The frequent fliers who flew too much

http://www.latimes.com/business/la-fi-0506-golden-ticket-20120506,0,3094073,full.story

by ams1 • 14 years ago

546 222 14 years ago

cperciva2• 14 years ago

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.

seanmccann• 14 years ago

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.

cperciva2• 14 years ago

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.

chollida12• 14 years ago

I used one of these last summer. I took a job in Toronto but my wife wanted to stay in Calgary until we had our baby.

So Monday morning I'd fly to Toronto for the market open and Friday after the close I'd fly back.

I even made a few trips home midweek for 12-24 hours of visiting time for appointments.

ticks2• 14 years ago

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.

excuse-me9• 14 years ago

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.

richdougherty• 14 years ago

Does this remind anyone of unlimited data plans?

bergie2• 14 years ago

Only if you consider operator capacity as scarce as seats in an airplane

wisty• 14 years ago

And if the airline can secretly put you on a Greyhound bus if they think you're flying too often.

kamaal12• 14 years ago

Bandwidth is limited too.

Imagine everyone having unlimited internet data plans running torrent downloads 24x7 365 days a year.

w1ntermute• 14 years ago

I should start selling access to my wifi tether password at airports and other places where wifi is hard to come by.

bconway• 14 years ago

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.

Irishsteve• 14 years ago

They say Michael Dell has one of these passes. He should personally deliver laptops every now and then. Good PR

mef2• 14 years ago

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.

Danieru2• 14 years ago

Does that factor in compounded interest?

I tried asking wolfram alpha but it keeps trying to calculate a mortgage.

omonra• 14 years ago

It uses official rate of inflation to calculate: http://www.wolframalpha.com/input/?i=350000+usd+in+1981+wort...

pbhjpbhj• 14 years ago

The article didn't mention people that bought the lifetime pass and then died the next day/month/year of a heart attack or what-have-you.

Presumably AA made some good money at that modern equivalent $900k rate on those that didn't optimise their usage.

We're not seeing the full story financially here.

kamaal12• 14 years ago

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.

meric• 14 years ago

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?

mef2• 14 years ago

Probably makes more sense to use inflation instead of ROC for purposes of putting the cost of the tickets into the perspective of 2012.

imjk• 14 years ago

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.

mhartl• 14 years ago

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:

http://www.techcrunch50.com/2008/mark_cuban.php

marshray2• 14 years ago

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.

wtvanhest2• 14 years ago

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.

corin_3• 14 years ago

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.

robryan• 14 years ago

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.

guan• 14 years ago

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.

marshray2• 14 years ago

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.

kijin2• 14 years ago

Holy crap, 40 million miles? That's over 1,600 trips around the world (1,850 if you use nautical miles) and nearly halfway to the Sun.

dtparr• 14 years ago

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.

Retric2• 14 years ago

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.

kijin2• 14 years ago

> you can sleep in the air

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!)

excuse-me9• 14 years ago

Back in the 90s United gave you super platinum-diamond-uranium star status for life once you did 1Million miles.

We were building a site in Chile and had service techs flying from the UK several times a month - who ended up with free business upgrades for life!

ilamont• 14 years ago

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.

EDIT:

Crates of cheese:

http://consumerist.com/2006/11/buy-cheese-fly-for-free.html

Pepsi/iTunes:

http://www.methodshop.com/gadgets/tutorials/hackpepsi/index....

martingordon2• 14 years ago

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.

orborde• 14 years ago

I don't quite understand the purpose here. Is the idea that you can keep rolling your credit card debt forward interest-free indefinitely?

chollida12• 14 years ago

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.

dsrguru• 14 years ago

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.

jahmed2• 14 years ago

Another recent example on reddit:

http://www.reddit.com/r/funny/comments/t7ma1/so_my_roommate_...

corin_3• 14 years ago

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.

CamperBob25• 14 years ago

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.

ForrestN2• 14 years ago

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.

angrytapir2• 14 years ago

Based on this story I assume: http://www.snopes.com/business/deals/pudding.asp

sp332• 14 years ago

My favorite is the time Burma Shave sent a guy to Mars. http://www.snopes.com/business/market/mars.asp

inuhj• 14 years ago

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.

cjy2• 14 years ago

Yeah, I did that in the 90's too. Got kicked out of a Rite-Aid for being a little too obvious about it.

qxcv• 14 years ago

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.

angrytapir2• 14 years ago

There's this famous case too: http://www.snopes.com/business/deals/pudding.asp

Tuna-Fish• 14 years ago

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.

Link in Finnish, but scroll down for pictures: http://www.pulu.org/pro/1-1500-litraa-pepsia-ja-sony-vaio-s5

ctz• 14 years ago

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.

pavel_lishin4• 14 years ago

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.)

unimpressive2• 14 years ago

I think the real lesson here is:

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.

jowiar• 14 years ago

See AT&T, Verizon, Comcast, et. al?

sans-serif• 14 years ago

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.

kamaal12• 14 years ago

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.

raldi• 14 years ago

What "too little" search result are you referring to?

unimpressive2• 14 years ago

This one:

http://consumerist.com/2011/02/man-sues-all-you-can-eat-sush...

Oxryly• 14 years ago

Nordstrom offers unlimited and lifetime exchanges for cash. It appears to work well (overall) for them.

martingordon2• 14 years ago

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).

driverdan• 14 years ago

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.

1 - http://bluepassers.com/users/expertdan

citricsquid• 14 years ago

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 :(

brodd• 14 years ago

There's always Eurail (http://www.eurail.com/)

cletus• 14 years ago

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).

raverbashing• 14 years ago

This serves as a lesson to startups as well

Never offer something for a lifetime

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)

natep• 14 years ago

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.

morganpyne• 14 years ago

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?

nostrademons• 14 years ago

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...

dale31• 14 years ago

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.

forgottenpaswrd• 14 years ago

"Never offer something for a lifetime"

Unless cost decrease exponentially over time, like with gmail, in witch storage cost falls down like a stone.

JumpCrisscross3• 14 years ago

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.

wtn• 14 years ago

The British War Loan is not a comparable that supports your point, because it is callable.

derekp7• 14 years ago

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.

Bamafan• 14 years ago

"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.

fpgeek• 14 years ago

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.

bergie2• 14 years ago

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.

http://www.bahn.com/i/view/DEU/en/prices/germany/bahncard.sh...

jamesaguilar• 14 years ago

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.

moioci• 14 years ago

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.

temphn2• 14 years ago

  "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:

http://en.wikipedia.org/wiki/Stark_Law

http://en.wikipedia.org/wiki/Medicare_fraud

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.

Mz3• 14 years ago

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.

zackmorris• 14 years ago

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.

willwagner• 14 years ago

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.

icefox• 14 years ago

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.

ticks2• 14 years ago

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.

chaostheory• 14 years ago

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.

scarmig• 14 years ago

Well, the people making that deal didn't have their incentives aligned with the incentives of the people on the shop floor.

lurker142• 14 years ago

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"

acdha• 14 years ago

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.

losvedir• 14 years ago

> 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.

dlitwak2• 14 years ago

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.

ChuckMcM• 14 years ago

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.

fpp2• 14 years ago

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.

rdtsc3• 14 years ago

> 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!".

fpp2• 14 years ago

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!

batiudrami• 14 years ago

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.

kamaal12• 14 years ago

>>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.

dhaivatpandya• 14 years ago

I really, really want to buy one of these.

tantalor2• 14 years ago

> 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?

rdl4• 14 years ago

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.

tantalor2• 14 years ago

> 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.

What agents? Detained under whose jurisdiction?

brown9-2• 14 years ago

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.

paolomaffei• 14 years ago

Very good point, I was also pretty freaked out by this bit

yohui• 14 years ago

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.

duaneb• 14 years ago

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.

togasystems• 14 years ago

As a serious question, what would you actually try to accomplish by suing? Monetary gain or a morale one?

MSM• 14 years ago

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?

cmbaus1• 14 years ago

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.

coleca• 14 years ago

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.

MBCook• 14 years ago

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.

excuse-me9• 14 years ago

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.

pavel_lishin4• 14 years ago

> 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.

I was not aware this was a thing.

gruseom2• 14 years ago

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.

rdl4• 14 years ago

Offering "lifetime" deals to drug addicts is probably a much safer deal than offering "lifetime" deals to moderately successful business executives.

andrewpi• 14 years ago

Details on this: http://on.wsj.com/onLCZN

gruseom2• 14 years ago

Interesting, thanks!

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.

ShabbyDoo2• 14 years ago

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.

libraryatnight• 14 years ago

The band Rocket from the Crypt did this, except with free admission to shows.

http://en.wikipedia.org/wiki/Rocket_from_the_Crypt#Formation

michael_fine• 14 years ago

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.

cjy2• 14 years ago

I agree this is the problem. In economics it is called "adverse selection" and is particularly problematic for insurance.

andrewfelix• 14 years ago

Oh the humanity! After flying 10's of millions of miles a few wealthy individuals are no longer able to fly to the Louvre on a whim.

Meanwhile my neighbours and I have to catch a bus that is always late, often doesn't arrive and leaks when it rains.

CamperBob25• 14 years ago

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.

Retric2• 14 years ago

I think your underestimating things, someone that can dump 350k on one of these is probably richer than around 99.99% of humans who have ever lived.

learc83• 14 years ago

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.

potatolicious• 14 years ago

> "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.

tptacek• 14 years ago

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.

vinayan3• 14 years ago

It makes no sense for a business to offer this. I'm surprised it has taken them this long to finally do something about it.

excuse-me9• 14 years ago

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.

Pkeod• 14 years ago

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.

kamaal12• 14 years ago

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.

konceptz• 14 years ago

If I had an unlimited air pass w/companion, I would pick you up.

Which is(was) the beauty and spirit of the offer.

droithomme• 14 years ago

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.

kamaal12• 14 years ago

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.

wilecoyote• 14 years ago

"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.

loverobots• 14 years ago

Rothstein made 3,009 reservations in less than four years, almost always booking two seats, but canceled 2,523 of them.

Until I read this I was cursing AA. Now it seems like they are trying to cost AA even more money, on purpose. It may be legal but definitely not cool

steilpass• 14 years ago

Am I the only one thinking that it's unethical? Because of your carbon footprint.

powertower• 14 years ago

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.

excuse-me9• 14 years ago

That would involve logical thought and perceiving the future effect of business decisions.

This is an AIRLINE we are talking about!

scotty79• 14 years ago

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.

tnash• 14 years ago

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?"

dlitwak2• 14 years ago

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.

ShabbyDoo2• 14 years ago

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.

CamperBob25• 14 years ago

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.

The frequent fliers who flew too much

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