Attaching a value to your airline miles and points

How do you value your frequent-flier miles and hotel points and maximize their value?

Hotel points and miles you have both from actual flying and from credit card spending have significant value. However, the value may not be as clear as money in a bank account. There has been a rush in the past few years to market airline and hotel-branded credit cards that reward card holders with points and miles based on every dollar of spending. While this may seem good for consumers, remember that the airlines are carrying the miles as a liability in their balance sheets. It is in their best interest to encourage customers to use up their miles.

Unfortunately, the airlines usually take the easiest route, so to speak, in devaluing these points as they are really a liability in their books, in accounting terms. For example, a miles-based flight from San Francisco to New York one-way may involve 20,000 miles. When the airline raises the minimum to 25,000 miles for the same itinerary, in one stroke, it has devalued your points by 20 percent!

Maximize your miles

The key to maximizing your miles is to understand the concept of cents per mile. I cannot emphasize this enough: cents per mile. Books and blogs have been written on this topic.

Following is a simple explanation of the basics using airline frequent-flier points as an example.

Frequent-flier points are a great way to reward loyalty to a single airline. Such programs have been around for a while, and airlines try very hard to woo and keep their elite and business travelers, as they make a lot of profit off of them. However, with so many credit cards offering miles for purchases, the rewards are rapidly getting diluted, even for the business travelers who spend more money and time in the air.

Massively accumulating miles is also a liability on the airlines’ balance sheets. Airlines have many tricks up their sleeves, including increasing the number of miles needed for a trip every so often.

Regardless, as a consumer, you should always calculate the cents per mile for each trip. Here are two examples for a San Francisco to Paris round-trip:

• San Francisco to Paris in economy class: Let’s say that you found a cheap ticket for a $600 round-trip on your favorite travel website. You check the airline’s website and see that you will need to spend 60,000 miles for the same itinerary. Here is how you calculate the cents per mile for this itinerary: $600 (price) / 60,000 (miles required) = $0.01 = 1 cent per mile. Voila!

• San Francisco to Paris in business class: Let’s assume that you have a lot of miles and want to live life a bit and fly business class. You check your favorite website and see that the SFO to Paris itinerary on the same days costs $6,000 (ouch!) in business class. Your airline website tells you that it will cost you 120,000 miles total for the SFO to Paris round-trip in business class. Here is the cents-per-mile calculation for business class: 6,000 (price) / 120,000 (miles required) = $0.05 = 5 cents per mile. Make that a double voila!

In the above examples, the miles go a much a longer way if you fly business class. However, if you don’t have a ton of miles stashed away, then economy class is the only option. It will depend on your situation. A general rule of thumb is to always try and get at least one cent per mile when you use miles. Otherwise, it may be better buying a ticket and adding more to your frequent-flier balance.

ARVIND VEN is Founder/CEO of the Capital V Group. He has an MBA from MIT Sloan. Arvind Ven is a Registered Representative with and Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC. Financial planning offered through Capital V Group, a registered investment advisor and a separate entity from LPL Financial.

 Note: This write-up is for educational purposes only and should not be considered financial or tax advice. For questions, please reach out to Arvind Ven: 408.725.7122 or arvind.ven@lpl.com.