One of the most important questions in the mile collection game is, “So just how much is a frequent flyer mile worth?” It’s a simple question that ignites big arguments. It’s like walking into a bar in downtown Boston and innocently asking, “So, who was the best Red Sox outfielder of all time?” It’s a frustratingly subjective question, because different people place greater (or lesser) worth on different properties in a ballplayer (it’s also a good way to get a beer mug thrown at your head). So, what’s a frequent flyer mile worth?
As a certain ex-president might say, it all depends on what the meaning of “worth” is.
Let’s start with a little make-believe contest. The local Ferrari dealership is trying to drum up business. In their well-lit showroom, directly in front of a brand new, cherry-red, sinfully gorgeous Ferrari FF is a huge fishbowl, filled with envelopes. Most of those envelopes are filled with a Buy 3 Get 1 Free coupon from the taco truck across the street. But one blessed envelope contains a certificate good for that new Ferrari FF and the 651 neck-snapping horses under its hood. You close your eyes and rub your hands in anticipation, dreaming of doing zero to sixty in 3.5 seconds, and plunge your arm into the fishbowl…and pull out a taco coupon.
Oh, well, them’s the breaks. You can’t win ‘em all. But then, amazingly, the guy standing next to you reaches in and pulls out the grand prize ticket! He jumps for joy as confetti rains from the ceiling, until he notices the look of dejection on your face. So he turns to you and says: “I’ll sell you the ticket for $200,000.”
Whoa, dude – that’s an awesome deal! The Ferrari FF has an MSRP of $295,000, so that’s a huge discount! You’re saving almost a hundred grand! I mean, it’s not every day you get a 30% discount on a new car…oh. Right. It’s still more money than you make in a year. Perhaps, several years. Maybe if you moved back in with your parents to save on expenses…dang, that’s right, they turned your old bedroom into a yoga studio. Not gonna happen.
Frequent flyer miles have two “values”: objective and subjective. Or, put another way, what you can Get for a Mile, and what you’d Pay for a Mile. In my example, the Grand Prize Ticket had an Objective Value of $295,000. But I certainly wouldn’t pay that amount for the ticket. How much would I pay? Well, initially, I was willing to pay nothing. It was a contest, after all. But my Subjective Value for the ticket falls somewhere between zero and $295,000. Probably a lot closer to zero.
As Miles Collectors, we’re looking to acquire the miles for free, or as close to free as possible. Then, ideally, we’d like to turn around and redeem those miles for high-value items, like international First Class tickets to Australia. We might be more accurately described as Miles Arbitrageurs. We’re counting on the fact that a mile has two values: the acquisition cost and the redemption amount. And we’re looking to maximize the difference between the two.
Many other bloggers have done impressive work on calculating the value of a frequent flyer mile; however, each individual has a different concept of value. Say I want to fly to Vienna in first class. The price of that ticket on Kayak might be $9,000; that’s what the first class seat is worth, but I’d never pay $9,000 to sit in it. But how much would I be willing to pay for the miles necessary to redeem for that seat? $1,500? $2,500? That’s what it might be worth, to me. To you, it might just be a fun splurge that’s not worth a dime more than the cheapest economy fare. The value of a frequent flyer mile is highly subjective. And you could make an excellent argument that the subjective value is the only important value, but I’d argue that it’s fundamentally impossible to calculate – at least, without running numbers for every individual mile collector.
However, I believe it is possible to calculate the Objective Value – the purchasing power – of a frequent flyer mile, or at least, a darn good estimation of it. What good is that? It should allow us to make an apples-to-apples comparison of one program to another, and answer questions like: Would you rather have one Starpoint, or five Hilton HHonors points? Is that transfer bonus from Membership Rewards to Avios miles a good deal? And just how much more worthless can SkyMiles get? (Okay, that was a cheap shot. Sorry, Delta fans.)
It won’t answer the question of how much we’d be willing to pay for a mile. But I believe it will provide a consistent yardstick to measure the relative value of different loyalty programs. Over my next few posts, I will present my process for calculating the objective value of frequent flyer miles. Hopefully, the answers will be useful to all of us.