Executive Travel : Airlines and Travelers Anxiously Await High Court’s Decision on Mileage Rules

Frequent-flier miles may be one of the most popular freebies around, but disgruntled fliers get annoyed when they can’t use an award or the airlines up the ante.

Until now, passenger dissatisfaction has primarily been a problem for airline customer service departments. But depending on the outcome of a U.S. Supreme Court case involving American Airlines, such complaints could become a problem for their legal departments as well.

A decision in Wolens vs. American Airlines, a case that has been wending through the courts since 1988, is expected early next year. A ruling against American has the potential to open up mileage award programs to state regulation, a move that carriers fear could make frequent-flier programs too complicated to administer and could make them vulnerable to a host of new consumer lawsuits.

Consumer groups such as the International Airline Passengers Assn. in Dallas and Inside Flyer in Colorado have noted increasing complaints by frequent fliers. One Manhattan Beach passenger was so frustrated with Northwest Airlines after trying for nearly a year to use his free miles on a ticket to Bangkok that he recently took the airline to small claims court. But the threat of lawsuits is not the airlines’ only concern.

If the high court decision goes against the airline, it could threaten the existence of frequent-flier programs, American spokeswoman Teresa Hanson said.

“It would be nearly impossible to even offer a frequent-flier program,” she said. “From an administrative standpoint, if every state’s laws would apply, you’d essentially have 50 different programs.”

Wolens vs. American Airlines was originally filed in Illinois on behalf of 4 million to 9 million members of American’s AAdvantage frequent-flier program. The plaintiffs argued that the carrier violated state consumer laws when it changed the rules of its program retroactively, affecting how miles could be used after they were already earned in good faith. They see the frequent-flier programs as contracts the airlines cannot break.

American has the oldest and largest frequent-flier program in the country, with 23 million members. The airline honored 2.2 million awards for free travel in 1993.

“The question is whether airlines can have contracts enforced” under state laws, said Gilbert Gordon, attorney for the plaintiffs. If the answer is yes, nothing will change except that airlines will be held accountable to the rules they specify when passengers join their frequent-flier programs, he said.

If the answer is no, it means airlines can change their frequent-flier programs at will, he said. Airlines have always had the right to change the rules on how miles earned in the future can be used, Gordon said. But if they cannot be held liable under state consumer fraud laws, they could continue to change rules retroactively, thus affecting the value of miles already earned. In most cases, the airlines have given fliers a short grace period in which to use up miles under old rules.

In 1992, the Illinois Supreme Court ruled that airline frequent-flier programs should be subject to state laws. American appealed the ruling to the U.S. Supreme Court, arguing that airlines are not subject to state laws because of the Airline Deregulation Act passed in the late 1970s, which exempts carriers from state laws on matters relating to rates, routes and services.

The high court heard oral arguments in the case last month and is expected to rule as early as February or March, Gordon said.

The case is the most significant test of the issue of state regulation to date, Hanson said. However, it is not the first. In June, 1993, a ticket-holder who was denied a seat on an overbooked flight sued Northwest Airlines for “breach of covenant of good faith and fair dealing” under Montana law. In that case, the appellate court found that the claim was preempted under the Airline Deregulation Act and that the plaintiff could not seek punitive damages. However, the court did allow the plaintiff to seek compensatory damages.

In another instance, the Texas attorney general’s office sued Trans World Airlines for allegedly deceptive advertising and trade practices, claiming the airline did not disclose all surcharges in its ads. In that case, the court found that airline advertising practices were exempt from state laws because of the federal law.

Despite a history of the courts agreeing that airlines are not subject to state laws, the industry is still nervous as it awaits the Supreme Court decision.

“It’s a major concern,” said Chris Chiames, spokesman for the American Transport Assn., a Washington-based trade organization representing the industry. “It opens the door to all kinds of regulation by state governments that airlines are currently not subject to.”

If the court were to agree with the Illinois decision, every state could regulate the programs differently, said Jon Austin, spokesman for Northwest Airlines. “It would have a pretty dramatic impact for the industry.”