It boggles the mind every time I read about one of these "unlimited for life with a fixed initial cost" products.
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.
In the 80s in Australia there was a chain of health clubs that offered a life membership... shortly before going bankrupt.
This scheme has a number of problems:
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;
2. Booking flights you never intend to take is obviously a problem. AA staff were complicit in that however;
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
4. Life memberships are silly. If they want to attract the business flyers they were talking about it should be an annual charge.
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.
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).
"unlimited for life with a fixed initial cost" products
Interestingly, this is the same problem that bedevils Social Security and Medicare/Medicaid. Consider the change in perspective that AA underwent when it realized how much these passengers were costing the company:
Rothstein, Vroom and other AAirpass holders had long been
treated like royalty. Now they were targets of an
investigation.
The same thing happened with Medicare. For any costly program that doesn't put financial caps on utilization, cost can ultimately be capped either by queues or by various kinds of fraud charges and investigations into the users of the program. This is why we have the Stark Law and Medicare fraud investigations:
Some of the asserted frauds are actually crimes. Some of them are in a gray area and arguably abusive, like Rothstein. Some are really just attempts at innovative business models. Whatever the reason, though, if you are costing the government a lot of money, you are going to get hit with a Medicare fraud investigation. It doesn't matter if it's because your product is amazing and the cost is due to organic growth. All that matters is how much money it's costing the government.
I do not know about medicare per se, but when social security was designed to support people 65 and over, I think life expectancy was around age 62. So it was designed to support a relatively small number of retirees in their extreme old age. Then people began living longer.
Somewhat similarly, welfare was aimed at a tiny fraction of "the deserving poor" but was poorly worded/thought out and thus inadvertently changed the social contract and thereby actively grew the number of poor moms. At the time it was created, having a kid out of wedlock was strongly taboo. Poor single moms were thus mostly widows. The authors apparently could not imagine it becoming more socially acceptable to have children out of wedlock.
I worked at bigco for five years. Similarly shortsighted wording for contracts and the like is pretty rampant from what I have seen.
> I do not know about medicare per se, but when social security was designed to support people 65 and over, I think life expectancy was around age 62. So it was designed to support a relatively small number of retirees in their extreme old age. Then people began living longer.
This is true, but the real problems with Social Security began when Lyndon Johnson combined the Social Security fund, then entirely separate, with the rest of the federal budget. Instead of maintaining a very close eye on how much money was coming in and going out for Social Security, there was no longer any urgency to keep that money around. In other words, money taken out of paychecks for Social Security was spent on everything else, and Federal income taxes were paid out as Social Security.
The Republican-invented meme of social security insolvency because it didn't account for life expectancy increases is tired and worn out. The reality is that the architects of it were nowhere near that stupid, and they accounted for evolving life expectancies with a fairly high degree of accuracy. Had they not, the fund would have been bankrupt long ago.
Even now, the system faces not a crisis, but a need for adjustments. In the 2030s, incoming taxes are expected to be at approximately 75% of payouts. If no changes are made, once the trust fund is exhausted, people will continue receiving at least 75% of their entitlement indefinitely.
You are badly misinformed. There is no trust fund, only government IOUs to itself. The program already requires revenues from the general Treasury, and the accounting collapse of the fictional trust fund is now in 2020, not the 2030s.
What this critique amounts to is saying that the US will always honor its commitments to the market but not to it's tax payers. But why would that be? Are the financial elite more powerful than millions of retiring voters? Social Security taxes were raised in 1983 with the expectation of the baby boomers retiring 30 years later. But in those 30 years the surplus SS money was used to paper over deficits caused mostly by tax cuts on the top income percentiles. In effect the wealthy have raided the fund, but now they are wealthier than ever and we should hold their feet to the fire to pay the money back.
But in those 30 years the surplus SS money was used to paper over deficits caused mostly by tax cuts on the top income percentiles.
This is getting way off topic, but the lower and middle class portions of the Bush tax cuts, for example, contribute way more to the deficit than those for the upper class. And your claim doesn't really square with the trend of more % of all income taxes being paid by the top percentiles over time.
A Ponzi scheme is also really safe, if it's clear that there are a ton of gulliable fools willing to support the pyramid long enough for you to get in and get out. :)
I am aware of all the information behind your assertions, so no, I am not "badly misinformed", thanks, I simply reach very different conclusions than you do.
Only paying part of your outgoings is considered 'not paying,' or grounds for a default, typically? So that 'meme' is pretty much factual reality, if your statistics are correct?
disclosure: non-American with no knowledge of your welfare scheme
Not being able to pay something twenty years from now given current income is much different than defaulting. Specially given historically low tax rates and an economic depression, and a spenditure that has mostly not been made yet.
I agree, but that doesn't seem particularly relevant. The system in question would generate significant revenue shortfall if that fellow's comments are accurate. Typically in public policy we make plans for these kinds of scenarios, instead of just assuming that Future Murika will have a tax base robust enough to pilfer from and a political scenario permitting us to actually legislate.
On the other hand, that strategy is working fine for Twitter...
Look very closely at what I actually said. The meme I speak of is not "insolvency" generally, but insolvency due to a specific cause.
> disclosure: non-American
Which may explain why you're not familiar with the particulars of the meme I refer to, but does not excuse randomly shuffling my words.
> with no knowledge of your welfare scheme
Social Security is not a "welfare scheme", it is a government-administered pension program. Everyone who has paid into the system, from the very poor to Bill Gates and Warren Buffet, is entitled to benefits at retirement in proportion to their contributions.
30 years ago, to the nearest decade. That was the change in Social Security policies that raised my retirement age and the tax rate that I pay into the system. My standard retirement age is just after Medicare "exhausts," that is runs out of accumulated funds to pay full benefits to people who have been paying into the system for their entire working lives.
The original New Deal guys had mechanisms in place to deal with those sorts of things. But in order to keep funding in place for the Vietnam War and other things, the Congress accelerated cost of living adjustments in the 60s and 70s -- basically using Social Security as a political tool.
Since adjustments were made long ago, many other tweaks have affected Social Security. Welfare reform pushed folks who were chronic public assistance recipients onto the SSDI rolls. The ceiling for payroll tax adjustments hasn't kept up with inflation. And of course, the Obama administration decided to cut the payroll tax in the short term to stimulate the economy.
I hear this argument all of the time here in conservative Idaho, that social security provides more of a benefit than what's been paid in. This is fundamentally NOT how social security works. It has always been self-funded, and if not for the manipulations of unscrupulous politicians who borrowed from it to pay for 30 years of wars, it would be doing just fine today Thank You Very Much.
Most people my age (35 and younger) believe that they can't rely on social security for their retirement. It takes some meta thinking to go a step above and realize that this line of reasoning is leading to a self-fulfilling prophecy, meaning we are unlikely to fight for a system we think is doomed.
All hogwash of course. Productivity is at least an order of magnitude or two higher today than it was in the depths of the Great Depression. Most staples like food, clothing, transportation and even shelter are cheaper now than they were 75 years ago, adjusted for inflation. We have no way to predict how high productivity will be in 2030, when social security will supposedly encounter "problems".
This all dwarfs any increase in lifespan, desired affluence, or cost of medical care we are likely to encounter (once real progress and cures begin happening, instead of the phantom progress we are experiencing in tech bubbles).
People complain more about the self-funding social security payroll tax of 6% than they do about the 3% rents charged by credit card companies. Heck some people spend more on their smartphone, cable and internet plans than they do on social security.
I really worry for the future of our society, when we freely give up all of the gains made in the 20th century like 40 hour work weeks, rights to privacy, shared public land and other resources like the airwaves, immigration for the huddled masses, and most importantly shared sacrifice and that our society is only as strong as the weakest among us, all the things that Americans used to believe in. We think we are somehow better or wiser than the people some respectfully call the Greatest Generation, who survived the depression, then fought in WWII and died for the standard of living we enjoy today.
We're better than this, especially here in such a mecca of ideas and enlightenment.
There is some truth to this, but not enough. Social Security provides a fixed rate of return, and provides benefits throughout old age, regardless of how long one lives. How? Not through investment, through fiat. And ultimately that's the core of the problem, because the only way to achieve that is to have more workers paying in to the system than there are retirees pulling from it. Whether it's dollars or government bonds sitting around in a vault somewhere the problem of making them multiply by fiat will always exist. And that's the problem that Social Security ultimately faces. Within the next decade we will face the "we've been stealing from Social Security" problem, but about 15 years after that we will face the absolute "Social Security can't pay for itself at all" problem.
This is taken directly from a Metafilter post[1]. In short, it seems the "social security is broke" trope isn't an accurate depiction of reality. The post is lengthier than this snippet, includes plenty of citations, and is worth reading in its entirety.
"Someone just told me that living outside the US for 5 years could disqualify me for Social Security benefits - I told them that I never expected to get them anyway.
It's been said upthread, but this pervasive attitude shows that the rich and their propagandamiesters are winning.
Straight talk on Social Security[2]:
'Here’s what Social Security is not:
- going broke;
- a Ponzi scheme;
- expected to stop paying out benefits in your lifetime;
That's nice, but it doesn't reflect reality. In reality it will require a great deal of budgetary pain just to get the government to pay out the social security trust fund. That represents a debt the US has made to itself but we haven't been very good at paying off even those loans. If we don't make any hard choices such as raising other taxes or cutting overall spending then we'll end up with an even greater increase in our national deficit and an accelerating buildup of our national debt. And that will cause the whole system (the economy, the government, everything) to come crashing down long before the so-called social security trust fund "runs out".
Right now a social security payments surplus is subsidizing many other government programs, when that subsidy ends within the next decade it will cause hardship.
More so, social security is on a glide slope to begin running an absolute deficit in about 25 years. At that point the trust fund will be emptied and there won't be as much money coming in as going out. That's a pretty serious problem.
Medicare is even worse off, by a huge margin.
Yes, we can change medicare and social security and perhaps fix these things, but right now the train is on a set of tracks which are aimed directly at the edge of a cliff. We can also potentially balance the whole budget and pay down our debt as well, but that isn't happening either. Look at the EU and their budgetary crises right now. The public doesn't want to pay down their debts, they don't want "austerity measures", they don't want to pay their bills, they want benefits to remain forever high regardless of whether that's financially feasible. And they are willing to vote and riot to have their way.
Social Security and Medicare are not sustainable in their current forms. Period. They need fixing. Period. Fixing them will be really motherfucking hard (politically and financially) for our country. Period.
I hear this argument all of the time here in conservative Idaho, that social security provides more of a benefit than what's been paid in.
For many people (the subset of the working poor who end up living a long time) this is absolutely the case. For many other people (those with a below average lifespan or substantially above average career earnings) Social Security is a terrible deal and has no chance under the current formula of paying them back what they put in. Even if you don't count what their employers had to contribute, which might otherwise have been spent on higher wages.
It seems inevitable that the SS payroll tax cap will be lifted without substantial changes to the benefit formula, which will make it an even worse deal for, say, the median earner with a post-graduate degree.
That doesn't demonstrate that it's a bad program, just that's it's redistributive and we should be honest about that fact. A smart, productive 35-year old should absolutely not rely on Social Security for her retirement, assuming she doesn't want her lifestyle to drop off a cliff at age 68 or whatever the retirement age is by then.
Social Security is redistributive much in the same way that flood or fire insurance is redistributive: those who never need it have overpaid, and those who do need it have underpaid.
The flaw that exists in the current discourse regarding Social Security is that the program is framed as a retirement program. It is not. It is "end of life insurance". In fact, one correct term to use in describing programs such as Social Security is "Social Insurance":
No, it's not redistributive merely like fire or flood insurance. My $300,000 house will cost the same amount to insure as my similarly-housed neighbor who makes twice as much. And the additional cost to insure a $400,000 house isn't typically greater than the reduction in cost to insure a $200,000 house.
That's not how social security works. The benefit curve drops off dramatically in relation to the "pay-in" curve:
And again, things will get worse when, seemingly inevitably, the payroll tax cap is lifted without substantially modifying the "bend points". A dollar you contribute to SS on your earnings over $56,000 is worth half the benefits of a dollar contributed under that amount.
People complain more about the self-funding social
security payroll tax of 6% than they do about the 3% rents
charged by credit card companies. Heck some people spend
more on their smartphone, cable and internet plans than
they do on social security.
But I can choose not to use a credit card, buy a smartphone, or sign up for cable or internet. I can't opt out of Social Security.
We have to be clear on whether it's supposed to be a great deal for everyone, or whether it's meant to be a redistributive program.
If it's supposed to be a great deal for everyone, ok, well, I have a different opinion. Let me opt out. You can continue to use it.
Alternatively, if it's supposed to be a redistributive program, well, then you might see why people complain about it. If it's redistributive, by definition some will pay in more than they get out, and others will pay in less than they get out.
All that the rational critics of Social Security, Medicare, and Medicaid want is the ability to opt out, in the same way we can switch from AT&T to Verizon. Right now you can only opt out via the very high friction process of moving and giving up citizenship.
I certainly think the frequent flyer miles thing was a mistake on the part of American Airlines (AA). But one of the things that bugs me about the article is that the 'marginal' cost of flying these folks is the same as the marginal cost of flying someone in coach, or flying someone in general. Weight * cost of gas to carry that weight + consumables such as food, tissues, Etc.
So when AA argues they 'lose millions' they are really saying that if they could sell this persons First Class seat to someone else on short notice they would make more money. But that assumption glosses over the fact that folks fly First with mileage upgrades, or get 'bumped' from coach on an over sale situation, or book way in advance and pay less. Since there isn't any discussion about what the average seat price is for First Class on the same flight when no AirPass member is flying, it didn't feel like they were being particularly objective with regard to price.
The fact that they could not sell AirPass + Companion for $3M (which according to them would have the owner 'ruining' AA in year 2 at this rate) seems to me to validate my feeling that they are over pricing their 'loss' here.
The lesson here is not that lifetime-for-fixed-up-front is inherently idiotic but that it must be sensibly discounted. AA discounting at the anomalous 1981 rates is akin to American public pensions assuming the stock markets will throw 8% at them ad infinitum.
An example of a lifetime-for-fixed-cost product that works is the annuity. Even British consols, perpetuities which pay out forever, are seen as a smart financing method (zero roll-over risk) because they were sensibly priced.
If the purchase price of these tickets were 350,000, and if the typical purchaser was in his 30's at the time of purchase, that gives an annuity of almost $2000 a month, assuming an average lifespan of 70's and a 6% interest (yeah, that may be a tad bit high on the interest assumed, but remember this was the 80's). So in effect, these passengers are paying 2G a month for their high end "bus pass". And if they travel once a week, that is $500 per ticket. I really don't think AA is losing much money here.
Edit: This also explains why these tickets didn't sell recently at $3 million a piece -- for that money, again assuming a 40 year annuity but a 3% interest rate, you can buy a $1200 ticket twice a week.
Assuming a lifetime flying pass purchased for $350 000 in 1981 by a 35-year old and the 1981 US life expectancy of 74.01 years [1], one would have to fly only $15 505 each year to beat the 1981 - 2011 CPI CAGR (inflation) of 3.1% [2]. If we instead use the 2009 US life expectancy of 78.09 that number drops to $14 745.
I fly once or twice a month and don't buy first class tickets very often; it wouldn't take too much for me to cross $15k (and as a 21-year old my threshold would be $13 061 assuming constant life expectancy). Remember, the marginal cost to you of these flights is more or less zero.
AA saw this as a source of financing so one should really see what rate they seem to have financed themselves at. Let's assume we're slicing above travellers who fly 100 000 miles (between Delta's Platinum and Diamond [3]; I wasn't able to find what the average of the top two tiers in 1981 would have been). Airline price per mile for domestic coach ranges from $0.06 to $1.22 [4]. Let's use $0.58/mile as our conservative guess for the cost of a first class flight. Thus we have an airline financing $350 000 for 39 years at $58 000/year at an internal rate of return of about...16.5%.
If American Airlines really believed in a 16.5% floor on US interest rates they should have started by dropping the first part of their name.
Note that we've ignored that $350 000 buys both you and your cuddly friend a ticket.
This kind of stuff goes into management books as classic case of why merely quarter to quarter of focus on company performance is so dangerous.
I am sure the then CEO and his fleet of execs even got a good deal of rewards for rolling out this scheme.
If companies really want to make up on profits in such a low margin industry the way really is to make travel cheaper and easier. Not offering unlimited plans and then expecting customers to not treat them as such.
You get 2 first class tickets for 350,000 and no costs for cancellations and rebookings. That's an incredible service. Booking 3 flights because you're not sure when you want to leave or whatever -- that's pretty huge.
Fair point, though it stands to be mentioned that this would require an Act of Parliament and hasn't happened since consols were first offered in 1751 (though the coupon was reduced through 1903).
Even if the cost of supporting it "forever" is minimal (that is, the complete opposite of what AA has done)
Things like GMail, for example. You may be tempted to do it. Don't
Always put in your terms of use a provision of termination. Of course, be reasonable, for example, allow the user to backup the data given a reasonable timeframe (e.g. Google Health)
Heh, perhaps some Joyent staff may have something to contribute to this conversation. They offered a "lifetime" hosting deal with shell access a while ago for a one-off fee, and I have heard that this is becoming a bit of a millstone for them. Certainly my brothers 'lifetime' account with them is not getting a lot of love and feels a bit like it's being left to rot on decrepit hardware.
I wonder would they do it again with the benefit of hindsight, or did it serve their purpose?
Upgrading users is one of those "damned if you do, damned if you don't" scenarios. If you do: some users are unhappy about old hardware. If you don't: some users are unhappy about uptime and changing software.
Joyent's CEO was on HN a while back and mentioned that if users on the old FreeBSD boxes want to run on the new illumos boxes, they should send an email to support.
I don't think GMail offers anything contractually "forever". The service is always offered "as-is", and you have the option of either continuing to use it or taking your data elsewhere. (Hence the furor over the new UI.)
If you'd said "Never offer something for free", which seems to be what people are responding to, I'd have a whole other set of arguments...
GMail generates revenue, so it doesn't work in your example as a "free" service. You pay for it by agreeing to have your email trawled to pull relevant ads.
Makes me a bit worried for pinboard.io. It's not free, which puts it in a better position than its competition, IMO, but it's a 1 time only payment. I hear they're profitable now, though, and have vowed to not go away like delicious did.
> It boggles the mind every time I read about one of these "unlimited for life with a fixed initial cost" products.
"For life" is a particularly egregious example, but these sort of conflicting incentives are everywhere. It's one reason I've been so happy with the popularity of pay-as-you-go models in, e.g., AWS.
I've always been leery of "unlimited" hosting for a monthly fee because your incentives aren't exactly aligned with the host. NearlyFreeSpeech.net, for example, highlights that fact in their marketing materials that since it's pay-per-use, the more successful your site is, the more money they make, so it's win-win.
Netflix and home broadband also suffer from these problems.
if you do enough research, the "unlimited" hosting isn't unlimited at all. There are certain restrictions in the fine print. which is exactly what American should have done.
I don't know how TiVo feels, but I always thought their lifetime subscriptions were a good way to seed their initial customer base. Lifetime is a little misleading because it's tied to the TiVo hardware, not the lifetime of the customer, but I still think it's relevant. TiVo started with a big problem of knowing they had a product that people would love if they tried it; in that instance, getting people past a hurdle of paying of monthly costs kind of makes sense, especially if they become devoted customers who tell their friends. I'm sure it also didn't hurt their cash flow.
Even then, lifetime subscriptions were rendered useless in the UK when TiVo dropped support for the original product and teamed up with a cable company. So it was neither a lifetime subscription for the hardware nor the customer.
On the flip side I am still using my first generation tivo because I have a lifetime on it and if I get a new device I would have to buy a new lifetime subscription.
I don't know what their current policy is but we've rolled our initial Tivo S1 "lifetime" subscriptions over to S2 and now one S3/Premiere Tivo. Seems to be an occasional special they do.
I'm not sure if it's such a bad idea in this case though. I don't know how much the marginal cost of a seat on a flight to London is, but it's a hell of a lot less than retail. Provided this handful of AAirpass customers aren't, in-and-of themselves, generating more flights that AA has to schedule, their actual sticker price to the company cannot be accounted for at retail prices.
But if the AAirpass people displace other passengers who would have paid retail and instead went to another airline, this opportunity cost should be assessed at retail.
I can't help but think of the deal GM struck with the unions back in the mid 20th century. Lower immediate wages for a nice retirement pension. Little did GM know about the trend of longer life spans.
Also worth noting that GM, like almost all US corporations, chose to under-fund their pension system. Assuming that most of your retirees will die early is like assuming that your stock return will average 8% annually but they've waged a successful PR campaign convincing people that this wasn't an epic managerial botch.
More like "lower immediate wages for someone else's problem in the future -- maybe we'll have plenty of money to pay, maybe we'll just file bankruptcy, maybe we'll get a bailout"
"4. Life memberships are silly. If they want to attract the business flyers they were talking about it should be an annual charge."
I'm not sure an annual charge would necessarily fix the situation for heavy users. It's very similar to the situation of cable and phone companies losing money on heavy users of their service.
An annual charge would give the company the freedom to adjust the terms on an annual basis in response to problems that are discovered. For a high-end product targeted at a very small market and a small part of the overall customer base, I think that makes a big difference.
The problem cable and phone companies have is that lots of people sign up for unlimited plans when available because of the mental transaction costs of doing anything else. That makes adjusting terms to manage heavy users harder because those adjustments also affect a large slice of customers where the unlimited deal is working as designed.
Deutsche Bahn (German railways) provides this option, you can buy a "100% discount" yearly card to either first or second class. But these are quite expensive.
Just hop on the next train: BahnCard 100 offers 12 months travel on all DB services. It only costs 3,990 EUR for standard class and 6,690 EUR for 1st class.
They also have 25% and 50% discount cards available. The 50% is quite a good deal, as I think I paid mine back within the first week of getting it.
Railways have an even lower marginal cost than planes.
DB would rather have a person travelling in the seat for 'free' and encourage ridership than have it empty.
Airlines used to think this way - the marginal fuel cost for a seat was something like $10 (essentially it only costs you at takeoff). But then airport improvement fees, security fees, faa upgrade fees meant that they were paying out $100s for passengers who were travelling for free.
A great write-up and a typical example of what you should never do as a service company.
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.
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.
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).
If AA is clever they re-issue / value all these special air passes and make a big event out of that.
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).
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.
> A great write-up and a typical example of what you should never do as a service company.
What I read is that you shouldn't enter into bad contracts. Somebody at AA screwed up and signed something "for life" without too many provisions put in for fraud and termination. The damage was done then. Those people should be found and punished.
> 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
But don't you think these customers went above and out of their way to abuse this. Yeah it wasn't in the contract, but selling the empty seat and making a living out of it. Or booking it under false names. That is fraud for most common sense definitions of it. In court it might not hold. But I think in the PR domain AA can redeem itself by just taking the responsibility and admitting they screwed up setting this up but also exposing what these passengers are doing and how they are exploiting the company. They can pit every other customer against them. "You know that time you were gonna fly to Europe with your wife but there was only one seat available, well it was so and so booking under a false, name he took your wife's seat!".
When was the last time that you shelled out $10k, $100k or like those $500k (in 1980s terms) for a single person's air travel expenses? With today's real inflation + financing cost certainly far beyond $2M.
Spending such amounts in the first place demonstrated very strong confidence and trust into AA and was a very sweet deal for AA as well (I'm sure it still is even though they are now wanting to get rid off the benefit of their counter-party / don't want to pay their part of the deal).
Keep in mind that none of those were in their teens when they put out such amounts so they are now merely coming to the end of their traveling spree. After all, this is only a life-time deal for those passengers if AA survives that long (and that wasn't so sure at that point as well).
For that amount - $500k in the 1980s - you could buy a pretty large house that even after the housing crisis will today still be worth a large multiple of that. Another example - even with all its ups-and-downs a better indication of the change in real value of the 500k till today might be e.g. the stock market with the Dow being below 1k then and now about 13k (this goes both ways and might also provide an indication for AA's financing cost since then).
But AA seemingly prefers to charge their normal U.S. customer even for luggage checked in, give vast discounts to their largest corporate customers (TMK the biggest in the industry - up to 70%), hike up their advertising spending and cut down in services.
The last figure I've seen is that they increased their spending for online display ads by 600% to about $27M - I guess a few 100K soft cost (the planes also fly without those few airpass holders and almost never fly at 100% capacity) for letting them carry on flying for a few more years and use this as a demonstration of their great customer service would have been better spent and provided a better story any online ad could ever tell. In other words - priceless!
What most companies don't realize is how differently these schemes are perceived among the masses.
The initial target segment of VIP's, companies purchasing as packages and business segment of people looks naive and too much of an wrong assumption to me. You really have to understand the mind of a common man here. How would your life be if you are told, you can travel infinitely for free your whole life? Is it worth investing a little extra money for such infinitely free vacations? I bet it is!
More than the money, I think the company is just irritated that the scheme was badly gamed and the customers have had the better of them.
>>But don't you think these customers went above and out of their way to abuse this.
No,
There is a reason why those are called free unlimited lifetime services. There is a price you pay for it. And there is deal you sign on. Now within the framework of all this anything you do is legal and fine. If at any time later the company felt this was wrong, then sorry this was a case of somebody goofing up on the contract.
At most this is stupidity on the part of the company, not a case of fraud on the customer.
And I agree that it is legal and that is why in my post I said that in court "it won't hold" in other words it might be an easy win for the customers.
But, at the same time, AA was operating under some assumptions, and that was that there won't be abuses like these going on. Now even though the contract says this and that, wouldn't your agree that selling the extra seat or booking it under a false name, in mind of most people is equivalent to abuse? I am using a common sense definition that appeal to some sense of "fairness" in everyone. Not the legal definition of it.
So to recap, AA was stupid for not fixing up the contract correctly, BUT these passengers, if this goes to the media or jury can be made to look like opportunists who are ruining and destroying a company. At least there is a PR opportunity there for AA that is contrary to what the grand-parent posted, that this is a 100% PR loss for AA and the PR loss is actually worth the $10mil/year or so loss from these customers.
>>AA was operating under some assumptions, and that was that there won't be abuses like these going on.
Please, I mean I agree with you about the abuse to an extent. But I can't imagine for a moment, how some one can go about things like this which involve tens of millions of dollars without proper paper work.
This sort of a scheme shouldn't ideally get out without reviews with the legal department. I mean any thing like this should really have some clauses for handling traditional definitions of fraud.
This looks plainly stupid on behalf of the company. I still don't see customers responsible for the abuse. Its like a lottery, If I win a lottery then the lottery company must not complain I am taking home millions after investing merely some $10. If that is what should worry them, then they shouldn't offer the lottery at the first place.
A major airline publicly attacking specific customers, especially those who are supposed to be the company's VIPs, would make me like the airline less, even if they were technically correct.
I am arguing that, regardless of the legal battle outcome, AA can turn this around and successfully portray these few customers as opportunists and abusers of the system who are hurting the company.
Most people have some sense of fairness and would probably agree that selling the empty seat or say booking it under a made up name just doesn't seem right. So AA could successfully turn this around make quite a few people sympathize with it.
Can you explain me why anybody shouldn't use a unlimited offer as defined?
Companies use this as a bait to catch fish, assuming unlimited plans won't be treated as such and that will translate to some profit. Isn't this fraudulent assumption to begin with at the first place.
Let me tell you most people will side with what you describe as 'opportunists' and 'abusers'. Because unlimited plans of all types - Phone calls, internet data plans, unlimited buffets, gambling, lottery all work on assumption of making up on volume assuming decline in consumption on an average.
If the company can't handle the unpredictable aspect of such a business they shouldn't offer such plans at the first place.
If AA can turn around pressurizing other paying customers into committing perjury in order to defraud long standing customers who took advantage of a good deal - then I would like to meet their PR agency.
Remember at 80s interest rates when AA made this deal those passengers were taking a real gamble compared to putting that $500K in the market and just paying list for the tickets - compared to making AA an interest-free loan.
Never offer "unlimited". Because if you promise "unlimited" people will treat it as "unlimited".
The results usually aren't pretty.
EDIT: As the post below points out, telecoms are a prime example of companies getting burned on this.
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.)
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.
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.
All you can eat buffets work because there's a physical limit to how much you can consume in a meal. It's comparable to a one-day train pass not a lifetime membership.
All you can eat buffets at $x a month kind of schemes perfectly fit this case.
The catch in such businesses is they serve repeated food, often spicy and oily. Which makes them unhealthy. By that, they effectively manage to make their customers eat less and increase their profits.
Except that to keep customers in the game, at times they do serve good food at some period.
I googled for 20 minutes to find out what the final verdict was in this lawsuit. Couldn't find it. That was an interesting case, but I can see my googlefu not strong enough.
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.
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.
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.
These flyers didn't find ways around anything, they bought unlimited flights and they used unlimited flights. Even the ones who charged money for the companion seats say that it wasn't banned in their contract, they were simply using the product they paid for.
Another example of this is USB vendor and product IDs. The USB standards body charges several thousand dollars for a 16-bit VID code; when you buy one of these, it comes with 16 additional bits of "address space" for your company's product IDs.
This makes sense for exactly nobody. Large companies are never even going to notice the $2000 that the USB consortium charges for a VID, and of course, not even the most massive international conglomerates are ever going to ship 65,536 different models of USB peripherals.
Meanwhile, the guy in the garage with an idea and a shoestring budget only needs one PID. But he either can't afford the $2000 or has much more immediate uses for it.
So an enterprising company in Holland immediately bought a single VID and started reselling the PIDs for about US $20 each. The USB Implemeters' Forum hit the roof, revoked the VID, and threatened to sue, but because their agreement didn't explicitly disallow PID resale, there was nothing they could do. It wasn't as if they could ever reassign that VID to any paying customer.
So I guess it's a good thing for the rest of us that large organizational gatekeepers are so often run by morons.
Awesome story. Reminded me of this one from Derrick Sivers:
"In 1996, I had a little record label, so I got a UPC barcode account, so I could put unique UPC barcodes on my CDs. I had to pay $750 to the Universal Code Council to get a company account, but that meant I was allowed to create 100,000 products under my account. Musician friends asked how, so I showed them how, but also said they could use one of my product IDs.
At first, I did this for free, as a favor, until friends started sending strangers my way. Because it took a little work to generate the number, create their EPS/TIFF graphic barcode, and keep track of their unique IDs forever, I charged $20.
Over the next 12 years, this made me almost $2 million."
I've actually considered this myself; invest $2k in it and get a large number of PIDs for my own purposes, and sell them off to others to recoup (some of) the costs. However, I think they've changed the rules on this for new licensees, right?
Which company does this? I may end up getting some from them.
Edit: Yep, they did indeed change it. Relevant text from the VID acquisition form:
> The USB Implementers Forum is the authority which assigns and maintains all USB Vendor ID Numbers. Each Vendor ID Number is assigned to one company for its sole and exclusive use, along with associated Product ID Numbers. They may not be sold, transferred, or used by others, directly or indirectly, except in special circumstances and then only upon prior written approval by USB-IF. Unauthorized use of assigned or unassigned USB Vendor ID Numbers and associated Product ID Numbers are strictly prohibited.
Another notorious scheme was people buying $1 coins from the US Mint (which included free shipping) with their credit card and depositing the coins in order to pay off the credit card.
Broken systems always seem to pop up, as do ways of exploiting them to make money. Steal This Book describes all-expenses-paid vacations to gambling resorts that existed in the U.S. in the 60s and 70s. The condition was you had to buy hundreds of dollars worth of chips to gamble with. They were specially marked such that people could gamble with them but not cash out. People realized you could just play red and black against each other in roulette to exchange those chips for a complete set of regular chips that could be cashed out. (They would usually make many small bets and incur the small 0 and/or 00 cost once or twice rather than one big bet and risk losing all the money.) Practically free vacation.
The British Columbia Lottery Corporation had a similar incentive ($100 in credit) set up to promote their online gambling site. The trick involved betting on both sides of baccarat, which was better than roulette as it avoided the chance of the 0/00 outliers.
Some major credit cards used to give rewards on cash advances taken out on them.
I remember going to the casino and taking out a $5000 cash advance and then paying it back the same night. For about $2 in interest you got 5000 aeroplan, or air miles. I did that each weekend for 20 weeks until I got enough miles for my trip to Australia.
This is more akin to financial arbitrage but my mother did a variant of this for her car payment. The card company would send her 'checks' to use for 0% balance tansfers that she would get 5% rewards on. So she'd use the checks for her 3.9% car payment, get the rewards and pay off the card at the end of the month.
No... From what I read people would get rewards from the credit card. So they bought say $10,000 in coins and deposited the coins back before the end of the billing cycle, winning a $200 cashback reward. That $200 is what the person doing this would profit.
That "hack" has the nasty characteristic of probably making everybody lose, maybe more than the $200 the guy was getting.
I imagine shipping was not free for the government, which also probably paid the credit card operator a fee. The credit card operator is losing money by paying rewards on a bogus transaction.
The credit card company doesn't lose money. They charge a settlement fee to the government, which more than covers the cost of the rewards program. So only the government (ie, the taxpayers) lose out here.
The taxpayers also don't lose out because the mint makes the coins and mails them and pays the credit card settlement fee for less than the face value of the coins.
Nobody loses, except people who object to the subtle inflation by seigniorage. The Federal Reserve can control that anyway.
The best actual cash back on unlimited general purchases is probably 2% (Schwab used to do this; Sallie Mae Visa, Capital One Venture or their 2% business card, NASA Credit Union).
5% is basically always either category-limited (Gas, sometimes restaurants) or limited to a trivial (<$5k/yr) spend.
I personally do the American Express Starwood card, since I value Starwood points (1 per $1 in general, and some other bonuses for hotels, gas, etc.) at about $0.025-$0.04. You can also convert SPG points into FF miles at a rate better than unity.
Back in the day, paying for space segment ($200k/mo) on a business credit card meant never having to pay for a hotel suite or airline ticket.
The Chase Amazon card is also 3% on Amazon purchases, which basically means 3% on every mailable product in the world. I think it also gets you 3% on Amazon Web Services purchases...I doubt Dropbox or Netflix pay their bills with that card, but it would be amazing :)
Discover rotates the category of things that give 5% back every few months, which is generally easier to take advantage of than just gas. 5% for everything would be way over the interchange fees, so it'd require some sort of catch.
There is also a limit on the amount applicable to the cashback bonus, per program, and it's usually a trivial amount like $300 (so, $15 cash back per month).
A few years back there was a pepsi promo in Finland that involved collecting codes from bottles and returning them for rewards. The lower amount reward tiers were sensible, but if you collected codes from a thousand bottles, (cost roughly 1250€), you received a laptop worth 2000€. Considering you can still resell the drink, you can probably see the problem.
I did a similar thing in 2003 -- codes from 200 chocolate bars could be collected for a free xbox (5GBP shipping, normal cost 160GBP). This coupled with a 5 bars for 1GBP offer in a local supermarker meant I got an xbox and 200 bars of chocolate for 45GBP.
The even more famous one was Hoover, who were offering free flights to the USA if you bought a vacuum cleaner.
They were shocked(!) to discover people were buying 100GBP appliances to get a free flight worth 500GBP.
Then they decided to get 'creative'. They offered people flights that involved multiple inconvenient changes, or gave passengers in the south of England flights that left from the North of Scotland and v.v. They set up fake call centers who would ring customers up and tell them that the flight had been changed and send them to the wrong airport, they would send others long complex legal forms to sign which in the small print actually waived the prize.
The result after paying out a few million quid in tickets, several 100,000 in fines and a lot of annoyed customers - is that 20years later the company that was the generic term for vacuum cleaner in the UK is now known mostly for the con.
I remember a Coca-Cola & 7/11 promo about a year back, where if you "Liked" the 7/11 page on Facebook they would give you a printable coupon for a free Coke. The first problem was that the barcodes on the coupons didn't scan so well after being printed out on a home printer and crumpled up in somebody's pocket for a few days (which undoubtedly cost 7/11 thousands or tens of thousands of man hours) and the second was that you could simply refresh the coupon page to get /as many coupons as you liked/. Needless to say, the promotion ended not soon after.
The main character does this to great effect in Punch Drunk Love, which also happens to be a beautiful film that I highly recommend. He purchases pudding to earn frequent flier miles.
That didn't start with iTunes. That was a known hack dating back to my childhood in the early 90s. My 7 year old cousin and I used to do this to get free Pepsi from the "you won a free pepsi" caps.
The peeking-under-the-bottle thing happened long before iTunes. Dr. Pepper had caps you could redeem for a free bottle. For me, this meant I had to buy maybe one bottle per week, and I'd drink the rest of the week for free by picking out all of the guaranteed winners. (I also got kicked out of quite a few stores doing this.)
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.
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.
I cannot comprehend why they even thought about allowing the use of a reward scheme on an unlimited product. Reward schemes are there to increase the purchases of one-off products, whereas you want to deter unlimited customers from abusing their product.
The words 'thought' and 'Air Canada' aren't normally used in the same sentence.
I other news Air canada have announced the development of a new left-hand right-hand communications system will will hopefully allow the transmission of ideas from one side of the CEO's brain to the other.
It looks like Air Canada still has an unlimited pass but it's quite expensive. There are several but for example there's a pass called "transcontinental" that costs 3,322 per month for 3 months. It includes most western Canadian and American cities. You have to do at least 5-6 roundtrips per month to make it worthwhile.
5-6 round trips if you book two months ahead of time and pick the cheapest flights, maybe, but only 3 round trips if you only book a few days ahead and pick the flights which are most convenient for you. Flight passes are aimed at people who do a lot of flying and optimize for convenience rather than price.
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.
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.
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.
According to the article, some of these people would book dozens of seats then cancel them at the last minute (with no cost) when they decided they didn't want to go.
On flights no one was taking, this wouldn't have been much of an issue. But on flights that are regularly full, this could have easily prevented normal paying customers from purchasing the seats.
Regular full-price business tickets let you do this anyway - that's why flights are overbooked.
Airlines prefer not to overbook first and business class - because these are the sort of customers you don't want to piss off - which is why there are normally upgrades available.
With 3hour checkin requirements it's got a lot easier for the airlines to manage who is missing up front and pick the tactically best customer in cattle class to upgrade - or just to sell the upgrades, sometimes they even sell them after you get onboard.
> 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.
Melt, a grilled cheese restaurant in Cleveland, offers 30% off for life in exchange for getting a grilled cheese sandwich + logo (scull and crossbones) tattooed on one's self. I met a woman at the airport who had a sleeve of food-related tattoos including a Melt one. In addition to the discount, these ambassadors (my term) are treated well -- invited to special parties, restaurant openings, etc. It's a great scheme because it's strong social proof to others that Melt is a trendy/cool/worthwhile/whatever place. Being on the Food Network all the time can't hurt either.
I knew Martha Sanchez a bit (she's not the person in the picture) because her husband had a reptile store called Ross's Reptiles that was situated under our apartment a block away. My kids used to go down there to play with the bearded dragons. Needless to say to anyone who knows the neighborhood, it was not the greatest location for a reptile store. It's a beauty salon now.
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.
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.
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.
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.
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.
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.
Do you know of any similar products that exist for Europe? I'm in England and would love to fly all over Europe (and have been considering it for a while) but having a bluepass type thing would make it even more attractive. My google searches produce nothing so I'm not too hopeful :(
"Only non-European residents can use a Eurail pass." An English resident would need to get InterRail.
But see the cautions at http://en.wikipedia.org/wiki/InterRail#Decreasing_attractivi... . Going from London to Paris by train requires a 75€ supplement on ~50€/day pass. The one-way price is 123€. While there is some savings because you can go on additional trains afterwards, France also charges a supplement for InterCity trains and has a seat quota.
> 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.
That whole affair sounds sordid. What was American Airlines thinking when they decided to detain, bribe, and extort third-parties in their private investigation?
And kudos to Murkharji for resisting AA's attempt to press a confession out of him to use against Vroom.
I was actually more freaked out by the fact that the company withheld flights and, essentially, blackmailed the customer into saying he payed for the ticket. I would have sued.
Airline security agents. It's doubtful that the passenger was required to follow them to the private office if he/she didn't want to, but it's also doubtful that the airline employees would have made this clear to him/her.
This definitely rubs me the wrong way. Coupled with the fact that they froze the (point) account of Sam Mulroy in an effort to get him to nark on Vroom is just so shady.
It was later revealed that Vroom was in fact violating the rules, but the ends don't justify the means. Sam Mulroy and Auyon Mukharji didn't do anything illegal that I'm aware of, so why were they being detained?
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.
The article states that interest rates were high back then. If you assume that the buyers would use them for 40 years on average, and use a cost of capital of 15%, these things would make sense if the cost of providing the flights was expected to be less than about $37,000 per year. Change the assumptions to 30 years and 20%, and that figure becomes about $50,000. It’s not insane for the airline to think that typical buyers’ flights would cost less than that, especially since the marginal cost of even a first class seat would be low. It is true that the same people, who are probably rich, might have bought full price tickets anyway, but then again they might have traveled on other airlines.
especially since the marginal cost of even a first class seat would be low
The cost all depends on whether or not they would have two spare first class seats to throw away on someone (and his bag) that they are never going to get a dime from again. Even then they could use those seats to offer upgrades to loyal business/coach customers.
$37,000 per year doesn't go very far when divided by the price of two first-class tickets.
I think this is a classic case of short-term vs long-term thinking.
When it was originally offered the airlines were regulated and they were high margin. At the time, in the 80s credit was almost nonexistent and they needed to raise money so they let their customers finance them. This is not so different then what startups do.
It's very different - most startups (in the HN world anyway), by offering an unlimited anything, are only losing the ability to make money off that customer in the future. They aren't having to pay high taxes for the rest of that customer's life, nor is he taking up slots that prevents them charging someone else for the seat.
Sounds like what GM I think it was did with retirement plans, apart from limited lifespans it is essentially also an open book of unknown future obligations.
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.
Rather than using the rate of inflation to calculate I suggest using the rate of return on capital.
Let's say that for 5 years, AA was able to return 50% on its capital (massive growth in the sector), after that it is the rate of inflation.
In that case the benefit for the passes to AA in todays dollars's (assuming 3.25% inflation): (350000 x 1.5^5) x 1.0325^25 = $5912563.906.
We use the rate of company's return on capital rather than inflation. Here's why:
Imagine you own a stock trading company that can double the money risk-free in its bank account every 12 months. Wouldn't it make sense to borrow money as long as the interest rate was < 100%, because the benefit of those funds would be 100% - the rate of return on capital of your company?
The logic for these schemes is always that a vast majority of people enrolling won't really use all that it has to offer.
Take the unlimited buffets for example. How it generally works is if you are offered unlimited buffets at $x a month. Then the restaurant can repeatedly serve you repeated food, oily, spicy and unhealthy. Of course in while to keep you in the game they can serve you good food. But by this they can make you eat less and increase their profits compared to a per meal deal. Every once in a while this doesn't workout and people eat like pigs, and you lose out.
Same with telecom companies, the assumption they make is not everyone has the time for unlimited calls. Now there are people sitting next to me who talk to their girlfriends/boyfriends for hours everyday. There are also guys whom I know who download stuff from torrents 24x7 365 days an year.
Same with health clubs. Entertainment of weekends is expensive. So unlimited plans don't do well.
In this case it was a classic goof up. Free travel opens a flood gate to unlimited vacations.
> 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.
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.
What's the actual cost in terms of fuel, service, and occupied seating?
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.
> "What's the actual cost in terms of fuel, service, and occupied seating?"
I have some familiarity with airline pricing... and the answer is... very close to the retail price of said flight. Seriously, there's a good reason why airlines are always teetering near bankruptcy. Their margins are lower than even cut-rate retail.
Slightly OT, but it's also the reason why Hipmunk doesn't stand a chance in the long run unless they branch out into selling, well, things that aren't flights. The margins for resellers is practically non-existent.
> "and since first class is rarely full"
Ah, but first class is almost always full. Few people who fly in first actually pay for first-class fare. First class, in its modern incarnation, is more of a loyalty tool than an actual product. How many business travelers do you see in First nowadays? And how many work for companies that would actually pay for a First-class fare? Not too many. Airlines use first class seats to curry loyalty from frequent flyers, along with alliance benefits for frequent international travelers.
Specifically: airlines use first class seats to get business travelers to book flights on their airline at higher coach fares when many lower fares are available on other airlines.
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.
I saw that, too; it's from an interview at TechCrunch50 in 2008. You'll see that he actually bought the lifetime pass before Broadcast.com. Most people don't realize that Cuban was already rich when he started work on Broadcast.com, and came out of early retirement to do it. He didn't have buy-the-Mavericks money until Broadcast sold to Yahoo! at a bubble-era valuation, but he had buy-an-AAirpass money (and then some) long before that. I especially like the story of how he once used his pass to kick Magic Johnson off a flight. "That's how I roll!" Here's the full video:
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.
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).
Yes, but not for the reasons being brought up in the snide replies to your post. As with data plans, there are two types of people that snatch up unlimited deals: A.) Those who want to use a service at whatever pace meets their needs and not worry about running up the meter, and B.) Those who fly 16 round-trips to London in a 25-day span.
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.
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.
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.
I'm assuming those are "miles earned" and not "miles flown". There are usually multipliers for flying first class, various promotions grant them, credit cards, etc. However, even a low percentage of that would still be a hard-to-fathom distance traveled.
40 million miles @600 MPH = 66,666 hours in the air or 7.6 years. Granted, you can sleep in the air, but I still think there is some multiplies involved in that number.
Interesting scenario: A millionaire blows all his assets in a bad investment. Now he's homeless, but he still lives in luxury thanks to his AA unlimited membership. He always schedules his flights so that he can enjoy a good night's sleep in the comfy, fully reclining first class seat.
(And then Leo DiCaprio plugs him into the Inception machine, and now Leo has 7.6 x 20 x 20 x 20 = 60K years to play with!)
Add to this drinks, free food,VIP lounges and other goodies you can buy frequent flyers programs.
Looks like they just handed over investment options(More like lotteries, in which you are guaranteed to win) with guaranteed returns along with luxury in nearly everything.
What really was going in the minds of the people who drafted this scheme?
There was an old couple in England who sort of did this in the equivalent of a Travelodge/Holiday Inn place.
They looked for special offers and booked months in advance and stayed at 1 of two local motels for 15+ years. On average it cost them about 10,000GBP/year (say $16K) with all their heating, laundry, etc paid for. They worked out it would have cost 10x that much to be in a nursing home.
Touchingly the local staff had become friends with the couple and did their personal laundry, kept 'their' room reserved with their own personal touches etc.
Even more sensibly when management found out about this 'abuse' - they spun it into a big 'just like home' and 'the motel your grandma would be happy stay in' story and got a big boost.
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.
Isn't this the same like raising money in an IPO. The investors buy the stock only once but are eligible for dividends and other incentives like stock splitting for lifetime.
Anything with the term 'unlimited' looks dangerous to me.
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:
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.
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.
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.
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.
You realize that even the cheapest tickets on Southwest can be rescheduled, right? There is no need to book refundable seats unless you think you might actually want the cash back.
"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?
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?"
Really?
It's the late 80s, interest rates are pushing 20%, you are an airline with a credit rating that makes a drug addict look like a safe bet.You are flying with 50% empty first class seats.
You offer a $1M (at today's RoC adjusted rate) ticket for fat cats to fly whenever they want - as a way of covering next months payroll.
You figure that these people will get bored after a couple of flights/year. But you don't know that airport and security charges are going to start costing you $100/seat and you forget that these people will retire and decide that flying first class around the world is more fun than golf.
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.
Meanwhile my neighbours and I have to catch a bus that is always late, often doesn't arrive and leaks when it rains.
The only difference between you and said wealthy individuals is that they are richer than 99% of everyone who has ever walked the earth, while you are only richer than about 95%. I'm sure that after a few moments' contemplation of this fact, you will conclude that corporate ethics and business integrity are important values to uphold, even when dealing with "rich" customers.
Actually like somebody else mentioned, its more on the lines $993K by today's measurement. More like $1 million.
An ordinary person would consider himself lucky to end up having $1 million at the end of his life. Let alone investing something like $1 million just on air travel.
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.
In the 80s in Australia there was a chain of health clubs that offered a life membership... shortly before going bankrupt.
This scheme has a number of problems:
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;
2. Booking flights you never intend to take is obviously a problem. AA staff were complicit in that however;
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
4. Life memberships are silly. If they want to attract the business flyers they were talking about it should be an annual charge.
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.
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).