I know we all have varying ideas of what our miles are worth, but how do the airlines value miles? I know that the airlines have to place a value on outstanding miles (as a liability) for accounting purposes. Does anyone know what that value is?

Some years back, when they were first required to begin accounting for the miles as a (contingent) liability by the SEC, I recall that one of the airlines made a disclosure in its 10K of the number of outstanding miles, and a possible liability number, based upon the actual marginal cost to transport a person on a US round trip for 25,000 FFmiles (really just the cost of some marginal additional fuel and the meal). I think that the cost disclosed was $25 per trip, or something like that. Seems to me it might have been TWA before the bankruptcy.

But my memory is fuzzy on this one.

Interesting question. Below is what Delta says in their annual 10K filing with the SEC.

My thoughts:

1. There's a huge difference b/w the perceived "value" of an award to a pax and the "cost" to Delta of providing the seat.

2. Delta states that the cost of Skymiles to them is substantially reduced b/c they believe that most members will not be able to redeem their miles for a travel award (in part b/c of restrictions they have in place).

3. Delta states that the liability they record is based on an "incremental" cost that they don't define.

4. Delta says the liability is based on estimated r/t awards outstanding, not miles outstanding. As a result, I'm not sure an accurate calcuation of the cost/mile can be made. If one were to make the extreme assumption that all r/t awards could be obtained for 25k miles (not possible of course), Delta's projected cost/mile is 6/100 of a cent. If the average is 40k miles, the cost/mile is only 4/100 of a cent. And so on.


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"We account for our frequent flyer program obligations by recording a liability for the estimated incremental cost of travel awards we expect to be redeemed. The estimated incremental cost associated with a travel award does not include any contribution to overhead or profit. Such incremental cost is based on our system average cost per passenger for fuel, food and other direct passenger costs. We do not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award. We believe this is appropriate because the large majority of these participants are not expected to earn a travel award. We do not record a liability for the expected redemption of miles for non-travel awards since the cost of these awards to us is negligible.

We estimated the potential number of round-trip travel awards outstanding under our frequent flyer program to be 14.3 million, 13.7 million and 13.1 million at December 31, 2003, 2002 and 2001, respectively. Of these travel awards, we expected that approximately 10.4 million, 10.0 million and 9.6 million, respectively, would be redeemed. At December 31, 2003, 2002 and 2001, we had recorded a liability for these awards of $229 million, $228 million and $226 million, respectively. The difference between the round-trip awards outstanding and the awards expected to be redeemed is the estimate, based on historical data, of awards which will (1) never be redeemed; or (2) be redeemed for something other than award travel.

Frequent flyer program participants flew 2.8 million, 2.8 million and 2.4 million award round-trips on Delta in 2003, 2002 and 2001, respectively. These round-trips accounted for approximately 9%, 9% and 8% of the total passenger miles flown for 2003, 2002 and 2001, respectively. We believe that the relatively low percentage of passenger miles flown by SkyMiles members traveling on program awards and the restrictions applied to travel awards minimize the displacement of revenue passengers."

Taking this further, does anyone know how miles are valued when traded between airlines in the context of alliances/partnerships? In this instance, how much would DL have to pay, say, AZ if a Skymiles member were to redeem on AZ flights (ones without DL codeshares of course).

Airlines value at the rate 2c/mile. But actually they are worth closer to 1.2 c/mile.

Care to share the source of your information?

Hm. Just exchanged 260K miles for two business class trips to Cairns from Austin. In January (high season). If you want to buy seats on those flights it will cost your $2500 a piece...IN ECONOMY. The business class seats are $10K a piece.

Now, tell me again about these miles being worth 1.2 cents each....

Actually everyone values miles differently. Just because you can get a $12,500 First class ticket for 125,000 miles does not mean the miles are worth 10 cents each.

If you were planning to pay $12,500 then maybe (minus the lost opportunity to earn miles) so say they are worth 9 cents

However if you would not pay the $12,500 then the miles are worth what you would pay to fly coach, plus to value to you of the upgrade.

If you make an average salary and were in First - Would you downgrade for $10,000 cash. Most folks would as its as much as $1000 an hour! But would you downgrade for $500. Some would some wouldn't. Determine what cash you'd downgrade for and that's the value to you. Or conversely - How much would you pay at the gate to upgrade from Coach to Buisness or to First in cash. Thats the value to you. Someone making just $50,000 would probably not be as prepared to pay $1000 each way as someone making $300,000.

As regards the airlines, the poster who mentioned TWA was right

TWA valued miles at 0.08 cemts each
25,000 miles = $20 = Incremental cost of fuel and food

That's not what they said. They said, "We do not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award (i.e., 25,000 miles). We believe this is appropriate because the large majority of these participants are not expected to earn a travel award."

They also wrote that because most passengers on the plane are not on award tickets, in addition to limited inventory, revenue displacement is negligible (i.e., they assume that people on award tickets wouldn't have bought a ticket anyway if it weren't for SkyMiles). This means that their liability can be set at marginal cost only, rather than marginal cost plus opportunity cost (opportunity cost being the lost revenue because you issued an award ticket rather than selling the seat).

Sure they do: "Such incremental cost is based on our system average cost per passenger for fuel, food and other direct passenger costs."

They gave us the numbers: "We estimated the potential number of round-trip travel awards outstanding under our frequent flyer program to be 14.3 million, 13.7 million and 13.1 million at December 31, 2003, 2002 and 2001, respectively. Of these travel awards, we expected that approximately 10.4 million, 10.0 million and 9.6 million, respectively, would be redeemed."

Potential number of round-trip awards is outstanding miles (excluding those with balances < 25,000) divided by 25,000. Expected value of round-trip awards is the proportion of miles they expect to be redeemed for a 25,000 mile coach award (i.e., the other miles are used for upgrades or anything other than coach award tickets).


I found this interesting:

"Of these travel awards, we expected that approximately 10.4 million, 10.0 million and 9.6 million, respectively, would be redeemed. ... Frequent flyer program participants flew 2.8 million, 2.8 million and 2.4 million award round-trips on Delta in 2003, 2002 and 2001, respectively."

Taking a simple ratio of 10.4 to 2.8 implies that the average lifetime of a block of 25,000 accumulated SkyMiles is only 3.7 years. That sounds like a nice average between earn-and-burn (a year at most) and miles hoarders (decades).

Now, this makes sense to me.
Their fiscal liability is one thing. Although I wonder with all the fraud in 10K's being exposed lately whether this will be an acceptable accounting practice in the future.

The value to a FFer is a lot more.

Not be picky, but....

They also said: "We believe that the relatively low percentage of passenger miles flown by SkyMiles members traveling on program awards and the restrictions applied to travel awards minimize the displacement of revenue passengers." That's the "in-part" part of my comment.


So then, what is that cost (in $)? I sure couldn't find it. That is what's needed to calculate the cost/mile to DL.


Huh? (My head is starting to hurt at this point.) I've looked at this a few times and I can't figure out how it gets us closer to estimated DL's cost/mile for Skymiles.

Would you have paid $10K from your pocket for a business class seat? Would you have paid $2500 from your pocket for a coach seat? If not, it's very hard to make the argument that miles are worth 8 cents each ($10K / 130K miles).

You managed to snag two business class tickets in high season to Australia with your miles.....that's excellent. Do you think the next person who wants to travel the same route, same times as you will be able to use his/her miles to do so? Very doubtful.....but coach and business class tickets will still be available for sale at the quoted prices. How would you value your miles if you were in that situation since you wouldn't be able to claim an award? Zero? How many others are shut out of claiming an award to Australia at that time since no award seats are left? If you average your 8 cents per mile with their zero, you only need 7 other people who couldn't claim that award before the true value of a mile in this instance drops to 1 cent. It is the luck of the draw in many instances.

Given the reduction in award seat availability and all the restrictions airlines have placed on award tickets over the past few year, it is "old think" to value miles at anything above 2 cents each, and even that would be high. Even Randy doesn't value them at 2 cents any more.

What they mean is that opportunity cost (i.e., potential ticket sales revenue left on the table) is negligible. That is, if half the plane were on award tickets or there was no limited inventory, then you know that many people would have bought a ticket for that trip if it weren't for the unlimited inventory. Given the average price of a ticket ($200 or $300 I guess), lost revenue would be much, much more than the 25 bucks in incremental cost.


For 2003, Delta set aside a liability of $229 million for 10.4 million award tickets. Assuming all of those are the 25,000 mile version, that's $22, or 0.09 cents per SkyMile. Higher mileage requirements for South American, et al, also carry higher incremental costs, so let's just round it off to 1/10th of a cent per SkyMile. That's easily 1/10 of what we value them, and could be as little as 1/20 or less if you apply them to otherwise expensive tickets.

Valuation is part art and part science. The science part of it is looking up published fares. The art part of it is quite flexible.

Take life insurance for example. If you buy a $1,000 death benefit, what is the value of that contract to you? Is it $1,000 because that is the benefit if you die? Or is it the premium of $100? There's a big difference between those two figures, and which one you look at depends on the purpose of the calculation.

With award tickets, simply taking the published fare divided by the miles you redeemed to obtain it is one method. If you paid less than that for the miles (e.g., flew at 5 cents per mile and redeem at 8 cents per mile), you are ahead of the game in one respect. Complicating this is business travel -- should you count total expenses or only your out-of-pocket expenses (e.g., out-of-pocket being 0.5 cents per mile if most of your travel is business; zero if all is business).

This type of analysis is not one-dimensional. One thing is for sure, if you are contemplating a mileage run, you must calculate your cost per mile of the mileage run and compare that to the cost you would be willing to pay (not necessarily the published fare) of the trip on which you would probably use the miles.

^ True that...

I've resorted to buying magazines with my Delta miles. That way I have something to read on the planes while I am accumulating more AA miles that are equally difficult to use.

I think blueeyes_austin has the best approach. Find a great value and blow a quarter million miles at one time. I can do this once a year at my current rate of accumulation - at least until I get married and have kids.

Sam