The Golden Formulae | A Guide to Valuing Miles and Points

Frequent flyer miles and points drive a significant part of this industry. Whilst the vast majority of people put in little thought with the whole miles and points business, the very small percentage of frequent flyers that make up the global travel population contribute around 47% of total revenue, and hence are a valuable asset. Whilst getting value out of miles is often difficult, there is almost always a way to benefit.

Over several posts, I’ll be taking a more in-depth look at frequent flyer systems, and providing tips on how to get the best value. This post will focus on valuing miles, when they are earned and when they are spent, and will help you to ensure you’re not losing out. So here is how to value frequent flyer miles or points.

The ‘Cents Per Mile’ (CPM) Staple

This is a super simple and straight-forward mathematical tool that will allow you to judge the value you are getting out of your miles.

Used in an earning sense, it essentially displays how much you are paying for each mile you receive.  Used in a spending sense, it depicts how much value you get for using your miles.

CPM = Total Ticket Cost / Miles Earned or Used

The equation is used a staple for any sort of decision involving flying and miles.

Valuing Miles – Earning

Do determine just how much you are earning for what you pay, we’ll use the variation:

CPM = Total Ticket Cost / Total Miles Earned

When entering values, you’ll be given a number that tells you the number of cents you pay for each mile you earn. For example, take a return flight from Sydney to Singapore on Singapore Airlines in Economy, costing around A$975. Based on a fare earning 100% mileage and no status bonuses, you will earn 7,824 miles.

CPM = 975 / 7824
= 0.12

This shows us that we are effectively paying 12 cents for every mile that we earn. Now from afar, this looks like quite a lot. And it is. The CPM for mileage earning is often, actually, useless. For normal flying, it is, in fact completely useless. Whilst you may be able to straight out purchase miles (a service offered by many airlines) for maybe 1-5 cents/ mile, that costs is for the miles ONLY. The 0.12 cost includes the flight itself, and such is only useful for comparing fare types and airline choices, when buying miles, when comparing credit card earn rates or when mileage running.

Back to the Singapore Airlines example, this price was for a fare category that permits 100% mileage accrual. Singapore Airlines offers cheaper fares, that earn fewer miles. So, if for the same dates we were to opt for the lower fare of $930 and earn just 50% mileage, a simple calculation would show that the CPM comes out at around 23 cents/ mile. This is an astounding difference, and is a prime example of how paying just $17 extra can give you a significant increase in miles earned. From comparing the total earned miles, the higher fare gives 3,912 more miles than the cheaper fare. Now use the formula again to see whether the extra cost can be justified. In this case, you will earn an extra 3,912 miles for just $17 extra. The formula shows us that these extra miles are earned at just 0.4 cents/ mile! Clearly, given the incredibly low cost, it is almost stupid to opt for the cheaper fare! But remember that THIS WILL VARY GREATLY, which is why the formula comes in handy. This method should also be used to compare different airlines. Ok, that may have been a beet confusing, so here it is in brief:

  1. Find a list of fare options for your desired trip, and note down the total cost and the miles you would earn for that price.
  2. For each option, find the CPM value.
  3. The lower cents/ mile results often have the greatest value.
  4. When tossing up between two fare options, note down the difference in fare and the difference in mileage accrual.
  5. Apply the CPM formula to the values in (4) to calculate the marginal CPM
  6. Justify whether the marginal cost is worth the benefit

So there’s the first tip. Don’t always buy the cheapest fare. Use this calculation to compare the values of different fare types, or different airlines.

Now the biggest question, is “What is an acceptable cost?”. Well, let’s look at the example above involving a difference in fare types. In this situation, the cost is incredibly low, but for some, the extra cost may not be justifiable. This all depends on how you personally value your miles. If you fly often and use miles often, then you will have very high value for your miles, meaning paying extra will more easily be justified. However, if you are someone who flies infrequently, or has no plans to travel in the near future, then your value will be much lower, and even a small cost may not be justifiable.

Valuing Miles – Redeeming

Now, the airlines have done a lot of analysis surrounding the whole earning and redeeming ideas. As such, on a general basis, you will be paying more to earn miles on regular flights, than the value you will be receiving when redeeming flights. This way, the airline makes money. However, there are instances where, in fact, the price you pay for miles is less than the value you receive when redeeming, resulting in a win-win! This usually only occurs through fare mistakes, status bonuses, promotions or purchasing miles straight out.

Continuing from above, let’s elaborate on the question “What is an acceptable cost?”. To determine whether an extra cost is worth your mile, mathematical formulas and economic analysis can only take us so far. We could say that an extra cost for higher mileage accrual may be eventually offset by the miles earned being used to purchase an upgrade to a premium cabin, increasing your business productivity inflight, increasing your rest time, resulting in greater productivity when arriving, and showing that the economic benefits here outweighed the original cost. But, for many, there are benefits that can’t be measured. Personal utility (personal satisfaction) makes up a big proportion of your value for miles. Say you are a relatively frequent leisure traveller. You will then base your mileage value on how much utility you will receive from spending those miles. Let’s say you are really passionate about flying and treasure every moment of flying more-so than others. In this situation, you would value your miles at a much higher rate than others, but it is not measurable. This is what makes valuing tricky. It often comes down to intuition and personal circumstances, rather than plain economic calculations.

No, when looking at how much value we receive, we will use:

CPM = (Total Dollar Cost of Ticket –  taxes for redemption ticket) / Total Miles Needed For That Ticket
Remember that you must subtract the taxes you will pay on the redeemed ticket from the total cost you would have paid for the flight.

Let’s look at redeeming a return flight from Singapore to London with Singapore Airlines in Economy Class.

Ticket Cost (to buy with money) ➔ $1,630
Mileage Cost (to redeem) ➔ 59,500 miles + $680 taxes

CPM = (1630 – 680) / 59500
= 0.02

This result shows that we get 2 cents value for each mile we spend. For an Economy Class ticket, this is what is expected. Because the value is low, frequent flyers often prefer to use miles for purchasing premium cabins.

Let’s look at the same dates and details, but calculate the benefit for a First Class ticket.

Ticket Cost (to buy with money) ➔ $14,486
Mileage Cost (to redeem) ➔ 182,750 miles + $886 taxes

CPM = (14486-886) / 182750
= 0.07

This result if 7 cents value for each mile spent is incredible! Because the paid ticket is so expensive, redeeming miles for First Class gives you much greater value for money than for Economy Class.

Let’s look at one more scenario: Upgrades. Just like redemptions, they have mixed value results, but have the added benefit of still earning miles. With redemption tickets, you receive exception value, however, you will earn no miles at all. Upgrades require a slightly different formula:

CPM = (Higher class dollar cost – lower class dollar cost) / (Miles required to upgrade – miles earned in lower class)

Keeping the same dates and details, let’s look at upgrading from Economy Class to Business Class

Economy Ticket Cost (to buy with money) ➔ $2,280
Business Ticket Cost (to buy with money) ➔ $7,259
Milage Upgrade Cost (to redeem) ➔ 110,500 no taxes
Miles Earned in Economy ➔ 13,522

CPM = (7259 – 2280) / (110500 – 13522)
= 0.05

The calculation here shows us still exceptional value at 5 cents per mile. Whilst this is less than the value you receive redeeming a ticket straight out, it does give you miles that will qualify towards your status.

This is another major factor influencing personal value. For someone who treasures elite status, upgrading probably has more value than redeeming a ticket. But for infrequent flyers who have little to no interest in status, then it is a far better option to redeem a ticket.

Whilst I have focused on Singapore Airlines, the same principles and formulae can be used for all airlines and all situations involving points and miles. The biggest thing to remember, is that your own value of miles can vary greatly from someone else’s. This is primarily due to personal utility and personal travel circumstances. A hard core aviation geek may be able to justify spending a lot more for a flight, because they receive great utility in return, thanks to the flight itself and perhaps the status that you get out of it. Normal travellers may have a very low value threshold, and only use points on the odd occasion.

So let’s recap the key formulae:

How much are you paying for a mile?
CPM = Total dollars spent / Total miles earned

How much value are you getting out of a redemption ticket?
CPM = (Dollar cost of ticket otherwise bought – taxes for redemption ticket) / Miles needed for redemption ticket

How much value are you getting out of a redemption upgrade?
CPM = (Dollar cost of higher class ticket – dollar cost of lower class ticket) / (Miles needed for upgrade – Miles earned in lower class)

And a very general guide to how redemptions should be valued. This is based on Singapore Airlines (which are quite high value compared to others), and can vary across airlines. Having said that, as a general rule, no redemption should be much lower than 2 CPM:

Economy Redemption: ~2 CPM
Business Redemption: ~5 CPM
First Redemption: ~8 CPM

So there you have it. The basic maths surrounding the value of frequent flyer miles. Take note of these tips, remember that individual circumstances vary, and please comment or email if you have any questions!

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s