Airlines Battle to Control Frequent-Flier Coupons

It was the summer of 1979. United Airlines, rebounding from a strike, hopped back into the travel market and issued special half-fare future flight bearer coupons in a competitive war to lure passengers to keep flying their planes. American Airlines then matched the promotion. Not long after, Eastern Airlines started handing out coupons on its shuttle flights between Washington, Boston and New York. And the coupon war commenced.

The coupon marketing program lasted barely more than a month, but the coupons issued during that period were valid for a year, and applied to all the flights of each airline. It was, at the time, quite a good deal for anyone who intended to fly again within the next 12 months. And, even if the passenger had no travel plans, the coupons were transferable.

Within days, savvy entrepreneurs who had done some basic arithmetic could be found at almost every major U.S. airport, greeting incoming passengers and offering to buy their coupons, hoping to resell them later to other passengers.

Didn’t Last Long

The brokering of United strike coupons didn’t last very long, but it gave a number of budding entrepreneurs the experience they needed when the airlines initiated their wide-ranging frequent-flier bonus programs five years ago.

As just about everyone who flies more than once a millennium knows, passengers who participate in these programs and accrue mileage can receive anything from a free upgrade to first-class certificates to round-the-world tickets, cruises and accommodations on the legendary Orient Express.

More than a dozen companies nationwide specialize in brokering the mileage-award certificates. It has become a multimillion-dollar business.

The new wave of coupon brokers have not been operating surreptitiously at airport gates or under the table through word-of-mouth. They work openly from offices, they advertise and they buy and sell the mileage-award certificates at savings from 25% to 60%.

Often, the frequent flier who accumulates the mileage awards may be the last one in the world who wants to take another airplane trip. By selling the mileage award, the frequent flier makes some extra money, and by buying the award at a price greatly reduced from normal fares, a vacationer can often manage a cheap trip.

Substantial Savings

To say the least, the savings can be substantial. Two years ago, a couple purchasing a TWA 50,000-mile award could travel first-class, to several major Western European cities (Paris, London, Rome or Athens) with unlimited stops and return to the United States for a total cost of $4,500. The same itinerary for two, if purchased directly from the airline or travel agent, would cost a whopping $10,508!

And, a frequent flier who had accumulated 90,000 miles on TWA could sell his award to a broker for a cool $3,000.

Officially, most of these travel awards have been non-transferable or transferable only to a member of the award participant’s family.

“It was an unenforceable rule,” says one travel agent who brokers the coupons. “Everyone suddenly became everyone else’s distant cousin. The airlines knew we were doing this, but they didn’t seem to care.”

Now, all that may be changing. Short of becoming genealogy detectives, the major airlines have decided to substantially tighten their programs to try to discourage the brokers.

New restrictions are being imposed. As a result, lawsuits against brokers, and countersuits against airlines have been filed, and different court injunctions have been sought to stop the sale of the mileage awards as well as to restrain the airlines from imposing such restrictions.

When it comes to frequent-flier awards, it’s a war out there.

TWA claims it has lost more than $5 million in revenue from tickets that would have been purchased by passengers who bought discounted mileage awards instead.

American and United claim similar losses.

As a result, TWA has announced that starting in two weeks (Jan. 1), it will not allow travel agents to issue the free tickets earned by participants in its Frequent Flight Bonus Program. Tickets will be issued directly by the airline.

Already, TWA has tightened the rules. As of Nov. 1, mileage awards must be issued in the name of the member of the program. (In the case of companion awards, at least one award has to be issued in the name of the program member. United has also started a “same surname” policy.)

TWA, American and United have sued the Coupon Bank, a La Jolla, Calif.-based broker, seeking to stop them from buying and selling the mileage awards.

Airlines Sued

And the Coupon Bank has sued the airlines, claiming the airlines have violated the Sherman Anti-Trust act by ganging up to try to put the broker out of business. The suit also accuses the airlines of libel, slander, defamation of character, interference with business and, last but not least, “intentional infliction of emotional distress.”

(In addition, the Coupon Bank filed a class-action suit, claiming to represent frequent fliers, seeking to prevent the airlines from changing their mileage program award eligibility and transfer regulations).

American Airlines will also soon start issuing its own mileage award tickets and will change the rules on transferring the awards.

“There have been too many abuses,” says Delta Airlines spokesman Vince Durocher. “We’re going to move quickly to make it difficult for these brokers to operate,” he says. “The mileage awards were designed to be used by those who earned them. They weren’t intended to be sold on the open market.”

Strict New Rules

United Airlines has just implemented strict new transfer rules for its MileagePlus award program. “Coupon brokering has gotten to be a $50-million cottage industry,” United spokesman Chuck Novak says. “When people sell the coupons, it upsets the economics upon which we’ve based the program. Our mileage awards are rewards to our frequent fliers. They weren’t supposed to be bought and sold.”

But the fundamental argument raised by the controversy is who really owns the award certificates--the frequent flier or the airline. “Our position,” says Eric Fuller, owner of the Coupon Bank, “is that the frequent flier bought and paid for the certificate and it is an accrued benefit that he or she can use, give away or sell.”

A number of frequent fliers have complained about the new rules. In fact, Fuller has taken out a number of advertisements urging disgruntled members of the frequent-flier award programs to voice their complaints directly to the airlines.

It’s too soon to tell if Fullers’ letter-writing campaign will have any lasting effect. But for now, the airlines are sticking with their new policies restricting mileage award certificates.

Firm Decision

“This is a firm decision,” United’s Novak says, “and we’re not worried about losing business because of it. We still have 4.5 million people in our program. Let’s just say that.”

A federal court in San Diego won’t decide the case until next summer--at the earliest--and so the issue continues.

And brokers, like the Coupon Bank, limp along despite the crackdown. “Our business has dropped significantly,” Fuller says, “but we’re still going. The airlines think they’re making it tough for us. They are. It’s more difficult for frequent fliers to sell their awards, but we’re still maintaining a market for the coupons.”

How? Fuller won’t disclose specifics. “Suffice to say,” he reports, “that airlines like TWA have left open loopholes that are still available to us.”

Less of a Bargain

The bad news is that those travelers who bought mileage award tickets in the past and enjoyed a 50% saving may now only realize a 30% reduction on price. And those frequent fliers who sold their awards in the past won’t be getting as much money for them. (A year ago, the Coupon Bank bought the TWA 90,000-mile award for $3,000. Today, it will still purchase the award, for $1,700.)

In the meantime, the airline frequent-flier programs march on. In fact, Continental, Eastern and New York Air have just started issuing special MasterCards that give card-holders mileage points every time the cards are used. And, when using the credit card to purchase airline tickets, members of the frequent-flier programs will receive points equal to the cost of the flight in addition to credit for the actual number of miles flown.

At this writing, no one is yet brokering MasterCards, but in the airline business, anything is possible.