The frequent fliers who flew too much

It boggles the mind every time I read about one of these "unlimited for life with a fixed initial cost" products.<p>In almost every case that I can recall it's been a result of a company having cash flow problems, often preceding bankruptcy. The article mentions that interest rates were high in the early 80s and it allowed AA to expand. They've done well to get away with it for now. Or maybe that's just a function of the cost being significantly high such that the market is small.<p>In the 80s in Australia there was a chain of health clubs that offered a life membership... shortly before going bankrupt.<p>This scheme has a number of problems:<p>1. Why offer frequent flyer miles at all? Those are to incent you to fly more but you can fly all you want anyway. I guess there's the option of giving them away but really you shouldn't get any;<p>2. Booking flights you never intend to take is obviously a problem. AA staff were complicit in that however;<p>3. An alternative would be to turn any ticket you buy into a first-class ticket. Free anything creates market distortions. It's nearly always better to have someone chip in something to incent the right behaviour; and<p>4. Life memberships are silly. If they want to attract the business flyers they were talking about it should be an annual charge.<p>AA are potentially looking at these people costing them money in the wrong way too. These people are essentially AA ambassadors who have paid for the privilege. How much does AA spend on marketing? How does it compare to the cost of these AAirpass holders? I bet these people otherwise sing AA's praises.<p>Also, what is the fill rate on first class seats on flights? I think part of the point of first class seats is they don't fill up giving premier passengers the ability to buy tickets on short notice. If so, it's incorrect to view each seat taken by an AAirpass holder as a seat not hold (in much the same way as the RIAA/MPAA view every song/movie downloaded as a one not sold).

A great write-up and a typical example of what you should never do as a service company.<p>The monetary damages for AA if at all (if any of their claims are actually true) is minimal (maybe $10-$20M over 30 years) - the damages to the brand, corporate recognition and being seen as a company that does not value their contracts as soon as it benefits their customers, might be of a magnitude bigger. And even a multiple of that in financial terms and years to repair the damage being seen as a dishonest organisation.<p>Faced with such a situation, with "bean counters" telling stories about something like that being very unprofitable or less profitable than expected in the first place, one has to use a strategic approach or even common sense. Particularly in such a situation - we are talking about people who have shown customer loyalty to AA for more than 30 years - 40M miles - what stories could they tell and what great advertisement for my airline this would be.<p>What AA has done here is only to demonstrate that those in charge of such activities have not the slightest idea of what they are doing and should immediately be removed from their positions and potentially sued for damages to the organisation (and this then might be billions).<p>If AA is clever they re-issue / value all these special air passes and make a big event out of that.<p>If you want to see when free air mileage is causing real financial stir-ups look to Lufthansa (about the same size as AA) - they are currently in a law suit in Germany being accused of serious fraud in 21M cases (and LH has already lost this case in the court of first instance) for taking away frequent flyer miles particularly from their best customers (those with more than 500K+ well LH is not known for being too generous with the mileage they provide on FF programs).<p>One outcome of this court case was that LH told the public that in the moment they have created accruals of about $4 Billion for not yet used mileage on their FF program - now that is what I would call some money at stake and not a few guys inviting people at airports on a free seat / upgrade - a seat that most likely otherwise would have been empty anyway.

I think the real lesson here is:<p>Never offer "unlimited". Because if you promise "unlimited" people will treat it as "unlimited".<p>The results usually aren't pretty.<p>EDIT: As the post below points out, telecoms are a prime example of companies getting burned on this.<p>My other go-to example would be all you can eat buffets. I know I've read about at least one lawsuit over people being kicked for eating too much at a buffet. (Or in the case of the only result I can get search engines to give me, too little.)<p>Of course, in the case of the buffet they're relying on the hope that people eat less than what they pay to get in on average. And since this sort of restaurant seems to stay in business that bet must be in the owners favor.<p>I hypothesize that business owners use this logic and offer unlimited only to watch it crash and burn all over their profit margins. From what I can tell, buffets appear to be the exception; not the rule.

There is always going to be a subset of people who are adept at finding ways around promotions and special offers, or the systems meant to regulate them. In addition, most companies don't understand how customers will react to contests and special offers.<p>For instance, when iTunes first launched, Pepsi had a promo that involved codes on the underside of 20oz plastic bottle caps that could grant free songs. Someone figured out that if you turned the bottle upside-down and at a certain angle before opening it, you could see the code and enter it into iTunes to determine if you got a free song. If the code was a dud, you could return the drink or sell it to someone else. Someone ended up putting the diagram on the Web. The promo ended not long afterwards.<p>There are also folks who figure out extreme hacks that can result in truly oversized rewards. I call this the "crates of cheese" phenomenon, after an airline promotion I read about that awarded people x frequent flier miles for purchasing a package of cheese. The rate was way too generous, and the marketing people setting up the promotion never anticipated that people would literally go out to buy crates of cheese to get cut-rate flights.<p>EDIT:<p>Crates of cheese:<p><a href="http://consumerist.com/2006/11/buy-cheese-fly-for-free.html" rel="nofollow">http://consumerist.com/2006/11/buy-cheese-fly-for-free.html</a><p>Pepsi/iTunes:<p><a href="http://www.methodshop.com/gadgets/tutorials/hackpepsi/index.shtml" rel="nofollow">http://www.methodshop.com/gadgets/tutorials/hackpepsi/index....</a>

A few years ago Air Canada offered a new trial product: unlimited-travel flight passes. If you were willing to limit your travel to a small region, you could get one for only a few thousand dollars. Some enterprising individuals picked these up and proceeded to take as many as a dozen flights per day on short-hop routes... racking up frequent flyer points for every flight.<p>Six months later, the unlimited-travel flight passes were introduced as a permanent addition to Air Canada's travel options, with one slight tweak: You now get a fixed number of frequent flyer points per month, independent of how many flights you take.

These calculations of the airlines "losses" on these pass holders strikes me as similar to the software industry's claims of billions of losses due to piracy, counting all pirated copies as lost revenue, even if the pirate would have never purchased the software in a perfect world.<p>Did they realize that if these guys are taking up what would have otherwise been an empty first class seat that it really costs the airline almost nothing (just the increase in jet fuel costs due to their weight and anything they might eat)? It's not like there were special flights just for these guys, they are scheduled flights.<p>I know folks that work as baggage handlers for just a few hours a week so they can buy $5 unsold tickets anywhere they want. This program is not that different from what they offer their employees, except for the first class designation.

Casa Sanchez on 24th St in the Mission (SF) offered lifetime burritos to anyone who would get their logo tattooed on their body. IIRC, it was an attention-getting stunt that they didn't expect anyone to take them up on. But a lot of drug addicts happily did and they had to discontinue the offer. This was in the late 90s. I wonder if anyone still gets free burritos on that basis.

What really was going on in the heads of these executives when they offered these schemes? Let me tell you something if I'm offered something for free for lifetime, than I'm going to use that as defined. Its free, for lifetime. You shouldn't be too surprised if customers treat it as such.<p>During my college days here in Bangalore, we would get a bus pass. My college was a little far away from my home, there was a college bus. But I preferred taking the public transport, you know why? Because for a paltry sum of 500 rupees I could travel unlimited any time during the day, any day during the year with unlimited supply of buses. On the other hand the college bus used to cost 10,000 rupees and you could take the bus on college working days, morning pick up and drop. Needless to say the clever students figured out within an year that the public transport pass was a lot better. These days I hear many companies are offering bus passes to employee instead of the company transport. Because of the kind of advantage they offer.<p>I see the same mistake being made by most clubs by offering lifetime membership on as meagerly sums as 50,000(Country club). This is a potential for disaster, Weekends are boring and other wise costly in Bangalore. Entertainment in multiplexes is pure rip off, eating out isn't cheap either. With all this, I would say most people would squeeze such schemes as much as they can for their benefit. And if they do, you should be too surprised.<p>If I ever got this free pass, I would get visas to the better part of the world. And this pass will now be my gateway to unlimited vacations, attending developer conferences around the world, traveling endlessly to see new places, meeting friends and relatives settled abroad. And why shouldn't I? Air tickets in my country are really expensive(for foreign travel), and I have never been outside India, not even once. I would like to travel around the world and any such scheme would make my job a lot easier.<p>People aren't doing anything illegal, and in fact doing just what you offered them. This isn't fraud.

As someone who did 39 flights in 3 months last year using JetBlue's Bluepass[1] I'd LOVE a lifetime unlimited pass. It's pretty clear the prices they were charging were far too low, especially for first class.<p>If I had an unlimited pass I'd probably average 2-4 flights per week, many international. It's even more practical when you have unlimited access to their lounge. Take a red eye and shower at the lounge and you just saved a day of hotel expenses.<p>1 - <a href="http://bluepassers.com/users/expertdan" rel="nofollow">http://bluepassers.com/users/expertdan</a>

&#62; Cade hatched a plan to confront Mukharji at London's Heathrow Airport. At check-in, American agents detained Mukharji and escorted him to a private office.<p>What agents? Detained under whose jurisdiction?

The problem with this is that people are self sorting. Only the people who intend to fly a lot will buy this. The airline loses money because there is a disparity of information. You know in general how much you will fly, whereas the airline only knows averages. This is very similar to Bill Clinton's Pay off college loans with percentage of 20 years' income program. That didn't work because people had general idea's about their future career path. So, a future government worker may elect to use it, whereas a future investment banker will not.

One has to question the competence of the executives who would sell a contract that obligates the company to nearly unlimited liability forever for a fixed one-time payment. Particularly in such a low margin industry as an airline.

For the curious, the estimated $350,000 each paid for their pass + companion pass roughly works out to $913,500 in 2012 dollars, if they purchased in 1981. Most of the travelers mentioned probably purchased theirs later in the 80s, but before the price increase in the early 90s.

&#62; In September 2007, a pricing analyst reviewing international routes focused the airline's attention on how much the AAirpass program was costing, company emails show.<p>They offered this product for decades without ever measuring how much it cost? Did everybody skip that day in business school?

It looks like AA is using the retail price of these flights when calculating how much money these customers are costing them, instead of the actual cost.<p>What's the actual cost in terms of fuel, service, and occupied seating?<p>The only way using the retail price makes sense is for fully booked flights, and since first class is rarely full, AA's numbers look extremely inflated.

They say Michael Dell has one of these passes. He should personally deliver laptops every now and then. Good PR

I remember watching a documentary on Mark Cuban where he says that this unlimited flight pass was the first thing he purchased when he sold Broadcast.com. I'm sure he began flying via personal jet shortly after.

That shows how much terms of service are worth. If company doesn't want to provide services any more then they just accuse you of fraudulent behaviour (even if you do nothing forbidden in terms of service) and cuts your service. They also sue you for good measure. You can contersue them but your case gets stuck in court because of procedural reasons and you are left without service you were promised for years.

What irks me about this is how AA is handling these clients. They are looking at the cost in today's dollars, not the advantage of having that money in 198x dollars. If AA had simply bought 30 year bonds with the income they received from the program, they would have probably come out ahead.

JetBlue offered something similar, albeit in a much more limited fashion, through it's All You Can Jet program. It cost $499 (no travel on Fri/Sun) or $699 (travel any day) and gave you unlimited flying for a month. It looks like they had the program in 2009 and 2010, but discontinued it after that.<p>They later introduced 3-month unlimited flying passes from Long Beach, CA (to select destinations; $1299) and from Boston (passes available for both limited and all destinations; $1499/$1999).

Does this remind anyone of unlimited data plans?

You have to prepare for how the worst user will abuse your system, and American didn't. They should have done the calculations based on a worst case scenario.<p>I've heard of people refer to it as the "Penis Problem", referring to Chatroullette's inability to stop perverts from exposing themselves on their service: lesson is that whatever service you provide you need to think about that 1% of the population will abuse it, and possibly ruin it for everyone else.<p>And this is just plain stupid for not having any opt-out clauses, or ability to revoke a pass, or setting any cancellation ground rules. Seems like they could have done a lot to stop this from getting out of hand, but were too incompetent to do so.

Holy crap, 40 million miles? That's over 1,600 trips around the world (1,850 if you use nautical miles) and nearly halfway to the Sun.

The real moral of this story is that if you offer a lifetime pass, put in a buy-back clause in the contract... That at any time you can buy it back from the customer at 2-3x the price he/she paid. No need to make this complicated.

It seems like the biggest risk in buying an unlimited airpass is that the airline will go bankrupt. AMR did (29 NOV 2011, the last of the legacy airlines to do so...), although I'm not sure if that invalidated the passes.

AA made a bad deal for short term cash. But the contract was valid and the people did not violate terms of the contract. Their investigations were done in bad faith and their cancellations of the contracts fraudulent.

I fly Southwest weekly and pay for my own travel, so I have an incentive to think about optimal purchasing schemes. There are some strategies which I am surprised are not made less appealing through relatively small fees:<p>1. When paying full-fare, flights are fully refundable. Not sure when you are flying home? Just book a bunch of flights. Even with the restricted fares, you get 100% back in SWA credit which can be used for the same person for one year. I'm surprised they don't have a 24 hour cancellation policy as I'm sure they lose money when flight sell-out and last-minute, full fare passengers book on other airlines. Even a $20 fee would provide incentive to cancel redundant flights.<p>2. Frequent flier points can be used to book restricted fares as effectively fully refundable -- if you cancel, you get the points back. So, just book-up a bunch of segments before prices go up in case you need them. There might be a $2.50 (yes, under three dollars) fee associated, but it's immaterial.<p>3. If you "miss" your flight and get to the airport within two hours of its scheduled departure, you can fly standby on the next one. There's an incentive to book a mid-afternoon flight (usually less expensive than, say, a 6:00 PM one), "miss" that flight, and standby on the more expensive one.<p>All-in-all, I don't abuse the rules much. Mostly, the lack of any fees for missing my Monday morning flights makes me less interested in showing up at the airport too early. I'm simply surprised that SWA doesn't provide me with small incentives to change my behaviors in ways which would help them immensely. Conversely, their website seems to have a bunch of O(N) or worse algorithms w.r.t. number of trips taken -- a huge annoyance to their most valuable customers.

"Become a member to keep on reading". Answering "No thanks" gets me to the home page. What am I supposed to be discussing? This is embarrassing, can we agree to discuss things that everybody can read?<p>The recent comment I saw about linking to one-page URL's was a great suggestion, but this is more egregious. Perhaps source quotations with submissions ala read later, etc. This would also provide a significant advantage for searching and reading HN archives.

Wow. You can't make this crap up. I love this: "Revenue Integrity Unit". I guess that's politically correct for "How do we screw over customers to make more money?"

It makes no sense for a business to offer this. I'm surprised it has taken them this long to finally do something about it.

I really, really want to buy one of these.

I think there are times when selling a lifetime account makes sense. Such as an infrequently used service where the lifetime value of a customer isn't too high. So pricing above the lifetime value would work. For a highly used commodity it does not make sense.

<i>Rothstein made 3,009 reservations in less than four years, almost always booking two seats, but canceled 2,523 of them.</i><p>Until I read this I was cursing AA. Now it seems like they are trying to cost AA even more money, on purpose. It may be legal but definitely not cool

Am I the only one thinking that it's unethical? Because of your carbon footprint.

Oh the humanity! After flying 10's of millions of miles a few wealthy individuals are no longer able to fly to the Louvre on a whim.<p>Meanwhile my neighbours and I have to catch a bus that is always late, often doesn't arrive and leaks when it rains.