Mileage Programs: Worthless or Worth Less?

“Frequent flyer programs have become worthless.”

I was taken aback to find that quote in an article appearing recently in a large daily paper, attributed to me.

What I actually said was that the programs are worth less. I’ve been making that assertion regularly over the past three years, and I suppose it was only a matter of time before the caveat was typographically transformed into a death sentence. Moderation doesn’t make for compelling headlines.

To be sure, there are those who dismiss mileage programs as worthless. And their numbers are growing. But that’s the minority view—and just plain wrong. So long as miles may be redeemed for an award ticket, the programs will have some value. The question is, how much? And what factors cause that value to change over time?

As ticket prices go…

The basis for evaluating miles will always be ticket prices—specifically, the price a consumer would have paid for an award ticket if she had purchased it at market rates rather than redeeming miles for it. So, if you were to redeem 25,000 miles for a ticket that could have been purchased for $500, the value of the miles would be two cents each ($500/25,000 miles). But if that same ticket were worth only $300, your miles would be worth less ($300/25,000 miles=$0.012).

By that measure, award values have definitely declined.

According to the Air Transport Association, domestic passenger yield (the amount a revenue passenger pays to fly one mile, net of taxes and fees, and a convenient proxy for ticket prices) peaked in 2000, declining 9.1 percent in 2001 and another 9.6 percent in 2002. The data for 2003 hasn’t been compiled yet, but industry watchers expect another decrease. So while there may have been a time—pre-9/11, pre-recession, pre-JetBlue—when the average domestic ticket price approached $500, those days are long gone.

Fees up, value down

While published fares are often used as the sole measure of the value of award tickets, the purchase price of the ticket is only the starting point in assessing the value of miles. One of the other factors that diminishes the value is if an airline ticket has more fees associated with it.

Air Canada, for example, charges $25 (CAD) for Aeroplan award tickets not issued via the airline’s own website. For now, that’s an aberration within the industry. But most airlines charge “rush fees” for award tickets issued within 21 days of departure. American, the world’s largest airline and operator of the world’s largest mileage program, charges $50 for award tickets issued between seven and 20 days out and $75 for awards issued within six days of departure.

In addition, American imposes a $100 change fee for any award ticket reissued to reflect changes to the ticket’s origin or destination. And if your plans change and you need to reinstate miles into your account, American will charge you $100 to do so.

To the extent that such fees exceed those associated with comparable revenue tickets, they arguably reduce the value of award tickets, as well as the value of the miles redeemed for them.

Capacity squeezed, value squeezed

The value of a mile and the availability of award seats are also intimately connected.

For many years, the conventional rule of thumb was that a frequent flyer mile was worth, on average, about two cents. The calculation underlying that estimate was built on the assumption that awards would be reasonably if not readily available at the restricted, or saver, level—25,000 miles for a domestic round-trip in most programs. And they were.

But increasingly, consumers are complaining that award availability is so reduced that they’re being forced to spend twice as many miles for an unrestricted award.

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As the percentage of unrestricted awards increases, increasing the average number of miles redeemed for an award, the average value of a mile decreases.

Struggling airlines, weak miles

Like any currency, the value of miles fluctuates with the strength of their issuer.

That’s bad news for miles, since very few airlines currently enjoy good financial health. And in fact, there are currently three major North American airlines whose very survival is questionable.

United remains stuck in bankruptcy, forced to beg for month-by-month extensions from the bankruptcy judge. US Airways may have to return to Chapter 11, and many industry analysts rate their long-term chances of survival as slim.

To the north, Air Canada is in Canada’s version of bankruptcy protection. The airline’s future is so bleak that questions have been raised about the government’s readiness to step in and prop up that country’s largest airline if the unthinkable should occur.

There are two interlocking probabilities to be aware of when considering the true effect of a bankrupt airline on the value of its miles. First, there are the odds of the airline’s liquidating altogether. And second, there are the odds that, even if the airline disappears, the miles themselves will survive. As optimists are quick to point out, that’s what happened when TWA finally called it quits. Among the assets acquired by American in the liquidation sell-off was TWA’s Aviators program—both the members and their miles. They were folded into American’s AAdvantage program, giving them what truly amounted to a new lease on life.

But today, with so many airlines in such dire financial straits, it is much less likely that any carrier would assume the financial liability represented by a failed airline’s frequent flyer program. And that uncertainty undermines the value of any precarious airline’s miles.

A squeeze at the top, too

As a final thought, consider the downward pressure on the value of miles for the airlines’ very best customers, members of the mileage programs’ elite tiers.

On the earning side, Continental and Delta now credit a miserly one-half elite-qualifying mile (EQM) for every mile flown on discounted coach fares. However, in Continental’s case, cheap coach fares continue earning a full EQM for every flown mile through the end of the year, if the tickets are purchased on Continental’s website.

And on the award side, most of the larger airlines have downsized their first-class cabins and, in many cases, replaced larger aircraft with smaller regional jets that have no first-class seats at all.

Impact: Not only is elite status harder to attain, it now has fewer perks associated with it. More miles are needed to access a lesser product—a double devaluation.

The bottom line

So, what are miles worth?

Less than they used to be, certainly. Airfares are down, and award-ticketing fees are up. Award seats are harder to come by. And in the case of some airlines, the very longevity of miles is in doubt.

But worthless? Hardly. I have an award ticket to attend a June family reunion to prove it.