Is 20 Month Expiration of Miles Even Legal?

A new legal challenge to mileage expiration in Europe raises interesting arguments about fairness and frequent flyer programs.

Expiring miles remove liabilities from a balance sheet, letting an airline recognize revenue while confiscating what is often seen morally (if not legally) as an asset.

Program policies have varied tremendously over time — sometimes a loyalty program doesn’t want to lose a customer, other times they value revenue recognition, and we’ve seen a see-saw across programs over time and different approaches around the world.

Mileage Expiration in the US Varies from Program to Program, and Changes from Time to Time

In the U.S. we’ve seen a variety of policies, from miles that expired after a certain amount of time, to miles that never expired, to miles that would expire unless a member had activity in their account within a certain period of time.

Delta once advertised during the Superbowl that their miles would never expire, before introducing expiration. When they ended the Delta Frequent Flyer program and launched SkyMiles, with expiring miles, they promised that miles earned under the old program would never expire. But then they decided that old miles would be merged into SkyMiles, and those old miles would therefore.. expire.

Delta had also committed that any elite member who continued to maintain their status could always redeem their old Frequent Flyer miles under the original program’s award chart, that promise went poof as well. Delta’s explanation? The terms and conditions of the program said they could change the rules.

Delta took the lead in aggressively expiring miles a decade ago. In 2007 the then-head of SkyMiles Jeff Robertson said “anyone who hasn’t had activity with Delta in anyway in the last two years, is not all that valuable to us.”

They eliminated mileage expiration in 2011 and Robertson explained,

that expiring miles was the biggest complaint that they received, more so than even award availability. That they were spending millions just to notify members about expiring miles, the revenue from re-activation wasn’t especially great, and so they believed it was in their long-term interest to no longer antagonize members who would otherwise need to earn perhaps 20 miles to extend an account’s lifetime (not very profitable to the airline) or who would just redeem their miles in anger and walk away from the airline (creating a redemption cost and a lost customer).

JetBlue followed suit with miles that never expire.

In South Korea, the Government Doesn’t Simply Allow Unfavorable Program Changes

Korean Air announced in 2007 that effective July 1, 2008 SkyPass miles would expire after 5 years. This was challenged by the South Korean government, and in 2010 it was agreed that SkyPass miles would expire after 10 years.

In Italy the Law Requires It

Under Italian law Alitalia’s program expires.

Although Alitalia now believes that ending a program doesn’t require expiring all of the miles in that program.

Air France KLM Flying Blue’s Mileage Expiration is Challenged in Court

Air France KLM’s Flying Blue has one of the stranger expiration policies. Miles expire after 20 months without a flight credited to the account. Crediting a Delta flight works — but it must be a flight. Apparently a court in Austria has ruled against this policy.

The Oberster Gerichtshof — which is the Supreme Court of Justice in Austria — upheld a decision from a different court in May of 2016 and ruled in favor of all aspects of a lawsuit which opposed the practice of miles being no longer valid for use after a period of 20 months if a member of a frequent flier loyalty program does not engage in an activity which extends the expiration date.

It’s not clear whether this decision will have a binding affect, or how broad that affect will be. But European courts are much more given than US ones to determine whether a policy is ‘fair’ to consumers.

You Really Can’t Sue in the U.S.

In the US fairness isn’t even a consideration, as that would be reading state-level contract claims into an agreement with an airline — and this is deemed state regulation of an airline, which is pre-empted by the federal Airline Deregulation Act. A consumer’s only avenue of redress is the Department of Transportation which has improperly ignored complaints about frequent flyer programs.

The only grounds for suit under Northwest v. Ginsberg is actual violation of a program’s terms and conditions, which are written with so much discretion that it’s almost impossible a program could run afoul of their own rules.

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community InsideFlyer.com, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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Comments

  1. I agree that the Air France rules are onerous. Years ago, when the rules allowed peons to use miles for FC (at less than staggering rates) we flew them quite a bit (in Biz & FC) Somehow we ended up with 80000 leftover miles that we have been keeping alive with Delta flights in the US for the last 5 years or so. It’s been a pain, and as soon as we find a convenient use for a 1 way flight with them, we will drain our balance and be done with AF. It just isn’t worth the hassle.

  2. Didn’t AirTran have a 24 month expiration policy? How about hotels.com credits expiring 12 months after earning (not inactivity) ….the most annoying!

  3. Hi Gary / any accounting experts,

    I was hoping you could help to clear up some confusion I’m having regarding the accounting treatment of miles, which you’ve touched on in this post (sorry, totally a finance related question and not miles & points related).

    Why are airlines allowed to recognize expired miles as revenue? I understand that they will have a liability on their BS that reflects the future obligation they may have in providing a seat to redeemers of miles (I can see this line item on AA’s BS in their 10K), but if those miles expire, how has the airline gained revenue?

    Hope that makes sense. Appreciate any help and please excuse what may well be my lax understanding of accounting treatment here.

    Thank you.

  4. @Carol S when selling miles, and airline will recognize some revenue now and will attribute some of the money to cover the cost of redemption later. Even just altering assumptions, assuming greater expiration of miles (more breakage) lets the airline recognize money they had held in reserve to pay for redemptions as revenue with no cost associated.

  5. When the airlines sell the miles to the Credit cards etc they increase their cash and increase their liability. When those miles are used they decrease the liability and record revenue, and have expenses of the flight (fuel, airport fees, transfer fees, etc)

    Revenue $.015 x 25000 miles =$375 $70 cost per person gives us $305 gross profit.

    When the miles expire they record 100% revenue and no expense. so there is $375 of gross profit, since no person sits in a seat!

    In accounting terms we call this breakage. Just like when you buy a gift certificate you may hold I for 4 years but under the Internal Revenue code the company will record 100% of that as income even if you have not used that Gift certificate , at the end of the second year that the transaction takes place.

    For financial accounting purposes we look at historical results of each person’s account and the likelihood that they WILL NOT use the miles. So when grandma earns 6000 miles for flying BOS LAX round trip the value of those miles is $0 because they will most likely expire since she does not have a AA credit card and she only flys once every couple years. Now for her grandson who travels every week and has 500,000 miles in account then those miles are worth $$$ since they more likely than not will expire and he will use them as upgrades or for a free ticket.

    By the way an accountant values this account as a full time job each year for each airline.

    As of 12/31/15 American Airlines has as a liability on their books $657,000,000 on their books

    With the following 10-K disclosure:
    The transportation component represents the estimated selling price of future travel awards and is determined using historical transaction information, including information related to customer redemption patterns. The transportation component is deferred based on its relative selling price and is amortized into passenger revenue on a straight-line basis over the period in which the mileage credits are expected to be redeemed for travel.

    Now you know why accountants have the highest rate of divorce then any profession!

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