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<snip> 2) Are the distances between cities calculated in direct miles? (ie - from Rio to Lima is via SCL. This adds considerable mileage onto the flight)</font>
No. Miles will be calculated as RIO-SCL and SCL-Lima as they are different flight numbers on LAN. Only where the flight number stay the same can you calculate the direct point to point miles (even if stops enroute somewhere)
Other airlines in South America like TAM - Varig also have an air pass system. It all depends on the places you want to visit