Company sold tickets for the price they wanted. They made the rules. They excluded everything that wasn't allowed in those rules.
Time passes and company finds out the deal wasn't so good anymore (or never was in the first place). So they decide to go after those costumers who are using the tickets in unexpected ways, but that weren't forbidden.
When the company has an extra profit for your last-minute ticket, or your cancellation (even when very ahead of time, so that they don't loose some revenue), it's just business, for-profit, hallelujah. When company does something that isn't profitable, they try to stretch rules' limits, the costumer misbehaved, costumers aren't allowed to gain from the company just because the company miscalculated something.
Agreed. Hiring someone specifically to try to do an aggressive, audit hatchet-job on special, star customers that had spent six figures on golden tickets with them doesn't make this story read very sympathetically for American Airlines to me.
Perhaps it's naïveté on my part, expecting a business to have some care for its reputation as well as its bottom line, but as far as I'm concerned, if you're going to promise an elephant, you'd better at least have a pachyderm on backorder and not try to wriggle out of it the moment it inconveniences you, because that just makes you look callous.
I can't help but feel that "they broke the rules!" is a hollow argument in a case like this. Most obviously, because it's not clear they did - Vroom's contract didn't prohibit ticket sales, but that was still the grounds for revocation.
More broadly, though, the issue of selective enforcement is a thorny one. If you write a contract sufficiently byzantine and ambiguous, any legitimate use will rub up against the edge of some prohibited behavior. At that point you have a totally broken agreement - you preserve it for anyone whose behavior you like, and revoke it for anyone who crosses you.
It's like the issue of selective policing. We live in a world where "don't commit any rules" isn't a viable answer, because there are endless lists of ambiguously defined rules on everyday tasks like accessing a computer. So if someone decides they truly want to pursue you, they can dig up a website where you mis-entered your birthday, declare it fraudulent misrepresentation, and try to put you in prison.
If everyone is guilty, the only question is how you decide what to pursue. And in this case, it's painfully clear that American didn't pursue egregious violations or frequent offenders, they went after anyone who had taken advantage of a product they regretted selling.
I think this is why inter-company contracts tend to be clearer and often simpler than company-employee contracts.
Your average EULA is impossible to follow or even understand because the company has so much more recourse to the law than the customer - as we see here, with American violating its own contracts and trusting their legal weight to make good. The law very sensibly attempts to punish willful lack of clarity, but (as with patent trolling, and asset forfeiture) it only holds when everyone can fight a legal case.
A company-company contract is actually a much simpler, self-defined, and symmetric relationship. Whereas an employer-employee contract must take into account the huge lump of complexity that is employment law. The company doesn't really like employment law, so they make every attempt to nullify it, paralleling its complexity.
EULA drafters are similarly trying to create a whole new body of law, bootstrapping it using copyright while eroding any consumer rights granted by copyright. Companies would prefer a much simpler EULA that said "we can revoke your license at any time for no reason, with no refund". But such a thing would be rejected by courts. So they attempt to construct such a policy by following the contour of the law (ie what courts won't reject) as close as possible.
Regarding the original post, I think American was really just doing the standard corporate stonewalling (I'm not endorsing this as being morally right). It seems as if the pass holders would have eventually prevailed in court, but what actually settled the question was American's filing of bankruptcy - which made the whole thing moot.
>If you write a contract sufficiently byzantine and ambiguous, any legitimate use will rub up against the edge of some prohibited behavior. At that point you have a totally broken agreement - you preserve it for anyone whose behavior you like, and revoke it for anyone who crosses you.
I remember reading that this is huge part of how the Russian government does corruption. The rules to operate a business are very complicated and expensive to follow, but you can get unofficial permission to flout them.
> any legitimate use will rub up against the edge of some prohibited behavior. At that point you have a totally broken agreement - you preserve it for anyone whose behavior you like, and revoke it for anyone who crosses you.
That sounds like a totally fantastic agreement, at least from the issuer's point of view and ignoring potential PR problems.
Yep, and I think that's what's being done. The article makes it pretty clear that the anti-fraud team had total freedom to reinterpret the contract until they got a success.
It's hideous, and as someone else pointed out illegal if you can make the claim stick (ambiguity is meant to favor whoever didn't write the contract), but still a great business move.
This is what Joyent, aka TextDrive did to us back in 2004 when they founded the company. Granted it was only $400, but it was for lifetime hosting. For the first few years it was garbage quality, then once they started doing a better job with their VPS/container style hosting they dropped us even though we were the foundation of the company—they literally wouldn't have gotten off the ground without us. To this day, I still consider Jason Hoffman a schmuck, and Joyent to be a disreputable company. Undoubtedly they are much more professional and grown-up now, but then again so am I, and I carry a lot more purchasing power in the companies I represent these days, and I would never choose Joyent as a vendor on any project. Reputation is everything.
Yeah, this kind of thing pisses me off. They're literally trying to have it both ways.
More pragmatically, it's why I'm wary of purchasing any "unlimited" or other deal where a back-of-the-envelope estimate suggests the deal is so good the company is losing money on me. It may seem like a great deal for me, but I know that eventually the company may wake up and start looking for every possible excuse to kill the deal, cancel my account, get me in trouble to end the offer, etc, etc. Especially because even if they're in the wrong, it may not be worth it to hire a lawyer to prove it. In the worst case, I may never recoup my investment, in the best case, I may merely break even or make a small profit that doesn't really reflect the hassle and time I put into it.
Three random examples:
(1) I signed up for Santander's crazy extra20 deal where you get $20 a month for having a checking account. They lied to me (of course I asked this) and told me even if the promotion ended I'd be guaranteed to be grandfathered in forever as long as I kept the account open and met the conditions ($1500 direct deposit monthly and two bill pays per month). A year and a half later they announced they were closing all extra20 accounts and converting them to normal accounts. While I made a couple hundred bucks off it, taking all the time and hassle involved, I'd consider it just slightly better than a wash, which is much worse than the original offer. Not complaining or anything as I knew what I was getting into, just an example of this phenomenon.
A lot of incentive offers are kind of similar. Mad respect to those people with nerves of steel who make a living off of churning credit card offers.
(2) Rent controlled or stabilized apartments sound awesome but could be kind of scary. The more time passes, the better a deal it becomes for you.... and the more incentive the landlord has to try to stalk and harass you to find an excuse to evict you, and the more you may need to retain an attorney and deal with increasing hassles. Is it worth it? Maybe, maybe not. Rent can be very expensive, but so can legal costs. Do you want your home to be the center of anxiety in your life instead of your refuge from it?
(3) Any kind of unlimited storage or bandwidth. You have no idea what the secret magic number is where if you go past it, they'll start looking at you funny trying to find an excuse why you're technically violating the ToS, or degrade your service and find an excuse why it's OK that they degraded it, etc, etc
> the lifetime unlimited AAirpass, which started at $250,000 ... In one 25-day span this year, Joyce flew round trip to London 16 times, flights that would retail for more than $125,000. He didn't pay a dime.
This is the kind of logic that always sound so wrong. He did pay, twice the amount, in 1994, which in 2012 is worth what, about twice again? So, in 2012 the company is repaying a $250k investment done in 1994.
If this person had spent $250k on air line shares, how much "free money" would he have been given by the stock market (stocks which is restricted and can't be completely sold)? Is it more, or is it less, than the marginal cost on all the travel that he made between 1994 to 2012? It would have made a very interesting article if it included that.
Well, if you're flying First/Business internationally every week anyway, you'll spend more than $20K/year pretty quickly. The question is what value you're actually getting out of it.
Tangentially, this is one of the reasons that reward miles/points are so hard to value. Your stay at that fancy resort would have cost $10K had you booked it on your own dime--but would you actually have done that on your own dime? Anecdotally, I find that I do get some incremental pleasure/benefit out of things that I use rewards to get but often not so much that I would have actually paid the cash value for them.
One thing that bothers me: Much of the value calculation assumes the seats taken by these lifetime pass holders would always be 100% utilized and never empty. I don't think the opportunity cost is nearly as high as the article states, but I think that AA losing tons of money is more a result of other poor financial decisions than issuing around 60 lifetime passes.
Not only nonempty, but full fare. On a lot of flights, there are a fair number of people who would get a free upgrade into an empty seat if there were one. But that wouldn't earn AA any more money.
Yes, for domestic flights Executive Platinum flyers (basically 100K miles or more each year) get upgraded to any open first class seats for free. At other levels (50K+ or 25K+) can also upgrade to available empty first class seats, but it can cost a small amount.
Taxes and airport fees are easily 20% (and that's just for US domestic) of the cost of a ticket which the airline had to eat every time these golden ticket holders flew (or even booked?).
These fees unpredictably and radically increased over the time since the golden tickets were issued as well. There's more in the soup than just the marginal cost of the physical seat occupation.
The main "fee" that has radically increased is the fuel surcharge, which is not a tax payable to the government, it's a bullshit added fee imposed by airlines which may or may not correspond in some way to some cost they have.
It would be more reasonable just to say that the opportunity cost of a free seat they gave away in the past is more than the airlines expected for various reasons (higher load factors, higher ticket prices).
Do the taxes and fees scale linearly with the cost of the ticket? I would guess that as seats become more expensive, the amount taxes and fees comprise of the total goes down.
Fees and taxes are a mix though, at least with domestic coach, they scale to within a few percentage points with the price of the ticket--about 15% overall. International has quite a few more fees. Overall they added up to about 25% with a recent US-UK flight.
British Airways is notorious for its "fuel surcharge", which is not a government-imposed tax. It's just an extra fee they tack on to make sure the low advertised ticket price ends up costing you enough for them to make a profit.
The worst is when you use frequent-flier miles to book with them; you still have to pay the "fuel" surcharge, which guarantees they get an amount, in cash, equal to an economy-class fare even for your "free" ticket.
Obligatory warning that this wouldn't work the same way today, at least in terms of getting you frequent-flier status with an airline. Airlines have learned to give out two classes of "miles": one class is only redeemable for tickets (or transferrable to rental cars, etc.), and those are handed out like candy. The other class earns the enduring status levels that get you things like complimentary first-class upgrades, and can only be earned by actually flying (the frequent-flier community calls them "BIS" -- "Butt-In-Seat" -- miles), or in some cases by spending $20k+/year on their affiliated credit card.
Also my favorite gimmick of all time, another now-closed loophole, was someone who realized the US Mint will sell you dollar coins at face value, with free shipping for orders over a certain amount. So buy, say, $X worth of dollar coins for $X with free shipping, charge to your airline-affiliated credit card, go deposit them in your bank and immediately pay off the card. For the cost of the time you spent placing the order and going to the bank, you get X frequent-flier miles.
> Also my favorite gimmick of all time, another now-closed loophole, was someone who realized the US Mint will sell you dollar coins at face value, with free shipping for orders over a certain amount. So buy, say, $X worth of dollar coins for $X with free shipping, charge to your airline-affiliated credit card, go deposit them in your bank and immediately pay off the card. For the cost of the time you spent placing the order and going to the bank, you get X frequent-flier miles.
This is genius.
It also helps the economy. Banks hate putting small value cash into circulation - a $1 note for example 'costs' a bank the same amount to stock in a cashier desk as a $20 note in terms of space and time needed, leading to much complexity from central banks of how to get money into circulation. Coins have a pretty good amount of time in circulation, notes of low denominations don't, don't know about dollars (probably with a long tail as used as currency in many developing economies) but a £5 note has an average circulation lifetime of around 3 months before it is too crumpled, water stained, and plain worn out.
> So buy, say, $X worth of dollar coins for $X with free shipping, charge to your airline-affiliated credit card, go deposit them in your bank
Strictly speaking, that's against the policy of most credit cards, which normally charge a premium for anything equivalent to a "cash advance", because of rewards among other reasons.
The rules on many credit cards directly prohibit the purchase of "negotiable instruments" or "currency" or similar. Along the same lines, many credit cards will charge cash advance fees and rates for purchasing foreign currency.
There was also a incident where a guy bought travelers checks (fee free through AAA) and simply cashed them and paid the credit card bill, over and over..... eventually they stopped awarding miles for travelers checks purchases.
> or in some cases by spending $20k+/year on their affiliated credit card.
There may be examples but I'm not aware of airlines that give you status through credit card spending today. The one sorta exception I know of is that United does currently waive their qualifying dollar spend requirement for some status levels given sufficient spend on an affiliate card.
They don't directly give you status, but in addition to waiving dollar-spend-on-tickets requirements, there are cards which convert part of their redeemable-only mileage earning into status-qualifying mileage earning when you hit spend thresholds.
Before the American Airlines merger, you could get to low-level status on US Airways this way. Sign up for or renew a lounge membership, and you got 5,000 qualifying miles. Then hit both spend thresholds on the Barclays affiliated credit card, and 20,000 miles from that would convert to qualifying, putting you at 25k for the year, good for Silver Preferred.
I believe it's still possible on Delta to reach Silver Medallion status, in the first year you have their top-end Reserve Amex, by hitting bonuses and spend thresholds that award or convert to qualifying miles.
Quite the interesting read. It sounds as if there was some rather questionable behavior on both sides. That said, it's a good lesson about a couple of things:
- Be careful about grabbing revenue today in exchange for incurring not well understood costs more or less indefinitely into the future.
- Characteristics like unlimited/completely free/etc. can lead to unexpected behaviors that are pretty far outside the norm.
This kind of reminds me of a couple of situations in the sports world:
Bobby Bonilla[1], middling former baseball player for the Mets, who cut a deal when being released by the Mets that they wouldn't have to pay him the balance of his contract now, but would have to pay 5X as much over 25 years, ten years hence. Thus a baseball player who hasn't taken the field in 15 years is making a cool $1.19 million.
In 1976, the ABA finally collapsed, and arranged a merger with the NBA[2]. There were six remaining ABA teams, but the NBA would only accept four. The Indiana Pacers, New York Nets, Denver Nuggets and San Antonio Spurs were chosen to join the NBA. The two remaining teams, the Spirits of St. Louis and the Kentucky Colonels, disbanded. The owner of the Colonels reached a buyout agreement with the other ABA owners for $3 million, plus another couple from selling off rights to his players. On the other hand, the Silna brothers, who owned the Spirits, cut a deal to fold their team in exchange for $2.2 million, plus a 1/7th share of the television revenue of the four remaining ABA teams, in perpetuity. This probably seemed like a bargain in the mid-70s, when NBA Finals games were being shown on tape-delay. However, as the league expanded in popularity, that TV money exploded, to the tune of tens of millions of dollars a year.
And of course it's even easier to make a decision that makes you look like a savvy businessman today while kicking costs or potential costs down the road when they're likely to be someone else's problem.
They concluded that, by the time his contract is paid off, he'll have received total compensation in line with the market rate for a player of his caliber. The deferred payments also opened up payroll space immediately, allowing the Mets to make successful roster acquisitions.
I thought that they also thought that they were getting higher rates of return with their Madoff investments than the deferred interest of his contract?
There are various weird examples of royalties etc. being paid in perpetuity. See, for example, the case of Listerine. I don't know the status today but as of a few decades ago, Warner Lambert was still paying royalties based on a contract that was signed in 1880s.
- One of the executives that was there from 85-94 noted right away the customers were costing them money.
- They raised the cost in 1991
- They raised the cost again in 1994
- And finally terminated the program in 2004.
The company ran this for 20 years knowing full well since its inception that it was costing the company money and did nothing about it? I have absolutely ZERO remorse for what the customers got away with, none. The fact they had to play dirty pool to revoke them just shows how incompetent the executives were that were running the company.
It's staggering to think they let a handful of customers practically bleed the company dry, while continuing to sell these in a sad attempt to generate revenue for the company.
I am not a lawyer, but these tickets look like a pyramid scheme to me. If I were an attorney and worked for American Airlines, I would consider claiming it was illegal for them to offer that to get out of it. I know that courts tend not to let companies out of bad deals, so that might make a bad situation worse.
It reminds me of the guy who has a life insurance policy that allows him to invest the amount covered in stocks at prices 1 week in the past knowing what the future performance would've. The insurance company that purchased the one that issued that really wants to get out of it, but they have been unsuccessful. I recall that it is estimated that by the time he dies, his estate will be worth more than the insurance company due to that policy.
At least American Airlines can take consolation in the fact that the total losses from their mistake will be limited by the ticket holders eventually dying naturally. In that insurance company's situation, the policy holders dying will ruin them.
His estate (or beneficiary) should just assume ownership of the insurance company then. Insurance is a good business, as long as you don't have any other policies like that on the books.
I'm guessing that they did but they used bad assumptions. For example, I could see them doing a query to see how often their most frequent flyers flew and using that number or some multiple thereof. It likely never occurred to them that "unlimited free" would completely change the way that some people would use the service.
Time passes and company finds out the deal wasn't so good anymore (or never was in the first place). So they decide to go after those costumers who are using the tickets in unexpected ways, but that weren't forbidden.
When the company has an extra profit for your last-minute ticket, or your cancellation (even when very ahead of time, so that they don't loose some revenue), it's just business, for-profit, hallelujah. When company does something that isn't profitable, they try to stretch rules' limits, the costumer misbehaved, costumers aren't allowed to gain from the company just because the company miscalculated something.
Yes, it's good to be a company this way.