The Points Guy took an interesting stab at a data-driven valuation of frequent flyer miles.
They don’t share enough about the routes they used for each airline. They only looked at travel within the next 3 months. They looked at Thursday-to-Thursday roundtrips only and excluded basic economy fares. And partner redemptions don’t appear to be a part of this. So the methodology and data isn’t fully transparent or comprehensive.
Nonetheless, they came up with interesting conclusions. And if they’d simply said ‘we’re measuring how much airfare your miles will buy in the next 3 months’ I’d have had very little beef.
- They valued American miles at 1.68 cents apiece, up from their previous valuation of 1.4 cents (I value AAdvantage miles at 1.3 cents)
- They valued Delta miles at 1.48 cents apiece, up from their previous valuation of 1.1 cents I value Delta miles at 1 cent)
- They valued United miles at 1.13 cents apiece, down from their previous valuation of 1.3 cents (I value United miles at 1.3 cents)
The problem is, as I explain in some detail they are looking at how much airfare a mile buys but that is different than ‘how much a mile is worth’. You can’t spend miles on nearly as many things as cash (and get lower value for things other than travel when you redeem that way). You don’t earn interest on your miles. There’s more devaluation risk with miles.
What The Points Guy failed to do is discount how much airfare a mile might buy for all of the factors that make miles less useful than cash. Surprisingly they even failed to discount their valuation based on the miles you earn flying on a paid ticket that you give up on a redemption ticket, and even the miles earned paying for a ticket with a credit card versus not generating that card spend.
Here’s a stab at quantifying the discounts that you should consider taking when converting ‘how much airfare do miles buy’ into ‘how much are miles worth’?
- Let’s assume average redemption in 24 months, discounting using the 10 year treasury rate of ~ 1.4% so we take a present value discount 2.7%.
- You want to discount not just for time but also devaluation risk, let’s call it (generously) 5% over those 2 years.
- And that all miles are earned by general members, so the mileage-earning foregone is 5% (rather than 11% for a top elite)
- You’re foregoing 2% in credit card earning when you don’t buy the paid ticket (even though Membership Rewards are worth 1.7 cents apiece so 5x earning with a Platinum card would mean giving up 8.5%).
- And recognize that miles that can be used for airfare aren’t as valuable as cash. I’d be inclined to take a 10% discount here, but in a real market you take about a 20% haircut selling American Airlines gift cards but buy at only a 4% discount to face value. Let’s call it just 4%.
So let’s generously discount the valuations by 19.7% – although a top tier elite paying with an Amex Platinum card might discount by 32.2%.
Here’s how a 19.7% discount changes their valuations:
- American AAdvantage: 1.35 cents apiece
- Delta SkyMiles: 1.2 cents apiece
- United MileagePlus: 0.009 cents apiece
The discounts here probably aren’t enough, as I explained, but AAdvantage miles and SkyMiles start looking a bit more reasonable when you factor things that drive value of miles beyond just ‘how much airfare can these miles buy in the next 3 months?’
On the other hand MileagePlus miles come out lower than they should, in my view, but that’s because the value of those miles is driven by international business class awards on partner airlines which the TPG analysis doesn’t appear to factor. They’re great for Lufthansa, Turkish and ANA awards.
That said, their analysis would be more helpful for someone who doesn’t redeem their miles that way. For consistency, though, this should change the advice a site like that gives on what credit card to use. The person who values miles the way they’ve laid out should be accruing cash back in most circumstances.