Airlines are a lot like central banks (2020) | Hacker News Reader

Airlines are a lot like central banks (2020)

abroaden.substack.com

93 pointsflygurl81 comments

>> Unfortunately, in the EU, rules concerning credit card payments and fees make co-branded credit cards unattractive to airlines and banks

In the EU card fees are capped and this is a good thing. AMEX extracting excess fees from my local coffee shop and then giving (some) of it back to me as air miles is the dysfunction.

I was shocked to find out that there is a 3-legged marketplace between acquirers, issuers, and merchants that funds a trillion dollar business model where neither the merchant nor the customer gets benefited.

Large merchants like Walmart and Amazon pay 50% less fees for every dollar compared to smaller merchants—-Smaller merchants is the channel where the most cashback accrues to cardholders.

Costco play pretty hardball with them as well. Only supporting one payment processor for CC payments. No idea where their fees/margins are, but guessing they're lower than just about anyone else as a merchant.

Winco, as a contrast doesn't even play the game at all.

Many small merchants just refuse as well. Try to use Amex at the local Chinese food marts around me and they will not take them (and I don't blame them).

A tax by any other name... is still a tax. That it's levied by our financial elite and not by the government is the more concerning part.

It isn't a tax if you can opt out of paying it. The part I find most concerning is the shift away from accepting cash at various retailers.

It's still a tax even if you don't incur it by avoiding the activity.

No, it's absolutely not. That's an insane definition that treats every platform or distributor's cut as a tax. Visa is taking a fee for the use of their service, which you are not compelled to use.

Merchants sure as hell have very little choice to participate in the Visa/Mastercard payment networks since so many of their paying customers are cash-free these days.

It’s not a tax on the end consumer. It’s a tax on businesses.

Consumer ultimately pays all costs.

I mean “free delivery” that you don’t use is baked into the price.

“Buy now pay later”, “park and pick up”, etc, etc are all things you pay for even if you don’t use it.

Those aren’t taxes.

which is why i prefer not to call it a tax, but a toll, or a levy.

Or extortion money, if less charitable.

I also always wonder what stops competition from encroaching on these credit card fees and reduce it.

Because the sellers benefit from people using credit to purchase goods and services, because more people are willing to pay more when they use credit.

If that were not true, then sellers have long had the option of refusing payment via credit card, or at least offering discounts for debit card.

But they do not, because overall, they earn more money from the higher prices that their customers are willing to pay with credit cards than the cost of the credit card processing fees.

It seems like false equivalence to state that Central Banks and airlines are the same because they both create an intangible asset.

Most nation's central banks bailed out airlines (if by proxy) just a few days after this was originally posted, which should be a fairly big indicator that airlines are far from akin to Central Banks.

But that's only because (unfortunately for the airlines) miles are not a universally accepted currency. Just like some poorer countries needing to be bailed out by the IMF, despite issuing their own currency.

The strange way Chuck E Cheese is like a central bank.

You joke, and yet [Lucas 1988] uses an amusement park as a toy model to demonstrate how monetary shocks can affect real economic activity. The key difference between this and Chuck E. Cheese, though, is that Chuck E. Cheese is the only merchant that accepts their tokens for any sort of payment.

[Lucas 1988] https://home.uchicago.edu/~vlima/courses/econ203/fall01/Luca...

To be fair to the article, the title is "the strange way airlines are actually central banks", implying that it's just in that one way that they are central banks.

analogies compare dissimilar things with a common attribute

it is almost impossible to judge an analogy, despite how common it is to do so

A day doesn’t go by without someone claiming a company is a bank.

Apple is a bank, Starbucks is a bank, my hospital is a bank, my cat prints money.

Just because it sounds silly on its face doesn't make it not true. The basic premise is solid: many of the most successful corporations today make a large portion of their profit from convincing customers to park funds in their accounts, and investing that money in financial instruments.

Everyone's got millions of unsecured creditors at zero interest. What could possibly be problematic about that?

Yeah, the truth is we live on a Casino Chip Society https://brettscott.substack.com/p/casino-chip-cashless-socie.... And it is true that companies love this status quo.

Cool article, thanks for sharing :)

Discussed on HN 8 months ago: <https://news.ycombinator.com/item?id=33801973>

The question is: What is their value add? What is their moat?

People call Mc Donald’s a real estate fund and feel smart about it, but their moat is in fast food, no matter how they realise their earnings.

> What is their moat?

That's only a useful question if you're an entrepreneur trying to answer the question of "How do I get in on this game?" The question currently being asked is closer to "Is it a problem for society that so many players are in on this game?"

If every big business is just a moat and/or backdoor for banking, that might be indicative of a problem.

Sure but the problem might be internal find-the-lady accounting.

In fact it probably is. Much like internet advertising has to be. You can't have an entire economy based around free services funded by advertising for other free services, you can't have returns generated solely by investing in companies that invest in other investors. Unless massive numbers of private sector backers have been defrauded, the lady is somewhere. Though maybe not somewhere that taxman looks.

I might buy slighter fewer Starbucks, or Fords, or flights if they were no loyalty programs, but I'd be spending zero money on StarBank/FordBank/DeltaBank without the product to go with it.

> might be indicative of a problem.

why is it a problem, if it means that these funds are _more_ efficiently allocated?

For example, buying a starbucks gift card is money being invested by starbucks (elsewhere) and generates a profit. Had the customer not purchased such a card, would the cash have been invested in a similarly efficient manner? Or would it be in the proverbial cash-under-the-bed and not generating any returns?

> All and all, frequent flyer points are a massive business for airlines. According to some valuations, these programs are worth just as much as the airline itself.

This alternative currency that's been around long before cryptocurrency... is more significant / interesting than your cat printing money.

The original assertion is ambiguous - we can't determine if the GP meant that their cat operates a printing press that outputs currency, or that the cat itself outputs currency.

Honestly, I'd be pretty interested either way.

If you're in the right place with heavy machinery at the right time, your CAT will print money.

https://www.cat.com/en_US/products/new/equipment.html

The only really interesting breakdown I’ve seen along these lines was a dissection of how cheap Starbucks’ cost of capital is due to their gift card system. It’s quite a remarkable business they’ve created totally apart from selling coffee!

In my opinion frequent flyer points are only interesting to consider in terms of the implications of a currency that will only get shittier over time.

They're notably distinct in that you can simply exit their system and choose not to participate. Calling them banks is apt, I suppose, but calling them central banks takes gravitas away from the most heinous, utterly unethical institutions that are the actual central banks.

and this is the only the beginning. Wait until everyone can create his own credits and everything is liquid and can be exchanged :)

That's not going to happen. Our finial system depends on centralization (not that I agree with that) and if your talking about crypto that's just another level of control we can't quite see yet.

Max Berry's book Jennifer Government[1] posits that WW3 will be fought over airline miles.

[1]: https://en.wikipedia.org/wiki/Jennifer_Government

I’m sure the author has a sequel planned——Cashback Planet :-/

There’s a blast from the past. I played the associated online game back in the day, dang I’m old.

It looks like it's still around: https://www.nationstates.net/

Relevant Wendover video: https://youtu.be/ggUduBmvQ_4

Also relevant Byrne Hobart post on how frequent flyer miles programs are worth more than the airlines themselves: https://archive.is/yUTay

I just want them to upgrade my damn seat. United 1k, hundreds of thousands of lifetime miles, and they almost never upgrade me even with their new “plus points” model which appears just to be some kind of fixed price bid for increasing your place on the waitlist.

It’s been my experience over the past ~year (as a top-tier flier on multiple airlines) that the airlines have completely depreciated their frequent flyer programs to the extent that regardless of your status the only thing you really get is, preferred economy seating, not boarding last, and some free checked bags.

I used to direct my spend to preferred airlines, now I don’t bother, it literally doesn’t matter.

(Not to mention the ~80% devaluation in mile value)

Platinum Medallion with Delta whose been on 30 segments this year with 2! "complimentary upgrades" across those. I'm going to start just booking first on the major (DL,UA,AA) with the direct flight from my local airport and be done with it. Loyalty doesn't buy anything when everyone has it via credit cards.

The thing that keeps me on Delta (despite frequent flyer status being worth ~nil) is that fact that they're the only one out of the big three who has not frequently delayed my flights by more than an hour or just cancelled them outright *after* everyone has already boarded the plane.

Honestly, I like it this way. Provide good service -> receive customer loyalty.

Also United 1K here for 2 years straight.

It really depends on the flight segment and the seating class you bought. Flying to/from the hubs? Forget it. Everyone and their mother are 1K for United if you're flying from SFO. United really screwed the pooch by allowing insane amount of people to qualify for 1K.

At least you get priority boarding (assuming non-1K members don't line up in 1K pre-boarding) and 1K priority support line.

This post is from 2020 when all air travel ceased. It would be nice to see an update with the new creative airline miles schemes.

I 100% agree I would love to see a follow-up. The post made predictions about post-pandemic air travel, I wonder if they've panned out.

As for the new miles schemes: airlines used to publish charts showing you earned for X points per mile. The shorthand "miles" referring to FF points is telling. Now airlines use "Dynamic award pricing". It's impossible to tell in advance how much your points are worth.

https://thriftytraveler.com/guides/points/points-principles-...

Could someone elaborate? What are the new airline miles schemes?

Instead of the old "fly X miles get X points", it's now "fly X miles and the airline determines at the time of the flight how many points its worth".

That trend started in 2019, but it took off as the pandemic wound down.

Maybe it's different for other airlines, but Delta shows you the miles you'll earn when you book the flight.

I'm not familiar with all airlines. The important change is that the rewards vary and the airlines can and do change them at any time, subject to whatever marketing or sales numbers they are targeting.

Instead of the old "fly X miles get X points", it's now "pay X air fare get X points".

Side bar: Does anybody else dislike this one-sentence-per-paragraph format?

I dislike it, but there's something maybe related to it that I do like and recommend. Unsurprisingly, it appeared here on HN about a year ago. One sentence per line: https://news.ycombinator.com/item?id=31808093

I started writing like that after I saw it here and it's definitely improved my writing process. Note that this is not one sentence per paragraph. After my source writing (in markdown) is processed to whatever output format, the paragraphs look normal.

Just like the comment you are reading now.

Yes, I use one sentence per line for things like latex or markdown, but I mainly do that because of line-based diff tools.

For me, reading one sentence per paragraph is fine for short things like comments, but I find it gets exhausting after 8~10 sentences. It feels like the author is unable to focus and expand on one thing, and keeps moving on new points over and over again, or like every sentence is of equal importance and some pivotal revelation in the story.

The part of about line-based diff tools caught my attention at first, too. In the section "Hints for Preparing Documents" in Unix for Beginners[1], Brian W. Kernighan writes, "Make lines short, and break lines at natural places, such as after commas and semicolons, rather than randomly." At the time he was writing that, around 1978, the unix editor was ed, a line-based editor.

As Derek Sivers notes in his post, there are many other reasons for semantic linefeeds[2], and over time I've found those reasons more important.

1 https://web.archive.org/web/20130108163017if_/http://miffy.t...

2 https://rhodesmill.org/brandon/2012/one-sentence-per-line/

I dislike it less than the hyphen-between-every-word format.

You sound like a run-of-the-mill chocolate-chip-loving stay-at-home mother-in-law.

You-nailed-it.

This is a pretty interesting read. There is definitely a similarity to crypto currency here as well. Wonder why the SEC does not categorize airline points as securities and come after them...

See the Howey Test: https://www.investopedia.com/terms/h/howey-test.asp

Airline Miles don't grant you access to a portion of the profits from the airline. They aren't an investment. They are a currency for future travel.

They're a liability of the airline, and they're an asset of the customer, but they are not an investment, because they can only go down in value, not up.

Same as gift cards.

Sometimes the dollar price of a flight goes up but the points price stays the same = points went up.

That you can make money through arbitrage is not the definition of a security. See my link above.

Does the CC companies buying these and then granting them to card holders as a reward qualify or affect the test at all?

Because people don't buy FF points as a speculative investment. If you said "I am starting wonderwonder's airline. I will only sell tickets based on FFPs. I am currently selling FFPs at a discount to what I will sell them at later and they are transferable. You should buy them now to resell them later" they would be securities.

>Because people don't buy FF points as a speculative investment

Why not? People do it with forever stamps.

>If you said "I am starting wonderwonder's airline. I will only sell tickets based on FFPs. I am currently selling FFPs at a discount to what I will sell them at later and they are transferable. You should buy them now to resell them later" they would be securities.

Might as well be the way the USPS advertises forever stamps.

People buy stamps that are guaranteed to rise at less than the rate of inflation as an investment? And the USPS advertises it that way??

I'm not convinced. I would need some evidence of that.

(I am aware that stamps may be used in prison as a currency, but that's a special case.)

You can sell forever stamps. You can't sell airline points.

You can generally only get frequently flyer points by flying on an airline, and even then airlines sometimes sell points for money and it’s always a bad deal.

I get them on several of my credit cards as rewards. I have the option of getting FF points or something else.

Yes you can use other rewards programs to get frequent flyer points but you could also get dollars instead if you wanted

Central bank comparison is farfetched here.

Was going to post the exact same here. Economics major. Making this comparison shows lack of insight into what a central bank actually does, or the power it yields.

> According to some valuations, these programs are worth just as much as the airline itself

Interesting source about this: https://www.wsj.com/articles/are-frequent-flier-programs-rea... or its archive: https://archive.is/ZOVme

Ha, I just posted about this in another discussion about an hour ago [0]. It astonishes me how a link to an article tucked away in a thread can find itself in the top page of HN an hour later.

[0] https://news.ycombinator.com/context?id=36943868

That’s where I first read it! Very interesting analogy.

The automatic title mangling somewhat hides that the author intends it to be an analogy only, not an identity.

Personally, I ignore frequent flier points (and similar programs in other industries). They add additional complication that I don't need to something that's already a substantial hassle.

It's different. Nowadays, central banks create money out of nothing. Companies can create these loyalty points but they need to pay the customer back with services when they come back to exchange it.

Should be noted that this is from March 2020

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