Mileage Pro The Insider's Guide to Frequent Flyer Programs

AIRLINE LOYALTY PROGRAMS HAVE PROVEN themselves to be uncommonly powerful. That power derives from two sources: one purely emotional (the aspirational value of travel) and the other more quantifiable (the actual dollar value of travel).

As a reward, nothing packs quite the aspirational punch that travel does. In the real world of security lines, oversold flights and a weak U.S. dollar, a trip away from home is still an enticement without any equal. That is because a trip-to-be is a fantasy. It is a repository of hopes and dreams. It is also an escape into mystery, into romance, into adventure. It is a getaway packed with invaluable memories. But it does come with a price.

The Dollars and Cents of Miles
There are ways to put a price tag on miles.

Miles have different values when observed from different perspectives: when they are accumulated, when they are redeemed, and how they are viewed by the airlines’ own accountants. (One reason the IRS has stopped short of taxing frequent flyer miles is that there is no simple, straightforward way to assign a value to those miles—a prerequisite to computing tax liability.)

Want Miles with That?
How much does it cost to earn a frequent flyer mile? Answer(s): nothing, something or it depends.

In one sense, frequent flyer miles are free. For your next airline flight or hotel stay, price your airline ticket or hotel booking both with earning and without earning frequent flyer miles. The cost of the ticket or hotel stay will be the same either way. So, in the great majority of cases, there is no extra cost for earning miles. They are free.

(The flip side of this is that you are, in effect, overpaying if you decline to earn miles for a transaction for which miles are offered. It would be like telling the dealer to keep the spare tire even though it is included in the car’s price. By doing that, you would be receiving less than full dollar value.)

In another sense, frequent flyer miles cannot be free. Participating companies spend money to operate their loyalty programs by employing customer service reps, by establishing call centers, and by funding marketing communications. Like all operating costs, those expenses are folded into the price of the product and then passed along to customers. When you buy an airline ticket, the cost of frequent flyer miles is included in the price whether you choose to earn the miles or not.

There are cases where the purchase price with and without miles varies depending on where the purchase is made. As an example, mileage earners routinely face a choice between earning miles when purchasing from an online retailer linked to one of the airline’s mileage malls or when purchasing the same item for less at a competing retailer that does not award miles. So, which is it? Earn the miles or get the lower price?

The first step in making an informed decision is to compute the cost of the miles. Divide the price difference (which is the difference between the price with miles and the discounted price without miles) by the number of miles awarded for the purchase to arrive at the price per mile. Then ask yourself whether you will be able to recoup the cost of the miles when they are redeemed.

So, in the hypothetical case of a Sony Walkman purchased for $100 earning two airline miles for every dollar spent versus buying the same item elsewhere for $80 but without the benefit of earning miles, you would pay an extra $20 to earn 200 miles. That is 10 cents per mile.

As we have established elsewhere in this chapter, the average value of a frequent flyer mile is somewhat less than two cents. So paying 10 cents per mile is a stretch. In this case, the financially prudent decision would be to buy the cheaper Walkman and forego the miles.

Redemption Value
For most loyalty program members, where the rubber meets the road is on the award side of the programs. What can I get for my miles? How much is that award worth?

Assuming the award is a free ticket its value is simply the price of a comparable paid ticket in the marketplace. And the value of the individual miles is the price of that revenue ticket divided by the number of miles redeemed.

So, if a restricted coach ticket between Philadelphia and San Francisco can be had either by redeeming 25,000 miles or by paying $391, you would be getting about 1.6 cents per mile if you elected to use miles for the flight ($391÷25,000 miles).
If cheaper flights were available, the value of the miles would be lower. If the flights were more expensive, the miles would yield a higher value.

Recognizing and capitalizing on this value variability is key to maximizing mileage payoff. The general rule: To get the most bang for your buck, cash in your miles for more expensive flights. Or to put this rule in the form of a caveat: Do not redeem your hard earned miles for a ticket you could have purchased for a paltry $99.

Comparing award tickets and revenue tickets is a bit oversimplified. In particular, frequent flyer awards—at least restricted awards that are requested the great majority of the time—are subject to much stricter capacity controls than revenue tickets. That restricted availability arguably diminishes their value by increasing the hassle factor in obtaining them. Other factors undermining the value of award tickets versus revenue tickets: Award trips do not earn miles and award travel cannot be upgraded.

While it may be an imperfect approximation, comparing an award ticket to a comparable revenue ticket remains a simple and reliable way to benchmark the value of redeemed miles. It is a computation that loyalty program members should make every time they consider cashing in their miles for an award.

Buy 12 Get 1 Free
Another way to place a value on frequent flyer earnings is to think in terms of the number of paid trips required to earn a free trip.

This approach lends itself especially well to some of the discount airlines’ loyalty schemes that offer a free ticket after a set number of paid tickets are acquired.

The obvious example is Southwest. This airline offers members of its Rapid Rewards program a free roundtrip ticket after eight paid roundtrips. The value proposition is very straightforward: Fly eight times and get the ninth flight free. Rather than looking for a dollar value, this highlights the discount or rebate aspect of frequent flyer awards. In Southwest’s case, the member who fully participates, making the required eight paid trips within 24 months and then taking the free award trip, effectively gets an 11 percent rebate.

Miles and Points for Sale
Travel loyalty programs sell their miles and points to two distinct sets of customers: Individual travelers who are members of their programs, and companies that participate in the programs as partners by purchasing miles from the program operators and using them to reward customers for buying their products or services.
Compared to the sale of miles to program partners, which goes back to the programs’ earliest days, selling miles directly to the traveling public is a recent development.

When purchased by individual travelers directly from the airlines, miles can cost as much as 5.5 cents apiece when purchased in small quantities, but are usually priced at around 2.8 cents each, including processing fees and a 7.5 percent Federal Excise Tax. All airlines impose a cap on the number of miles travelers can purchase, ranging from 7,500 to 40,000 miles per calendar year.

To put the per mile price into perspective, purchasing enough miles to cash in for a free restricted domestic coach ticket (25,000 in most programs) at 2.8 cents per mile would cost $700. That amount is far more than an advance purchase ticket would cost on the open market. And a revenue ticket would not be encumbered by the capacity controls of the
award ticket.

Where purchasing miles may make economic sense is in situations where a small number of miles are needed to reach an award threshold. If, for example, you were just 1,000 miles short of the 25,000 required for a free domestic ticket, purchasing those miles for $28.00 to “top off” the account would be a quick and easy solution.

As you might expect, airlines that sell miles to other companies do so in larger quantities and at lower prices.

Where a maximum number of miles are available for purchase by individuals, there are a minimum number of miles for companies wishing to use them to reward their own employees or, more often, their customers. That minimum is generally 200,000 miles.

For lesser quantities, airlines charge companies approximately 2.5 cents per mile. When the quantities increase, volume pricing can drive the per mile price down below 1.5 cents.

So, combining the purchase price of airline miles to individual travelers and to both smaller and larger partner companies, the average per mile price is in the neighborhood of two cents. (The airlines do not disclose this level of detail in their financial reports, thus it is impossible to be precise.)

You Won... A Tax Liability
Another data point: The airline must assign frequent flyer miles given away in contests and sweepstakes a dollar value in order to report the winner’s tax liability to the IRS. (Yes, there is an apparent disconnect between how the IRS treats miles earned and how the IRS treats miles won in sweepstakes.)

In the terms and conditions of sweepstakes, the ARV (approximate retail value) of miles awarded as prizes ranges from 2 to 2.5 cents. So, if you win a million frequent flyer miles, be prepared to be taxed on $20,000 of additional income. That would increase the average taxpayer’s IRS bill by about $6,000.

Pssst... Wanna Sell Those Miles?
Finally, like anything of value, miles and points can be bought and sold. The bad news is that all airline and hotel programs explicitly prohibit such sales, except through authorized channels as discussed above.

The following legal verbiage quoted (and edited for clarity) from the terms and conditions of American’s AAdvantage program is typical:

At no time may AAdvantage mileage credit or award tickets be purchased, sold or bartered. Any such mileage or tickets are void if transferred for cash or other consideration. Violators (including any passenger who uses a purchased or bartered award ticket) may be liable for damages and litigation costs, including American Airlines’ attorneys fees incurred in enforcing this rule.

Use of award tickets that have been acquired by purchase or for any other consideration may result in the tickets being confiscated or the passenger being denied boarding. If a trip has been started, any continued travel will be at the passenger’s expense on a full-fare basis. The passenger and member may also be liable to American Airlines for the cost of a full-fare ticket for any segments flown on a sold or bartered ticket.

Although against the programs’ rules, a fairly active market in selling and purchasing miles thrives, both directly between buyers and sellers and via coupon brokers. The latter matchmaker of would-be buyers and sellers charges a commission for their services. (To get a sense of the scale of such activity, simply run a Google or other Internet browser keyword search for “frequent flyer miles.”)

Many frequent travelers are outraged by the airlines’ restrictions on the use of miles, reasoning that having earned the miles legitimately they are the traveler’s property to use as he or she sees fit.

From the airlines’ standpoint, the sale of miles—or more accurately, the sale of award tickets since the miles themselves cannot be transferred—amounts to a gray market for their product that undermines the published prices available through authorized sales channels and ultimately depresses profits.

No matter which side of the argument you choose to subscribe to, we suggest that you strictly observe the airlines’ policies.
First and foremost, doing otherwise is against the rules. Secondly, it is not worth the risk and anxiety to make or save a few dollars. At the very least, those caught selling their miles will have their accounts frozen, forfeiting any remaining miles. (It is up to the airline to reopen the member’s account or to close it permanently.) And buyers who are detected will have their tickets confiscated when checking in for their flights.

REMEMBER THIS:

• On average, the value of a frequent flyer mile is approximately one cent.
• By redeeming miles for expensive tickets and upgrades, savvy travelers can get significantly more value from their miles.
• Caveat: Do not overpay to earn miles. In some cases, you are better off buying a cheaper product and foregoing miles. Do the math.