Frequent Flyer Program Points / Miles Inflation

Airline Award Price Inflation

Inflation is a great way for governments to take wealth and reduce their debt. It happens continuously, but no one really notices, so it's a low risk political move.  By creating more currency, the government receives the full value of the new money while everyone's existing money is worth slightly less.  It's something everyone endures, but no one enjoys. 

South American Style Currency

Recent Inflation Victim

Airlines also manage a currency and create inflation. Airlines created their own currency with points programs and have been adding more currency than is being redeemed.  This creates an over supply of currency against a static (more or less) supply of awards.  The unbalanced supply and demand creates an opportunity for point inflation. Airlines manage their currency like Venezuela or Argentina.  There is constant inflation by creating more currency with fixed award opportunities.  They also engage in large and sudden devaluations periodically.  Venezuela has inflation every day, but they will also suddenly change exchange rates.  Both destroy currency value, but the gradual devaluation stings less.  Airlines do the same when they change their award charts (British Airways most recently).  Awards that cost 80,000 miles yesterday can cost 100,000 points today when the award chart changes over.  These massive changes are usually, but not always, announced several months in advance.

More Miles Pursuing Same Seats

Hyper Inflation Airlines

Airlines create new currency, point or miles, at no cost to them.  They sell this currency to partners, like credit cards or hotels and receive real money for their proprietary money.  United Airlines sold $2.9 billion of frequent flyer miles in 2013 and has about $4.9 billion of frequent flyer miles outstanding.  They expect 20% these miles to expire, so the mileage expiration policy creates $1 billion in profit.  They did not disclose how they value a frequent flyer mile.   

“Five million and 4.7 million MileagePlus flight awards were used on United in 2013 and 2012, respectively. These awards represented 7.7% and 7.1% of United’s total revenue passenger miles in 2013 and 2012, respectively. Total miles redeemed for flights on United in 2013, including class-of-service upgrades, represented approximately 80% of the total miles redeemed.” (UAL annual report)  20% of mileage redeemed was used for partner flights, merchandise awards, and other ground based awards. That’s a massive amount of miles chasing relatively few awards and creates a great inflation opportunity.

Costs More and More To Sit Up Front

44% Inflation over 9 Years

When I started collecting United miles in earnest, a round trip to Europe in business class was 80,000 miles.  Then it became 100,000.  Now it's 115,000 on United or 140,000 on a partner.  1,000,000 United miles was worth 12.5 round trips, but is now worth 7 trips.  This is a massive currency devaluation of 44% over 9 years.  Frequent flyers should be marching and banging pots in front of United's corporate office, but I doubt many realize their miles are worth so much less.  Most customers measure their balance by the number of miles in it.  This is a poor indicator of value though.  Viewing it as the number of awards you want (business class tickets to Europe in my example) is a better indicator of value. 

Program Changes Can Reduce Award Balance Value

Reducing Inflation Risk

Collecting miles and points creates an inflation risk.  The more you collect, the larger the risk.  Inflation can't be eliminated, but the risk can be managed.  Here are a few tactics to help support an inflation hedge strategy:

• Collect Points in Multiple Programs – All programs have inflation, but at different rates and different times.  Diversification reduces your exposure to a single program's risk.  It also creates more reward opportunities.
• Spend Points Regularly - A smaller point balance lowers the potential loss of value to inflation.  Also, why bother collecting miles if they are never used?
• Be Aware of Pending Award Price Changes - Don't be taken by surprise, read emails from your programs.  If a change is coming, book at the lower prices if able.  I booked a round trip to Europe before British Airways changed their award chart this year.
• Change Programs if Required - Most airlines have partners and one partner may have a more rewarding and stable award structure.  Alaska miles seem more stable than Delta miles and you can earn either on a Delta flight.
• Set Award Based Goals - Don't set a balance number as a goal.  1,000,000 United miles has a nice ring to it, but it isn't an end in itself.  4 round trips to Europe in business class is a better goal because it has a fixed value while the miles could change value.  Redeem when you reach your goals.
• Create A Single View of Your Assets – Take a look at your award balances on one screen.  Copy and paste into Excel or Gmail if needed.  Looking at your assets on the same page will help you understand where your risks are.  It also may help you be more creative with your awards. 80,000 Delta miles and 62,500 American miles is a round trip to Australia in business class.

In Memory of Midwest Airlines (Midwest Express)

Frontier Airlines announced that they will stop serving fresh baked cookies on board their flights.  The cookie was the last remnant of Midwest Express.  Republic Airways purchased Midwest and Frontier out of bankruptcy and merged them together under the Frontier brand.  Midwest was known for having “The Best Care in the Air” and that included fresh baked cookies on all flights.  The cookie doesn’t fit with Frontier’s drive to be an ultra-low cost carrier, so it is no more.

Midwest Express Plane Landing

Midwest Airlines started as an extension of Kimberly-Clark’s aviation division.  Flights had 2x2 leather seating (when 3x2 was standard on similar jets) and every flight had a meal service.  It was an all first class airline with economy class fares.  Their hub was Milwaukee and they served all of Wisconsin, most of the Midwest and a few locations on each coast.  Midwest was also active in Milwaukee and advertised heavily, including upgrading fans to their airline seats at Brewers games to show off just how nice it was.  Midwest’s fresh baked cookies were even sold at the games.

Frontier Airlines E190 Plane, Cookie Free Since 2012 

Things took a downturn when high fuel prices and increased Milwaukee competition hit.  Midwest dumped the meals, but kept the cookies, added more seats, and started their race to the bottom.  They stuck it out for a while, but finally went bankrupt.  Republic purchased them in an attempt to make their own national branded airline with Frontier.  All the Midwest branding was removed.  The only thing left was the cookie and now that is gone too.  Midwest focused on service and the customer experience, but those aren’t things many people are willing to pay extra for.  It’s a shame and Midwest will missed.  The airline club at Mitchel Field in Milwaukee is called the Best Care Club, the last bit of Midwest Airlines branding (closing May 31st).

First Time On Frontier

I’m a Star Alliance flyer for about 99% of my trips.  It can get you almost anywhere in the world quickly and easily, but not DEN to LAX on a Wednesday after 9pm.  The only option was Frontier, so I joined a new frequent flyer program, booked my ticket, and broke my flying routine. 

I’ve been interested in Frontier since they (Republic Airways really) took over Midwest Express a few years ago.  Republic is a successful operator of regional jets for mainline carriers.  It’s a nice business model as the large airline pays for fuel and has to sell tickets.  Express carriers just need to show up with a plane and crew to collect a flat fee per flight.  A few years ago, Republic’s management decided to run branded service and purchased Frontier out of bankruptcy.  Soon after, they bought Midwest Airlines in bankruptcy too.  This isn’t proving to be the best business decision as Frontier loses as much money as their core business line makes.  Frontier has a large operation in Denver and is serious competition to United and Southwest at DEN; helping keep fares down.  They also have different animal pictures on their aircraft, so it makes for fun plane watching too.  I had never traveled with them before and didn’t know anything about flying with them.

My travel experience with Frontier was pleasant all around.  There were no lines at check in and no window seats on my flight.  Frontier sells their equivalent of Economy Plus called stretch seating; it provides a few more inches of leg room and seat up front, but I declined the upsell.  If you don’t buy a stretch seat, select row 20 or higher, those are the first rows called in general boarding.  The boarding process could have been done better because there was no general explanation of the process before it started, so everyone gathered around thinking they could be next.  The gate agent made one announcement per group and had to turn many people away because they didn’t hear the single announcement.  Frequent use of the PA would be a simple solution to a frustrating situation.

Decent legroom on Frontier's A320

The aircraft was a new A320 and spotless inside.  It had LED lighting and the new slim style seats.  I sat in seat 20B, a middle seat, but with enough space for the two hour flight.  There are seat back TVs available for a fee, unlike JetBlue’s free DirecTV offering.  The flight attendants came through with a drink offering and baked onboard chocolate chip cookies, the lasting legacy of Midwest Express.  The flight arrived on time and I enjoyed my first Frontier flight.  I don’t think I will become a regular, the EarlyReturns program is very weak, but will defiantly consider them for future travel.  

Why You Should (Almost) Never Use Points.com

Points.com is one of the worst values for frequent flyer redemptions.  The premise is that you can trade points from one program into another.  Great, except the redemption ratio isn’t 1:1 but more like 13:2.  Check out the chart below showing what I can get for my 1300 Frontier EarlyReturns miles, terrible.  There is also a trading feature so members can trade with other members.  The ratios are around 1:1, but there are fees with the transaction that make it cheaper to just buy miles from the airline. 

Points.com Exchange Example

There are three possible uses for Points.com.

• Resetting expiration dates.  You can transfer as little as 1 mile into a program.  This 1 mile will reset your 18 month expiration clock so you don’t have to worry about any large expense to generate activity if you are at risk of expiration.  It just costs 3 or 4 miles from another program and posts within a day or two.  Some programs require a minimum balance of 1,000 before you can do a transfer out.
• It lets you keep track of a lot of balances in one place.  It’s nice to see a single view of what you have, especially if you are just starting to plan an award trip.  Not all programs participate, but it will give you enough data to get started.
• Cheap hit for the US Airways Dividend Miles Grand Slam promotion.  Transferring in a mile costs 3 or 4 miles and gets you an almost free hit in the annual Grand Slam Promotion. 

Unless you are working in very small numbers, Points.com should be avoided.