Thanks for the effort, JS. It would be interesting to know the average # of miles redeemed per R/T award ticket, per DL's definition. (Blending in int'l trips, Biz/FC awards, SkyChoice, etc.) I'm guessing it's not just a little but substantially more than 25k.

All in all, not a bad biz model, though. Give away something that costs you very little (especially when carefully managed thru restrictions ) but has a much higher perceived value to the customer.

Maybe these airlines are not such a bad investment here at the bottom....

1) I did not claim a value of 8 cents a mile.

2) If you would have read what I wrote, the ECONOMY CLASS FARE yields a value of 2 cents per mile. I have to go to Oz in this time, so I'm saved $5K. The marginal value of business class to me is, clearly, less than $10K per ticket...but if I could spend an extra $500 to $1000 I would in a flash. Thus, the real value of miles is something higher than 2 cents per mile.

3) The poster claimed 2 cents a mile was not a supportable valuation

Two cents a mile is a reasonably conservative valuation of miles IF the person spending the currency is reasonably clever. No one is holding a gun to people's heads and making them blow 25K miles on a trip from Austin to New York rather than 35K miles from Austin to Kona, for example.

Since Delta ends up paying the segment tax of $3.10/segment and PFC of $3 (or more) per departure on awards (like most US airlines), I don't understand how $22 covers the cost of their award:

1. According to Delta the incremental cost of fuel and meals is $9 per domestic roundtrip.

2. The typical domestic roundtrip has 4 segments and will cost Delta 4 times $3.10 + $3 or $24.40.

And this doesn't include the cost of occasionally displacing a revenue passenger (which has been estimated as around $9-$15 per ticket based on capacity controls with a 3-5% chance of displacing a $300 paying passenger)

One possibility is that US airlines somehow get around paying the segment tax and PFC (Passenger Facility Charges) on award tickets, but since they charge these amounts on certain awards (eg "Fly Free" awards and some partner awards) I assume these taxes are actually paid by someone.

The conspiracy theorist in me says the following:

Airlines are fully aware that the real cost of supplying award tickets is much higher than $22 each. They report solely the marginal fuel/labor costs only because the SEC made them, and they have are interesting in keeping that published figure down as much as possible.

Why? Because investors may see a frequent flyer liability of $1 billion without realizing that the value of the program through increased sales to frequent flyers is worth a substantial, albeit unreportable, amount. The higher value takes place by paying fares higher than a competitor, booking otherwise marginal trips with the freuqent flyer miles breaking the tie, etc.

I say it's unreportable because I don't think there's a place to put goodwill and that sort of thing on a financial report. Marketing does that, whereas financial reports have to stick to verifiable, "black and white" figures.

Sure there is. Delta carries about $2B worth of goodwill on their balance sheet.

Financial reports are anything but black and white. While each individual number may be accurate, it often is difficult to discern a true picture of a company's health.

IMO, airlines report only the incremental cost b/c they believe that substantially is all it really costs them!

While it's true that many of the passengers flying on a 25K domestic Delta award would likely have paid cash to fly otherwise, there's no guarantee that they would have paid that cash to DL, and not AA, UA, etc.

It was posted in InsideFlyer once how much each airline valued the miles against their accounting records. They valued them in 25k blocks (for a domestic RT - the most commonly redeemed award) at between $15 and $25.

But they sell them at a minimum of like 2.5 cents per mile.

And the members seem to value them anywhere from 0 to 10 cents a mile - an argument that has gone on forever.

This question came up on an NPR travel program a couple of weeks ago; the travel expert said FF miles were worth 1c per mile.

Anybody know how much the airlines sell miles to major users?

Example: Marriott Rewards has travel packages where 270000 MR points will get a week in a great hotel AND 140000 FF miles. Marriott must buy miles in HUGE blocks.

Knowing this price to Marriott would be interesting.