Value of a Mile
 

To give some background, I'm currently getting my PhD in engineering, and if its anything i've learned, you can fit a formula to at least approximate a model for anything. Given that, I'm trying to create a tool that, given your needs, can put a number of cents that each award mile is worth that is a little more objective than the valuations that TPG gives, for example. I was just wondering what you all thought the contributing factors are for valuation (ie. ease of accrual, awardspace, etc)?

The fact that such a firm valuation is impossible to arrive at is what keeps the IRS from taxing miles as a form of income. Believe me, they've tried. When you redeem 350,000 miles for a Vizio TV, they're not worth very much. When you redeem 2,000 for a drink at Newark Airport, they're not worth much at all. Redeem 25,000 for a domestic ticket that retails for $300, and they're worth a little more. Redeem the same 25,000 for a last-minute domestic ticket that would otherwise cost you $1,000, and they're worth far more. And if you redeem 100,000 for a first-class overseas ticket that would cost you $7,500 to purchase, they're worth more still.

This recent thread may give some pointers of the ranges of this almost impossible mission:

http://www.flyertalk.com/forum/miles...-bookings.html

There are more threads like the above if you perform a proper search task on FT that should show you what's on people's mind w/ award travels.

Good luck!

if you have zero miles then 1 mile is not worth very much,
if you are one mile short of an international first class ticket that has space available then one more mile is worth a whole lot.
you might check out frequent miler blog he does a pretty good analysis of the cost of acquiring miles.
Not everything is black and white there is much value in the satisfaction in gaming the system. but there is no monetary value for this satisfaction.

About 1c.

It gets even more complicated (and more controversial) if you're talking about a class of service or a flight you could not afford otherwise. Just because you redeemed for a business class flight which would have cost $5000 cash, but you wouldn't have paid $5000 cash for that flight if you couldn't have redeemed miles, is it legitimate to now value the miles as now being worth $5000? If you would have flown in economy class instead, perhaps it's clear that it's maybe not worth that much, and that maybe the value is somewhere between the economy class flight you would have bought with cash and the actual business class flight you booked. But what if you would not have flown at all (because you're tall and you can't bear flying a superlong flight in economy)? So if the business class redemption hadn't been available at all, you simply wouldn't have taken that trip. Well, in that case, it's not at all clear how you should exactly value the miles, because they're no cash comparison point (of what you would have bought).

So the value of miles used "aspirationally" is a lot less clear than the miles used very "practically".

Some examples: A $5000 business class round trip may cost only 100k miles, which seems like a 5c a mile redemption. And a $11000 first class round trip may cost only 150k miles, which seems like a 7.3c a mile redemption, but even fewer people who have actually paid $11000 and would never have considered at least a business class flight instead, so the 7.3c mile valuation is even more obviously suspect.

Also complicating analysis: The time at which an award redemption may be available (either 10 months out or 3 days out in some cases) does not correlate to the time when the lowest cash prices may be available (6 to 8 weeks out in many cases, or else during sales whenever they happen). So do you compare against the cash price it would have been when you booked with miles, or do you compare against the cash price it would have been when you would have booked with cash (which would certainly not likely be 10 months out or 3 days out)?

another variable - miles to me are worth being able to take 3-4 vacations a year versus maybe one a year (and that done on the cheap).

Determining the 'value' of miles by referencing full-fare C or F fares is misleading. Instead, try to find the cheapest consolidator fare in a premium can for a particular route, the kind of fare sold as part of a cruise holiday, and you'll be on the right track. The idea that a F redemption is worth $15,000 is just naive (and the proof is in the price airlines are willing to sell the miles in the first place.)

When i use my miles for first class i consider them to be worth at least 3 cents

Which kind of first class? :confused: Domestic 2-class aircraft first class (which the rest of the world would call business class), or "true" first class on three-class (or more) aircraft (where the second class is business, not premium leisure, of course)? They're totally different, so IMHO using the term "first class" without making clear which kind you mean is kind of ambiguous.

True first class of course

....but you can't use DL miles for *true* FC.

I think the naive metric is this:
Cost of the good/service you are redeeming for if purchased with cash.
By this metric, we can take a typical airline mile and assign it a value of ~10 cents, as this is about the value for a premium cabin redemption. However, this is an extremely naive metric, as you presumably would not be purchasing a $10k first class ticket otherwise.

A better metric is:
Cost you would have been willing to pay for the good/service you are redeeming for if purchased with cash.
In this case, if I would be willing to pay ~$2k for a premium ticket and I instead used miles for it, I would be getting a valuation of about 2 cents or so. There is still a flaw for this metric though, as it doesn't make the miles especially fungible--we're looking at a single specific booking, which may not be representative of the actual value.

To fix this, we can go to:
Cost a typical person would be willing to pay for the goods/services they would redeem airline miles for.
I'd call this the "per capita GDP" of airline miles. If we sum up the value people received from their redemptions and divide by the number of miles, we can get an estimate of the actual value of those airline miles (sample size, etc etc). I still don't like this metric, though, as it mostly just demonstrates how inefficiently people use their miles.

I think the best we can do is something along the lines of this:
Cost a typical person would be willing to pay for the goods/services they would use their miles for if making choices informed by an expert.
This gets us to the value I think is most appropriate if you want a single number valuation. As flyertalk tends to a wealthier audience, we tend to tout premium cabin awards, but a decent percentage of fully-informed average Americans could easily set their valuation based on an economy award, as they may not be willing to "pay" the extra cost for a premium cabin. Although a small minority, some people would not be interested in air travel no matter how efficient, so they would be getting a lower-valuation merchandise award. I do think, though, the valuation of a fully-informed average American would be in the 1.5 to 2 cent range, as this is the "sweet spot" where most reasonably-efficient redemptions are going to occur.

I think you could experimentally determine this valuations, but it would certainly be a pain. Any sensible valuation is going to be within a couple standard deviations of 1.5 cents, so it's probably not even worth as much thought as I took writing this up.

Who was talking about delta miles?

Your profile:
implies to many people that you must earn lots of Delta miles from your flying. And it shows just to the left of every message you post.