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A recent question:

How can I tell if it’s better to use miles or buy the ticket?

Excellent question. The short answer is: Pay cash when the cash price is less than the value of the miles you’d be redeeming.

But how much are the miles actually worth?

Smartertravel.com recently ran an advice piece that addressed this issue, and they are wise to suggest a range of options for your miles, but some of their tips are off the mark:

Whereas the industry standard of the value of a mile was once two cents, experts agree that it’s dropped to one cent.

ONE cent??!! I respectfully disagree.

For starters, a mile is not a mile. Each airline’s program has its own rules, including its own redemption rates. If a coach trip from the US to Europe costs 50,000 miles on United and the same flight costs 60,000 miles on Lufthansa, then a United mile is worth more than a Lufthansa mile. It’s like comparing American and Canadian dollars; they’re both money, they’re even both dollars, but they’re not worth the same.

Second, smartertravel.com cites “experts” who “agree.” Experts? Experts also agree that I’m the most important blogger in all of Blogistan. Who is saying this?

Not The Economist. Their study, cited in The Guardian, estimated that there were 14 TRILLION frequent flyer miles out there, with an estimated value of $700 million. That’s 5 cents per mile. That seems on the high side, frankly. But it’s not the 1 cent that smartertravel.com deems the consensus figure.

What about the airlines themselves? They sell their miles to hundreds of firms, such as credit card companies, rental car agencies, hotels, and who knows what else. The rate per mile the largest companies pay is confidential, but they reportedly average between 1 and 2 cents per mile. In fact, this is a huge revenue stream for the airlines, estimated at $10 billion worldwide.

Airlines will also sell miles to individuals, usually for around 3 cents per mile. This is nearly always a bad deal, unless you’re just a few thousand shy of that first class trip to Singapore, and this is the only way to top up the account.

And what do the airlines consider the liability of these miles (earned or sold) on their own books?

American airlines ignore all miles in individual accounts until they reach blocks of 25,000 miles (the minimum required for a domestic ticket). Then, for each 25,000-mile block of unredeemed miles, they enter a liability of only $20-25. They also assume, on average, that one third of miles will never be redeemed. Taking all this into account, in 2004 the 14 biggest American airlines posted a total liability of only $3.9 billion to allow for future frequent-flyer mileage redemptions, according to IdeaWorks, a consulting firm.

$25 per 25,000 miles?? That’s a measly 0.1 cents per mile, which they sell for 10 to 30 times that much. Nice margins!

Note also that a full third of all miles are expected to expire, unused. This is an important point. Besides not earning interest, miles are unlike dollars in another important way: they can expire, if you don’t keep your account active. (Rules vary by program.) Don’t let this happen. At a minimum, get yourself some magazine subscriptions, rather than let the miles disappear.

So what should you consider the value of a mile?

Averaging across programs, and assuming that you have the financial wherewithal to choose between spending miles or spending cash, I would consider 2 or more cents per mile to be the target, 1.7 cents per mile to be breakeven, and 1.5 cents the absolute floor.

How do I get these numbers? Basically, from two observations:
1) Many frequent flyer miles are actually frequent buyer miles — they’re miles earned through a mileage-earning credit card. One could choose a different rewards-earning credit card, such as a cash-back card. The value of the rebates I could be getting with such a card is approximately 1.7% of purchases. Thus, if I’m getting 1 mile per dollar charged instead of 1.7% cash back, then, for me to come out ahead of the cash-back card, 1 mile needs to meet or beat that 1.7%. That’s the breakeven level.

2) At the same time, value is impressionistic. When do you feel like you’ve gotten a good deal? At what price does a plane ticket start to sound expensive? These are personal decisions, and it’s up to you to decide when you’d rather spend cash or a “virtual” currency such as miles. For me, I like feeling that my miles have taken me great distances, in comfort, and in lieu of significant cash. 1.7 cents per mile feels okay, but 2 cents feels better. Higher than 2 cents is even better still.

Settling for 1 cent/mile is foolish, unless you have so many millions of miles in your account that you don’t know how to spend them. For example: Looking over my own accounts, I’ve averaged 4.4 cents/mile lifetime on redemptions. The best I’ve achieved in recent memory was a pair of business class tickets to New Zealand, using 90,000 United miles per ticket on an Air New Zealand/United itinerary. Taxes paid: $37.60pp. Distance traveled? Nearly 17,000 actual flight miles. Retail value of the tickets? Approximately $9000 each. About 10 cents/mile, and well in excess of the “experts” left unnamed by smartertravel.com.

Premium-class tickets (especially internationally) are the best use of miles, in my opinion. High cash equivalent, and it feels like a reward, but inventory on these tickets is often tight. Second-best: Last minute tickets, when the no-advance-purchase fares are in effect and the prices are sky high.

So beware the advice that one cent per mile is the consensus. What constitutes good value is, in the end, your choice. But one cent per mile should be your value of last resort. Aim high.

UPDATE: See also Miles or Buy, the guide/tutorial for people figuring out whether to pay cash or use frequent flyer miles for a ticket. Check it out.