This morning I wrote a post about my luck using miles and points to visit family. Circumstances were such that my wife and I had to take these trips, but prices were high. I think this is a great use of miles. I also made a passing comment about “overhyped” first class awards to exotic destinations in first class.
One reader appeared to think I was disputing the value of miles for aspirational awards, which is not the case. I use miles for aspirational awards all the time, but the post wasn’t meant to be about that. I was trying to talk about the value of miles when you don’t have the freedom to change your travel plans. Vacations leave a lot of choices open to the traveler including destination, dates, cabin class, and even choosing not to travel at all.
His comment did get me thinking about how I value miles in more flexible situations, and I came to a surprising realization: In many cases I assign almost no value to the miles I use for aspirational awards.
Of course everyone is welcome to their own opinions and value systems. I’m not attempting to pass judgment on anyone, and this post is not directed at that reader. Those who have been reading this blog for long enough know that I enjoy thought experiments. Agree, disagree, or ignore me. I just want to write about it because I think it’s interesting.
This post will discuss a few options for valuing miles and my thoughts on each. I’ll ignore the cost of fees and taxes unless I say otherwise.
Headline Value
First, there is the headline approach: this flight normally costs $30,000 so by redeeming 100,000 miles I obtained 30 cents per mile in value. Usually there are lots of exclamation points.
It makes for a good headline because of the extremely high number even though most people readily admit they would never pay this much. That leads to the second approach, which seems to be most popular among frequent travelers.
Perceived Value
The perceived value approach says, in essence, that I would only be willing to pay $2,000 for that flight so it only provides 2 cents per mile in value. You recognize that it’s better than the other options available if you had to shell out cash to fly coach, but you’re not actually willing to pay full price. You think the airline is overcharging. What you are willing to do is take an unsold seat in exchange for your hard-earned miles.
Although this second valuation model is more defensible, it’s also worth mentioning that the perceived value and the headline value are equivalent if you’re an extremely wealthy person who is used to paying for first class. It would also apply if the airline actually offered a flight at this low price, perhaps a mistake fare.
But airlines almost never offer $30,000 flights for the bargain price of $2,000. This is a very important point. Even if the perceived value is a more reasonable number (and who knows what “reasonable” is?), it still uses a hypothetical situation. In the first case you wouldn’t pay the price that the airline offers. In the second case you would pay a price that the airline doesn’t offer. Plus, this perceived value is largely discretionary and can be manipulated to fit whatever valuation framework you choose to create.
Subjective vs. Objective Valuation
I’ll pause for a moment and explain that it’s no coincidence I use the example of valuing a 100,000-mile award at perceived value of $2,000. Many people who use this system value their miles at something close to 2 cents per mile (well, somewhere between 1-3 cents but the point is they aren’t valuing them at 30 cents a mile).
Now imagine a situation where the same award costs 200,000 miles. Is it still a good deal? Well, I really want to go. So I’ll just decide that the trip is worth more to me. Now I’d pay $4,000. Thanks to perceived value you can assign whatever number you want to justify your decision to redeem those miles. It’s very subjective — the airline doesn’t care if you value their product at $2,000 or $4,000 because they’re not seeing that amount of money either way. And subjective valuation is fine as long as you recognize it for what it is.
The only time miles are objectively worth some number are when you have a choice between two hard realities. Like in the example I shared this morning, imagine you have to visit family for an important event on a very specific date. You can choose to redeem 25,000 miles or pay $500. Those miles are objectively worth 2 cents each. You were going to take the same flight either way. The only question is how you choose to pay. Likewise, if you pay cash to buy more miles then they are clearly worth that amount.
Now let’s imagine we’re considering another choice between 25,000 miles or $500, but my wife is taking a vacation by herself and not to traveling to celebrate her sister’s wedding. They may not be worth the same amount. Canceling my wife’s trip to her sister’s wedding isn’t really an option. (Strictly speaking, it is, but you try telling her that.) Most people do have the choice to not take a vacation, to vacation closer to home, or to change their destination to someplace less expensive.
I suggest that the only way you can use objective valuation is if you’re committed to taking a very specific trip. Otherwise it’s all subjective.
Replacement Value
So if recreational travel — which includes aspirational travel — is all subjective, how do I value my miles for those situations? When I reached this point in my internal dialog I had one of those “a ha” moments. Usually I can only take two or three vacations per year. My wife has limited time off, and I try not to vacation without her. We have a certain budget in mind. We’re willing to be flexible on the dates we travel and where we go, but I don’t think that redeeming miles for part of the journey really affects the budget.
Consider our upcoming summer vacation. We originally planned to go to Hawaii, and we were content to pay cash for this trip. We paid about $400 each for two first class tickets to Hawaii using an Alaska Airlines companion fare and some MVP Gold upgrades. We had a reservation for a hotel that would cost about $1,600 for a week. So we were looking at spending about $2,400.
When we changed our mind and decided to go to Bali instead, we never really considered spending less. It was just a way to use all the miles and points we’d accumulated. I redeemed close to 180,000 KrisFlyer miles for two first class tickets on Singapore Airlines. There are fees of about $350 per person. I’ll probably redeem another 220,000 American AAdvantage miles for two first class tickets on Cathay Pacific with more fees of about $100 per person. We had to pay $250 each for a third flight between Singapore and Bali. The hotel costs will be a mix of cash ($1,000) and points (100,000) at different properties. So now we’re looking at spending about $2,400 and half a million miles and points.
The dollar costs are the same. The experiences will be radically different. And of course we’ll be spending half a million miles that we wouldn’t redeem otherwise. So what value do I put on those miles?
None.
I’d be perfectly happy to go to Hawaii. They’re both beaches so I consider the destinations roughly equivalent. We take these big trips rarely enough that we’ll probably earn most of them back before we take another. What matters is that our vacation will have the same out-of-pocket cost, and because I wasn’t really prepared to pay more, I don’t think I’m saving anything by redeeming these miles. We’re just using them to change the destination.
This is taking the perceived value approach to its logical extreme, but it’s different because it has a holistic view of my mileage account balance, how quickly I can replace those miles, and what I would have done otherwise. I’m not looking at every individual flight or hotel and deciding what it’s worth to me. I’ll call it the replacement value. The replacement value of these miles is essentially zero because I will not have to make any significant investment to earn them back.
If you are someone who relies entirely on manufactured spend to earn your miles and prefers never to pay cash for a ticket, then I think the same model applies to you. You would rely on miles regardless of the destination, so your out-of-pocket cost is zero either way. You probably know exactly how much it costs you to pay for gift card activation fees and money orders, which is your replacement cost. I earn enough miles through travel or regular spend, so I see them as a free perk with a replacement cost of zero. Even though we think very differently about how we travel, since I still pay for most of mine with cash, I think fundamentally we are using the same logic to value our miles.
Accounting Value
I don’t normally mention the value of individual awards on this blog, so I don’t think any of this discussion really affects my writing. If I redeemed miles to fly business class it was because I wanted to fly business class and that’s how many miles it required. The alternative was probably not traveling at all because I don’t want to fly coach. This is why I don’t like using the perceived value model. For me, it’s a binary choice — redeem or don’t redeem — and I can’t assign a number along an analog scale.
But I do use a number sometimes. Alaska miles are worth 2 cents. Starpoints are worth 2.5 cents. American miles are worth 1.7 cents. Is there a contradiction between saying my miles are worth nothing while at the same time I tell you they’re worth something? Maybe. I’ll try to explain.
When I talk about the value of miles on this blog, I use an accounting value — some average value that I use to decide if it’s worthwhile to buy miles or redeem them. It’s an intentionally fictitious number that looks at how quickly my miles are accumulating and whether it’s worth making a decision to earn (or buy) more or spend more. If they’re accumulating too quickly I may adjust it downward. It’s not based on any particular redemption. It’s just my opinion that if you buy miles for less than this value, you’re probably going to find ways to use them at a higher value, coming out ahead.
If I give you a number, I’m trying to think about the average person and what would make sense. Feel free to disagree with it. For example, imagine a consultant who flies every week and earns hundreds of thousands of miles. Her accounting value is probably pretty low because she has more than she can use. She won’t buy more miles unless the price is practically free, and she’ll redeem them for almost any award.
So there you have it. I doubt anyone agrees with everything I wrote, and some of you probably agree with very little. Parts of it could be explored further. But it was an interesting exercise I had in my head this morning while running errands. I’m glad to put it down on “paper,” so to speak.
