An American 737 in classic livery at Chicago O’Hare Airport
Last Sunday, the Dallas Morning News business section ran a profile on Hal Brierley, a Plano-based consultant whose claim to fame was helping design the first airline loyalty program, American Airlines’ AAdvantage program, back in 1980. Considered one of Bob Crandall’s most innovative ideas during his time at American, the launch of AAdvantage in 1981 eventually caused all of the other major airlines to design their own loyalty programs, officially kicking the points & miles game into high gear. The article itself is well worth a read, as it chronicles Brierley’s career as a loyalty program consultant for many other travel loyalty programs, including Hertz #1 Club Gold, Hilton HHonors, and United MileagePlus. It also describes his turbulent time at eRewards, building it into a dot com bubble juggernaut, nearly losing the company after the bust, then turning it back around by changing the company’s business model. He also opines on how he thinks airline loyalty programs should evolve in the future, which I’ll comment on a little bit later.
But the most interesting nugget is saved for last. Brierley says he has earned more than 22 million AAdvantage miles since 1983. While a lofty number, that in and of itself isn’t terribly out of the realm of possibility for a frequent business traveler over 32 years in the program, what with elite status bonuses and all. How Brireley has earned those miles, however, is pretty remarkable – he hasn’t paid a penny to American for airfare since 1983.
How does that work? Brierley was one of a handful of people that took advantage (no pun intended) of another American innovation of the 1980s, the AAirpass program. AAirpass was originally pitched as a lifetime prepaid, “all you can eat” flight option to business executives. The basic idea – anyone buying a pass would be someone who flies extensively, and thus would see value in paying for a lifetime of flights up front as opposed to worrying about the volatile cost of airfare. The introductory price in 1983? $250,000 for one, or $400,000 for two, with a discount for fliers over the age of 40 (Brierley, over 40 at the time, paid $352,000 for his two-person AAirpass). Of course, by paying that pretty penny up front, you would never have to pay for your airfare, even for taxes, ever again, a deal that has worked out pretty well for Brierley; he claims to have received more than $10 million worth of air transportation for his initial investment, for an average annual return of roughly 11.222%. By comparison, the S&P 500 averaged a 10.12% return over the same period. So to answer the inevitable question, yes, Brierley has gotten a good deal, even if he had invested the money and used the returns for his flights instead.
But here’s the kicker. The purchase of an AAirpass granted the buyer two other ancillary benefits, a lifetime AAdmirals Club membership, and – you guessed it – the ability to earn AAdvantage miles on every ticket. That has allowed Brierley, and the select few other individuals who purchased the original AAirpass, to rack up insane amounts of frequent flier miles without paying another penny to American along the way. Not bad at all, if you ask me.
Sound Too Good to be True? American Sure Thought So
While the exact number of people who purchased an AAirpass is unclear – the DMN article suggests around 30 people purchased a lifetime pass, whereas a Los Angeles Times article from 2012 puts the number at 66 – those who did purchase one undoubtedly received a tremendous deal. As former chairman Bob Crandall put it in the article, “it soon became apparent that the public was smarter than we were”, and American raised the price of an AAirpass with companion to $600,000 in 1990, and to $1.01 million in 1993, before stopping sales of the pass entirely in 1994. As a historical side note, American did make one more attempt to sell an unlimited AAirpass, this time in the hometown Neiman-Marcus Christmas Catalog in 2004, for the price of $3 million for a single pass or $5 million for a companion pass. Nobody took the bait, though the gimmick was widely featured in the Dallas media that holiday season. For what it’s worth, at the age of 27 on Christmas 2004, I would have gladly forked over the $3 million for a lifetime of free flights, but alas, I didn’t have $3 million in cash or an equivalent credit line then, and I probably never will.
Turns out American was just getting started, though. Apparently not content to just stop selling the pass and wait for their users to stop flying, the airline began aggressively investigating AAirpass users in 2007. Several passes were confiscated, leading to a protracted legal battle as detailed in the LAT story. (If this sounds familiar, that’s because it is. My colleague Matthew reported on the AAirpass controversy back in 2012; please check out his post for more details.) Somehow, though, I suspect they’ll allow Brierley to enjoy his companion pass without interruption. I doubt anyone over at headquarters in Ft. Worth is short-sighted enough to anger the architect of one of the airline industry’s most successful innovations.
Reforming Airline Loyalty Programs, Straight From the Horse’s Mouth
As mentioned at the beginning of this post, Brierley also opined on how he things airline loyalty programs should evolve from here. Brierley is of the opinion that loyalty programs have become too rich, reasoning that the number of miles awarded to super elites is out of proportion to the value of the miles themselves. I don’t really follow the logic in the article, though, where he states that an Executive Platinum making three round trips at $250 each in coach earns enough miles for a $2,500 coach ticket. DFW to SFO in the el cheapo seats would yield an Exec Plat 1,464 base miles each way + 100% bonus miles = 5,856 miles for each round trip, or 17,566 miles total for three round-trips. JFK to SFO would yield 31,032 miles for three trips in the cheap seats. If you’re based in DFW, that doesn’t even get you a Mile SAAver award in coach, and JFK barely gets you there. That certainly isn’t anywhere near a $2,500 coach ticket.
In any event, due to this perceived richness of the program, Brierley suggests moving to a model where instead of free flights, passengers would be issued a voucher with a fixed airfare value when redeeming a reward. If, for example, we use the generally standard value of 2 cents per mile for frequent flier miles, a domestic Mile SAAver award (25,000 miles) would entitle you to a voucher worth $500. Particularly if the program is structured to where residual value can be applied to a second ticket, such an approach would theoretically allow you to “redeem” more than one ticket on a 25,000 mile award. Sounds great, right?
I get Brierley’s point in the article. When we receive a voucher or gift card with a fixed value, we tend to spend more than the voucher value, thus providing more revenue to the company while making the consumer feel as though he or she received a better item at a bargain price. I’ll admit, I do it all the time. If mom gives me a $50 gift card from Best Buy, I’ll most likely buy something unnecessarily fancy for $75, then feel like I got a great deal because I only “paid” $25 for it. In practice, though, I see two issues with this approach when it comes to frequent flier programs. The first is what value to assign to a mile in the first place. Most people generally consider two cents per mile a fair value, but would the airlines really do that? Or would they follow the credit card model where one point is generally worth one cent? My 25,000 mile example would only yield a $250 voucher in that case, which is considerably less compelling to someone redeeming an award. Of course, the idea would be that you would use that $250 to, say, buy up to a higher fare class than you otherwise would have, or perhaps bring along a companion. Plus, unlike award tickets, tickets paid for with vouchers are generally treated as “paid” tickets, and thus eligible for mileage accrual, so there would be “double dipping” opportunities to some extent. But the reality is, many mileage redemption occur on so-called “aspirational” awards, i.e. redeeming first and business class tickets that one would never be able to afford otherwise. The dollar value of your miles is much higher in this case. The last time I cashed in miles for a business class ticket to India, for example, I used 135,000 miles for a ticket that retailed for ~$6,500, yield a value of 4.8 cents per mile. First class saver awards can be even more lucrative. If the airlines were to switch to a system where a mile is now worth a fixed value of 1-2 cents, I don’t see most people seeing that as an “enhancement”.
Which brings me to the second, and perhaps larger, issue. Making redemptions equal to a fixed dollar value would put aspirational awards pretty much completely out of reach. If we use the Mile SAAver business class award as an example, 135,000 miles at 2 cents/mile would yield a voucher worth $2,700. Unless you find an exceptional fare sale, you’re not going to find a business class ticket to India for $2,700. A discount business fare on Oneworld member Qatar Airways from DFW to Delhi today retails for roughly $3,900 and up (aside – that’s actually an exceptionally cheap fare for an exceptional in-flight product, if you have a little money to burn). That would still leave you on the hook for ~$1,200. Given that typical business class fares are generally in the $5,000-6,000 range, chances are, you’ll be paying a lot more. I just don’t see doing enough flying to earn 135,000 miles, just to have to cough up $2,500 for a business class award ticket, as a particularly exciting proposition. The numbers become larger, of course, when talking about first class awards. For that matter, would vouchers be usable on partner airlines, or only on the issuing carrier? I’d assume they’d have to be, but getting that to actually work in practice would seem to be quite a challenge.
Anyway, consider yourself forewarned. If the pioneer of mileage programs has this in mind, chances are, someone’s going to try it before too much longer. Then again, maybe I shouldn’t give Delta any ideas…