jkearns

I hesitate to generalize, but...

I think the widely accepted highest value usage of miles is found in upgrading. A rough example: over the Independence Day weekend an AA economy class ticket LAX-NRT-LAX is roughly$800, the cheapest Biz seat looks to be about $4800. So for 50,000 miles + $700 in copays, you get ($4,800-$800-$700)/50,000RDM = $3,300/50,000RDM = 6.6˘/RDM.

There are probably a lot of examples that are both better and worse than this one. But,you get the idea.



Jim

Redhead

I've gotten value as high as $0.09 or $0.10 getting business class tickets from the US to Asia on Cathay. I once redeemed for a ticket in biz - ATL-JFK-LAX-HKG-BKK-HKG-YVR-JFK-ATL (I had to stop in JFK since that's where I was meeting a friend) which would have cost around $11,000 for 120,000 miles or $0.09

I don't like to use my miles for upgrading since I value actual cash above all, so I generally redeem for biz class tickets

MichaelColey

(Not directed at anyone in particular - just my view.) If you would never pay $10k for a First Class ticket, it's not accurate to value AA miles based on a full retail price of $10k.

I prefer to value my miles based on what I would actually be willing to pay for a ticket. When it comes to First Class, if I were paying cash I probably wouldn't be willing to pay more than a 50-100% premium. For a $200 domestic ticket, I would be more than happy to pay an extra $100 while a $200 premium would really depend on the length of the flight, the aircraft, the meals, etc. There's no way I would pay $1000 or $2000 for domestic First. For a $500 ticket to Europe, I would be excited to upgrade for $250 but would like "suffer" in coach if I had to pay an extra $500 to go up front. There's no way I would pay $5000 for First to Europe.

So I might be willing to pay $500 or $600 for domestic First (for a long flight), which would value miles at $0.012.

I might be willing to pay $1000 to $1500 for First to Europe, which would value miles up to about $0.015.

So normally, I would value miles no higher than about $0.015. But there's a redemption that I find even more valuable...

We're saving up miles for a RTW trip in a couple years. We'll do a OW150C which will give us 25k miles in Business Class at a cost of 150k AA miles. That ticket would cost $10k (implying a $0.067 value per mile), but what would I be willing to pay for that ticket? That's hard to judge. We'll be taking about a dozen flights with an average distance of 2k miles each. Domestically, those flights would be worth easily $400 each in First, so perhaps $4800. That values miles at $0.032 each.

But then you also have to consider what you can buy miles for. You can buy 40k miles for $1030, which is $0.025 per mile. You can also buy Starpoints for $35/1000 and transfer to AA with a 25% bonus for a value of $0.028 per mile. You can also frequently do MRs for under $0.03 per mile.

Based on all of that, I value my AA miles at $0.025 each. If I can earn miles for less than that, I do it. If I can redeem miles for more than that, I do it.

Now if I weren't saving for the RTW trip, I would value them lower, likely at $0.015 each. I suspect that after we do our first family RTW trip, we'll start saving for another and will always be saving for more. It's just such an incredible value.

jkearns

This gets a little tricky, so I'm sorry if I fail to write as clearly as I'd like to.

Valuation of anything isn't based on what I or you would be willing to pay for it. It's the price at which market transactions take place.

I certainly understand the personal valuation intent. There is no way I'd consider paying $250,000 for a car. But here in L.A. you see them everyday. But that doesn't mean that a Bentley is only worth the $40k I'd pay for wheels. The market is telling me otherwise.

The rub is the notion of "personal valuation" versus "market price." When our personal valuation of something exceeds the price of it, we buy it. Otherwise we don't. But in the end the value is the price at which the transactions are occurring.

In economics one speaks of the "opportunity cost" as "The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative"

So the fact I choose not to pay $5,000 for a biz class seat to/from NRT does not mean it should not be considered the benchmark for valuing miles. It or whatever else of greater value I choose to forgo is the proper measuring stick. In the end, because I could do so it is a relevant reference point.

If we did not value the miles and perks we receive a frequent flyers did not exceed the price of earning them, we wouldn't bother accruing them. The airlines generally charge us between 2˘ and 3˘ per earned mile. Since we actively chase RDMs and status, they must be worth more that that. Or, we're even more irrational than on non-FT/non-MR friends accuse us of being!




Jim

MichaelColey

Let me give an example that will further clarify why I think you need to value miles based on a personal valuation rather than a retail valuation...

It's not hard to find an award ticket or upgrade that implies a $0.10 valuation per mile if you use the retail valuations. If I do that, though, I'll make some poor decisions when it comes to earning and mileage use. If I did that, I would be willing to take mileage runs for any fare under $0.10 per mile and wouldn't redeem miles unless I was able to get $0.10 per mile in value. That just doesn't make sense.

hiltonlondon2009

2 cents / mile for me. I never use miles for UGs so I try and get .02 cents per mile for my tix.

jkearns

There are all sorts of costs -- financial and non-financial. If you are not taking the 10˘ valuation option it must be because something involved with that trip has a significant "negative value" (i.e., cost) that changes the equation.

(All numbers below are fictitious and arbitrary -- they're intended for illustration only.)

For instance, I have very little desire to travel to DEL. Frankly, I'm just not prepared to travel to a hot, noisy, polluted, crowded, city noted for poverty and full of food I don't like (admittedly, this is pretty closed minded, but it's how I feel. Today.) So I'd say the value of avoiding that emotional discomfort is worth several thousand dollars to me, let's just say $10,000. (Or, alternatively, I could say you would have to pay me $10,00 to travel there. This is really 2 sides of the same coin.) Thus that should be built in to the cost of the trip.

So if I could get an upgrade that would ordinarily be worth $3,300 ($4,000 less the $700 copay) and it was only 50,000RDM on the surface I'm being foolish not to consider redeeming the 11.6˘/RDM option. But really the cost is $13,300 when you add in the value of my discomfort. Now the cost is 3.8˘/RDM. That seems a lot less irrational to avoid when I can find destination that I really want to see. Even more so when the emotional/psychic benefits are added. For instance, I vey, very much want to see Berlin so I'd be willing to pay more to go there.

We go through this everyday. The stock market is a perfect example. At the end of the day Friday (6/5/09) some people valued IBM at more than $108 because they expected it to appreciate over time. Those people are buyers. There are other folks who feel the company's long term prospects aren't as great and they value the shares at less than $107. They're sellers. At the time of the final trade what was the value of IBM? It was exactly $107.24 -- because that was the price generating actual transactions. A price that both (at least some) buyers and (at least some) sellers actually agreed on.

This is not immediately intuitive. In fact, it has stopped a lot of folks cold in their tracks and convinced them that they should study anything but economics. However, economists are pretty much uniform in this understanding of what costs/values are. This is really a fundamental building block for all of modern (micro) economic theory.

Does that help? I'd be glad to look around for a good reference book that makes a clearer presentation of the issues if folks think it'd be helpful.





Jim

IncaFlyer

A couple econ. comments below:

1. Miles are a non-market good. RDMs are basically the property of an airline and while they share some characteristics with fiat money (including a depressing tendency to inflate over time), their value is not set in a market of buyers and sellers.

2. In this case, it does make some sense to think of miles "value" in terms of utility and not what they could absolutely purchase. Think of miles as a very context-specific store of value. Cigarettes are one comparison. Each cigarette has a value that is contextual. In prison they can be worth quite a bit as a store of value. In North Carolina each cigarette costs less to acquire than in NY. And then some people just like (or need) to smoke them regardless of the price. Each person's own utility curves will lead them to differential holdings and trades wrt cigarettes or miles...

Hoc

I would disagree. I think that AA's Business and First Class cabins and service (as well as its lounges) are far inferior to those of its Oneworld partners. At least BA and CX, whom I have used. Therefore, I think that using your AA miles to upgrade, which you can only do on AA, yields far less value that using them to get First or Business class tickets on the Oneworld partners (or at least First on BA or First or Business on CX). While AA might charge a high price for First Class or Business, I would never pay that.

Although I just don't see the value in paying $12k for first class or $5k for business class for a 12-hour (or so) trip in any event, I certainly do think that the miles are better used by using them in that way on a partner carrier. Using them that way, I value them at about 5-6 cents a mile.

jkearns

Whether a good trades in a market is irrelevant. We all readily attach valuation to things that don't have a formal market. "Is it worth my vacation time to go to... for this particular week?" (Since your employer will pay you either way, this is not a decision to sell your labor per se.). And even when transactions do occur, we still add in the non-pecuniary impact: When not on sale, the price of a can of Diet Pepsi is the same as the price of a can of Diet Coke. But, I'll always choose the Diet Pepsi because I attach greater value to it than the Diet Coke.

There are many example of pricing distortion. Cigarettes are notorious one. States like KY and NC have public policy concerns -- tobacco farming revenues -- that lead to low taxation. NY, IL, and CA have public policy concerns -- recovering the added health care costs from smokers -- that lead to high taxation. I don't know for sure, but I bet the price of a pack of smokes sans the tax is not outrageously different across states. Gasoline is much the same. In general, prices are almost always distorted by taxation. But people still make a valuation relative to the financial costs.

Prisons are just small economies. They lead to their own valuation systems since choices are generally restricted. That's no different than seeing different valuations attached to foie gras in Paris and La Paz (BOL.) Local preferences work within the model. Federal prisons no longer sell cigarettes. So, prisoners adopted a new currency: tinned mackerel

The bottom line is still the same: in economic theory, the worth of something is measured is by the value of the highest forgone choice. And, the theory makes some pretty good predictions of our behaviors.



The one who spent too many years studying "The Dismal Science",


Jim

dc9703

For me the value is based on my opportunity cost. I won't spend miles unless i'm saving at least $0.02/mile used. So domestic economy tickets would have to be greater than roughly $500 (minus award booking fees) each for a 25K mile ticket for me.

Also typically "my" miles also fund my wife's travel as well (she doesn't fly for work) so we stick to economy. the best values as others have said are International and/or Hawaii. I guess upgrades are good values too, but I'm too cheap even with my miles to pay for a biz travel. Give me 2 trips in economy over 1 in business.

Mountain Trader

I'd agree, but this assumes the cheapest Biz seat at $4,800 is a) Truly the cheapest and b) the upgraded coach seat is as available and liquid (eg. refundable, etc). Your sample may be accurate but I've seen lots of folks use a "cheapest ticket" value thousands higher than the real cheapest C on any airline.

Availability is another big factor many often ignore. That cheapest C is usually there with a click while upgradable seats are another matter.

Finally, using this value as the point is earned means you value at zero the time between earning and using the mile (for me it's years), and the possible (likely?) changes between those two dates.

onobond

Interesting figure, would you share with us the tix you had for the last 12m for this extremely low ( .02 cents propably typo, but 2 cents/mile is impressive)

jkearns

Excellent points -- I'm in full agreement. Those would be fine extensions to my generalized claim. So good, that I'd say there's a dissertation in there for some eager economist.

Then the youngster could go off and ruin all of our fun by applying their model on behalf of the airlines. Uggghh.


Jim

billgrates3

another example:
I bought an F/J ticket for Mrs.Grates3 only 1 week in advance SFO-ORD-DEL, then DEL-ORD-STL-SFO (only available routing) She is in F for DEL-ORD (i have never sat up there in the 777, sigh). The award cost 207k RDMs. How much is that worth?? Frankly, I was amazed I could get the award for her at all.

By comparison, my ticket was $1495 and I used 2 eVIPs to fly in F(dom)/J(intl).

by the way, once i became EXP, the miles started accumulating quickly, so much so that out of my 1.8M and the Mrs' 200k lifetime, we still have 400k left. So, fortunately, I have not had to choose, as dc9703 mentioned earlier, "Give me 2 trips in economy over 1 in business", as it's been all trips in BC.