Why Airlines Should Always Dump Miles In Passenger Laps For Long Tarmac Delays

Seth Miller writes about a four hour, sixteen minute Air Canada Rouge tarmac delay in Las Vegas in 2017. The airline violated the ‘three hour tarmac delay rule’ by not allowing passengers to get off the aircraft, and the Department of Transportation has issued a $100,000 fine.

Now, Air Canada actually has to pay less than half the fine.

  • they get credit for the $25,000 they spent compensating passengers already
  • and $30,000 is suspended as long as they don’t have another violation

That’s common for these sorts of resolutions. What’s interesting to me, though, is that the miles issued to passengers count towards the compensation already provided, and DOT is counting travel vouchers as worth 80 cents on the dollar compared to cash and counting frequent flyer miles as worth 2 cents apiece.

To be sure, Air Canada Aeroplan miles are valuable. But they’re worth more like 1.4 cents than 2 cents. And, more importantly, they don’t cost the airline anything close to 2 cents to produce. Airlines should always hand out miles as compensation when they think they’re going to get fined because it’s a huge fine-reduction strategy.

While airlines routinely discount their points roughly speaking U.S. airlines will put a liability on their books of around a penny apiece for miles earned from flying, and around an eighth of a cent per mile for miles sold to third parties (like banks). That’s because accounting rules are different for miles sold to a third party, versus transactions where part of the value is a rebate for future travel (ASC 606).

Roughly speaking, though, we can assume that an airline mile costs around three quarters of a cent to produce, that banks are paying about twice that (though less for miles earned as part of a signup bonus) and that other third parties pay more. Award miles represents more than a 60% discount on DOT fines if DOT gives airlines 2 cents’ credit for each mile paid out as compensation.

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *