The Value of a Frequent Flyer Mile Revisited

March 21, 2011 — -- After three decades of earning and burning frequent flyer miles, what do we know about their value?

On the eve of the mile's 30th birthday -- American launched the first mileage-based program in May 1981 -- there's no single answer to that question. But what we do have are more ways than ever of assessing a mile's value. For better or worse, depending on your point of view, the only consistency among those values is their variability.

Miles for Flights

Since the great majority of airline miles are used for domestic coach award tickets, priced at 25,000 miles in most programs, a rule-of-thumb baseline for the value of a frequent flyer mile is the average price of a paid coach ticket (around $350 currently) divided by the required miles, giving us a nominal value of 1.4 cents each.

To account for the inconvenience and difficulty -- sometimes impossibility -- of finding award seats at all, I deduct 0.2 cents from the nominal value, giving us an average per-mile value of 1.2 cents.

In most programs, it's possible to get more or less value, depending on the market price of a comparable paid ticket.

Cashing in 25,000 miles for a ticket that could be purchased for $100 yields just .4 cents (four tenths of a cent).

On the other hand, redeeming 100,000 miles for a business-class ticket to Europe priced at almost $11,000 yields a nominal per-mile value of 11 cents, slightly less with the hassle factor adjustment.

Miles for Merchandise

Merchandise has been featured in the airlines' awards catalogs on and off for years. Although it's an attractive option in theory, in practice such redemptions typically deliver poor value.

Some random examples:

A Nikon 14.2 Megapixel Digital SLR camera, available from BestBuy for $588, costs 91,000 United miles, yielding about .6 cents for each mile redeemed.

An Amazon Kindle 3G + WiFi Bundle, selling for $189 at Amazon, costs 83,400 miles in Delta's program, or about .2 cents per mile.

Frequent Flier Miles as Money

The history of frequent flyer miles has been one of ever-increasing resemblance to a traditional currency, like dollars, yen or euros.

That evolution took a giant leap in February when Points.com, a ubiquitous facilitator of conversion and trading of loyalty miles and points, teamed up with PayPal to allow members of the programs of American, US Airways, and Aeroplan to redeem their miles for a cash credit in a PayPal account. From there, the cash may used to offset purchases paid for using PayPal, sent to anyone with an email address, or transferred to a linked bank account.

Convenience is one thing, value something else again. And the value differs wildly depending on which program's miles are being converted into dollars.

Redeeming American miles for PayPal cash yields a per-mile value of .42 cents, about a third the average value of miles used for flights. The Aeroplan miles are worth closer to half the value of miles redeemed for flights, at .56 cents apiece. And the US Airways miles are worth a meager .083 cents each, about 6 percent of the value of miles used to fly.

Value considerations aside, there is now only a single degree of separation between miles and cash. The next and final step: a debit-like card, loaded with frequent flyer miles that have a cash value when used to purchase goods and services.

There have been other baby steps in the direction of miles-as-money, each making its own contribution to consumers' notion of what a mile is worth.

Delta's Pay with Miles feature allows members of Delta's SkyMiles program who also hold program-affiliated Gold, Platinum, or Reserve American Express credit cards to pay, in part or in full, for flights on Delta and Delta Connection with miles valued in most cases at 1 cent each. Using 30,000 miles for a $300 flight might not seem like the best possible return, but the deal is sweetened somewhat by the fact that the tickets being purchased are normal, retail tickets, unencumbered by the restrictions and capacity controls that affect award tickets.

With United's Miles & Money feature, Mileage Plus members can use a combination of cash and miles to book restricted round-trip coach awards on United and United Express. So, for example, a round-trip flight between San Francisco and New York could be booked for 25,000 frequent flyer miles, or, using Miles & Money, for 15,000 miles plus $120. So in effect, you are buying 10,000 miles for 1.2 cents apiece. The cash-to-miles ratio is not uniform, however. According to my own test bookings on United's website, the value of the purchased miles varies between well under 1 cent and slightly less than 2 cents.

The Cost Side

In the end, the value of frequent flyer miles is best quantified as the difference between the cost to earn them and their value when redeemed for flights or other awards.

Normally, the cost to acquire the miles is nil, inasmuch as the airline has already folded their cost, as a marketing expense, into the price of tickets.

The exception to that rule is the increasingly common practice among airlines of making their miles available for sale, typically for around 3 cents each including fees and taxes.

Given the value of miles when redeemed, it's hard to rationalize paying 3 cents each for them. But selling miles is big business for the airlines, and as with any business, there are deals to be had. Airlines routinely discount the price of the miles by 25 percent. And there are occasional sales where the purchase price falls by half, making them potentially a good buy.

Good Value Hunting

So, what do we know after three decades of earning and burning frequent flyer miles?

While travel loyalty programs can deliver solid value, even great value, they don't do so automatically. It's possible to overpay for miles, and to redeem them for less-than-stellar value.

Which leaves us with the following general guidelines for getting solid value from airline mileage programs:

Depending on the award they're redeemed for, frequent flyer miles can be worth less than a penny, or 10 cents or more. As a broad average, figure they're worth 1.2 cents each.

The cost to acquire miles, on the other hand, ranges from nothing (when earned through normal channels) to as much as 3 cents each (when purchased from the airlines).

Unless you have a plan to redeem miles for significantly more than their average value of 1.2 cents each, buying miles for 3 cents apiece amounts to financial self-flagellation.

And no matter how you acquired the miles, cashing them in for a cheap flight is wasteful.

Tim Winship is Editor at Large for SmarterTravel, as well as the editor and publisher of FrequentFlier.com, and a frequently quoted expert on frequent flyer programs. This article originally appeared on SmarterTravel.

In the end, the value of frequent flyer miles is best quantified as the difference between the cost to earn them and their value when redeemed for flights or other awards.

Normally, the cost to acquire the miles is nil, inasmuch as the airline has already folded their cost, as a marketing expense, into the price of tickets.

The exception to that rule is the increasingly common practice among airlines of making their miles available for sale, typically for around 3 cents each including fees and taxes.

Given the value of miles when redeemed, it's hard to rationalize paying 3 cents each for them. But selling miles is big business for the airlines, and as with any business, there are deals to be had. Airlines routinely discount the price of the miles by 25 percent. And there are occasional sales where the purchase price falls by half, making them potentially a good buy.

Good Value Hunting

So, what do we know after three decades of earning and burning frequent flyer miles?

While travel loyalty programs can deliver solid value, even great value, they don't do so automatically. It's possible to overpay for miles, and to redeem them for less-than-stellar value.

Which leaves us with the following general guidelines for getting solid value from airline mileage programs:

Depending on the award they're redeemed for, frequent flyer miles can be worth less than a penny, or 10 cents or more. As a broad average, figure they're worth 1.2 cents each.

The cost to acquire miles, on the other hand, ranges from nothing (when earned through normal channels) to as much as 3 cents each (when purchased from the airlines).

Unless you have a plan to redeem miles for significantly more than their average value of 1.2 cents each, buying miles for 3 cents apiece amounts to financial self-flagellation.

And no matter how you acquired the miles, cashing them in for a cheap flight is wasteful.

Tim Winship is Editor at Large for SmarterTravel, as well as the editor and publisher of FrequentFlier.com, and a frequently quoted expert on frequent flyer programs. This article originally appeared on SmarterTravel.