Josh died in a car accident. He was 15 years old. Over 1,000 people attended his funeral. Ten of them worked at American Airlines.
Steven Rothstein, Josh’s father, didn’t work for the company. He was merely a valued customer. Maybe the most valued of all.
In the time following his son’s death, Steve would often call the airline — just to have someone to talk to. He’d walk to the gate, greet a dozen people along the way, and smile every time they greeted back.
Unlike many other communities Steve was a part of, American Airlines didn’t treat him like he was broken. They treated him “like a normal human,” his daughter Caroline Rothstein said in an article for Narratively, which provides most of the information for this post. Until, a few years later, they didn’t.
Some people don’t travel to be somebody. They travel because that’s who they are. Steven Rothstein is one of those people. When they took away his lifelong ticket, American Airlines didn’t just break a promise. They took away part of who he was.
This is the story of the AAirpass.
If I give you $7 million right now but ask you to pay me back $50 million over the next 30 years, does that sound like a good deal to you? That’s one expensive loan — not the kind a barely profitable airline can afford.
Of course, in 1981, the executives at American Airlines didn’t think of their cool marketing campaign as a simple financial transaction. If they had, they might have stuck to actual loans.
They surely didn’t expect to walk away from their innovative idea with a net loss in the tens of millions, months wasted in court rooms, and irreversible reputation damage that would one day make the rounds on Reddit. When the nightmare finally ended three decades later, the judge ruled in AA’s favor — but it was too late. In November of 2011, they filed for Chapter 11 bankruptcy. Two years later, they merged with US Airways.
Airlines are a tough business to begin with: Countless moving parts, low margins, and oh, the politics. The campaign in question wasn’t the sole factor that brought American Airlines down, but it highlights a disregard for basic financials that is very common in c-suites, particularly when it comes to marketing.
It’s the lack of common sense and financial soundness that can kneecap a company for decades, keep an otherwise good business out of profit, and, as in this case, even end in insolvency. Just ask the inventors of the AAirpass.
The idea was so simple, it must have sounded brilliant: For $250,000, let’s give people a lifetime ticket for unlimited first class flights.
The Airline Deregulation Act of 1978 had hit American Airlines. Badly. Within just two years, competition had multiplied. In 1980, the company reported a $76 million loss (nearly a quarter billion in 2020 dollars). The pressure was on and — maybe because of it — logical thinking was not.
The calculation goes like this: “If we sell 100 AAirpasses for $250,000, we’ll make $25 million! We can recover a third of our loss with a single promotion!”
If your business calculations are extremely simple and end with millions in your pocket in no time flat, there’s a good chance they’re wrong.
You might have forgotten a zero somewhere or missed an important connection. In American Airlines’ case, it was probably both.
The moment they launched this offer, they effectively said: Flying first class wherever you want, whenever you want, for the rest of your life, is worth $250,000 (~$783,000 today). The number of simple calculations you could have made to prove this was hopelessly underpriced is endless.
For example, at the time, the average US domestic round trip cost over $600 (~$1,900 today). If someone used the pass for 417 trips from, say, New York to LA and back, they’d already have made back the money — and that’s economy class. If you use the pass for 30 years, that’s only about 14 round trips per year, a little more than one a month. Again, all in economy class. Just eyeball the increased cost for first class, and you have your missing zero.
On top of this “rounding error,” American Airlines neglected a simple cause-and-effect dynamic: If you offer cheaper air travel, people will fly more.
Lucky for American Airlines, initially, only 28 people bought the pass — lucky because, while $7 million in cash were nice and needed (~$22 million today), the only thing that would later limit the financial damage this promotion caused was the number of passes never sold.
If there is some financial loophole in your offering, people will find it, and they will exploit it until there’s nothing left — just like marketers so often do with consumers. The difference is the customer will be right.
I’m not sure what statistics AA had available back in 1980 (their frequent flyer program was launched in 1981), but even a few surveys might have revealed how much frequent travelers fly on average — and hinted at how excessively some customers would use the AAirpass.
Enter Steven Rothstein.
Having had a good year at Bear Stearns, Steven Rothstein bought his AAirpass in 1987. $250,000 was still a crazy amount of money, but not as crazy as this deal, he decided. And so he got “access to fly first class anywhere in the world on American for the rest of his life,” his daughter Caroline recalls. “He flew so much it paid for itself.”
Over the next 20 years, Steve racked up more than 30 million miles on AA airplanes. He flew to LA, Tokyo, and San Francisco. He flew to New York, Paris, and Sydney. He flew to London several times a month. He flew to Canada for a sandwich. Steve flew anywhere and everywhere, all the time.
Steve wasn’t your average traveler, and he definitely wasn’t the corporate manager type AA execs expected to buy this pass. Steve was a super traveler, and he single-handedly destroyed at least 50% of the revenue American Airlines would make as a result of the campaign.
Here’s where it gets crazier: Next to the AAirpass for $250,000, American Airlines also offered a Companion Pass for $150,000 (~$426,000 today). Any AAirpass holder could buy it to bring a fellow traveler on any flight they booked. Savvy as he was, Steve bought both — and booked a total of over 10,000 seats on American Airlines planes over the next two decades.
There are multiple ways to calculate the potential cost of this campaign. None will be 100% accurate, but they all make one thing clear: American Airlines did not make any money on this one.
A common metric to calculate flight cost is “Cost per Available Seat Mile,” or CASM for short. “It divides an airline’s operating costs by ASM to get the cost to fly a single seat by one mile,” according to Investopedia.
In 2013, Rome2Rio formulated CASM via a fixed base price plus a variable cost per mile flown. They put it at $50 + $0.11/mile, which’d signal costs of $3.8 million from Steve’s flights alone.
However, back in 1980, cost per mile flown was much higher, starting at $0.32 before slowly falling over the next few decades. Taking the average of $0.22 in 1993, Steve’s flights cost $55.40 + $0.39/mile in 2020 dollars — a whopping $12.2 million.
Then, there’s the question of missed revenue. How much money did AA miss out on as a result of AAirpass holders using or blocking first-class seats? Some Redditors suggest $2,000 per ticket for 10,000 flights makes roughly $20 million, but the figure could be much higher.
AA assumed Steve Rothstein cost them about $1 million per year. The worst part? He wasn’t the only one. Jacques Vroom bought his AAirpass in 1989. He traveled even more than Rothstein — over 37 million miles.
All in all, American Airlines lost some $40 million dollars on two customers, which is why they rescinded their passes in 2008. Both of them went to court — and lost years later, after long, costly battles. From the outside, neither case seems to show clear, fraudulent activity, given the nature of their contracts, but the “elite revenue integrity team” determined they’d violated the rules AA themselves had put in place thirty years earlier.
What was clear was that, in 2008, AA reported a $2 billion loss after having just barely crawled into profitability in 2007 and 2006 — it was about time to stop the financial bleeding. But that too would come at a steep cost.
The customer is king. Even if the promise you made to her is near-impossible to keep, it is her good right to demand of you to do so.
When they launched the AAirpass, American Airlines thought the offer would be used by consulting and finance companies to reward their top performers — people with little time to fly outside of work. They were wrong.
As CEO Bob Crandall later reflected: “It soon became apparent that the public was smarter than we were.” Having realized this, AA increased the price of the AAirpass to $600,000 in 1990 (~$1.2 million today), and again to $1.01 million in 1993 (~$1.8 million today).
After officially shelving the offer in 1994, the last time the too-good-to-be-true deal was spotted was in luxury brand Neiman Marcus’ Christmas catalog of extravagant gifts in 2004 at $3 million (~$4 million today.) A forum member of Flyertalk still has his copy of the catalog, part of which reads:
Each AAirpass allows you to book seating in any available cabin, with VIP privileges on any open seat for American Airlines’ 4,200 daily flights to 250 cities in more than 40 countries around the globe. For the rest of your life. Period.
I’m not sure the company had learned its lesson, but whether it was now accurately priced or not (at $5,000 or more for one first class flight, $4 million still feels cheap), no takers were found.
Ultimately, 66 people acquired a lifetime AAirpass while it was available, most of them wealthy, some of them famous — like baseball legend Willie Mays, computer tycoon Michael Dell, and acclaimed investor Mark Cuban.
Most of the passes are honored to this day, incurring expenses year after year after year. All of them — except three (another customer had resold flights).
Before they had their freedom passes yanked away, Rothstein and Vroom taught American Airlines a hard lesson: If your marketing campaign is a last-ditch attempt to make a quick buck and save your business, it’s likely more risky than creative.
We say necessity is the mother of invention, but, more often than not, the stress that comes with it is the father of stupidity. It’s hard to make sound decisions under pressure — and easy for vulnerabilities to sneak in.
The difference between customers using flawed campaigns and marketers leaning on them to make profit — beyond a simple “karma’s a bitch” — is that falling for a false promise and making one that’s hard to keep aren’t the same thing. “The customer is not a moron. She’s your wife,” David Ogilvy once said.
Recalling the time after his son died, Steven Rothstein says:
“When everyone was asleep in the house, and I had nobody to talk to, and I was lonely about Josh’s death, I would telephone American Airlines reservations and speak to the agents about who knows what for an hour. […] I was confused and lonely and I was calling American Airlines because they were logical people for me to speak to. They knew me. I knew them. I knew their names. I knew their lives.”
Travel is how Steve made sense of the world. It was how he grieved and how he celebrated. When AA handed him a letter terminating his AAirpass — no less than a few feet from yet one more plane he was about to board — they didn’t just break their lifetime agreement with him, they took away part of who he was — no wonder things got ugly.
Honor your promises to the individual. If our word is no good, not even the world’s best marketing can fix it.
Since their merger, AA has recovered. The brand still exists. So does Steve Rothstein’s anger. The court case is closed — but not the relationship. In his office, among many souvenirs from his travels, a letter from 1998 sits in a drawer. It carries the signature of Bob Crandall himself.
“What a pleasure to see you on the Concorde,” he wrote. He also said: “I am delighted that you’ve enjoyed your AAirpass investment — you can count on us to keep the company solid and to honor the deal, far into the future.”
Be careful what you promise. It doesn’t always take an epidemic to bring your business down. Sometimes, a single customer is enough.