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Last week I suggested an approach for estimating “reasonable redemption values” of points and miles (please see “Pondering Reasonable Redemption Values”). The idea is to estimate how much value one might reasonably expect to get from specific types of points or miles. When estimating the redemption value of points, it is necessary to estimate the number of points that will be needed for an award and the value of that award. The word “reasonable” here is actually used in two ways: The goal is to estimate both how many points will be reasonably required for different types of awards, and to estimate a reasonable value for those awards.
Reactions to my prior post were all over the map. Some loved the idea. Others thought it wasn’t worth attempting (either because it is impossible to come up with values that everyone will agree are reasonable or because they think there is no value in such estimates). Most responses were somewhere in between. And, some offered great suggestions for how I should go about this.
I think developing a chart of reasonable redemption values (hereafter referred to as RRVs) is a worthwhile goal. When deciding whether to earn one type of points or another (or cash back), having at least an estimate of redemption value would be extremely helpful. I do agree, though, that everyone will have their own definitions of “reasonable”. So, I’ll build the chart in Google Docs and let people put in their own reasonable assumptions (in their own copy of the spreadsheet) if they’re so inclined.
The Spreadsheet
The spreadsheet now exists. You can find it by clicking here. You are welcome to view it any time. If you’d like to edit cells, you’ll have to make a copy first. Be warned that the spreadsheet is likely to change regularly, at least at first, so you might not want to invest too much time in a copy just yet.
The organization of the spreadsheet is pretty simple. The first tab, currently titled “Overview” shows all of the RRVs calculated to-date. Subsequent tabs serve as the data for the first tab. In general, expect to find one or more tabs for each rewards program. For example, there is currently one FlexPerks tab, one Southwest tab, and two United tabs.
United
The RRV spreadsheet currently shows the following for United MileagePlus miles:
| Program | Reasonable Redemption Value (cents per point) |
| United Domestic Economy | 1.37 |
| United Domestic First | 1.03 |
| United International Economy | 2.44 |
| United International Business | 2.56 |
| United International First | 2.29 |
It’s interesting to see that my calculations produced very similar values for all international cabin types. That is, I didn’t find significantly better per point value in business or first class awards than for economy (in fact, the calculated value for first class is slightly worse). For domestic flights, you can see that the estimated RRV is much lower than for international flights. Of course, all of this is due to the assumptions that I put into the calculations…
Estimating Economy Fares
I started by finding what appears to be a reputable document showing average domestic flight prices. I took the 2013 average price ($381) and arbitrarily decided that a “reasonable” price is 10% lower than that ($343). My assumption is that people tend to use services like Kayak to shop for the best prices and are sometimes willing to fly at less convenient times, or on less convenient routes to get better prices. So, I figured that a discount was in order.
Next, while I couldn’t find a good source showing international fares to specific destinations, I found a document showing average international airfares overall and, importantly, average fares per mile flown. I was be able to use this to estimate international fares between cities. First, though, I discounted the fare per mile by 20%. I don’t know if it’s true, but my impression is that international fares have much more variability than domestic fares, and so it should be often possible to find significantly lower than average fares. That’s why I picked a 20% discount rather than a 10% discount.
Estimating Premium Cabin “Premiums”
In order to estimate the value of business and first class fares, I chose not to try to estimate the paid fares. Instead, I estimated how much the premium cabin is worth above economy. I came up with this chart:
| Type of flight | How much is it worth over economy? | Assumption Notes | Assumption Source |
| US First Class: | 1.5 | Reasonable to assume 50% premium over economy. Better legroom. More comfortable seats. Often includes meal service when economy does not | Top of head |
| International Business Class | 2 | Business class usually offers much more comfort (e.g. fully flat beds) and significantly better food and entertainment options | Top of head |
| International First Class | 2.5 | Better than business class and way better than economy | Top of head. Note that this is equivalent to a 1.25X premium over business class |
Obviously, the validity of the above assumptions will vary wildly from person to person, and even from flight to flight. That said, to me these seem like reasonable overall numbers. I combined these multiples with estimates of economy flight prices to calculate the reasonable value of premium cabin awards.
Estimating Distances
In order to estimate international fares, I needed first to estimate distances that would be flown. I used Dallas as the starting point because it is a large city and fairly central in the US. From Dallas, I estimated direct round trip flight distances to a number of international cities:
| From US (Dallas) To: | Round Trip Distance (Miles) |
| Europe (Paris) | 9,895 |
| Southern South America (Santiago, Chile) | 9,739 |
| South Africa (Johannesburg) | 18,302 |
| South Asia (Hong Kong) | 16,245 |
| Australia (Sydney) | 17,155 |
Distances shown above were calculated using the Great Circle Mapper.
Estimating Award Prices
I created a table showing award prices for the US to each of the destinations shown above (in the distance chart). Each destination has multiple entries to account for multiple possible classes of service (e.g. economy, business, first). For each row, I entered both the United Saver price (e.g. price in miles to fly United Airlines when Saver level space is available) and the Partner award price. To come up with a single award price I made the arbitrary assumption that one would book flights one way on United metal and the other way on a partner. I didn’t adjust for the possibility of having to pick United metal “standard” awards. My assumption is that miles will be used on United only when Saver level space is available. I also didn’t include domestic short distance awards (20K round-trip) so that somewhat offsets the lack of Standard awards.
Shown here are the first several rows of the award price chart:
| Type of flight (round trip) | Saver United | Partner Award | Average Award Price (assume half United and half partner) |
| US to US Economy | 25,000 | 25,000 | 25,000 |
| US to US First (two cabin) | 50,000 | 50,000 | 50,000 |
| US to Europe Economy | 60,000 | 60,000 | 60,000 |
| US to Europe Business | 115,000 | 140,000 | 127,500 |
| US to Europe First | 160,000 | 220,000 | 190,000 |
Estimating Reasonable Redemption Values
Using all of the assumptions stated above, I calculated the reasonable redemption values for each award. Here are the first several rows, for example:
| US to: | Award Price (Miles) | Reasonable Value | Reasonable Redemption Value (Cents Per Point) | International / Domestic | Class of Service |
| US Economy | 25,000 | $343 | 1.372 | Domestic | Economy |
| US First | 50,000 | $514 | 1.029 | Domestic | Business |
| Europe Economy | 60,000 | $1,240 | 2.066 | International | Economy |
| Europe Business | 127,500 | $2,479 | 1.945 | International | Business |
| Europe First | 190,000 | $3,099 | 1.631 | International | First |
I then created a pivot table based on the above table to collapse the results into buckets:
| Program | Reasonable Redemption Value (cents per point) |
| United Domestic Economy | 1.37 |
| United Domestic First | 1.03 |
| United International Economy | 2.44 |
| United International Business | 2.56 |
| United International First | 2.29 |
Next Steps
I’ve outlined above the way in which I’ve calculated United MileagePlus RRVs. I could use this work as a starting point towards doing the same for AA, Delta, etc. First, though, I need your input. For those of you who like diving into numbers, did I get the math right? For those of you who think about these things a lot, what did you think of my assumptions that drove the calculations? Please do keep in mind that you’ll always be able to go in and alter assumptions for yourself, but if there are things I can change to make this more applicable to more people and situations, that would be great.
I realize that several readers offered terrific ideas in my prior post on this subject, but that only a few minor suggestions made it to the spreadsheet. Some ideas were simply too complicated to produce. Others, I think, confused the idea of redemption value with the cost of earning points. I see those as two very separate things that need to be looked at together to form a mile-earning strategy. So, while the cost and ease of earning points is important, it is outside the scope of this particular pursuit.
Another “gotcha” has to do with first class travel. Some will argue that I estimated international first class value far too low. Actual first class flight prices are undoubtedly way higher than the “reasonable values” I estimated. This was intentional. I believe that most actual international first class prices are unreasonably high and do not represent the true value that one gets from them. So, my estimates for the premium cabins are based on an idea of how much value those flights have (relative to economy) rather than an estimate of actual fares. Was this a reasonable way to approach this topic? I think so, but I’d love to hear from you.
On this topic, BikeGuy argues that the true value of an award is the amount that someone would be willing to take out of their pocket to pay for that flight or hotel. I disagree. Just because someone isn’t willing to pay more for business or first class does not mean that they won’t get more value from it. By flying in a premium cabin, that “someone” may have received a good night’s sleep, good food and service, better ground service, and more. Just because they weren’t willing to pay extra doesn’t mean that the extras weren’t valuable. I believe that the incremental value of a better product needs to be accounted for.
So, what do you think? Please comment below.
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[…] Reasonable Redemption Values. A work in progress […]
We are going to disagree on the multiplier, but I think 1.5, 2.0, and 2.5 are grossly inflated unless you have an expense account from a generous employer. In my case, my employer is NOT generous. I’m not generous either. The values I would pick are in the 1.25 range with domestic premium closer to 1.0. A separate article on the multiplier would be great.
I don’t understand why an expense account would influence the multipliers. The multipliers are intended to be the perceived increase in value over economy, not the price you would be willing to pay (I still adamantly see those as different things)
Think of it this way. You can go to a dealer and pay retail for a item. Or you can find ways to buy it for less via coupons, rebates, gift cards, cash back, etc. You could also wait for it to go on sale. You might even give up something like warranty. If you give up warranty would you still use retail prices for the redemption value of your cash? Yet this is what you are doing if you use paid fares, because paid fares don’t reflect award availability and other award restrictions. The best way to equalize this in my opinion is to use the retail price airlines sell miles to cap redemption value. Also, you can’t ignore sale prices of miles either. While other airlines aren’t as generous as US when it comes to selling miles at a discount, it’s pretty common to see a 25% discount. This might be a reasonable proxy for wholesale price.
Sorry, but I disagree. The price airlines sell miles at is a fare ceiling to acquisition price estimates, but nothing to do with redemption value. Take Southwest, for example. If they were to sell points for a penny each, that wouldn’t change the fact that you can get over 1.5 cents per point redemption value with Wanna Getaway fares. Of course, then they would have to devalue again, but that’s another topic.
I’d tend to agree with BikeGuy. Nothing like putting your money where your mouth is to validate what you believe miles are worth when it comes to redemption! I recall one blogger valued UR at 2 cents when shopping thru the UR portal, but a week later opted to cash out their mypoints stash for Macy’s gift cards instead of UA miles at ~1.5 cents. Go figure! I would say we can glean insights by looking at what people will typically pay for miles. For example, lots of people buy US miles when they go on sale for ~1.2 cents. Now, it wouldn’t make sense to pay redemption values up front due to the cost of carry and devaluation risk, so use this as a floor for redemption value. There seems to be far less interest in US miles when they go on sale for ~1.75 cents. I’ll go out on a limb and say this is the point at which most are indifferent. 1.75 might be a reasonable mid-range proxy for redemption value since those inclined to purchase at this price are probably devoid or short miles, and the cost of carry / devaluation risks are minimized. As far as a cap, I’d use the regular price one can buy miles, typically in the 3.5 cent range, but sometimes lower. Of course, there is usually a limit on how many miles you can buy this way, but I think it’s a more reasonable cap than the actual fare given the latter doesn’t reflect award availability, etc.
I think that the values you are considering here are the values of the points not the redemption values. I think of those as different things. I do think it is reasonable to estimate point value as the price at which you are indifferent to holding points or cash, but I think this is a very different metric than redemption value.
You are one of my favorite bloggers because you post original pieces like this that I can relate to.
I don’t believe in CPM based on prices that I would never pay.
I believe in real values based on prices that I would consider.
Yes international premium cabins are worth a lot. But no, there is no conventional ticket that is worth $10-15K to me.
And yes, you can combine apples and oranges on a single table, and intelligent people can decide what it all means to them.
I think the bottom line is that earning and burning points/miles takes significant extra work to extract extra value, and how much extra work one can/wants to invest is up to them.
The unique slant on analyzing value is so much more interesting than puppeting 40-50k point deals (which are valuable and appreciated) or fare mistakes ex-EUR or something.
Thanks!
Sorry if this isn’t completely on topic, but I’m having trouble getting an answer to this question. I found Paypal money cards at CVS and they let me pay with a credit card. The fee was $3.95 just like a VR. Any reason why buying these, loading your Paypal account and then transferring the money into your bank account hasn’t been among any of the suggestions I’ve seen for manufactured spend?
PayPal will lock up your account, and keep your money for 6 months. Unless you’re looking for trouble, stay away from ScamPal.
I think that all ‘Reasonable Values’ should be derived using a consistent methodology, whichever you choose to be appropriate. If I read your description correctly, you base US domestic fares on actual ticket prices, International – on distance flown, and Premium cabins on arbitrary multipliers. Any of those methods might have merits — some more appropriate than others depending on the market. But you can’t combine ‘apples and oranges’ in a single table.
I see your point, but really all 3 are ways to estimated subjective redemption value. The first two are different ways of estimating actual fares and I’m making the leap that economy fares are roughly equal to redemption value.
One other thought is where does fuel surcharge get added into the international value? From my experience a UA international FC has much higher value than a BA nternational FC when you factor in the $1200 in fuel/tax surcharge difference………..and an award mile using Emirates on Emirates has to be worth a lot less than an award mile on Alaska using Emirates due to the surcharge differences?
I would subtract the estimated fuel surcharges from the estimated fare before calculating RRVs
I do think the FC multiplier idea at the top is an excellent way to allow folks to manage it…….your FC multiplier at 2.5 is less than the airlines (UA). And while having this as a reference is “ok” for me cost of earning points is “much more” important than the redemption value……..for someone “in the business” of blogging I can see where understanding these nuances are important to grasp and inform your writing and help you judge good and bad values but I would guess that the average reader’s eyes glaze over when diving into this where the miles earning strategy offers a very real and practical tool that can be quickly implemented………..perhaps I am not seeing the full practical value of the redeption value and why it ultimately matters but that wouldn’t be the first time nor probably the last that your dive into the nuances flew by me………..
I second Ben’s thought on an increase in award cost for convenience issues relative to buying a ticket in cash, and also agree with his estimate of 20-25% being in line with the effort required to deal with that. Also support Lin’s point about miles foregone on an award needing to be added back in.
On the positive side, you could say that US’ stopover and region transit rules are a big reduction as it’s like 2 awards for 1 price, whereas their no change would be a negative factor. What I am actually saying is that rules and fees need a adjustment factor listing, as Ben also suggested, probably on a list/page along with the Premium for Premium. That list should also include a redemption partner quality factor. I have lower premiums in mind for the F/J cabins than you, but am fine with having the adjustment factor list to deal with that.
Beyond those points, I think there ought to be a better estimate for economy fares internationally. I think I could give pretty strong estimates of shoulder season fares from large US hubs to major cities in each award region. Not sure until I actually put it down, but I think the fares per mile vary substantially by region due to competitive factors, for example JFK-HKG is often the same as JFK-LHR or CDG. I guess you could be making an assumption that cash fare per mile regional variation is not reflective of value received, similar to the Premium for Premium issue, and I guess I am ok with basing value on distance traveled if ao.
Jig, thanks. I’ll think about those suggestions. I need to balance thoroughness with practicality. That is, I need to keep the spreadsheet relatively simple if I’m going to have a chance of completing it for the major programs and maintaining it going forward.
Hmm, I see your point with getting this done for the programs in a reasonable timeframe. Think I saw elsewhere you’re a fellow Tar Heel? If so, I’d be willing to take a crack at expanding the adjustment factors for the programs once you have the first draft if you’re interested…
Thanks! Yes, I graduated from UNC. Full disclosure, though: As an Ann Arbor resident for the past 18 years, I’ve also been known to cheer for the Wolverines 🙂
You’re awesome FM but I tend to agree with BikeGuy on this one. The true value of the points is the price tag you would personally put on that same good/service.
Here’s how I’d calculate an example RT LAX-NRT SQ first class ticket for a random week in Sept:
~$14k = actual cost
~$9k = what I would actually pay (if I had the money)
~($1k) = subtract for date/time restrictions & hassle using miles
~($400) = YQ and misc fees
~$7600 = my personal pricetag and the price I use for my CPP valuations
This ticket would cost 289,000 Amex MR transferred to KrisFlyer so my personal redemption value for this ticket is ~2.62 cpp.
I think this method gives me a decently realistic valuation for my points. Note that this doesn’t mean I’d actually ever buy a first class ticket on SQ (I’m not rich!) but if I suddenly became super loose with my money, $9k is how much I’d pay for this one.
Thanks Brian. I think that your estimate of what you would actually pay if you had the money is roughly the same idea as what I’ve proposed because you have included in that estimate your subjective view of what the flight is worth (we just generated the numbers in very different ways). That’s different than someone saying something like “I would never pay more than $2K for a first class flight”. In the latter case, $2K is not that person’s redemption value, but it is maybe an estimate of how much they saved by using miles instead of paying up to $2K for a flight.
@Frequent Miler: I think a 20-25% bump in carriers that don’t offer amazing Saver availability (read: most except WN, B6, VX, etc.) would suffice as either a ‘convience factor’ or going after standard awards. For #2 convenience, I think this applies as well, namely how even at DTW, you won’t find saver award availability on every flight, especially if you are a family of 4.
For #3, arbitrage, it might be good to include a ‘beneficial’ or ‘strong points’ column. For example, BA allows close-in bookings without a fee and low redemption values on short-haul flights. UA doesn’t (or almost doesn’t) charge fuel surcharges on their or their partner’s Euro flights, and WN offers great availability.
@Paul: If airline/travel miles didn’t exist, would you pay $10k to fly to Europe in F when economy is $1000 or Premium Economy is $1500? If yes, then you are valuing the tickets at $10,000. If no, then they are not worth $10,000 to you and therefore you do not get to claim that you got this obscenely large redemption value. I like JTI’s model of ‘at what point would you take the cash over the tickets’.
Convenience factor: I’m on the fence about this, but I probably will include something like your suggestion.
beneficial/strong points column: Yep, I think that would be good
I’m sick of reading about the value of F tickets and why some have this odd notion that what they would like to pay vs what the actual cost is somehow relevant. F tickets are worth what they are sold at. Yes, obscenely high in most instances (hence the premium in premium seating). But being obscene doesn’t change anything (or your ability to buy them cheaper) and in no way justifies adjusting prices to what one arbitrarily thinks they should sell at.
If we go down that slippery slope then why not adjust the value of economy to a negative value? I simply refuse to fly longer than a couple of hours in economy – I’ll stay at home rather than subject myself to that. And in that case the relative value of F/J is infinite.
For your exercise to have any usefulness, you need to use actual prices. And then one can “adjust”. But to arbitrarily “adjust” while running the calculations is a sure way to produce skewed results.
I couldn’t agree more, Paul. You are 100% correct.
Most people just don’t realize that ticket prices are completely unhinged from “cost” (which is why airlines struggle). Airlines will charge what they think they can get and adjust up or down constantly. It’s no different than the stock market. If I think IBM is worth $25/share it doesn’t mean a thing when the market thinks it’s worth $50/share. I can put a limit order out there for $25 all day long and nothing is going to happen. To claim I’d “only pay 2.5x for first class” is like saying I’d only pay $25 for IBM.
Airlines are REVENUE managed. They will charge what people will pay whether it’s in Y, C, or F.
Its clear to me that we won’t get consensus on this topic. I’m trying to measure subjective value and I made the debatable assumption that economy prices were close enough to the subjective value. What you propose, I think, is to base this on market value which is also a reasonable way to go. I think you can achieve that with this model by estimating, on average, how much more does business class cost over economy. And, same with First. Then, plug in those numbers.
Love your model. It enlightens how much one willing to pay for international biz is not its cash value airline charges.
My question is how are you accounting for miles payback in the cash fare. For example, if my coach ticket cost $340 from SFO to JFK. It’s really $240 if I get 10,000 miles on that trip (with UA plat), valuing UA miles at 1:1 without counting the benefit of using the mile to benefit for elite.
In that scenario, it’ll become even harder to justify miles for domestic redemption. However, may even change the international redemption figure…
I purposely didn’t account for miles earned on cash fares. As I wrote about in the previous post on this topic, there are counter-weighting costs and benefits to choosing awards over paid flights (e.g. miles not earned vs more lenient routing rules). I decided to simplify things by making the very debatable assumption that those pros and cons are roughly equal.
I think you’re taking the right approach in trying to create a reasonable redemption value, as the actual value to each individual is so subjective.
I also agree that the individual value obtained is NOT what that person would have paid for the ticket otherwise. The flaw in that thought is that you are pulling money from your fixed budget to pay for a luxury item. In doing so spending $4k for a ticket to Asia in business class may break you, so obviously any responsible person would not pay that…but that doesn’t mean it isn’t worth that amount to you.
The better way to assess individual value is to assume someone showed up at your door and offered you a business/first class ticket to the place you are going or an amount of cash. The value of that ticket to you is the point at which you would take the cash over the ticket. This is a much better way to think about it as you are not having to spend money out of your fixed budget/earnings to create a value – which is how it should be as miles don’t cost you anything (opportunity cost of cash back spending excluded).
That’s not exactly a concrete way to come up with an individual value, but it is more accurate than trying to come up with the value you would have paid otherwise.
Thanks. I do think your suggestion of asking people to take money or a ticket gets closer to redemption value, but its not how I think about it. In that scenario, the person’s decision to take cash or ticket will be heavily dependent on factors such as: how badly do they need cash at the moment? How much do they want to take a flight like that? Do they have time available to take a flight like that? etc. In other words, even if they take, say $2K cash, the value of the flight may still be greater than that.