Unlike modern myths of popular pastimes, frequent flyer programs did not begin in a garage, they weren’t scribbled out on a napkin in Bob Crandall’s kitchen, nor are they a dot-com wonder. The fact is that frequent flyer programs, while celebrating their 20th Anniversary on May 1, aren’t anything they started out to be except one thing — successful. The roots of these programs can be traced back to 1979 when Bill Bernbach, CEO of Doyle Dane Bernbach — the advertising agency for American Airlines proposed that American do something special for its best customers. At that time, Bernbach was watching with wonder as banks were offering toasters and electric blankets to their best customers and to new customers for opening up accounts. They were having great success with the idea. The agency’s idea was to offer American’s best customers a special “loyalty fare.” Following deregulation in 1978, the airline industry was afloat with ideas that all evolved around airfares. Bernbach’s idea was passed around until Nick Babounakis, then director of Marketing Plans for American Airlines, discussed the idea in mid-1980 with Rolfe Shellenberger, who was manager of Marketing Plans at that time. They both came to the conclusion that frequent travelers would not likely feel rewarded by a special fare. The two were supported in their conclusion by the Pricing Department at American Airlines, which offered up a conclusion that a loyalty fare would likely be matched by any other airline and American would likely lose some revenue from decreased yield. Pricing then handed the file off to the then Senior Vice President of Sales and Marketing, Tom Plaskett, who passed it along to Nick Babounanis and Rolfe Shellenberger asking them to try and salvage something from the variety of opinions and research that had been done.

About the same time, Western Airlines (“The Only Way To Fly”) introduced its Travel Pass program, which might well be called the first real frequent flyer program. The Travel Pass program awarded $50 in travel certificates to passengers that flew five trips with Western. While not mileage based, it did pass the reward test and moved beyond the “earning copper” programs that were already in existence. These earlier programs were designed for the business traveler, and were literally the only marketing efforts by the airlines to this important group. At that time, the airline industry had abandoned the business traveler and was comfortable in turning this customer over to the travel agency.

After some ideas were kicked around at American, the Marketing Plans group agreed that a free trip would mean a lot to a frequent traveler if it included a deal for a companion and a first class upgrade. At the time, first class was a relative unknown for the frequent traveler, the space was usually occupied solely by movie stars and VIPs. The idea was then defined in a short paragraph for Tom Plaskett, asking to pursue a concept that offered a frequent traveler the equivalent of a free first class trip to Hawaii from any domestic point, with a free upgrade for any companion for whom a ticket at even the lowest fare was purchased. Of course, Hawaii was kind of a symbolic destination because most business travelers would not have traveled there on business and would find it an attractive incentive for them to fly American Airlines.

The group went on to define the rules and the rewards, the lowest award being a free upgrade from any fare. Its “cost” was pegged at 11,000 miles because American’s longest city pair at that time was Boston to Los Angeles and they didn’t want travelers to be able to get a free upgrade after only two transcontinental roundtrips (10,444 miles). They also offered discounts from any fare at levels of 25,000, 30,000, and 40,000 — 25 percent, 50 percent and 75 percent respectively. The grand prize was 50,000 miles for the first class roundtrip plus the companion upgrade. When these programs began, there was no such thing as free coach tickets, the closest thing being discounts off a paid ticket in coach. Also, the emphasis was on first class as an award, not a benefit. Times have changed, as today most awards are redeemed in coach and the reward of first class is usually defined as a perk of the program’s elite level program.

The early rules of the program included such caveats as: Awards would not be transferable to anyone. Accumulation must occur in the 12-month period beginning with the first trip. First class would give you a 25 percent bonus in mileage accumulation. Actual flown miles or nonstop distance between origin and destination on through flights would be credited. One free layover in addition to point of turnaround would be permitted.

Interestingly, it doesn’t seem as if Bob Crandall, then president of American Airlines, was directly involved in the creation of AAdvantage, except insofar as he and Tom Plaskett discussed what was being done.

Plaskett hired Hal Brierley, a successful direct marketing consultant whom he had met at Harvard. Brierley helped to define the rules and to add professionalism to the direct mail program. Brierley went on to found his own company and has successfully directed the frequent traveler efforts of many programs including United Mileage Plus, Hyatt Gold Passport and others.

But while it seems that American orchestrated a smooth and successful launch, there were times when the program almost didn’t get launched. Early on, some vice presidents and sales managers tried to derail it, mostly because of the turf war it was starting. The argument was that this isn’t the right time, we’ve got too much on our plate right now. Finally, Bob Phillips, vice president of Passenger Services, sprang to defense of the concept and gave his complete commitment to its success, citing that his boss (Tom Plaskett) thought highly of the concept. In a meeting with sales and marketing guys, Phillips said “I think we can do a good job of it, I think it’s a great thing for American Airlines. And we’re finally doing something for the customer.” It was a courageous move and really made a difference.

And then there is that name — ‘AAdvantage.’ The decision to name the program fell to the advertising agency, they called all the marketing people from American together and, from a list of names on a blackboard, voted unanimously for AAdvantage. They discovered that, by using a typewriter, they could type the two A’s and half way up between the two AAs put a little ‘x’ and it looked like a bird. But there was a slight problem. While American called the program ‘AAdvantage,’ many early customers called it ‘A’ ‘Advantage.’ Over time, the name became a brand and the double A became silent. Clearly, the launch of this program wasn’t a completely smooth ride. In fact, some of the public, and CEO’s and CFO’s of companies who used American for much of their business travel, soon began to contact American complaining of ‘this immoral’ thing that American was doing. Today, some of that sentiment stills exists.

Financial justification for the program was based on incremental tickets purchased by award redeemers for their companions, plus “stretch,” a word that was used to define extra trips generated by the program. All the research done by American in this period indicated that all costs of the initial program would be covered if each traveler in the program took a quarter of an extra trip per year. Later on, it was discovered that the induced “stretch” actually was more like six extra trips on American Airlines per traveler, per year.

And so the program was launched. At the time, American had about 60,000 members in its Admiral’s Clubs and another 130,000 members in the American Traveler program. So on launch day, they simply mailed letters to these people, pre-enrolling them in the program and giving them their new AAdvantage number. In a second wave of membership growth, American bought the American Express list, which brought many new members to the program. The thing that surprised American at this point was that it was only witnessing the tip of the iceberg. Its good customers from the Admiral’s and Traveler programs were not nearly as numerous as the people that eventually became new members of the program. That was a surprise, as American realized it had under-defined the market.

It wasn’t until United and TWA got involved, that the program became liberalized. In the fall of 1981, United offered a deal where six trips would qualify any traveler in its program to receive a free trip. However, the rules did not restrict it to members only, so American matched United, worrying about what might happen as people earned, then sold free trips to friends and strangers. That behavior, of course, would cut deeply into the risk factor because now any free trip might deprive American of full-fare revenue from somebody who used a scalper.

After a few months of success, an element of the program emerged: nobody really jumped at the discounts for coach class tickets and everybody was after the free trip, which was only available in first class. American had calculated something like three to five percent of the regular travelers would qualify for free tickets. It turned out to be more like seven to 10 percent. American ran out of first-class seats to Hawaii and could not fulfill the demand of first-class seats at the end of the first year. The big question was what was the program going to do? The demand was larger than the supply.

The First Five Years

Launched on May 1, 1981, it wasn’t until October 1981 that AAdvantage started to issue a monthly mileage summary. Special award statements were generated separately whenever a mileage award level was achieved. Also in October 1981, AAdvantage introduced Hyatt and Hertz as “award” partners and its newest innovation: two first class roundtrip tickets to any American Airlines destination for 75,000 miles. Fifty thousand miles was one first class ticket plus a free first class upgrade for a companion. The original award structure allowed you 12 full months to accumulate mileage toward an award and when you claimed that award, you automatically began a new AAdvantage year. The original newsletter contained messages from Tom Plaskett, then senior vice president of Marketing, now past chairman of Legend Airlines with stops at Pan Am. From Nov. 15, 1981 through Jan. 31, 1982, AAdvantage held its first “AA Holiday Special,” a promotion much like today’s offers. If you flew 7,000 miles with a minimum of five flight segments, you received a free first class ticket to any American Airlines destination. In those days, the airline didn’t fly globally like it does today, and the free award certificates were redeemable at travel agencies.

One of the more unusual promotions involving AAdvantage was in February and March of 1982. The program offered “AAdvantage Happy Hour” on all Dallas/ Fort Worth flight departures. Show your AAdvantage card on board, and you received the second cocktail, wine or beer free. In 1982, the program also had several “day-of-the-week” bonuses. You received extra bonus miles for Tuesday or Saturday flights. In April of 1982, another promotion involving miles and flight segments was launched. Fly 5,000 miles with at least five segments and you earned a free first class ticket plus first class upgrade on American to Mexico, the Caribbean, Bermuda or the Bahamas. On May 1,1982, AAdvantage ushered in a new twist to its program — mileage-earning partners. British Airways joined the program allowing members to earn mileage when flying British Airways, but more importantly for many members, the ability to use an award to Europe on British Airways. There was one caveat with British Airways — only 50 percent of mileage flown in Tourist Class was awarded.

The original 1981/1982 award chart looked something like this: