Frequent-flier brokers on edge

Vicente Ayarza was one of the first to realize there was a lot of money to be made from brokering airline discount coupons. His flash of inspiration came in 1978 and began innocuously enough. ``We were clipping [airline discount] coupons off Rice Crispy boxes and redeeming them for tickets,'' says Mr. Ayarza, who then hawked the tickets at a discount for cash. ``We made a lot more money than we spent on Rice Crispies.'' Airline coupons aren't on cereal boxes anymore. Rewards and incentives have become much more sophisticated, and today's frequent-flier programs have become the ``most effective marketing tool we have,'' an airline spokesman says.

Under deregulation, airlines have had to fight to keep first-class fliers (generally business people), who are the most lucrative customers. To keep them loyal to one airline, the major airlines offer mileage awards through which fliers earn free round-trip tickets, often first-class, and often to exotic destinations.

With the expansion of those programs, coupon brokerages like Ayarza's New York-based Travel Discounts International have flourished. Today about half a dozen coupon brokers dominate a ``gray market'' business, buying and selling frequent-flier awards. By some estimates, sales in this strange secondary market have grown to $100 million ``Airlines and coupon brokers have had an uneasy truce,'' says Joe Brancatelli, a contributing editor to Frequent Flyer magazine. ``Airlines have basically said: `Don't rub our noses in it. Don't set up alternate lines of ticket distribution, and we'll let you live.'''

Transferability of the mileage awards has been a key to the popularity of the programs, but also a problem for airlines. It is a boon to the frequent flier who can give the ticket as a gift or to a family member. But airlines absolutely do not want their free awarded tickets sold at a discount and transferred to someone who didn't earn it.

Yet for some frequent fliers, the question arises: What to do with all those first-class tickets? Sell them to coupon brokers has been the frequent answer.

This is exactly what a small percentage of very frequent fliers, who fly as much as 250,000 or even 500,000 miles in a year, do all the time. An award of a pair of round-trip first-class tickets to Hawaii can fetch $1,000 from a broker. He then sells the ticket for more than he paid, but up to 50 percent less than the airline charges.

Now, however, several major airlines are on the verge of making sweeping changes in their frequent-flier programs aimed at stifling the coupon brokering business. Airlines could easily do this by making mileage awards nontransferable.

``Ours is a dying industry,'' Ayarza says. ``The airlines are starting to clamp down, and in an industry of this type you won't last long without the tacit cooperation of the airlines.''

Another major coupon broker, Alan Gross, owner of AGCO, which is headquartered in Silver Spring, Md., says bluntly: ``We're just little gnats on their backs.... We exist at the pleasure of the airlines,'' which could destroy brokering by eliminating transferability of coupons.

So far, it has been more valuable for the airlines to keep tickets transferable. But a consensus has developed among the major airlines that enough is enough.

Says a United Airlines official: ``We've known they were there for a long time and I think things have finally worn down for us.'' He points out that brokers are ``aiming now for the business travelers to Europe and the Pacific. That really hits us where it hurts.''

Airlines are also concerned that more travel agencies are using discount coupon brokers and that this could eventually spread and destroy their fare structure.

The same United official says: ``One of the brokers even ran a 16-page insert in a travel agent publication that stated: `Why buy tickets from the airlines when you can get them cheaper from us?'''

So the airlines' ax appears ready to fall for a number of reasons: loss of revenue; diminished control of their own ticket fare structure; brokers' rising profile; and the fact that even travel agencies (which had adamantly opposed discount brokers because they undercut their sales) are beginning to use them.

In September, United Airlines, American Airlines, and Trans World Airlines filed separate suits against San Diego-based Coupon Bank. Coupon Bank has filed a countersuit alleging antitrust violations.

Eric Fuller of the Coupon Bank contends passengers are free to use discount coupons in any manner: ``When General Motors sells a Chevrolet, they don't tell the customer what to do with it.''

Mr. Fuller believes that by picking on him the big airlines hope to set a legal precedent that will cut coupon brokers out of the ticket selling business. While many coupon brokers hope Fuller wins his day in court, they also say he has caused, or at least accelerated, the demise of the industry by stirring up the airlines' concern about what had been a quiet, lucrative niche market.

Coupon brokers such as Fuller contend their service enhances the awards programs by making cash available in exchange for frequent-flier awards. Although acknowledging that the such sales are not illegal, the airlines clearly explain to customers that their programs prohibit the selling of frequent-flier awards.

``We think brokering coupons deprives us of potential revenue,'' says Stephen McGregor, a spokesman for American Airlines. ``We oppose the sale or barter of coupons because it creates a secondary market for tickets over which we have no control.''

Mr. McGregor says there is always some danger that the case could backfire in the courts and have the effect of legitimizing the discount brokers. But he contends the problem has become serious. Some brokers, he says, end up besmirching the reputations of airlines by issuing a ticket for ``blacked out'' periods when discounts aren't allowed. When the airline refuses the ticket at the gate, it naturally makes the flier angry. The flier, however, usually blames the airline, not the broker.

Brokers counter by saying they rarely make mistakes in issuing tickets and that the airlines are simply afraid that discounting might destroy their fare structure.

A few brokers, however, think the writing is on the wall. ``If you step on airlines' toes enough,'' says Ayarza, ``pretty soon they're going to decide they've had enough and really squash you good.''