April 28, 2013 Loyalty Program Fraud: what it is and why it is the airline’s fault
The transportation business has been fraught with fraud since the time it came into being. Ever since there were commercial sailing vessels there have been people unable to pay who tried to stowaway on the ship. Of course in ye ol days, stowaways would get tossed overboard at least there was the deterrent factor of a watery death to dissuade people from stealing a ride. With the invention of airlines fraud came as well. Apparently, it used to be easy, or at least purported to be. Helen Hays plays the part of an airline stowaway in the 1970 film “Airport” and goes into great detail about how to stowaway on airlines. In addition to stowaways there are other ways to defraud airlines through their loyalty programs.
Airlines want you to believe they lose millions through loyalty program fraud every year. This is in some parts true, and some parts not. Mostly, I think it is just an accounting method airlines use to purport the image they are suffering at the hands of fraudsters. The truth I am sure is somewhere in between. But lets look at some instances of “fraud.”
The terms and conditions of every loyalty programs states that the user does not own the points she earns and is unable to transfer them to other people outside of prescribed channels for money. You can purchase tickets for other people, but you cannot purchase those tickets and receive compensation for them. However, a simple Google.com search for “sell my airline miles” turns up these gems.
These companies will then turn around and sell tickets using those miles.
Iflybusiness.com is apparently an example of this. According to this tripadvisor.com thread they book business class tickets using other people’s miles. I confirmed this though a series of e-mails with the website this morning. This is of course a huge no-no with the terms and conditions of the airlines and there is good reason why. Any revenue ticket is changeable for the right fee and fare. However, a reward ticket is not. Reward tickets and especially premium cabin tickets are heavily restricted by the airline, to encourage people to actually pay real money. This is reasonable and a normal business practice. Now say the passenger who buys this tickets has to make a change. She calls up the airline and is confronted with a lack of seats. She checks online sees that there are seats to sell on the fight and calls back.
uhoh. The airline is confronted by a near impossible problem. The passenger here (what we call in the business a BFP, bona fide purchaser) purchased the ticket without knowledge of the malice that went into the tickets creation. The airline has three options at this point and they are all bad. First, the airline can void out the ticket as it has been improperly issued; second, they can deny all changes; or third; they can make the changes as requested. The first two options hose the customer for something they have no knowledge on and the third justifies the improper behavior. Most of the times unless the changes are obscene the airline will grant them from a customer relationship standing.
Is this fraud. The airlines and passengers will scream YES!, and for the passenger who thought she was buying X and got Y it certainly is. But what about the airline, was the airline defrauded here? The answer here surprisingly is no.
Lets look at the transaction from the airline’s POV. Jason Smith buys a ticket from New York to Paris for Jane Smith, total cost 50,000 miles. That is a legitimate transaction. It is the situation that led up to the purchasing of the ticket was where the terms of conditions of the program were violated. This brings me to the next question, how does one define fraud. Fraud is defined simply as deception for personal or financial gain. The only deception and profit here comes from the BFP. The airline has nothing to do with that. But wait you say, the airline may have to shell out when the customer comes to them with problems. This is true, but helping the customer when they should be voiding the ticket doesn’t have anything to do with the ticket. This is a customer service choice that the airline made and not the fault of anyone else besides the airline’s.
To put this in another way, just because you have a bad choice doesn’t mean you have no choice at all.
How about a more pragmatic way of putting this, if the airlines didn’t have the prohibition against reselling miles, there would be no reason for businesses like Iflybusiness.com to operate in the shadows and force the airlines into impossible customer service issues.
In short, the airline made this problem and is now complaining about it. I can’t really feel bad for them on this issue.
Now, that’s not say there is no loyalty program fraud whatsoever. I am sure there is. As long as there have been systems people have been looking for ways to take advantage of them. Maybe I just don’t have a nefarious mind. But in my next post, I will explain how airlines actually commit fraud on a constant basis.