November 1, 2012 The business of airline miles and what happens when it goes wrong
Airline miles are huge business. In some of the darker times airlines were solely supported by their frequent flyer program. Originally, a person took a flight and got miles equal to the distance of the flight. Now, a person can get miles from eating out, dry cleaning, hotel stays, rental cars, credit card spend, and even online purchases. Let’s look at how this works; an airline sells miles to a company or an individual at set rate. Then the program members get miles for doing business with the purchaser.
A specific example should clear this up. We’ll use online shopping. An airline sells miles to an online shopping portal. The online portal lists a bunch of online merchants. When the consumer goes through the portal to make a purchase, the online merchant pays a commission to the portal. The portal tells the airline to issue the consumer some miles and the portal pays the airline with the commission they get from the purchase. The portal gets its profit from the margin between the commission and the cost of the miles.
So there are two agreements at issue here. First, there is the buy/sell agreement between the portal and the airline. Next there is the commission/services agreement between the portal and the merchant. Now there is a lawsuit that was filed in a Massachusetts’ court over this type of deal. The complaint can be found here. I’ve surfed around and tried to figure out what is going on with this. Resident ethicist Wandering Aramean has basic commentary here. Here are the facts near as I can tell. Over the summer a web hosting company ran a promotion with two airlines (US and HA) that for new accounts a person would get X amount of miles. The company the web service hired to run the promotion and purchase the miles mistakenly described the promotion as any transaction. The result was the plaintiff’s made a large number of micro-transactions which earned millions of miles. The web hosting company canceled some the transactions citing fraud, and the promotion company is refusing to award the miles.
This case is going to turn on what the agreement was between the hosting company and the promotion company. Notice I didn’t say airline. While the airlines are pleaded as defendants they are not going to be liable here. Why? Mostly because they couldn’t care less about how many miles the promotion company buys and how they award them. All the airlines see is note that says please issue X miles to Joe Cool, and here is a check to cover the cost. If the promotion company got the agreement right, then web hosting company will have to pay the promotion company for the miles. If the promotion company got the agreement wrong they are going to have to cut the airlines a huge check.
This lawsuit is morally bankrupt. I agree with Wandering Aramean that the plaintiff’s here have gone too far. While legally, someone may be liable for this mistake, these plaintiff’s actively took advantage of it. Now it looks like not one but two companies are at risk of going out of business through having to pay for the miles a poorly worded advertisement said would be issued. I like flying and I like the challenge of collecting miles, but this is too much.