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.
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.