/wiki/Aircraft_lease
In a nutshell, when you buy an asset you can depreciate the value of the asset over the working life of the asset and in many tax jurisdictions (my knowledge/experience comes from the UK and US asset financing industry) offset that depreciated amount against profits, in the year the asset depreciates.
This means that you can essentially offset capital expenditure against tax, which is good business.
But if you don't make enough profit through the use of the asset at the right time, you end up losing the benefit.
But there exist large companies that make lots of profit, such that they can always offset the depreciation. And so _they_ can buy the asset, use the depreciation against their profits and then lease the asset to you. They might even be able to do this at a rate that ends up _being cheaper than you actually owning the asset_, depending on circumstances.
I mean AWS is the obvious example, that's basically leasing your hardware. But even companies with on-prem data centers lease most of that gear. It's way better for cash flow to make monthly payments than an up front one.
If it costs on average $X/month to maintain a plane, then the maintenance company is going to charge you $(X+Y)/month, where Y is a decent profit margin. Certainly you'd save money by not involving the third party, right?
Or are these companies happy to pay it because that $Y also covers risk of a sudden expensive repair?
Edit: a word
I think you’re ultimately right, but finding an investor would be irrationally difficult.
There are tons of airlines. I can often have my choice of airlines to fly to a particular city, nonstop, within a given hour. Where's the lack of choice? Economy tickets range from cheap to very cheap, unless you need to fly somewhere like Guam. Renting cars and booking places to stay are both significantly more expensive pieces of traveling. As long as that's true, it's hard to justify flights getting that much cheaper... unless you're flying a family of 6+, in which cases you're part of a small market.
> They make more money from mileage programs than from flying planes—and it shows.
Delta reported 5% of its revenue came from its loyalty programs in 2022 (2.5B of 50B according to 2022 10k). Although in the June annual shareholder meeting, it expected >6.5B in AMEX remunerations in 2023 with a long term goal of 10B.
American Airlines may have been closer to 10% (4.5B of 49B according to 2022 10k). I can't quickly find any public data on it's long term goals.
Both still well short of "more money" than from flying planes.
I expect the author is saying that if your split each up into profit, the profit is greater on the rewards program than the flying part.
> More than 16,700 Southwest flights were canceled and 2 million passengers stranded between December 20 to 29, scuttling holiday plans and leaving mountains of unclaimed baggage nationwide.