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Do the Math: The Continuing Decline In The Value Of Frequent Flyer Miles
The frequent flyer programs are changing again. This past week we saw Delta make "flying with SkyMiles easier" according to the Atlanta Journal Constitution. The New York Times was slightly more circumspect, quoting Tim Winship of SmarterTravel.com who suggested that "The real question is, what miles will people pay on a round-trip basis to take the trip they want to take??"
For a long time the irony of the airline industry has been that the only way they have consistently made money was through the frequent flyer programs. Airlines have set up subsidiaries to house the programs and in some cases (Aeroplan) even spun them off into separate, publicly traded units.
As we have discussed here, the airlines make money selling miles to partners and consumers at rates that are typically around $0.02, though lower for large partners and higher for consumers. Their "cost" on the miles when redeemed is typically well under $0.01.
So when the number of miles needed for a free ticket goes up, it effectively decreases their cost of redemption for the airline and it also lowers the value for the frequent flyers. For example, if you can purchase a ticket for $250 and it takes 50,000 miles, as a frequent flyer you are only getting $0.005 in value (half a penny) for your miles. At 25,000 miles you are netting $0.01 per mile.
With the new three tier system, you can expect that most seats will be priced at 40,000 though on more attractive flights the seats will be 60,000 miles. These compare with 25,000 and 50,000 miles today. When seats are only 20,000 miles, they will be a pretty good deal.
Of course the value is largely a function of what the ticket would cost if you were paying for it. This is where it is imperative to do the math. If you are pricing a ticket and it's more than $600, even at 60,000 miles it is a reasonable value ($0.01 per mile). At 40,000 miles it's $0.015 per mile.
The other significant implication of these changes devaluing the miles is the impact they will have on the frequent flyer partnerships. The partners are now buying miles from the airlines and those miles are, at least in our opinion, worth less with these program changes. If you're a partner you'll want to renegotiate your deal with the airlines so that you're either paying less per mile or getting more miles per dollar you spend.
If you're a frequent flyer collecting miles from partners, especially credit cards, pay close attention and do the math as suggested above. The market value of miles and points earned from credit cards these days is around $0.01 so you want to make sure that you are earning points and miles that are at least that valuable.
No one should be surprised about the frequent flyer program changes. Delta has actually done a very good job in effectively "raising prices" but providing more value (i.e., last seat availability) as well as other recently announced program changes such as Pay With Miles.
Still, frequent flyer miles are continuing their decline in value and that is not going to help an already challenged industry.
