Opening the Door for Coupon Brokering
Continental dropped a federal lawsuit last month against a well-known broker in frequent-flyer miles and awards, and that may signal the effective end of the airlines' claims that buying and selling miles are illegal. Filed in U.S. District Court for the Southern District of Florida, the suit was Continental's first-ever case against a coupon broker. The broker's attorney, well-known travel lawyer Barry Roberts, was circumspect about his victory. "Every case is different and this does not technically set a precedent," he said Tuesday. "But I think this is the first time a [coupon broker] has obtained a satisfactory conclusion" in a lawsuit. Another attorney was more definitive, however. "Now when an airline sues a broker or a traveler, the defense will say, 'Well, you knew about that guy and you didn't do anything,'" he explained. "It opens the door for brokering because it undercuts the airlines' claims that they vigorously pursue people who violate the rules of the frequent-flyer programs. And it certainly indicates that airlines are reluctant to allow their arbitrary rules to be tested in a court of law."

-Joe B.

Great article Doc...thank you.

Just look at eBay today...over 30 people selling their AAdvantage certifcates from Kellogg's...and AA is just sitting there allowing them to do it. They cannot control it anymore and the free enterprise system of capitalism is taking over, courtesy of the World Wide Web.

If brokers are allowed to do this, we can most likely look forward to sweeping changes in the way frequent flyer miles are redeemed and used. I am sure the marketing departments of the major carriers are discussing this decision with their legal departments. I just hope that whatever comes of this will not adversely affect our programs. There are a lot of people who have worked hard to attain their high balances of miles and points.

This should be a very interesting 12-18 months.

In my opinion, Kelloggs AAdvantage 100-mile certificates are a bad example, and what's happening with them don't necessarily accurately reflect upon other awards and their potential negotiability in the future based on court decisions.

• These certificates are relatively non-traceable as compared to mileage awards which have traditionally been the domain of these brokers. After all, there are no cereal numbers on them. (Sorry, had to sneak that pun in. ) Proving that the pieces of cardboard actually redeemed by a consumer who has entered into an agreement with American AAdvantage was really acquired in a trade could be quite difficult and non-cost-effective. Taking away miles from such a consumer without adequately proving that he/she really violated the terms & conditions of the American AAdvantage account agreement would be a disaster in the court of public opinion.
• The terms & conditions printed thereupon by Kelloggs don't say anything about non-tradeable, non-barterable, non-sellable, etc. Consumers who have never entered into an agreement (opened an account) with American AAdvantage are perfectly entitled to buy and sell pieces of cardboard.
• American AAdvantage is getting paid by Kelloggs, after all. I certainly don't know the details, but it seems entirely plausible that the bulk of the payment actually comes when the certificates are actually redeemed as opposed to merely printed. (If I were Kelloggs, I'd certainly want to have the deal structured thusly.) If so, from American AAdvantage's point of view, if they're happy with the price they negotiated, they might want more certificates to be redeemed, since they get payment now, and the miles sitting in an account may never get redeemed for awards. Having there be an active market place should encourage more certificates to get redeemed, as opposed to ending up in the garbage can because they were purchased by a consumer who doesn't care, or who will never acquire the necessary set of 5 to redeem.
• Kelloggs might be the ones getting hurt, not American AAdvantage, if they wanted a different demographic distribution of people to buy their products based on this promotion than the one which is developing due to the widespread trading. E.g., instead of 10*N new consumers for their NutriGrain Twists bars who are motivated to try the product based on the offer of miles, they're getting 5*N new consumers, N of whom are buying six times the amount of product that the other 4*N new consumers are. After this promotion is over, if half the "normal" consumers decide to continue buying the product, Kellogs only gets 2*N new consumers (maybe 2.5*N, if half the crazies also get hooked on the product) instead of 5*N.

[This message has been edited by pshuang (edited 08-03-2001).]

I think trading the Kelloggs certs are certainly more legitimate. After all, those are miles which basically redeemable by anyone. AA didn't give Kellogg a list of AAdvantage members allowed to redeem miles, did they?

Now, actual mile awards is differnt. Simply transferring miles from one person's account to another would be a bad thing. Imagine what a mileage broker could do with the MM lifetime awards. Transfer 1MM miles in, h it the lifetime limit, and transfer back out. Repeat ad infiteum.

So why are airlines seemingly so very loath to test these matters in court?

Doc,

I think it has alot to do with the old adage that "they have more to lose than they have to gain" by testing this in the courts. If these awards could be "legally" sold and brokered the redemption levels for these awards would likely be far higher and thus,the liability to the airlines both greater and the lag time between earning and redemption far shorter than is currently the case.

That is the $64,000 question! One answer might be the airlines will most likely lose the lawsuit. The carriers would have more power enforcing their own company policies and making the consequences of violation much tougher than if the courts came up with a law. Currently, laws have very little teeth in the travel industry regarding frequent flyer programs. Airlines can currently close or freeze your frequent flyer account if you are caught trading, bartering or selling your miles...

Also, no matter what anyone thinks here, selling a "cardboard 100 mile certificate without a serial number" that provides 100 American Airlines AAdvantage miles is still selling 100 American Airlines AAdvantage miles. This indeed violates American Airlines' policies and procedures when it is done on eBay or anywhere else.

American Airlines' eBay police up until a couple of months ago were discouraging people from selling these Kellogg's certificates on eBay by sending sellers the dreaded email which informed them they would lose their AAdvantage accounts and the purchaser would lose their account if American Airlines' AAdvantage Department discovered the guilty member's name.

When AA was enforcing this, just about 100% of the sellers pulled their eBay ads down. In fact, there were weeks at a time when you did not see Kellogg's AAdvantage miles being sold on eBay...so the enforcement was working. Brazen sellers resorted to placing "private bids" to protect the purchaser's eBay username and promote their auctions in this manner.

AA must believe that selling miles is selling miles any way you look at it...whether it is on a Kellogg's certificate or to a ticket broker. I would tend to agree with them...however, I can see Doc's point about testing this matter in court. If the airlines lose in court, it could be a multi-billion dollar loss which would most likely would change the way we customers deal with frequent traveler programs...and most likely would not be to our advantage as frequent customers.

Even if it went to court and the airlines win, it would most likely hurt them in the long run because a partial victory could be a loss to them in terms of money and policy to protect the integrity of their program.

I can certainly understand why they would not want this to go to court...just look at the ruling that Doc just quoted.

"Airlines can currently close or freeze your frequent flyer account if you are caught trading, bartering or selling your miles."

I guess that this fact alone pretty much scares me off personally!

Yet it does appear that the carriers are not united in a definitive course of action to "protect" themselves, nor is it a certainty that they any given airline will pursue perceived "violators" aggressively!

Groaning and grinning....

Isn't that a cereal number (or a cereal code; it's letters starting with K) in the bottom right corner?

And does anyone know what the smilie is for a weak attempt at humor?

Airlines are starting to treat mileage awards as prepaid seats. American sells more miles each year than they give out in bounus and flown miles. This has become an important source or revenue. As long as the airlines control the number of seats avaialble for award travel why should it matter if they are sold or not on the open market? If they think they are protecting their $12000 fares I would question how many seats they would end up flying empty if they discontinued these types of awards.

The Pandora's Box they don't want to open works like this:

A business class round trip, US-Europe, costs 80,000 miles.

I can easily earn 80,000 miles for well under $2,000 in air fare. If I hunt for really good specials, I can probably do it for a bit over $1,000. (As AA Exec. Plat., I automatically get double miles, and can effectively triple them by not using domestic upgrade credits.)

There are people who now pay $6,000+ for those trips. Many of them would take the opportunity to get them for, say, $4,000, if they could do it openly, legally and without any hassles.

So, I fly the miles, get a big boost toward requalifying for top-tier, enjoy a few days in Paris or London, and make some easy $$. The purchaser saves a lot on a comfortable seat.

I am not going to do it for a lot of reasons, but if it was legal many people would. There goes the market for international first class and business class seats.

Given this scenario, if buying and selling FF awards becomes legal, I suspect we'll see big increases in the number of miles required for these tickets, to bring the ratio between economy and F/J awards more in line with the ratio of the fares.

If coupon brokers are legitimatized and usage of the brokers becomes common the most likely result will be an enormous devaluation of present mileage. That is, the mileage costs of free business class(especially) tickets probably would at least double, and could well triple. Both the market and the self-interest of the airlines would assure this. It would, therefore, be a mistake to see total legitimization of coupon brokers as a good thing for those of us who are earning the miles, as over against those buying the miles. Even for those buying the miles the loophole of vast difference in price could well be closed..

I disagree. Frequent flyer awards are limited and very restrictive. Most people who are willing to pay the mega bucks to sit up in front are using a business account or would be unwilling to go through the hurdles required to get an award ticket. There are only so many seats per cabin that the airlines will release for award travel period. Only at the very last minute do they sometimes free up remianing seats for last minute awards and upgrades. I challenge you to find a business willing to wait until the last minute to see if a seat "opens up" for them.

Elites can take several trips to Europe on cheap flights to earn enough miles for an award ticket but you need to remember that it takes time and money to do this---many people just do not want to spend more time on airplanes if they do not have to(except people who read this board). Those cheap seats to Europe are also giving the airline revenue on flights that tend to leave with empty seats.

As more airlines start treating mileage as a form of a prepaid travel, and as long as these awards have capcitiy controls on them, I fail to see what the problem is with brokering miles.