Frequent-Flier Programs May Be Grounded Soon

Just when you thought it was safe to cash in all the mileage you earned for that free ticket to Hawaii, the airlines suddenly raised the minimum mileage needed.

The public outcry was so loud--and sustained--that the offending airlines rescinded their actions.

And just when you thought it was safe to sell those mileage awards you earned but didn’t need or want, the airlines scored a major courtroom victory in their war against the dozens of brokers who were openly trading the frequent-flier tickets.

A growing number of veteran airline observers believe both cases indicate the limited life spans of the frequent-flier award programs. If they’re right, consider using your awards in the next year.

First, the good news. If you earned 50,000 miles and still want to fly to Hawaii on American Airlines, you can. “We have listened to you and are not too big to admit that we made a mistake,” said Mike Gunn, American’s senior vice president of marketing in a letter written to members of the airline’s “Aadvantage”mileage program.

And, Gunn said, the airline will continue to offer two first-class tickets for North American travel--including Hawaii--at the 75,000-mile level.

Other airlines have similarly rescinded earlier mileage eligibility changes.

But first, some history:

Until quite recently there have been more than two dozen companies brokering the mileage award certificates. According to the claims of one major airline, coupon brokers developed their practice into a $50-million-a-year business, buying awards from frequent fliers and reselling them on a relatively open market.

Savings to the consumer needing a ticket were substantial. Two years ago a couple buying a TWA 50,000-mile award from a broker could travel first-class to several major European cities (Paris, London, Rome or Athens) and return to the United States for a total cost of $4,500. The same itinerary for the two, if bought from the airline or a travel agent, would cost more than $10,000.

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

Officially, most of these travel awards were non-transferable or transferable only to a member of the award participant’s family. But it was an unenforceable rule. Suddenly, everyone became everyone else’s third cousin.

Then the airlines decided to get tough. TWA claimed it lost more than $5 million in revenue from tickets that would have been bought by passengers who instead bought discounted mileage awards.

American and United claimed similar losses.

TWA then announced it would not allow travel agents to issue free tickets earned by participants in its Frequent Flight bonus program. Tickets would be issued directly by the airline.

And there was a further tightening of the rules. The airline announced that 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 the same surname policy.

Then the airlines went to court. TWA, American and United sued the Coupon Bank to stop them from buying and selling the mileage awards.

The Coupon Bank countersued the airlines, claiming the airlines had violated the Sherman Antitrust Act by ganging up to try to put the brokers out of business. The suit also accused the airlines of libel, slander, defamation of character, interference with business, and “intentional infliction of emotional distress.”

At the time the suits and countersuits were filed, Eric Fuller, owner of the Coupon Bank, said, “Our position 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.”

The publicity surrounding the case had a significant negative impact on business volume of many other coupon brokers.

As a result, the market for the mileage awards has dwindled. There are still plenty of sellers, but few brokers are able to successfully handle the coupons.

“It makes me a little nervous,” says Rob Deutschman, owner of Travel Mart in Los Angeles, an independent broker. “A lot of people will lay low for a while.”

In Deutschman’s case, since he is not a travel agent and has no contractual relationship with the airlines, there is little concern about a court case. But there is general concern about the current street value of mileage awards.

Those travelers who bought mileage award tickets in the past and enjoyed a 50% savings may now only realize a 30% reduction--or worse. And those frequent fliers who sold their awards in the past won’t be getting as much money for them. (A year ago, a TWA mileage award could generate as much as $2,900. Today, the same award sells for less than $1,000.)

The case of the Coupon Bank was settled out of court, but terms of the settlement definitely were in the airlines’ favor. Part of the settlement bars the Coupon Bank from brokering TWA, American or United frequent-flier awards, the three biggest programs in the country.

“It has had a great impact on us,” says Coupon Bank’s Fuller. “We can still sell mileage awards but we’ve had to cut way back. We’re a real little company now.”

The court settlement also required Coupon Bank to return a substantial number of mileage awards to the airlines, and pay the airlines an undisclosed amount as compensation for losses sustained through the brokering of awards.

Just recently, TWA has sued the Flyer’s Edge, another broker.

If the airlines pursue additional brokers, it’s quite possible that the practice of award brokering could end entirely.

In the meantime, attorney Hanley represents individual clients--frequent fliers--who still want to test the transferability rules, and a case is expected to be filed soon in Federal Court in Los Angeles on their behalf.

At United, effective July 1, all free ticket awards and buy-one, get-one-free awards, as well as free awards that include a companion upgrade, must be ticketed exclusively by United. “We’re doing this to maintain necessary controls over free ticket usage,” a United spokesman says.

But in their zeal to maintain more control of their programs, have the airlines gone too far?

“What it proves,” says Edwin Colodny, chairman of USAir, “is that you can’t retroactively change the rules. These frequent-flier programs are very helpful and build product loyalty, but they’re also like eating candy. Once you start, it’s very hard to stop.”

Colodny doesn’t foresee a long future for the programs. “They’re very costly to run,” he says. “And the more awards that are given out, the more the IRS gets closer to ruling that they should be taxed as income. Once that happens, not one airline will want to take on that burden of reporting to the government who got what award. Then the programs will stop. But that won’t necessarily be a bad thing.

“After all, with the costly programs gone, there’d be absolutely nothing wrong with airlines lowering air fares.”