They go in some sort of order of frequent flier status/revenue generated/miles flown. The computer systems rank all the passengers on the flight by their scoring and they go down that list. They won’t always upgrade, eg. may only do so if there’s an open seat AND somebody over a certain scoring (eg. a platinum of 1K flier, but not if they’re just a silver or gold), or if they have standby passengers they need seats for, etc.
They basically just do it because they have empty seats in first/business and they want happy customers. It’s a slight hassle, but you make whoever you upgrade a very happy customer, and probably get repeat custom.
They might go down the list of passengers looking for something impressive (impressive titles, probably the only real value in a stupid fake lordship), they might pick frequent fliers, or just pick the most smartly dressed people out the crowd.
Each airline has their own criteria, but in almost all cases you need to have some minimum level of status to be elected for a free upgrade. As an example, you can read up here Delta’s priority policy (there are 7 levels of priority): https://www.delta.com/us/en/skymiles/medallion-program/medallion-upgrades
I used to work on the east coast and was required to meet with employees that reported to me on the west coast at least once a month. So I was racking up lots of frequent flyer points. But I got upgraded all the time not because of the points, but the fact that I worked for a huge company that frequently flew employees on the same flight. I probably flew first class about a dozen times.
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