Airlines are 3 trillion in debt. The Monetary Sovereignty of airline loyalty programs.

Frightening headline? It shouldn’t be. Here’s a bit of context:

Airlines don’t disclose how many miles are outstanding or the value used to calculate these liabilities. However, if we assume a valuation of 1 cent per outstanding mile, loyalty program members would have around 3 trillion outstanding miles.

Some economists, politicians, and media talking heads might tell you it means the airlines are seriously in debt.

OK, that “3 trillion” is not dollars; it’s miles or points. But there is a point (pun intended) to be made.

Travelers be warned: your air miles may be at risk 
by Jenny Surane, Justing Backman, and Bloomberg
May 19, 2021, at 6:54 AM EDT

Frequent flyers, consider yourselves warned: Sitting on a pile of unused airline miles could cost you.

Liabilities tied to the five most valuable airline-loyalty programs in the U.S. soared almost 12% to $27.5 billion last year, according to new analysis by LendingTree Inc.’s consumer-finance website ValuePenguin.

Airlines looking to shore up their balance sheets could reduce the value of those rewards or reinstate policies that allow miles or points to expire, the firm warned.

If the airlines wanted to reduce their mileage “debt,” they arbitrarily could reduce the value of their mileage reward points or allow miles to expire.

They are mileage-points sovereign. As the issuer of mileage points, the airlines can do anything they wish with those points. They can issue as many as they wish, increase or reduce the value, or void them simply by pressing computer keys.

If the Airlines felt generous, they could give you a few million mileage points. Or if they felt stingy, they could “tax” you points by reducing their value. Suddenly, flying to your favorite city would cost you double the number of points you thought. Effectively, that would be a 50% “wealth” tax on your point holdings.

Or they could tell you to use all your points by December 31st at which time the points would be worthless. The effect would be like a tax on you.

The airlines are to mileage points as the U.S. federal government is to U.S. dollars. By giving out more points than they receive, the airlines run “points deficits”; cumulatively, the airlines have “points debt.”

The airlines create points by pressing computer keys. Nothing prevents the airlines from pressing keys, forever. The U.S. government creates dollars by pressing computer keys. nothing stops the U.S. government from pressing keys, forever.

Being points sovereign, the airlines never can run short of mileage points. The U.S. government, being Monetarily Sovereign, never can run short of dollars.

The airlines never borrow points. The government borrows dollars.

“Especially in a time where airlines have gone through such financial issues, it would be easy to see that they would look at some sort of devaluation of the miles and points as a way to make up a little bit of financial ground,” Matt Schulz, LendingTree’s chief credit analyst, said in an interview.

“I would suspect we might see something like that going forward.”

This demonstrates the total control a Monetarily Sovereign entity has over its currency, whether airline points or dollars. The airlines create all the rules re. points. The government creates all the rules (i.e. laws) regarding dollars.

At the height of the Covid-19 pandemic, Delta, American, and United pledged their loyalty programs as collateral for bonds as the virus and resulting government restrictions sapped travel demand. Such deals could prevent any material changes to the programs, said Joe DeNardi, an analyst with Stifel Financial Corp., who follows airline loyalty programs closely.

United, for its part, doesn’t see currency devaluation as a handy tool to lower that accounting liability, said Michael Covey, managing director of the loyalty program at the airline.

Yes, it’s an accounting liability, but not a real liability because the airlines have total control over its value. They arbitrarily can create points by pushing computer keys, or they could eliminate the points altogether. Goodbye, “points debt.”

Does an airline owe someone a billion points? No problem. They can just type 1,000,000,000 into a computer and Voila! Here are the billion points.

Does the federal government owe someone a billion dollars? No problem. Just type the number into a computer and the dollars come into existence.

Think about that the next time someone tells you that Medicare or Social Security are running short of money.

A decade ago, revenue-based airline programs (rather than mileage-based) were fairly uncommon in the U.S. JetBlue was one of the first U.S. airlines to launch a revenue-based program when it revamped its program in 2009. Southwest followed with a program “enhancement” in 2011.

Then, the big airlines jumped on the bandwagon. Delta transitioned to a revenue-based system in 2015, and American Airlines and United quickly followed suit. Now, almost all major U.S. airlines operate a revenue-based program.

There again is that total control a monetary sovereign has over its currency. The airlines arbitrarily went from awarding mileage points to awarding revenue points.

However, programs differ a bit in how they award miles.

For better or worse, the three biggest U.S. airlines have similar mileage earning systems. General members earn 5 miles per dollar of eligible spending on travel with the airline.

Elite members earn a bonus on this base earning, with all three programs topping out at 11 miles per dollar for top-tier elites.

On Dec. 9, 2021, Delta became the first domestic airline to make basic economy fares ineligible for mileage earning. Basic economy flyers will no longer earn SkyMiles or Elite Qualifying Miles, Dollars, or Segments.

Again, the above demonstrates the total control by a monetary sovereign. Delta simply made the change by fiat. The federal government can, and often has, arbitrarily changed the value of the U.S. dollar.

The “Nixon shock” was an arbitrary move by President Nixon to end the convertibility of dollars into gold. Suddenly, the dollar was no longer worth 1/35th of an ounce of gold.

If airlines made the same kind of change, suddenly airline points would no longer be worth 1 cent or 1.5 cents each. The “problem” of the “points debt” would disappear.

Selling frequent-flyer points to banks
Airlines make money from loyalty programs by selling frequent-flyer points to banks, which then award them to credit card holders as purchase rewards.

The banks pay airlines 1 to 1.5 cents per mile, plus a bonus when new customers sign up for their branded credit card.

By selling their loyalty program frequent flyer miles to banks, credit card companies, car rental firms, hotels, and supermarkets, the airlines have found an almost guaranteed way to make a profit from their tickets.

In effect, most major airlines have a business model which is more like a bank than a transport company.

No, it’s not more like a bank. It’s more like a Monetarily Sovereign nation — Canada, Mexico, the UK, Australia, Japan, China, and yes, the United States — all of whom can create andvprice their currencies at will (unlike monetarily non-sovereign entities like cities, counties, states, euro nations, businesses, you, and me.)

This is the airline profitability program:

1. The airlines create points from thin air. They create as many points as they wish at virtually no cost.
2. They sell those points to credit card companies for whatever price they can extract from the companies.
3. They also give points to passengers as a temptation to continue using the airline.
4. Airlines lose money by moving passengers. All their profits come from loyalty programs, which allow the airlines to print money quite literally, which, is exactly what the U.S. government does with dollars.
5. Of course, airlines have to offer travel in exchange for points, so that is a cost of the program, but:
6. Airlines control how many points each flight costs passengers. So, high-demand days cost far more points than other days. This way, the airlines dissuade passengers from using points on those days when they can sell seats for dollars.
7. Finally, not all points are redeemed. Those not redeemed are free money to the airlines.

This shows you that Monetary Sovereignty is everywhere, though the public is kept in the dark. (See: “The genius of the board game, Monopoly.”)

When a retailer issues coupons, they essentially issue money in lieu of a price reduction. The retailer is sovereign over the coupons and can issue as many coupons as he wishes and make them any value he wishes.

All outstanding coupons could be counted as retailers’ “debt” – -i.e., the value of outstanding coupons—except customers pay for the coupons when they buy the products.

Imagine an airline saying, “We are going to raise the price of a seat from 100 points to 200 points because we are running short of points.”

You would think that’s crazy. How could an airline run short its points, points it creates at will, by clicking computer keys?

But that is exactly what the federal government says when it claims Medicare and Social Security are short on dollars.

You should ask the same question. How can the U.S. federal government run short of its own dollars, dollars it creates at will by clicking computer keys?

The reason you don’t ask is simple. No one questions the airlines’ ability to create their points at will, but your information sources tell you the U.S. government can’t create its dollars at will.

They tell you the federal debt (that neither is federal nor debt) is “unsustainable.”  They tell you the government should “ive within its means.” They tell you your taxes must be increased and/or your benefits reduced.

All these statements are deceptive, based on the hope that you don’t understand Monetary Sovereignty. The lie that the federal government can run short is dollars is told so that the rich can become richer while the rest survive in ignorance.

It’s that sort of ignorance someone like Eric Boehm promulgates when he writes an article like this:

The White House Claims Borrowing $16 Trillion Over the Next Decade Is Fiscally Responsible
If you can’t even get close to balancing the budget when unemployment is low, tax revenues are near record highs, and the economy is booming, when can you do it?

The article pretends that the federal government is not Monetarily Sovereign, can’t create dollars at will, needs tax dollars to pay its bills, and in some unexplained way actually could run out of U.S. dollars.

It’s a monstrous lie, aimed at keeping you down and the rich up by widening the income/wealth Gap between the rich and you.

If you ever feel like protesting something, this is what you should protest. The Big Lie in economics that the federal government can’t afford to provide certain benefits and/or that taxpayers fund federal spending.

The lie claims the U.S. “debt” is a “ticking time bomb,” to scare you. (It’s a “bomb” that has been “ticking” since 1940, and still no explosion.)

Rodger Malcolm Mitchell
Monetary Sovereignty

Twitter: @rodgermitchell Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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The Sole Purpose of Government Is to Improve and Protect the Lives of the People.

MONETARY SOVEREIGNTY