American AAdvantage members can still party like it’s 1989 … but only until Nov. 1, 2012. Last month, American AAdvantage announced that miles earned prior to July 1, 1989, known as “Miles with No Expiration” will automatically be converted on Nov. 1 to “Miles Subject to Expiration” and will indeed expire if you don’t earn or redeem miles at least once every 18 months. At that same date, members will no longer be able to redeem miles according to an old award chart like they have been allowed to do since 1989. To help soften the blow, AAdvantage is offering the members affected by these changes a 25 percent mileage bonus on all of the miles earned before July 1, 1989, when these miles are converted into miles that expire.

For many members, the news was barely news at all, since they either don’t have miles from 1989 or they have very few. Some members even welcomed the announcement since they would now be getting a 25 percent bonus when their miles are converted into miles that expire. But for some members (we like to call them “Old Milers”) with large account balances of non-expiring miles and who had been saving these miles for over two decades, the bonus miles aren’t nearly enough compensation to appease them.

And this decision from AAdvantage leaves us perplexed. Why would the airline decide to eliminate non-expiring miles now, when it’s battling bankruptcy?

Non-Expiring Miles Now Expire

Most programs these days have miles that will expire without account activity and with some international programs, miles will expire after a certain date, regardless of whether your account is active. Miles earned in the programs of U.S. airlines don’t have a shelf life and it’s quite easy to keep your account active. All it takes is one partner transaction or a small purchase at the mileage mall every 18 to 24 months to keep your miles alive indefinitely with most programs, so the expiration policy change doesn’t have much of an impact if you pay even minimal attention to your account. To understand why some AAdvantage members are so hopping mad about the change requires a trip down memory lane to the history of American’s non-expiring miles, a couple of lawsuits and the airline’s original award chart.

Non-Expiring Miles Background

From the start of the AAdvantage program in 1981 and up until June 30, 1989, miles in the AAdvantage program did not expire. American AAdvantage changed their expiration policy on July 1, 1989 and gave miles a shelf life of three years. If you didn’t use your miles at the end of the calendar year three years after they were earned, they would expire. The program also introduced a new award chart at that time that included capacity controlled PlanAAhead (now known as MileSAAver) roundtrip award tickets for 20,000 miles on domestic routes and AAnytime awards that required 40,000 miles per roundtrip. For nearly a decade, members had to use their miles within three years or they would expire and be gone forever.

However, the program made an exception to the three-year rule for flyers who had earned miles prior to July 1, 1989. In a letter to members, the program explicitly promised members that, “Miles you earned through June 30, 1989 are not subject to expiration.” Members could also choose to redeem their miles under the Regular AAdvantage award structure or use them for the new PlanAAhead or AAnytime awards. Since then, the program has separated out miles that were earned through June 30, 1989 and are not subject to expiration, and those earned from July 1, 1989 onwards.

The airline’s decision to change the rules of the AAdvantage program for the then four million members of the frequent flyer program prompted a class action lawsuit that took years to settle and made its way all the way to the Supreme Court. In American Airlines v. Wolens, the plaintiffs claimed that American had breached its contract with members. When the program introduced blackout dates and capacity controls, their miles became less valuable and they were seeking monetary damages for the devaluation. While all airline programs reserve the right to make changes to the program, the plaintiffs argued that these changes were made retroactively and that American Airlines changed the terms and conditions of their frequent flyer contract. The fact that American Airlines changed its expiration policy was not part of the lawsuit since the changes only affected miles that were earned after July 1, 1989. The mileage expiration clause did not have a retroactive impact on miles members had already earned.

The Illinois Supreme Court ruled that American Airlines could not retroactively change the frequent flyer program and that American was in breach of contract and violation of Illinois’ Consumer Fraud Act. The court found that, “a contractual relationship is formed which vests the frequent flyer with the right to earn specific awards.” American appealed to the Supreme Court, which ruled that frequent flyer members were legally allowed to sue airlines for breach of contract over retroactive changes to the frequent flyer program. Wolen plaintiffs and American reached a settlement in February 2000. AAdvantage members who were part of the class action case (those who had at least 35,000 unredeemed miles as of Dec. 31, 1988) received vouchers that could be used to receive a 5,000-mile discount off of an AAdvantage award using non-expiring miles or $25 to $75 off the price of a paid ticket on American Airlines.

Another class action lawsuit, Gutterman et al. v. American Airlines, was consolidated with the Wolens case and settled at the same time. Plaintiffs in Gutterman also sought monetary damages and attorney fees for the 1995 increase in the award mileage required for AAdvantage awards that they claimed breached the agreement between American and its AAdvantage members. Gutterman class members who had redeemed 25,000 or 50,000 AAdvantage miles as of Dec. 31, 1993 or had between 4,700 and 24,999 unredeemed miles that were earned in 1992 or 1993 were also eligible to receive certificates giving them a mileage or cash discount.

On Jan. 1, 2000, the program changed the expiration policy again to become more lenient so that miles didn’t expire as long as you earned or redeemed miles once every 36 months. At that time, the airline partnered with over 70 airline, hotel, car rental and other partners so it was easy to keep miles from expiring. The three-year timeframe was shortened to the current 18 months on June 15, 2007. But those changes still only affected miles that were earned from July 1, 1989. Until now, non-expiring miles continued to be exempt from the changes.

Why Now?

American Airlines isn’t the only airline to change its expiration policy so the recent move isn’t without precedent. Both United and Delta chose to abandon their original award charts and non-expiring miles. Unlike American, neither offered members a mileage bonus as compensation for the change when they combined the two types of miles. Delta announced the change 16 months in advance, which gave members a longer booking window than American’s three and a half months advance notice.

The big question is why American decided to make this change now? The airline filed for bankruptcy protection in November 2011 and it’s never a good idea to do something in bankruptcy that will anger your customers, especially those who have been your customers for a very long time. Two rules apply to any company that enters bankruptcy. Rule number one is never draw attention to your loyalty program with any changes. Members are skittish enough and any change may be viewed negatively by members. Rule number two is: See rule number one.

The AAdvantage program has had non-expiring miles sitting in members’ account for over 23 years and they didn’t have to change the policy now and open themselves up to the possibility of litigation from upset members. We don’t know the actual number of members with non-expiring miles but even if the number is relatively small, social media is a big megaphone for jilted members.

“Old Milers” Respond

The response from members to the AAdvantage expiration policy change was mixed. Some members were unfazed, having grown accustomed to frequent changes by loyalty programs. Milepoint member Scottrick reasoned that, “lots of airlines will inflate award charts without giving you a boost in miles. At least American has given you 23 years to adjust. It’s an abrupt change, sure, but they seem to have been more generous than most.” FlyerTalk member dayone had a similar stance. He said, “This change is a reminder of the obvious: Miles are a depreciating asset. Those who ‘save’ miles should not be surprised when their value is reduced.”

But some members held on to their non-expiring miles because the old chart has favorable redemption rates and American AAdvantage had promised that non-expiring miles would never expire. Milepoint member ceieoc explains, “the American Airlines redemption schedule published for the old awards had additional options which gave a better redemption value on things like first class upgrades. This is one reason American Airlines customers did not cash in their AAdvantage nonexpiring miles.”

Mark Steinberg, an AAdvantage member who has been saving his miles for more than 20 years and has more than 200,000 Miles With No Expiration, didn’t take the change lightly. He says American failed to “honor its agreement to treat certain frequent flyer mileage as non-expiring and to permit me, as a holder of those miles, to use them according to a schedule of travel awards that was in force prior to Jan. 1, 1989.” Because of the change, he estimates the “withdrawal of the highly valuable award schedule associated with non-expiring miles denies me at least $10,000.” As an example, members with non-expiring miles can claim two roundtrip first class tickets between the U.S. and the Caribbean, Mexico, Bermuda or Hawaii for 75,000 miles. The same award requires at least 160,000 miles according to the current award chart, over twice as many miles. He filed a small claims case against American for monetary damages but then withdrew his claim since he realized he’d probably have to go into bankruptcy court in order to be permitted to sue American. Since he was able to book an award using a substantial number of non-expiring miles before the change was implemented, he decided the “cost/ benefit of going the litigation via bankruptcy court route, i.e. the damages I’d recover vs. the cost/time in getting my now-reduced damages, didn’t make sense.”

Steinberg speaks for many when he questions why American Airlines is making this change. “It strikes me that a key question is what on earth would prompt American to alienate its most loyal customers, i.e. those who have stayed with their program since at least 1989?”

Possible Reasons for the Change

We have a few theories based on what other programs have done with non-expiring miles and why they made those changes.

Possible Spin-off

The AAdvantage program is a huge, and at times hidden, asset for American Airlines. Its value has never been tapped other than as an asset for revenue and an enticement for customers. If during the bankruptcy and beyond there was a reason to leverage the asset that AAdvantage is, there would likely be a need to “undo” miles that have no expiration. The airlines have to account for unredeemed miles, and the liability they represent, and financial markets do not like unidentified liability. When Air Canada spun off their frequent flyer program, there was a change to a definite expiration policy. Aeroplan members are required to earn or redeem miles at least once every year to keep their account active and miles have a shelf life of seven years.

Preparation for a Merger

As American moves through bankruptcy, the fact is that AAdvantage’s two-tier mileage system is a relic and if there was any sort of possibility of a merger, then having a simple and single mileage policy would be welcomed with any future changes regardless of the partner. In a letter to employees, Horton said, “We are approaching the point where we have greater clarity on our revenue outlook and cost structure and can begin to accelerate the plan for the new American. And it is at this juncture that it now makes sense to carefully evaluate a range of strategic options, including potential mergers, which could make the new American even stronger.” Getting rid of non-expiring miles could be the program doing some housecleaning and converting all miles to a single currency prior to merging with another airline.

Revenue Model

With major changes in the way that current travel loyalty programs measure and redeem their loyalty currency, the change to a simple and single mileage currency (without grandfathered non-expiring miles and a secondary award chart) would make any change by AAdvantage to adopt a revenue-based accrual and redemption model much, much easier to implement. There are certainly indicators among the legacy programs pointing to a change to a revenue model. And either reactive, proactive or for the good of the future of AAdvantage, this would require the recently announced change.

Make All Miles Non-Expiring

Another possibility is that AAdvantage is streamlining the program and may eventually make all miles non-expiring, similar to what Delta did. When Delta made its change to non-expiring miles, no one matched that move. It was a policy change that has its positives and negatives and actually plays well into a longer played strategy for a revenue model suggested above (expired miles make free agents of any passenger and if a change was made to a revenue-based program, then having some “value” from non-expiring miles makes for a sticky customer).

Delta opened itself up to potential litigation when they introduced expiration to miles that were never supposed to expire. The airline had even run a high profile ad during a Super Bowl in the early ’90s advertising that miles in Delta’s original Frequent Flyer program would never expire. There were no caveats or small print saying that the program could change the policy at any time and the message was unequivocally clear, “Miles Never Expire.”

When the Frequent Flyer program ended and SkyMiles was launched in 1995, the new program introduced expiring miles but told members who had miles from the Frequent Flyer days that their original miles earned prior to May 1, 1995, would never expire. In some ways Delta was forced into the no-expiration policy given that their own rules published in 1995 stated that, “As long as Delta has a frequent flyer program, miles earned prior to May 1, 1995 will never expire… We want you to keep the miles you’ve earned. It’s that simple.” Delta also claimed that, “All mileage earned in the current Frequent Flyer program may be redeemed for Delta awards under the Frequent Flyer Medallion Award Chart for as long as the Medallion program exists, provided you maintain elite status in the SkyMiles program and have a balance in your Frequent Flyer account.” Members who had maintained elite status continuously since 1995 were promised that the original award chart would be available to them with awards such as a roundtrip coach ticket in the U.S. for 20,000 miles, a first class ticket for 25,000 miles or two first class tickets to Hawaii for only 75,000 miles.

And then, just over a decade later, Delta’s reassurances that miles would never expire became meaningless when the program changed the policy and combined non-expiring miles from the original program and expiring miles so that all miles would be subject to expiration as of Dec. 31, 2006. At the time, Jeff Robertson, General Manager of SkyMiles, explained, “The complexity that existed in managing this older program, including the hundreds of award codes we had to maintain, the knowledge required of our front-line employees to understand both programs, the technology associated with managing two different pools of mileage balances and the limited use of these older program miles by our customers was the rationale for making this decision now.”

Then, on Jan. 1, 2011, the change to make those grandfathered miles into expiring miles made for an open source of possible litigation. Anyway, as we now know, the program became the only U.S. carrier without mileage expiration when it eliminated its mileage expiration policy altogether on Jan. 1, 2011. So, could AAdvantage’s decision to change non-expiring miles to expiring be a precursor to announcing a non-expiring mileage policy?

AA Explains

Our theories for American Airlines decision are only potential explanations based on what other programs have done in the past. When we asked American AAdvantage why they changed their expiration policy, Suzanne Rubin, President — AAdvantage Loyalty Program, said:

“The recent change to our mileage expiration policy was motivated by the cost of maintaining our systems to support dual expiration policies and award structures. This is in addition to the cost of training our staff to support a relatively small and continuously shrinking part of our program.

“To give some perspective, less than one percent of our AAdvantage members have enough Miles With No Expiration (or ‘Old Miles’) to claim an award under the old structure and have had any account activity in the past 10 years. American is the last U.S. legacy carrier to streamline its loyalty program in this way–and AAdvantage is the only airline loyalty program to offer a mileage conversion bonus to members with Old Miles.

“AAdvantage is focused, now more than ever, on investing in new, innovative program features that the majority of our members value and can benefit from.”

We understand that the conversion of the older AAdvantage miles into the newer AAdvantage miles has likely been a consideration of AAdvantage for many years, particularly given the complexity of managing both programs. It makes sense to combine them and the program said it was making the change “in order to streamline our program.” Employees need to have the knowledge to understand both programs, there is technology associated with managing two different pools of mileage balances and these older program miles have limited use by members. Although there are likely millions of members who still have some of these older program miles in their accounts, far fewer have enough left to redeem even a domestic first class or coach award ticket, which means the older miles could possibly stay out there for hundreds of years. But now, older miles have a date stamp of Oct. 31, 2012 before they are transitioned into Miles that Expire. If you are an Old Miler with enough miles for an award ticket, be sure to call American AAdvantage to redeem them using the old award chart.

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