The Value of a Mile - an experiment proposal
 

So, before I suggest this, let me say that I do not beleive that this inquiry is a violation of the TOS. If I'm wrong, please let me know ASAP and I'll pull the thread - that said....

I was in the American Airline board and came upon a thread discussing the value of a mile and the debate surrounding it. I will not recount the issues raised there - but needless to say, there was much discussion about value inflation, etc.

So I wondered - how could you calcuate an accurate value for an award mile?

What I'm suggeting is that people interested in this question post to this thread starting on Oct. 1st, the following information:

1. Airline
2. How many tickets you purchased
3. The class of service you booked into (first, business, coach)
4. Date booked
5. Date of travel
6. The number of miles used
7. The cost of the award in real dollars to pay taxes and fees not covered by the award
8. The cost of a seat on the day of purchase for the identical flight using the tool you most often use to PURCHASE flights. (So if you search on expedia, but generally buy from the airline's web site)

My method/rationale:
I would argue that real-world analysis is far better than hypothetical ones. One need only take the cost of the identical ticket - the cost you had to bear anyways (taxes and then some) to get the cost you avoid paying out of pocket to get what you would have paid to purchase the ticket. Some people choose to burn their miles in first class, and that choice would be weighted into the calculation. I've asked for class separately so that I can take that data and also calculate value in preferred class - cut the overall number still provides a good weighted average based on ACTUAL consumption.

I propose that we start this experiment on October 1st and continue for the entire month of October so we'd get 30 days worth of data. I suggest that far off time because others may want to make suggestions for the experiment. I'm willing to hear all ideas and will post another thread with the experiement on October 1st, once I hear that the idea is not a violation of the TOS. It may also be that this has already been done. I'd be interested in hearing that too.

I've been lurking for a while. FTers imply that their useage patterns are different. If that's the case, then this data would allow us to identify our demands and useage patterns. I don't know if we are different - but without data to show we are, we can't assume that we are.

I volunteer to do the analysis. Because the data is open posted, it is open to anyone who wants to look at it.

Comments?

I believe I have an accurate method of valuing your miles on the Value of Miles page of my website below.

First off, welcome to FT. I think, though your idea is pretty good, that this won't work. After a few people post their award uses, others will go off-topic and start talking about how to maximize value. That just happens with an open forum, and has happened in the 100s of threads on this subject that we've had in the past. Also, many here use miles for tickets they would never consider buying with cash. I used AA miles for a CX F ticket to Hong Kong and Australia in 2001. The ticket on the CX website was over $20,000. Now, I wasn't about to pay $20,000 for an F ticket, but I also wouldn't have paid whatever the cheapest Y fare was. Had I not had miles, I simply would not have taken the trip. So how do you put a value on that ticket?

I think that there's enough info out there in the other threads on this subject for someone to find out how different folks value miles. And since there are so many different ways to value miles, it will be impossible to determine a standard value for a mile.

But, good luck to you.

While its true you its subjective to try and figure out the 'value' of a mile. It is rather straightforward to figure out the COST of a mile based on earning through flying. In general, that COST per mile will be significantly lower for a member who has top-tier elite status (50-100% bonuses) and who flies on cheap Z fare Business Class fares (50-100% bonuses).

In fact, I can give you a real life example:

I flew on a Z fare Business Class CLE-SGN and I have top tier status with KLM. My friend flew the same itin in close to full fare coach and he has no status.

Me:18000 (Q) + 22500 (125% KLM elite bonus) + 18000 (100% COS bonus)=
58500 miles/$1700 airfare -------> 3 cents cost per mile

Friend: 18000 (Q) + 0 (elite bonus) + 0 (COS bonus)=
18000 miles/$1500 airfare -------> 8 cents cost per mile


Irrespective how I decide to spend my miles, I clearly earned them for much less cost than my friend.

Savvy FTers can objectively lower their cost per mile even further by participating in promotions that provide bonus miles for flying particular routes or booking online. And of course, aggressive credit card purchasing that earns 'free' miles can significantly lower the overall cost basis for miles.


My methodology in 'costing' a mile is pretty straightforward. Example for illustration purposes only!!!

Miles from flying: 50000 Cost: $2500
Bonus miles: 25000 Cost: $0
Credit Card miles: 25000 Cost: $0

Total Miles 100,000 Cost: $2500
TOTAL COST PER MILE: 2.5 cents per mile

With that 100,000 miles that cost me $2500, my best options are:
* 4- 25000 mile domestic coach awards
* 2- 50000 mile US-Europe/S America coach awards
* 1- 90,000 mile US-Asia/Australia Business Class award
* 1- 100,000 mile US-Europe First Class award

How each FTer 'values' these award redemption choices is subjective, based on individual needs and perceptions. But, there's NO DOUBT that 100,000 miles truly cost $2500 in that example. That methodology, I believe, offers a compelling apples-to-apples comparison of the COST of a mile.

Finally, as we all know plenty of people with loads of miles, but limited ability to redeem them. The 'value' of a mile can increase considerably if the member is in the top-tier of their program, where in some instances there is preferential award inventory available.

The value of a mile is indeed subjective.

For example, say a trans-Atlantic ticket in Y costs $1,000 and a J ticket on the same flight costs $6,000. Suppose I can also upgrade the round trip for 50,000 miles. (I picked these numbers to make the arithmetic simple. Plug in your own if you want.) So the "value" of a mile for the upgrade is 10¢.

Except that it's not, because no way would I pay $6,000 for that J seat. As far as I'm concerned, and as far as the value of my miles is concerned, that number is irrelevant. It could just as easily be $60,000 or $6 million - I still wouldn't pay it, but if it was $6 million, would my miles be worth $120 each? Of course not.

I'd pay more than $1,000, of course. If I'd pay $2,000, each mile is really worth 2¢

So far so good, but if I'd pay $2,000, there's someone else out there who'd pay $3,000, so her miles are worth 4¢ each, and there's a miser who wouldn't pay a penny over $1,100, so his are worth 0.2¢ each.

And that's just for this purpose. It's not as if trans-Atlantic upgrades are the only thing we use miles for.

I try to use my dollars where they bring me the most subjective, not financial, value. Ditto for my airline miles. Since my options for using both are different from yours and my priorities are as well, my uses will similarly be different.

So any attempt to figure out "the" value of a mile is doomed to failure. There is no such thing. There are many values to a mile - yours, mine and the bloke down the block's. An average makes as much sense as saying the average family has 2.4 children - perhaps true in a mathematical sense, but I have yet to see a family like that. That's one of the things that makes this game interesting.

post withdrawn.

"There are many values to a mile - yours, mine and the bloke down the block's."

Right on. MY miles are worth exactly what I get for them, NOT how I earned them. If they are absolutely free and I get nothing for them they are worth nothing. If I pay $1 million for them and get nothing for them they are worth nothing. If I pay $1 for them and get a free trip to Bangkok they are worth quite a lot.
Dave

uhm, as an economist by training I would suggest:
NOT to look at
-what people paid for miles AND a flight (i.e., when you fly and get miles for doing so), because that confounds the value of the flight and the miles
-what you can "get" for the miles, especially if these values are inflated (e.g., a $20k F ticket)

Instead, I WOULD look at
-the market prices for miles; it should most accurately reflect what "value" (monetary, and I suppose that's what you want to get at) miles have to people. It doesn't matter what they want to do with them, does it (in fact, people like myself just like to see miles piling up in an account - so be it!).
More concretely, one could look at
-price for miles/certs at ebay
-price for miles purchased on airline websites (although it would be nice to know what the actual demand is)

Of course, it is complicating that the value of a mile may differ across people and even within people. Some might wonder why someone pays $25 for 1000 miles on ebay - but if these miles were missing to get a free ticket, they are "worth" it. Still, I think looking at (market) prices is the most viable way to find out what miles are "worth".

In principle I have to agree with you, but economists by training are trained to look at free markets. This market is muddied by the fact that selling miles almost always violates program terms. It exposes both buyer and seller to risks that include confiscation of miles, closing either or both accounts, and the buyer showing up at the airport with a worthless ticket and being told "pay the last-minute fare or don't fly." This reduces what informed people (let's not get into uninformed eBay bidders; that's a separate topic) are willing to pay for miles to less than they're "worth."

Airlines, by contrast, knowing that they have a legal monopoly on selling miles in their own programs, charge a premium price above what they're "worth." They get some buyers, but not many (at least not from here).

If eBay selling prices are below their value and the airlines charge more than their value, one could make a case that their real value must be somewhere in between. That would be in the frequently-cited range of 1¢ to 2¢ per mile, well below what one would get from the selling price of many "high-value" awards. In fact, one reason for limits on how many miles one can buy in a year is to keep people from getting things like trans-oceanic F/J tickets for a fraction of their price by buying miles and claiming an award.

I totally agree - so are there market segments where these problems are less severe? For example, in Germany you get 5000 LH miles vouchers for certain magazine subscriptions and I don't think there is anything illegal about trading them - looking at their prices at ebay might be more informative.
Another problem with looking at ebay&Co. are transaction costs - they are ridiculously high (think of collecting 100 miles snippets from kellogs, sending them in and what not). This would suggest that auction prices are lower than real value. Interestingly, some people seem to actually enjoy collecting stickers and running to the mailbox to send them off - otherwise I have no way to explain why they do it (especially given the opportunity to get 15k free miles with credit cards etc.).

The prices people bid those Kellogg's certificates up to is based in large part on misinformation. Many bidders (maybe not "many," but it only takes two per auction) think that 500 AA miles entitle you to fly 500 miles. If only it were so...

Other than that side comment, I agree. I suppose we could figure out the value of a ton of wheat without too much trouble, or of anything else that's bought and sold in the light of day by informed buyers, but beyond that...

Isn't that why there are so many threads on this topic?

The cash value of mile is what the free market will buy/sell the miles in large quantities. My assessment for various miles is as follows:

Continental/Northwest/Delta - 1.2 cents per mile
USAIR/United 1.4 cents per mile
AA/BA 1.8 cents per mile
SPG point 2.4 cents per point
Hilton Honors .04 cents per point
Marriott Rewards 1.25 cents per mile
Membership Rewards (Amex) 1.4 cents per mile

Now I've got redemptive values of over 7 cents a point for Starwood and over 4.5 cents per point for Continental. But that's not a market. A market operates at a larger scale. Just cause the local mall store exchanges my USD at 1.10 instead of the market rate of 1.17 for Canadian dollar does not mean the USD is worth 1.10.


Mike

I looked at several airlines and they would generally sell you 7,500-40,000 miles at 2-3 cents per mile so that is a value that won't cost you your account.

The value that I have used them for has been 40K miles for a $1600 ticket or 4 cpm and 160K miles for a 20 stop round the world ticket in coach. That ticket was probably worth $8-10K so about 5-6 cpm, but like others have said I would not have bought the ticket for that price.

My next ticket will likely be SEA-NBO in British first for 160K miles. The list on that ticket is about $16,000. Coach class is about $2500. If I had to buy this ticket I would probably sit in the back.

I think overall I value miles at about 4 cpm for redemtion, but try to aquire them at 2 cpm including bonuses.

As this and every other thread on this topic suggests, there are numerous examples where someone has "valued" their miles at 4, 5, 6, or more cents each because they redeemed a business or first class award to some international destination for which a ticket costs $10,000+. That same individual may also have redeemed 25K miles for a $500 domestic coach roundtrip somewhere making the miles worth 2 cents each. So what "value" does this individual place on his/her miles? I would argue that if the person was willing to redeem at 2 cents/mile, that is really how they view a mile's value and the 4-6 cents/mile redemption was simply a great deal.

In my view, we should be viewing "value" as the hurdle rate for using an award, i.e., what is the lowest fare that a person will opt to use miles (an award) for rather than purchasing the ticket. Anything above that is gravy. This is straight-forward and eliminates many of the inconsistencies present with valuing miles based on highest value achieved or some hypothetical redemption.

For what it's worth, my hurdle rate is about 1.35 cents/mile. That is, if I can get that "value" or more from an award redemption, I'll use the miles, otherwise I'll purchase the ticket. (I say "about" because I value miles from some airline programs, such as AA, UA, and US at slightly more than 1.35 cents each, and miles from others, such as CO, NW, and DL at somewhat less than 1.35 cents each.)

OK, FWIW I've (sheepishly and at flame risk) cross-posted this from AA-land, thinking that this model combines theory and practice and can be generalized:

Out of curiosity, I thought that I would try to develop a model and apply it to my latest redemption. Clearly, there are a number of individual factors that will cause valuation to swing wildly, not only trip by trip, but also person by person.

I recently cashed 300,000 AA miles for 4 tickets to Tahiti and Oz. Even if first class was available (it was not), I would not have gone in front because I won’t separate from my kids and I do not believe that a 5 year old should, or a 15 year old needs, to fly first class. That said, the parameters:

Value: This is the cost of the tickets minus taxes, which have to be paid on a reward ticket anyhow.

First Class Enhancement: This is the amount that I would pay OVER the cost of coach to go first class. Of course, this number cannot be greater than the actual cost of a F/C tix.

Marginal cost of money: It’s not so much what a ticket would cost, but how much money I would have to earn to pay for the ticket. FF miles are not a taxable event; income is. In California, a high tax state, my marginal cost is about 50% (including fed, state and FICA), so I would have to earn $2,000 to pay for a $1,000 ticket.

Accumulation Effort: Free miles aren’t free. I fly less convenient AA routings, use an AA Citibank instead of cash back, Idine, fax Hilton when AA does not post, etc, etc. I have to consider the opportunity cost of my time. An up to 5% deduction can be applied here.

Redemption Effort: Sometimes cashing in is seamless, sometimes not: I had to call in four times to match every 332 day window opened up. I had to go to the Airport to re-ticket. I’m taking the maximum 5% hit here.

Date Woes: Not being able to get the dates you want can reduce the valuation by up to 5%

Destination Woes: I might have very well have gone to Fiji rather than Tahiti, deduction of up to 10% here.

Routing Woes: Up to a 5% penalty applies for having to accept less than preferred routing, I might have been able to avoid a change in Auckland if I paid for the ticket.

Certitude of trip: If one has to go, then the value of the miles is greater than if one is going on a lark. This can have an up to 10% reduction in value of miles. I off to a family reunion, award tickets or no award tickets.

Excess Mileage Excise Tax: The more miles one has, the less value they have. One could die, become infirm, AA could go bankrupt, etc. I am taking the maximum 5% ding here for over a million available.


Value of tix $5,200 per mile
Miles redeemed 300,000 0.0173
F/C enhancement 0 0.0173
Marginal cost of $ 0.5 0.0347
Accum effort 0.05 0.0329
Redemption effort 0.05 0.0313
Date woes 0 0.0313
Destination woes 0.02 0.0307
Routing Woes 0.01 0.0304
Certitude of trip 0.999 0.0303
Excess Mileage 0.05 0.0288




So, speaking just for me, and just for this trip, I am comfortable with valuating the miles at 2.8 cents per.