The story of Steven Rothstein, American Airlines’ most loyal and hated customer, is a textbook case. In the article below, I analyze the reasons behind a financial disaster that cost the airline $23m. It’s also a plea to use the right metrics to measure customer loyalty.
At a time when customer satisfaction and loyalty are more important than ever, Steven Rothstein’s story shows the limits of “loyalty at all costs.” He was American Airlines’ most loyal customer, yet he cost the company millions. The reason? This was a huge marketing mistake when the airline was struggling for survival.
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If you only have 30 seconds
- Steven Rothstein was American Airlines’ most loyal customer but also its least profitable. He cost the airline $23 million.
- Steven Rothstein had a clever idea of buying an AAirpass for $250.00 in 1987: it enabled him to fly unlimited on all American Airlines flights. For example, he could fly to the UK 500 times in 1st class!
- Steven Rothstein’s financial gulf was only discovered in 2007 when a financial audit was conducted.
- The KPIs used by American Airlines to measure its performance needed to be revised.
- This example shows that customer loyalty must be measured with the right indicators. The re-purchase rate is not necessarily the best.
Some customers are better than others and should be cherished. But not Steven Rothstein. For American Airlines, this customer was the one to get rid of at all costs, and American Airlines went to great lengths to kick him out after he had flown nearly 10,000 times in first class with the American airline. Discover this incredible story below.
Probably American Airlines’ most loyal customer
Rothstein bought an AAirpass subscription in 1987 for $250,000. This subscription gave him unlimited lifetime access to all American Airlines routes in any class, including first. Rothstein also bought an extra seat for $150,000, all this at a time when American Airlines desperately needed new money to keep from going bankrupt. This pass, called the AAirpass, was completely withdrawn from the market in 1993.
Sixty-six of these unlimited lifetime passes were sold (for more information on AAirpass, we refer you to the Wikipedia article). For example, the AAirpass enabled Rothstein to fly to England 500 times. In addition, each flight entitled him to additional miles on his frequent flyer card, accumulating some 40 million miles, which he distributed generously.
For some customers, “unlimited” really means unlimited.
A black hole in the company’s cash flow
In 2007, American Airlines analyzed the profitability of its customers and discovered that Rothstein was a cash black hole. Rothstein generated losses of $1 million a year and $23 million in total. It’s not exactly the kind of calculation you’d expect from a loyal customer.
Logically, American Airlines took every possible means to unilaterally terminate the contract, finding every possible violation of the AAirpass terms and conditions of use. The contract was unilaterally terminated in 2008 via a letter delivered to Rothstein, who was checking in at Chicago airport.
An article published on Americanow.com highlighted how Rothstein felt when the contract was canceled:
“He was so shocked he couldn’t get out of bed for days. He also felt betrayed, as he had helped the airline sell its passes and had agreed to testify at events [organized by American Airlines].”
What lessons can we learn from the Rothstein affair?
Steven Rothstein’s story is interesting in many ways. I see 2 lessons to be learned:
- customer behavior is not always easy to predict
- you need to choose the right indicators to measure customer loyalty.
Customer behavior is not always easy to predict
In the age of Big Data, some people pride themselves on accurately predicting the intentions and behaviors of even unconscious individuals. Yet it’s possible to be wrong. This quote from Time.com perfectly sums up the essence of the problem and the difficulties American Airlines has had to face: “What American Airlines has discovered over the years is a lesson that every restaurant owner offering all-you-can-eat has had to learn at one time or another: for some customers, all-you-can-eat means all-you-can-eat.”
Predicting behavior is a relatively easy task, at least for routine actions. However, everything changes when the decision is considered because the stakes are high. This is the case with a $250,000 subscription (equivalent to around $850,000 in 2024). It’s no longer a purchase. It’s an investment. And like any investment, it must be profitable.
The lesson is that bringing a new product to market shouldn’t be done lightly. Conduct market research beforehand, anticipate deviant behavior, and protect yourself with concrete conditions of use.
Choosing the right customer loyalty indicator
There are many possible indicators for measuring customer loyalty:
- average length of customer relationship
- Number of purchases over a given period
- Re-purchase rate
- Customer Lifetime Value (CLV)
Detecting problems requires using the right indicators. In the case of Steven Rothstein, it’s clear that American Airlines wasn’t using the right indicators. He bought his AAirpass in 1987, and it was only 20 years later, in 2007, that American Airlines conducted an audit on its 66 “lifetime” customers. 20 years during which the behavior of some of these customers slipped under the radar.
Steven Rothstein was the absolute champion if the performance indicator was the number of purchases over a period. But in terms of CLV, he was the worst customer.
Conclusion
This example shows that not all loyal customers must be retained at all costs. It all depends on the very definition of loyalty.
Some customers jeopardize your profitability and should be eliminated from your customer portfolio. CRM strategies must be based on several loyalty indicators to detect them. Yet, as we pointed out in an earlier article, most CRM strategies today focus on repeat purchases. Loyalty measurement, therefore, needs to be more holistic, measuring customer profitability. CLV is a good place to start.
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