This analysis is slightly incorrect, since if rewards programs are treated as assets, they contribute to net enterprise value, not to market cap. Market cap mostly subtracts loans outstanding from the total expected returns of the enterprise. American, for instance, has 37 billion dollars out in debt, and the market cap is the expected value above the expected payout to the loans.
So in this analysis, American is actually worth 47 billion-ish dollars. 37 billion of those are owned by the creditors, and 10 billion is owned by the shareholders. 22 billion of that worth is the rewards program, and the rest is the rest of the business.
If american’s rewards program disappeared, the creditors would take a haircut, but they would not get nothing.
You can do the same for all of these.
As an aside, every time I have seen someone saying this, they neglect to model debt. I think it might be systematically confusing.
This analysis is slightly incorrect, since if rewards programs are treated as assets, they contribute to net enterprise value, not to market cap. Market cap mostly subtracts loans outstanding from the total expected returns of the enterprise. American, for instance, has 37 billion dollars out in debt, and the market cap is the expected value above the expected payout to the loans.
So in this analysis, American is actually worth 47 billion-ish dollars. 37 billion of those are owned by the creditors, and 10 billion is owned by the shareholders. 22 billion of that worth is the rewards program, and the rest is the rest of the business.
If american’s rewards program disappeared, the creditors would take a haircut, but they would not get nothing.
You can do the same for all of these.
As an aside, every time I have seen someone saying this, they neglect to model debt. I think it might be systematically confusing.
This is correct and a big oversight on my part, thanks! I’ll update the post later today.
EDIT: It’s been updated.
Did you update the post? By my read, Mis-Understandings’ comment still disagrees with it, in particular with
But I’m not sure if I’m reading right.
It has been updated now—I didn’t get around to it that afternoon and then forgot until now.