We continue the reading theme from yesterday (Loyalty programs are scams; airlines are the OG scammers #1598123).... here's a nice one from last month in the NYT:

The more months that go by, the angrier I get about the death of Spirit Airlines, the discount carrier with the banana-yellow planes that saved passengers billions of dollars over its turbulent lifetime.

Spirit was supposed to be the odd-one-out, constantly and forever on the customer’s side.

The bigger loss for airline passengers is that the major carriers will retain an unfair advantage in their financing that will make it difficult for any other airline to replace Spirit as the industry’s ultralow-fare innovator and policeman.

For me, it’s personal. Spirit’s founder, Ned Homfeld, started his career in trucking but made the fateful decision to enter the airline business in my Washington law office in the fall of 1989. Shortly afterward, I became an airline executive. As Spirit’s vice chairman and general counsel, I was responsible for day-to-day operations until 2006.

Apparently, the explanations for Spirit’s downfall are all just SORT OF true:

• Poorly timed (planned?) order: 150 new airbus right before the plandemic
• Pilot shortage
• Engine defects grounding aircrafts for a long time
• Federal judge blocking the JetBlue merger
• Iran War

“To understand what really happened, you must zero in on the greatest barrier to airline competition: loyalty programs.”

You might see them as free travel. Major airlines see them as free money, which they can use both as a weapon against carriers like Spirit and as a cushion against shocks such as the Iran war. […] Look at your credit cards. If you hold an airline card such as the Chase United MileagePlus or American Express Delta SkyMiles, you are the fiscal foundation of the modern airline industry.

Amazing...fiscal foundation.

My bad: I approved it. (At the time, I was working for the Civil Aeronautics Board, the government agency charged with regulating the airline industry.) None of us at the C.A.B. foresaw that this decision would eventually marry the biggest banks to the biggest airlines.

And while the made-up points constitute some 10% of e.g., American’s top line (more for profits since, like all seigniorage, they are shockingly cheap to create):

the money, however important, is almost beside the point. What matters more is that these programs function as collateral, giving the biggest airlines access to inexpensive capital that their smaller rivals can’t match.

• JPMorgan Chase during 2008, made a $600m loan to United secured by MileagePlus (not real estate or jets)
• During the plandemic, all the major carriers borrowed against their money printers: (“United borrowed $6.8 billion against MileagePlus” plus “Delta borrowed $9 billion against its estimated $26 billion SkyMiles program”  plus “American raised $10 billion, secured by its AAdvantage program”).

Spirit had a credit card, too, a partnership with Bank of America. But the company was never important enough to Bank of America to warrant that kind of backstop. Even worse, Spirit’s credit card processor, a unit of U.S. Bank, did the opposite, holding back 100 percent of the carrier’s theoretical refund liability — a total it would never have paid — depriving it of working capital. That processor withheld $200 million from Spirit in 2024 and another $50 million in 2025. Those were steel nails in Spirit’s coffin.

Spirit was "too small to matter" (hence, why this guest essay/long read is in the New York Times... oligopoly, small guy falls prey to the financialized big guy etc etc.) I do hate when I join in with anti-capitalist leftists, but yes… outlaw loyalty programs since they’re scammy and violate ArtI.S10.C1.4 of the U.S. Constitution...

I'm game.

Ganesh Sitaraman, a Vanderbilt law professor and the author of “Why Flying Is Miserable and How to Fix It,” has argued that only a comprehensive overhaul of the domestic airline industry can fix the problem. He proposes regulating the airlines like public utilities — perhaps even imposing price controls — and outlawing loyalty programs of any kind.

Says Kahan again:

Deregulation was designed to enable more competition. It was never supposed to give major airlines free capital to build moats around their businesses. The remedy is to take away those moats, not to hand Washington back the authority to set fares and routes.

“Credit card points programs with “free” consumer benefits are so entrenched in the way Americans travel and so integral to major financial institutions that lawmakers are unlikely to ban them.”

Well worth the full read

archived: https://archive.md/vZxHV