Well, this is going to be a short article. It’s not rocket science. You cash in 25,000 miles for a round-trip ticket to Myrtle Beach that would have set you back $325. It’s X divided by Y – you got a value of 1.3 cents per mile. Simplicity itself. Hmmm, I’d better find a funny animated GIF of a kitten and a laser pointer to pad out the rest of this thing…
But wait. It’s not that simple. We have to consider: everything we’re redeeming/paying, and everything we’re giving up, when we cash in miles for a free seat and stale peanuts.
The great Sir Isaac Newton once said, “If I have seen further, it is by standing on the shoulders of giants.” This thought came to me as I was coming up with a methodology for measuring mile valuation. And I think it’s clear what the great English mathematician was trying to tell me: Copy Shamelessly! Several other bloggers have done fantastic work in coming up with miles valuations, but in my humble opinion, the place I turn to for research is MileValue.com. Scott has a mathematical approach to the miles game, like my own, and has clearly laid out his thought process for valuations. He does use the subjective value for awards in his math, but other than that, I plan to start with his method.
Let’s return to that hypothetical award you just redeemed. To get a free (Economy) round-trip ticket to Myrtle Beach, you cashed in 25,000 frequent flyer miles. But you also spent a bit on fees. It might have been as little as five bucks. It might have included a $75 close-in booking fee, if you were flying in less than three weeks. If this had been an international ticket, then there’s a good chance that you would have paid fuel surcharges as well, perhaps hundreds or thousands of dollars’ worth. Then there’s the variety of “passenger processing fees” and “airport improvement fees” that some countries charge to squeeze a few last drops out of departing travelers. As Benjamin Franklin might say, the only certain things in life are Death, Taxes, and Creative Surcharges. So, your miles aren’t covering quite the cost of everything. Let’s say that you had to spend $25 to book the award over the phone.
We also need to consider what you’ve given up. When you fly for free on an award, you’re not earning new frequent flyer miles. That effectively increases the number of miles you’ve spent to get the award. Let’s say that, if you’d bought a regular ticket to Myrtle Beach, you would have flown a total of 4,000 miles, round-trip. That means that you’ve effectively spent 25,000 miles, plus the 4,000 miles you didn’t earn – raising the price (in miles) of the award to 29,000 miles for that free ticket (plus the $25 fee, of course).
This gives us a formula to calculate the value we get from a mile:
( Price of Ticket – Taxes and Fees ) / ( Miles Redeemed + Miles Not Earned )
($325 – $25) / (25,000 + 4,000) = 1.034 cents per mile, in our example.
Dang. Buzzkill. The value we’ve gotten out of our miles has dropped a bit, but it’s a more accurate measurement. You can actually use this formula for any award ticket you may be considering, to see how much value you’re getting out of the miles. If you replace the Price of Ticket with your subjective value – the most that you’d be willing to pay – then you’ll get a number that tells you the maximum you should be willing to spend to acquire the frequent flyer miles (for this award, and only this award).
But now, to get back to business – comparing the objective value of miles from different programs. To calculate these values, we’ll need a decent batch of flights to price out, from quick domestic hops to once-a-year dream vacations. Here’s a list of twelve sample flights. I’ll look up the price for each ticket, using the best price I can find on Kayak.com, and then calculate the value per mile that’s received for each award redemption, and average them out.
- Denver – Atlanta (First Class)
- Denver – Charleston, WV (Domestic flight to non-hub city, often expensive)
- Denver – New York (Last minute flight, upcoming Friday)
- Denver – Honolulu (Business Class)
- Denver – Toronto (Canadian tickets are often surprisingly expensive)
- Denver – Punta Cana (Sample Caribbean trip)
- Denver – Rio De Janeiro – Buenos Aires – Denver (Business Class with Stopover)
- Denver – London / Paris – Denver (Business Class to Europe with Open Jaw)
- Denver – Tokyo (First Class)
- Denver – Hong Kong – Sydney – Denver (Business Class)
- Denver – Singapore (First Class)
- Denver – Mumbai (Business Class)
A few notes about my sample flights: they all originate in Denver, where I live. But Denver’s also a major airport that’s served by all major (and most minor) airlines. I’ve picked travel dates (Wednesday-Wednesday, two months out) that minimize ticket prices. And when calculating the miles forgone by redeeming an award, I’ve used the Great Circle Mapper tool at gcmap.com for each individual segment, and applied a 50% miles bonus for business class flights, and a 100% miles bonus for first class flights. I’ve made no adjustments for elite status (I’ll assume you’re a no-status schlub, like me.)
Wow, looks like I’m not going to need that Kitty-and-Laser-Pointer GIF after all! In the next installment of this series, I’ll present some initial findings, and some surprising results that demonstrate that I still haven’t considered all of the important variables in my valuation formula. There’s another very important measure, one that greatly effects the value of a mile program – availability.