The law definitely applies to domestic flights. It's actually international where it gets trickier.

Whether it's a good deal or not depends on your urgency in getting to your destination. I've probably successfully volunteered to be bumped about 6-8 times in my life, and have been satisfied with compensation offered, which usually is equivalent to a voucher for a free round-trip ticket. It has also included an overnight hotel voucher in couple of cases where it was necessary.

I've never been bumped involuntarily, likely because there is always a volunteer willing to take some offer the airline will make. The highest I've received (international with the next flight in the morning) was an $800 voucher, presumably because the alternative to the airline was $800 cash. But as always, your mileage may vary.

DOT has not mandated the form or amount of compensation that airlines offer to volunteers. DOT does, however, require airlines to advise any volunteer whether he or she might be involuntarily bumped and, if that were to occur, the amount of compensation that would be due. Carriers can negotiate with their passengers for mutually acceptable compensation.

In other words, it's very much down to how you can negotiate with the airline to derive value. :)

This is not really negotiation, but a scripted process of elevation that some know how to exploit for maximum benefit and some don't.

And the opposite nearly happened... My dad, his wife and my half sister were flying down to meet me in Florida a few months ago. In his case, an earlier flight was canceled due to mechanical breakdown. It looked like they would all 3 be bumped and he was a little pleased over the idea of a $1200 windfall. In the end he got on the plane. I suppose there weren't enough Mileage Plus Elite members on the earlier flight that needed seats.

Hah, I've done this before. I was in Orlando and missed my flight back to Chicago, so I had to stand by for the last flight of the day. The list was 100 people long, but since I had the top-tier status, I went to the top. Some family trying to go home from their vacation was stuck in an airport overnight, all because I could not get to the airport in a timely manner. I still feel bad about this.

But only a little.

Those rules require the airlines to pay for hotel costs incurred because of the involuntary bump. The cash compensation is in addition to reimbursement for costs borne by the traveler because of the bumping.

Also, miles only trump cash if you are close to reaching a significant plateau (i.e., upgraded frequent flyer membership). Otherwise, the restrictions on miles make them much worse then cash you can spend anywhere.

Firstly, there are almost never involuntary bumps. Someone will always take money. It's basic economics and it'll always work. The involuntary bumping is really only ever experienced when there is mass delay (e.g. the snowstorm in nyc here recently). This is because there is significant seat inventory (again, think legacy airlines) and usually people can be re-routed with not much more than a few hours delay and a couple hundred bucks in their pocket.

Hotel costs (and food coupons) are only required (for domestic flights) if the delay is overnight or past a certain time-window. Often, again, once you opt-in for voluntary bumping, you agree to be denied access to any other offer that may be made via DOT guidelines.

Finally, miles are almost always worth more, if you're on an airline that values them properly (aa & united especially). Note that Citi have often invested in AA's holding company by buying miles:

"A total of $2.9 billion in additional liquidity and new aircraft financing was obtained. The $2.9 billion consists of: $1.3 billion in new liquidity, including $1 billion in cash from the advance sale of AAdvantage ™ frequent flyer miles to Citibank and $280 million in cash under a loan facility from GE Capital Aviation Services (GECAS) secured by owned aircraft; and $1.6 billion in sale-leaseback financing commitments from GECAS for Boeing 737s previously ordered by the Company." - http://www.aa.com/i18n/amrcorp/newsroom/network_enhancements...

Clearly they're not worth nothing.

The tipping point however is that it's almost always cheaper for the airline to give you miles than money; the cost of miles can be deferred (and you might not even use them!). This makes them a better deal, as you can almost always exchange them for a greater dollar rate later on (e.g. to get a better hotel rate discount, a free flight elsewhere, etc).

(finally pro-tip, most airlines distinguish between miles claimable for status, and miles spendable on flights/services).

There are people on Flyertalk who churn through those Citi AA Mastercards like crazy, collecting hundreds of thousands of miles from each card's signup bonus (usually 25-75,000 miles depending on the promo used to open the account).

While AA can distinguish between qualifying flight miles for status, when it comes to redeemable miles they distinguish between flight miles and other earned miles from charge cards/etc.

Since you can earn lifetime status on AA by collecting 1MM or 2MM redeemable miles, you can conceivably get status for life this way.

In terms of restrictions, it's much more reasonable to compare to a Z fare (highly restricted first class), which is probably closer to $3-5k r/t.

flyertalk.com is the hackernews of frequent flyer mile optimization, though.