The frequent fliers who flew too much (2012)
articles.latimes.com
articles.latimes.com
"When he was seven years old, Max-Hervé George was given a magic ticket by his father. It lets him turn back the clock, to invest with perfect hindsight week after week, steadily accumulating a fortune.
The ticket is a life insurance contract and Mr George, now 25, has fought for years in the French courts to preserve its magic. He could be a billionaire by the end of this decade and, by the end of the next, his contract would be worth more than the insurance company which stands behind it, Aviva France.
There is no mystery to the financial magic, however. Instead it is a story of grand stupidity, of how a French insurer wrote the worst contract in the world and sold it to thousands of clients.
The company was L’Abeille Vie. In 1987 it began to offer a special deal to its richer clients, a Fixed Price Arbitrage Life Insurance Contract.
Life insurance is a popular savings product in France, and typically the customer allocates their money among different investment funds offered by the insurer. But this contract was not typical: prices for the funds were published each Friday, and clients were allowed to switch funds at those prices anytime before the next price was published, even if markets moved in the meantime.
L’Abeille Vie called this an arbitrage, but really it was a gift. Is the stock market up this week? Just call your broker to buy it at last week’s price and pocket the difference." ...
Arguably yes, though indirectly: society benefits from having a legal system that upholds contracts, even if one of the parties later changes their mind.
Or to put it another way - the harm to society of enforcing a ruinously bad bargain against one bank is possibly less than the harm that would be caused by the precedent that banks can sometimes wiggle out of bad bargains they make.
In anticipation of this rigmarole, this law was probably a great one-time boost for those who rewrite contracts for purposes of risk-management. It certainly wasn't welcomed by small shopkeepers who enter into relatively simple contracts with their customers (e.g. to purchase an expensive item on terms). To compensate, such firms might have told their customers "the new law means it doesn't matter what's on the contract". Although untrue, that statement would be plausible enough to generate more sales, at least until consumers heard enough stories about court cases that they no longer believed it. Certainly there are consumers who have been helped by this law, but there are probably others who have been disappointed by it.
AFAIK there's no unfairness provisions in common law. There are two statutes about unfair clauses - UCTA (Unfair Contract Terms Act 1977) and UTCCR (Unfair Terms in Consumer Contracts Regulations 1999, the UK implementation of an EU directive). Both are mainly focused on limiting businesses trying to enforce unfair terms on consumers. UCTA limits itself to specific types terms (liability limitations etc). UTCCR is much wider in the types of terms it covers, but still only applies to 'standard form' contracts (ie not-individually-negotiated terms), and only to terms which are unfair "to the detriment of the consumer".
Ie none of them will help a bank trying to claim that one of its own standard form contracts were unfair to the bank!
Edit: If you just meant that that the existence of this sort of legislation undermines my 'certainty of contracts' point, I disagree.
For one thing, even the more-powerful UTCCR explicitly bans the core terms of the contract (ie how much it costs and what you're getting for your money) from being considered 'unfair' -- it doesn't try to judge whether a bargain is good or bad.
For another, there's a hell of a difference between the law choosing not to enforce a term in a standard form against a consumer who probably didn't read and certainly couldn't have negotiated it, and someone objecting to a term they did write/negotiate - i.e. either an individually negotiated term or, as here, a bank objecting to a standard form term it wrote itself.
If we were talking about a Wall Street financial predator, people would be squealing for change. In fact, they have been. But this guy seems to get a pass for "sticking it to the man" or something.
It's weird.
Yes, "rich" people can get there "unfairly", but it turns out "just take it from them" is really a stupid idea.
So as to not fit too clearly into a "capitalist" mold, note this line of argumentation argues that such rich people shouldn't be able to simply pass this wealth down to their children, unless perhaps their children demonstrate similar facility with using it to their and society's mutual benefit. (Legalizing that would be tricky as well, but at least conceptually it could be argued.)
Who said "just take it from him?" I certainly didn't. I don't know the complexities of the case, the law, etc.
I'm just surprised people rally around this guy like he's a common man sticking it to those rich plutocrats. When, in fact, it kind of sounds like the exact opposite.
Also: He doesn't have "it." If anything, the argument would be that he should be prevented from creating an economic disaster just so he can jump from "pretty damn wealthy" to "unbelievably wealthy."
There is precedent for the argument that very long term arrangements (sometimes called "Methuselah Trusts"[0]) involving compounding interest should be prohibited or changeable in some circumstances but the lifetime of a single person would really never fall into that category.
Also of note in this specific instance, the "error" on the banks part is not a case of overlooked fine print, obliviousness to an extreme edge case situation that seems highly implausible, or a customer acting in somewhat bad faith or wastefully, which you could argue gifting first class tickets to random strangers is.
In this instance the whole point of the investment was to allow wealthy purchasers to make backward looking adjustments to a held investment portfolio. Which is, in fact, exactly what has happened.
[0] http://www.nickbaily.com/nick_bailys_002/2015/01/the-dangers...
> this story
http://www.iii.co.uk/investment/detail?code=cotn:AV-.L&displ...
These are not unlike other open ended packages where the seller expects to come out ahead, on average. Slightly further afield, it reminds me of yesterday's thread on reedit. They revoked their unlimited free speech policy, so that they could stop hosting some really nasty stuff.
Some people said "but you promised unlimited free speech forever."
I don't know if there is a clean judgement you can make. promises should be made in good faith and kept. If a company makes promises that it can't keep, then what. Sometimes you hit a sort of promise bankruptcy.
I think that's the case here.
On a complete tangent… The owners of these passes are probably an interesting bunch. (A) I think their brains are wired for quirky beat the system thinking. (B) You have to have a mind for opportunistic life hacks, in order to jump on this.
1. I am biased as I have hated AA ever since they decided to put me on some secret list (the SSSS list) for no reason which means anytime I flew AA I would be put through the wringer.
Edit. For those interested here is the details about the ssss list [2]. I am not sure what my "crime" was, but I suspect it was because I often flew one way (around the world tickets). The crazy thing is it is airline specific as I am not on the list with any other airline.
Can you prove that AAL did this? If you can't, then this is absolutely not the fault of AAL. This is the fault of DHS or TSA.
Peruse the various air travel articles on the papersplease.org blog for more info. (I wish I could give you good search terms, but some recent relevant articles don't contain the term "SSSS". Maybe try "Secondary Screening"?
The worst episode I had was when the TSA forgot to mark off my boarding pass after I went through security. At the boarding gate the AA staff freaked out, called security, and in front of the other passengers I was dragged out of the airport and back through security. I was then left with running through the airport to catch my flight. I just managed to get back to the gate before the plane left.
I suspect the owners of the passes were more characterised by having the sort of occupations where they could effortlessly stump up free cash, and a lot of time or requirement to travel, and probably a fondness for first class too. Most people with a mind for opportunistic life hacks don't have $250k to invest in future airline tickets.
Today, that would be $~661k. The folks who splashed out for the "travel with a friend" option paid a little more than a million dollars in 2015 money.
If the company is allowed to break the promise, then it benefits at the cost of trust. Not merely trust in the company, but trust in general. This ends up being a cost on all other entities (actual or legal) who will ever depend on trust. In short, it is a form of theft.
From the article:
"Each had paid American more than $350,000 for an unlimited AAirpass and a companion ticket that allowed them to take someone along on their adventures. ...
[T]he marquee item was the lifetime unlimited AAirpass, which started at $250,000. ... For an extra $150,000, they could buy a companion pass. Older fliers got discounts based on their age.
When American introduced the AAirpass in 1981, it saw a chance to raise millions of dollars for expansion at a time of record-high interest rates."
From Wolfram Alpha:
$400000 (1981 US dollars) in 2015
equals:
$1.059 million (2015 US dollars)
(based on Consumer Price Index)
AA was looking for non-traditional investors. I think that unlimited air travel for two for the rest of the investor's life is a reasonable alternative to a cut of the company's profits for a one-million dollar outlay, don't you?
2) What is a better compensation for a one-million-dollar investor to whom you don't wish to give a share of the company?
As I have posted already I don't cut AA much slack because of what they did to me, but the essence of stupidity is selling something far below its true value because you did not consider how others might use it.
I'm also not at all convinced that your analysis of the value of these tickets is correct. Again, see my other comments in this thread for more info.
This is short-sighted.
There's opportunity cost to be considered. AAL needed money at the time they were granting the tickets to investors. The way to figure out the total benefit of the tickets to AAL is to consider what would have happened if AAL had not used the tickets as investor compensation and had instead:
1) gotten the same amount of money from regular banks
2) entirely gone without the money
This is neither an easy analysis nor a straightforward one.
I would also expect the penny-pinchers of a in-danger-of-failing company to forgo such an analysis, and instead play the "These lifetime tickets granted as investor compensation are costing us too much! We have no choice but to renege!" card.
It's pretty difficult to view this as a smart fundraising strategy as opposed to a questionable promotion with ridiculously loose terms.
But ultimately neither the odd $xxx,xxx in revenue from a frequent flier nor the implied $xxx,xxx per annum foregone from the promotion's biggest abusers are likely to have made a great deal of difference to AAL.
Also, don't forget that the low end of the lifetime unlimited flights program cost between $600k and $700k, and the high end (flights for two) cost a little more than one million USD in inflation-adjusted dollars.
To speak to your first two paragraphs:
It could be argued that AA could have discontinued the program in the 1990's or so... maybe they should have, I have no idea. But that would not have freed them from their existing obligations.
To speak to your third paragraph:
AA is being rather dishonest when they use the retail price of services to demonstrate the impact of this program. They really have to quote the actual cost, which -I'm sure- can be difficult to determine.
If one is attempting to stir up sentiment for one's decision to renege on a lifetime contract, I suspect that one would want to do as little honest analysis as possible. :P
So in almost every flight, the real cost to AA is the cost of having a golden ticket passenger filling a 1st class seat, vs. having either an empty seat or elite upgrade passenger filling that seat.
In either case, the actual cost to the airline is far far less than the actual cost of a 1st class ticket.
*http://viewfromthewing.boardingarea.com/2014/12/12/many-dome...
[0] http://www.forbes.com/sites/maggiemcgrath/2013/11/15/the-new...
>> At check-in, American agents detained Mukharji and escorted him to a private office.
... caught me by surprise. Agents of an airline can detain you?
The other key factor is the marketing value. AA sold these tickets for years, presumably they had some sort of value, perhaps as an incentive for point junkies to aspire to?
Even if it was a good idea, the way they went around trying to break their own contract was not very good. The best way to handle something like this is recognise you made a mistake and buy back the tickets from their owners at their current market value.
What were they even thinking? How could that have ended well in any way? I wonder if there's more to that than the Wikipedia article tells (like a disgruntled exec who wanted to take the company down with him before he left or something).
Special loyalty programs just mess up the transparency of the market. And they can cause other problems as well, as illustrated in the article.
Especially that the prices should fluctuate if you were to pay for what you use. A taxi at night is already more expensive, and electric energy is sometimes cheaper but this should apply smoothly (but not necessarily predictably) to nearly every service: surge pricing everywhere and forever.
The added cognitive burden and transaction costs simply aren't worth it a lot of the time so you get various all inclusive offers instead that have to favour some outliers.
With any "all you can eat" scenario - especially high valued ones, it may be best to cap the number of participants so you can at least observe their behavior and cap your risk. It would also help with price discovery so you can truly calculate the value you are offering and price accordingly.
Edit: To the downvoters: This is a serious question, not snark. Folks are claiming that these tickets were a stupid idea. If you read the article, you discover that these tickets were compensation to million-dollar investors. AA needed that money. They had to give something to get it. If they were to give something other than those tickets, what should it have been?
Remember that someone who has a million dollars laying around will expect that they get more than a million dollars out of their investment. That's generally how investment works.
Note also that even though AA estimated that the passes (for certain individuals) "were costing it millions of dollars in revenue", no one bought one for $3M in 2004. The value of an unlimited pass is directly tied to how much you'd use it. A handful of individuals were at the far end of the bell curve.
How is that even possible? Did he never actually leave the airport?