Last month I updated how much I value each frequent flyer currency at and in doing so I laid out how I think about valuing miles. I also compared the most recent values I gave to miles against those from both The Points Guy and One Mile at a Time websites so that you can compare.
The Points Guy site has announced a new way they value miles and they’ve updated their valuations for Delta, United and American Airlines so far.
They look at a bunch of data comparing what miles buy you in terms of airfare at each of those three airlines to come up with a value. It’s an interesting big data project. Reader Nick asks me to go into detail on what I think they get right and wrong,
Longtime reader (since 2014/2015, not sure if that’s long or not actually) of your blog. I also have been reading TPG since the early days and OMAAT as well. Would love for you to do a piece commenting on TPGs “New” valuation. Thoughts on what they get right, and what they get wrong. I realize I am biased as a loyal UA 1K, but their valuation of AA seems wildly high to me. Also there seem to be some major flaws with their new weighting logic, but I’ll let you be the judge of that since you’re the expert.
And hey, maybe you actually agree with them…still would like to hear your thoughts.
How TPG Updates Their Mileage Valuations
First, here are the values they come up with.
- American moves up from 1.4 to 1.68 cents (I value AAdvantage miles at 1.3 cents)
- Delta moves up from 1.1 to 1.48 cents (I value Delta miles at 1 cent)
- United moves down from 1.3 to 1.13 cents (I value United miles at 1.3 cents)
They took “the lowest cash and award prices for a seven-day, Thursday to Thursday round-trip itinerary..for each week and on each route over the three-month period.”
They excluded basic economy fares (redemption tickets on airlines other than Delta are always more flexible, but this means comparing to higher fares and getting a higher points value). They weighted their data 20% business class, 80% economy. And they look at roundtrip itineraries versus one way (with American and Delta this would seem to bias towards higher valuations since roundtrip awards can cost fewer miles).
It appears they looked only at using United miles for United flights and Delta miles for Delta flights, since they note that they did not consider award availability as part of this exercise but that all flight options were available on points at some price. I’m not sure how you can claim to value miles without considering using them on partners.
It’s an interesting exercise using 3 months of data, and they haven’t released the full detail of their findings, which routes for each airline, which prices? That makes it a bit difficult to evaluate. But I think it’s pretty clear that their approach is systematically overstating the value of miles.
They’re Answering The Wrong Question
This exercise isn’t answering the question “what are miles worth?” they are answering the question “how much airfare will miles buy?” They are related, but the second question is only one piece of data you need in order to answer the first.
That’s because even if you can get $14.80 in airfare for 1000 Delta mile you’re still going to prefer $14.80 cash over 1000 miles if you had to choose. They aren’t equivalent.
- You can buy whatever you want with the cash, but you’re restricted to spending Delta miles however Delta says you can
- Even in an era of elevated inflation, there’s far greater transparency over how much things are going to cost in money than in miles
- You can earn a rate of return on your money – outpacing inflation – while your miles are only going to become less valuable.
Answering the question how much airfare do miles buy is one way to start an answer to how much are miles worth, it is not the answer. It’s the maximum possible number you can get to, but then you need to take discounts against current buying power for currency risk (devaluation) and time (discount to present value when you’ll redeem in the future).
Any valuation also has to recognize how contingent it is. For instance the value of a mile depends on how many miles you already have. If you have 23,000 miles and earn 2000 more to put you over the top for a 25,000 mile award, those last 2000 miles have much greater value at the margin that the ones you acquired earlier. (You’d be willing to spend more to accumulate them, since it’s those extra points that make the award possible.)
Finally, something that the TPG analysis overlooks completely is that when they compare the cost of a paid ticket with the number of miles an award costs, the award also gives up earning miles. They should be backing out the mileage-earning foregone from their valuation or that’s another way they systematically overvalue miles. If a mile were worth 1 cent, a general member gives up 5% by redeeming and a top tier elite gives up 11%, which needs to be backed out.
If they simply presented “here’s how much airfare your miles can buy right now” this would be an interesting exercise, enlightening even. However it purports to prove more than it does, and in doing so may lead readers astray overvaluing their miles in comparison to money.