I was researching Boeing and Airbus for a future episode and stumbled upon a very interesting story about American Airlines and thought it should be an episode of it’s own. So for those of you who don’t know, American Airlines is a major US airline and is actually the world’s largest airline when measured by fleet size.
3 decades ago, 28 really lucky people managed to snag the greatest travel deal in history, thanks to American Airlines. It was called the unlimited AAirpass, there’s two A’s in the spelling so I’m not sure how to pronounce it. So here’s the deal. For a one-time fee of $250k (about $770k in today’s money if we adjust it for inflation), American airlines sold the AAirpass which gave the buyer unlimited-first class travel for life. So this means if you just bought this pass once, you could travel anywhere anytime with it for life, with all the first-class perks, with no additional costs. To make the deal even better, a companion pass could also be purchased for an additional $150k (about 466k in today’s money when adjusted for inflation). With this companion pass you could basically take an extra passenger with you at no cost for a lifetime.
Famous people such as Mark Cuban actually still uses his AAirpass and went on record saying that it was one of the best purchases he’s ever made. But the AAirpass had a fatal flaw. It was such a good deal that it ended up costing American Airlines millions of dollars per year and the company set out to revoke the contracts of its top customers by any means necessary.
American Airlines was hit hard by the Airline Deregulation Act of 1978 at that time. The new law introduced a free market in the commercial airline industry. This led to a decrease in fares and removed the United States federal government from controlling routes, fares and market entry of new airlines. They posted a $76 million loss in 1980 and had a lot of new competition biting off their market share. There was a newly-elected president of the airlines, Robert Crandall. He was on a mission to cut all unnecessary expenses of the company and lead a massive expansion from the ground up.
American Airlines needed cash, but the interest rates were at a record-high so they came up with a different plan. They would raise capital from their own customer base by selling its wealthiest customers the “unlimited travel perk” which was later named the AAirpass. They decided $250k as the price and the idea was that companies would buy this for their top performers.
But as usual, the public was way smarter than any corporation. American Airlines discontinued the unlimited AAirpass by 1994 but not before 28 people got the deal of a lifetime. Steve Rothstein, an investment banker from Chicago was already one of American Airline’s top fliers when he was approached to buy the AAirpass in the early ‘80s. American Airlines contacted them and said, based on the amount he traveled, the AAirpass would be a great purchase for him. Rothstein purchased both the AAirpass and a companion pass for a total of $383k and over the next 25 years, he went on to book more than 10 thousand flights!
He took hundreds of trips to NYC, LA and SF. He went to London – sometimes a dozen times per month. He flew up to Ontario just for a sandwich. On occasion, he’d offer his companion-pass to complete strangers at the airport.
Over in Texas, Jacques Vroom, a marketing catalogue consultant also decided to shell out $400k for an AAirpass and a companion-pass. He said he never bought anything for $400k in his life. He actually took out a loan for 12% for 5 years and he did it because he thought it would give him a competitive advantage for life.
Over the next 2 years, Vroom flew an average of 2 million miles per year. He used his pass to catch all of his son’s football games on the East Coast. He popped over to France or London just to have lunch with a friend. When his daughter had a middle school project on South American culture, he took her to Buenos Aires to see a rodeo and flew back the next day.
Like Rothstein, Vroom trusted the contract he’d sign with American Airlines. They used the words ‘unlimited’ and ‘lifetime’ which he assumed they would honor but here’s what happened next.
Decades later, in 2007, American Airlines was once again having financial trouble. Their revenue integrity team crunched some numbers and found out that Steve Rothstein and Jacques Vroom were costing the airline $1mil dollars per year in taxes, fees and lost ticket sales. According to documents uncovered by Los Angeles Times, Rothstein had made 3k reservations in a span of 4 years and cancelled 2.5k of them. And Vroom on the other hand booked flights for strangers and allegedly accepted payment for tickets on certain occasions.
Now, neither of these activities were banned in the original contract. But nevertheless, American Airlines categorized them as “fraudulent activity” and formed an elaborate operation to take down Rothstein and Vroom.
In July 2008, Vroom was cornered by agents at London’s Heathrow airport and several months later, Rothstein was stopped while boarding a flight at Chicago. Both men were stripped off their passes and told they’d never fly on the airline again.
They both filed lawsuits against American Airlines for the wrongful termination of their contracts but were outmatched by the airline’s hundreds of lawyers. Then in 2011, American Airlines filed for Chapter 11 bankruptcy, catapulting them into an indefinite legal limbo.
Neither Rothstein nor Vroom have recovered their AAirpasses till now. A third customer also had his pass revoked, but the other 25, including Mark Cuban’s, are still valid.
What do you guys think of this incident? Do you think a lifetime pass like this can be a brilliant strategy for airlines if priced correctly? Let me know your thoughts on twitter, I’ll be tweeting about this as soon as the episode goes live.
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