Frequent-Flier Ticket Brokers Being Bumped Out of Business

When Eric Fuller was a student at UC Berkeley in 1982, he helped make ends meet by buying and selling airline frequent-flier mileage awards. The business became so good, in fact, that after he finished law school in San Diego and passed the California bar exam, he went into it full time.

At the peak of his success in 1986, his La Jolla-based Coupon Bank employed 100 people and grossed $2 million a month. But all that has changed.

Fuller said in an interview that he is lucky now if monthly sales total $150,000. Just two years ago, his company was handling at least 1,000 transactions a month; now the number has dwindled to between 100 and 150.

Fuller’s difficulty results largely from a settlement he made to end lawsuits brought against him by three airlines. Although the settlements were sealed, observers say that he agreed not to deal in their mileage.

“We can’t do much business. There is no turnover. We fully expect to be out of business within six months, a year at the most,” Fuller said mournfully. And he predicted that other coupon brokers “will have the same ultimate difficulty.” Of the estimated 30 to 40 brokers nationwide who were in the business at its height, several have already been forced to close up shop.

As the Fuller case illustrates, the once-thriving business of dealing in the free trips that airlines award to their best customers has run into difficulties. Although such bartering has not dried up completely, it no longer provides an easy way for frequent fliers--mostly business travelers--to sell their mileage awards for fast cash.

Variety of Rules

The frequent-flier programs were inaugurated in 1981 by American Airlines, and the other carriers followed suit. The programs are designed to lure more passengers to the airlines by giving them points for air mileage they pay for and rewarding them with bonuses ranging from free upgrades to first class to free tickets on international flights.

The carriers have a variety of rules concerning transferring the awards to others. Pan American World Airways will allow only the program member to fly with a companion; other carriers will allow mileage to be transferred to relatives or both relatives and friends. While buying and selling the awards is legal, it is against the rules of all airlines.

But most people who travel often want to be allowed to sell their frequent-flier travel rights. In its annual poll, Frequent Flyer magazine found that 56% of respondents said the airlines should permit brokering; 37% said they were opposed to it. The poll also showed that 4% of those who answered sold their bonuses rather than using them themselves.

The market in travel coupons is potentially huge, as it is estimated that there are more than 27 million members of U.S. frequent-flier programs, and the number is growing rapidly.

In 1986, before things started going sour, coupon brokers are estimated to have sold upwards of $100 million worth of low-priced tickets a year. According to John Holland, editor of the Business Flyer Newsletter published in Boston, until quite recently at least 5% of all frequent-flier mileage ultimately filtered through the coupon brokers. The figure has dropped to 1%, he says.

Various reasons account for the troubles of the discount airline ticket brokers. Most importantly, the carriers, in an effort to stem the drain on revenues they say they sustain when such free mileage is bought and sold by the brokers, have cracked down hard to stop the practice. They have won a number of civil suits against the brokers, and other cases are pending.

As might be expected, to some degree the suits have intimidated the coupon brokers, most of whom are very small business people. Some operate with just two or three staffers and a couple of telephones. “It’s a gypsy business,” noted one observer. But the brokers say they are going to fight the airlines vigorously despite their meager resources.

“The specter of functioning under such lawsuits makes doing business much tougher,” said Bruce Briggs, president of Platinum World Travel of Salt Lake City, one of several brokers recently sued by American Airlines. The big airlines and the little brokers are not evenly matched, he said, “as far as resources and energies go. These things get very complicated and it takes a lot of money to fight them.”

‘Capacity Control’

Besides litigation, the carriers have otherwise severely restricted the use of free mileage. Although they have made using the awards more difficult, the airlines certainly want them to be used by their frequent-flier program members. These are, after all, rewards for loyalty. But the airlines also want to sell tickets themselves to people who are now buying them from the brokers at bargain-basement prices.

Toward that end, the airlines, in the last few months, have made it more difficult for frequent-flier award users to reserve space. The carriers have set aside a smaller number of seats for their use, a practice known as capacity control.

In addition, the airlines have banned frequent-flier award travel during an increased number of periods. At such times, only passengers who have paid for their tickets are allowed to travel; previously travel by frequent-flier coupon was generally blacked out only during major holidays and busy travel periods. The carriers have also boosted some of the mileage needed to acquire an award.

“The airlines have basically devalued the whole situation,” said Judy Taylor, a spokeswoman for the American Assn. of Discount Travel Brokers, a trade group founded last year both to “create a code of ethics and standards” for the coupon brokerage industry and to try to avoid further lawsuits by the airlines.

“There is a lack of demand for the brokers’ product,” she said. “Are the brokers going to be able to run their businesses the way they have in the past? Probably not. When business becomes unprofitable, they will get out. People aren’t going to stay in an unprofitable business.” The tightening of the screws is a means of self-preservation by the carriers.

Small wonder.

It is estimated that there are 12 billion unredeemed miles of air travel in the hands of members of frequent-flier groups. One airline analyst recently calculated that the cash value of the outstanding mileage was $1.7 billion. If all of this mileage were cashed in at one time, the airline industry would suffer a catastrophic revenue drain.

Making things even more difficult for the brokers is the fact that so many of those travel rights out there are for sale. As the result of the triple-mileage programs the airlines have conducted this year, in which three times the normal amount of mileage is awarded to frequent-flier program members, a glut has developed. It comes as no surprise, then, that the prices brokers are paying and receiving for mileage coupons have taken a nose-dive.

The triple-mileage programs have had another effect: Since more frequent fliers are accumulating enough mileage to take trips, they are buying much less of the discounted mileage from the brokers.

“There is a general depression in the market,” said Lewis Spalding, who edits Bonus Bulletin Newsletter. “That is because triple mileage has given the infrequent flyers the benefit of frequent fliers. People who had marginal levels of 15,000 to 20,000 miles, which wasn’t enough for a trip, can now get their balances up to respectable levels to get a trip.”

With the more restrictive capacity controls and the increased blackout periods, the bonus brokers are having great difficulty finding space on planes for their customers. As a result, the prices the brokers are able to charge their customers are also depressed, and, sometimes, they have no product at all to sell.

To make matters worse, with the airlines getting more militant, many potential passengers are afraid to buy mileage--no matter what the saving--for fear that their tickets might be confiscated as they try to board flights.

As part of their clampdown, airlines have been checking passengers’ identity more closely than ever before, often confiscating tickets when they find discrepancies. One family of five returning last year from Paris on a Continental Airlines flight lost their brokered tickets that way and had to purchase full-fare seats to get home.

Brokers complain that the airlines, in a forceful effort to drive their point home, often do not confiscate brokered tickets, even if they have discovered them earlier in a trip, until the passengers try to board their return flight--and are thus stranded.

“If I were recommending,” said Holland of Business Flyer Newsletter, “I would not touch a brokered ticket these days.” The brokers say they refund the money lost by people whose tickets are lifted. But even in such instances the buyer still loses the cash difference between the discounted ticket and the full-fare price he or she must pay on the spot.

Furthermore, if a broker were to go bankrupt, the customer might not get a refund. The net effect is that the volume of coupon business the brokers have been doing has been cut drastically. And what business is left is producing much lower profits. Reduced volume and lower profit margins have placed the brokers in jeopardy.

“Once they were thriving, but the demand for their services has gone down,” Spalding of the Bonus Bulletin Newsletter said. “Their markets are drying up.”

Holland of Business Flyer Newsletter said the airlines had to act to defend themselves because “they found that three-quarters of their first-class seats, their bread-and-butter business, were (occupied by) people with brokered tickets.”

Supply, Demand Key

It is in the first-class cabin, he added, that an airline can “cater to its most-favored business traveler, (but) with everyone flying on a free ticket, that becomes impossible.” First-class tickets are normally sold by the brokers for as low as 25% of their retail value. Thus, Holland noted, a round-trip first-class ticket between Los Angeles and London, which normally costs about $8,000, can be bought from brokers for about $2,000 “and the airline didn’t get a cent of that.”

Prices on the frequent-flier mileage market depend on market conditions, much like the stock market.

Brokers sell coupons for 15% to 40%--the average is 30%--above what they have to pay to buy them from frequent fliers. But when there is more supply than demand, as is the case now, rates tumble and take brokers’ profits with them.

Mileage on airlines having financial difficulties--Eastern and Continental, for example--brings lower prices than does mileage on a thriving carrier. The more restrictions a carrier puts into its award program, the lower rates its mileage will bring.

It is a seasonal business, too, with prices usually lower in the winter and higher in the summer.

Also, according to Taylor of the American Assn. of Discount Travel Brokers, prices generally dip in August and December. In August, she said, a lot of mileage comes on the market because people sell it to gain money to pay for college tuitions. In December, they need the cash to buy Christmas presents.

“Just like on Wall Street,” said Neil Weisman, president of American Coupon Exchange, which has offices in Newport Beach and New York, “we set prices every morning. These prices are based on supply and demand and on market conditions.”

Weisman, who said he went into the coupon brokering business five years ago instead of beginning practice as a physician after completing medical school, said sellers can get between $5 and $15 per 1,000 miles for their frequent-flier mileage.

Price tags depend greatly on the size of the increment of mileage being traded. The bigger the chunk of mileage, the more valuable it is.

Spalding of Bonus Bulletin says that, as recently as a year ago, the brokers were buying 50,000-mile certificates for three-quarters of a cent to 1.4 cents a mile, depending on the carrier. It would have ranged from $375 on Continental Airlines to about $700 on American. The brokers’ purchase price has since dropped to between half a cent and three-quarters of a cent a mile, he said.

The brokers accuse the airlines of hitting below the belt in their efforts to run them out of business. They maintain that when frequent-flier programs began in 1981, there were no rules prohibiting selling mileage. The prohibitions came later, and the brokers are crying foul, saying the airlines changed the rules in the middle of the game. And, while they concede that they might be helping to circumvent the rules of the airlines, they insist that they are doing nothing illegal.

Side-by-Side Ads

“I think the frequent-fliers have a vested right to transfer their property in any way they wish,” Weisman said. “If they want to sell it, they can sell it. They have earned the mileage, and they have a property right to do what they want with it. The mileage is not what the airlines claim--a gift from the airlines.”

The process of buying and selling frequent-flier mileage is fairly complicated and, although each of the major brokers has its own method of buying awards, they all operate their businesses in the same general manner.

They advertise in newspapers and magazines that they want to both buy mileage and sell it. But since the airlines have gotten tough, it is not uncommon these days that such a broker ad is to be found side-by-side with others placed by the airlines warning that frequent-flier vouchers are void if sold and are subject to confiscation.

The coupon broker is nothing more than a clearing house between buyer and seller. When the broker has a buyer, he notifies the seller, who generally must request a bonus coupon from the airline in the name of the customer who will actually be doing the traveling. When the seller gets the coupon, he must take it to the airline to have a ticket written in the name of that traveler. Then the seller sends the ticket to the broker, who passes it on to the buyer.

The savings can be phenomenal.

According to Weisman, a round-trip first-class ticket to the South Pacific retails for between $6,000 and $7,000. The brokers give discounts of between 60% and 80%. Thus, a South Pacific trip would sell for $1,300 to $2,000. First-class fares to Europe, the most popular destination of American travelers, are also discounted as much as 80% by the brokers.

When a frequent flier has mileage to sell, he or she calls the broker to get a price quote.

Then comes the point in the deal when the broker takes something of a risk. Generally, the broker will send the seller either half or all of the cash once a verbal agreement has been made. But he does not send it out until he checks with the airline (usually posing as the passenger checking his account) to determine how much mileage the seller has accumulated in his account.

The brokers say that occasionally they are defrauded by people who have several brokers send them money for the same mileage. Since the deals are progressing at the same time, all of the brokers get the same mileage figure when verifying the sellers’ accounts.

When the fraudulent seller receives checks from several brokers, he just pockets the money, sending out no mileage coupons to any of them. The brokers try to protect themselves by exchanging information about fraud attempts.

But the brokers’ loss factor is only about 1%, they say, because the people they deal with generally are reputable business people. Mileage is usually sold by “ultra-frequent” business fliers. The last thing such travelers want to do is fly to a vacation somewhere on the other side of the world.

“A free airline ticket is not an incentive,” said Briggs of Platinum World Travel. The frequent business flier usually just “wants to go fishing or camping with his family. So he unloads his mileage.”

But not all of the sellers are well-to-do executives.

Some badly need the cash they receive, according to Taylor of the discount brokers trade group. She said one Tampa, Fla., man who travels a great deal has regularly been financing his wife’s cancer treatments with the income he receives from selling his frequent-flier mileage.

A man in Louisiana helped put his seven children through college, and a Miami man financed his divorce by selling his mileage coupons.