Disclaimer: This post summarizes and comments on a publicly available opinion essay and its reader comments. Facts and figures about specific companies are as reported in that essay and have not been independently verified. Everything else is my own opinion and interpretation. I have no affiliation with any airline or bank mentioned, and nothing here is financial or legal advice.

In a New York Times guest essay, Mark Kahan, a former Spirit executive, argues that Spirit Airlines died partly because it couldn’t borrow the way its big rivals can. Big airlines sell miles to the banks behind their branded credit cards. Those card deals are so profitable for the banks that, by Kahan’s account, the banks lend to their airlines on easy terms and help keep them afloat in bad times. Spirit’s card was too small to earn that treatment, and in his telling its banks held money back instead.

The reader picks. NYT’s reader picks sometimes do the explaining that the essay skipped. Michele asks what I suspect many readers were wondering:

For those of us who aren’t financial experts, it would be nice if the author had started with a basic explanation of how a loyalty program is “worth” something, or how the fact that X number of passengers earn Y number of free miles can be used as collateral for a loan (don’t those free miles represent something an airline owes, not something it has?). … I am left baffled as to what, in plain language, the problem actually is.

Her parenthetical gets the accounting right. Under standard accounting, unredeemed miles sit on the balance sheet as deferred revenue, which is a liability. What gets pledged is the program as a business: the member list, the brand, and above all the future cash from the bank.

BJX replies with the whole mechanism in a few lines:

A Bank buys miles from an Airline. It issues a credit card awarding its customers these miles when they use the card … Merchants pay a commission whenever the card is used. The difference between these commissions and the cost of the miles awarded, is the profit for the Bank, and creates the „worth" of the loyalty program — for the Bank, not the Airline. Now Airline is threatened with bankruptcy, in which case Bank would lose this very profitable business. In order to keep Airline afloat, Bank issues a loan. Et voilà.

The last line deserves more weight than it got: “it is neither the airline nor the bank who pays for this game but the customer who pays inflated prices to the merchant.” Interchange fees are built into prices that everyone pays, whether they use cash or cards. Spirit’s passengers, who by Kahan’s account were less likely to carry these cards, were helping fund the rewards of people flying the airlines that outlasted Spirit. Now they also pay the higher fares.

A good comment section works as a free editor.

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