It occurs to me that a modern reward program where the currency is largely issued for buying things with a credit card is analogous to not just an emerging market central bank, but a central bank in an emerging market that exports a lot and accumulates a lot of forex reserves.
This suggests that the programs themselves are most valuable to long-duration value investors: they're basically a permanent capital source (assuming that number of miles outstanding over medium-to-long timescales doesn't decrease). Think about how important insurance companies are to Buffett and you get the idea, and then recognize that it's virtually inconceivable that these programs get as regulated as insurance companies are.
Example: consider a more separated SkyMiles from Delta (e.g. one that's 30% owned by DAL, 20% AXP, the balance other). SkyMiles sells miles to AXP at 0.9 cents/mile, and net settles daily with DAL where if DAL hands out more miles than are redeemed, DAL pays 2 cents/mile and if more are redeemed DAL gets 1 cent/mile. DAL also gets a daily payment based on the maximum level that day of the SkyMiles monetary base, maybe $1 for every 3.65 million outstanding SkyMiles. That structure incentivizes DAL to keep the exchange rate for DL flights reasonable and likely allows sales to AXP to be recorded at negative margin (great for taxes before any investment income is factored in).
That seems like a business which doesn't even need high growth to get a high valuation from someone who fancies themselves the next Buffett (or the next Tisch, I guess).
It occurs to me that a modern reward program where the currency is largely issued for buying things with a credit card is analogous to not just an emerging market central bank, but a central bank in an emerging market that exports a lot and accumulates a lot of forex reserves.
This suggests that the programs themselves are most valuable to long-duration value investors: they're basically a permanent capital source (assuming that number of miles outstanding over medium-to-long timescales doesn't decrease). Think about how important insurance companies are to Buffett and you get the idea, and then recognize that it's virtually inconceivable that these programs get as regulated as insurance companies are.
Example: consider a more separated SkyMiles from Delta (e.g. one that's 30% owned by DAL, 20% AXP, the balance other). SkyMiles sells miles to AXP at 0.9 cents/mile, and net settles daily with DAL where if DAL hands out more miles than are redeemed, DAL pays 2 cents/mile and if more are redeemed DAL gets 1 cent/mile. DAL also gets a daily payment based on the maximum level that day of the SkyMiles monetary base, maybe $1 for every 3.65 million outstanding SkyMiles. That structure incentivizes DAL to keep the exchange rate for DL flights reasonable and likely allows sales to AXP to be recorded at negative margin (great for taxes before any investment income is factored in).
That seems like a business which doesn't even need high growth to get a high valuation from someone who fancies themselves the next Buffett (or the next Tisch, I guess).