The Economics of Airline Miles – Part I

The Value of Airline Miles

Airline Miles are an asset. They hold true value. Like any collection of assets, your miles in the multiple programs you participate in need to be treated like a portfolio. They need to be managed. Their value to you evaluated (it is subjective, as I will discuss). Over time their value will change and it needs to be monitored. And eventually they need to be redeemed. Their value to you will determine what you should redeem them for and when. I will talk both on the economics of earning and of redeeming miles in this and future posts in this series.

Let’s start with the basics. My first Economics class started with the professor making the statement – “Money is what Money does”! To a bored teenager who did not want to be in that class anyway, this made no sense at all. But over time, I have realized the extreme validity of that statement. Money is in fact nothing more and nothing less than what it can do for me at the moment that I need that something. At the end of the day (or for the whole day for that matter), we make money to spend on things we can buy with it. (Hmmm, I like what I just wrote. Maybe I should start a blog on money and economics. Move over Suze Ormon…).

Airline Miles are no different. They are currency you can use to redeem for multiple things the airlines allow us to redeem them on – Free Award Travel, Upgrades, Lounge Membership, Merchandise, Hotel Stays, Car Rentals, Gifts, to name a few. What we can and intend to use them for determines their value to us, at that moment

Airlines too assign a monetary value to miles. In fact, every outstanding mile that they give out and has not been redeemed, shows up as a liability on their balance sheets! They also raise cash by selling miles – not just to you and I, but also to all the 3rd party partners that offer miles for their services. So, the way American Express is able to give Delta SkyMiles on their credit card to you every time you make a charge is by first buying the miles, for cash, from Delta. Some Airline Miles programs have been so successful at this that they have been spun off by their parent airlines as independent companies. Aeroplan from Air Canada is the best and most successful example. United has been toying with the idea for along time.

Airlines typically sell miles to us the customers directly for 3¢ a mile (plus a transaction fee). That tells a lot about what an Airline Mile’s value to an airline is.

The value of an Airline Mile to you, the customer is determined by several factors. Here are a few important ones:

Economics of Earning Miles:

Are you earning Award Miles or Status Miles?

Status Miles or EQM earn you benefits other than just the ability to redeem for the items I mentioned above. They earn you loyalty rewards and recognition by the airline. They also are more transient than Award Miles. Most airlines allow award miles to live forever as long as you take appropriate steps to keep them from expiring. Status miles expire every year (Delta here is the exception with the introduction of roll-over of excess status miles). On January 1st of every year, you have to start earning your status again. This makes the value of status miles vary based on the time of the year and whether you are able to reach the next status milestone within the year or not. For example, I am reached Premier Executive (at 50,000 EQM) status on United in July. I know that based on my flying pattern for the rest of the year, I am too far away from reaching the next elite level (1k at 100,000 EQM). So, for the rest of the year, I no longer care what program I earn my miles on. Till I reached the Premier Executive level, I wanted every flight to give me status miles on United. That made every mile flown on United or a Star Alliance worth much more to me than it is for the rest of the year.

Economics of Redeeming Miles:

What do you intend to redeem the miles for?

If you do not have any expensive tickets or hard to get airline awards in mind to redeem your miles on, the value of the miles – to you – is lower than it may be to someone else. For example, I redeem my miles typically on $1,000+ international award tickets. They need 80,000 miles per ticket and I like to have my family of three to get the award tickets (see the linked post on why I never fly for free). So, I need 240,000 miles accumulated before I get what I want. So, every mile counts. I scrounge. I look every double mile deal. I never pay cash for anything – everything goes on my credit card. The only two merchants I use who do not accept credit cards hear from me every time I they say no to my card (and I try every time too). Miles are hence, worth a lot to me. Not in terms of their cash value, but in terms of what they will do for me. In terms of cash value, if it takes $3,000 for me to pay for three tickets, if I redeem 240,000 miles for them, it is only 1.25₵/mile. But because it takes so much time and effort to accumulate the miles and shelling $3,000 at one go hurts the pocketbook so much, the miles are worth a lot – to me.

On the other hand, if all I want to use miles for is to upgrade my next 3 hour flight to grandma’s, I would not hurt much if I do not accumulate enough miles in time for the trip. (In full disclosure, the $1,000 international flight is how I get to see grandma).

Part II in this series discusses the Value of Elite Status. Part III of this series is on how to Maximize Airline Miles earned and Part IV on Maximizing Mileage Redemptions.

Your thoughts on my Economics theory of Airline Miles – please share by leaving a comment.

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