Locking in a flight, stress free

The website FiveThirtyEight (of Nate Silver fame) recently published “When to Hold Out For a Lower Airfare.”  In that post, author Kaiser Fung reviewed Kayak’s Price Trend feature which gives recommendations of whether to Wait or Buy Now when shopping for flights.  Fung tested 32 routes to see whether following Kayak’s advice resulted in savings.  The results were mixed, but Fung still recommended the service.  He wrote:

In the end, even though my analysis shows that you might not save any money following Kayak’s algorithm as opposed to buying tickets two weeks ahead of your scheduled departure, it still might be worth your time and energy to use airfare prediction software. Why? Because following the algorithm isn’t going to cost you more money, and it might actually relieve some of the second-guessing that occurs when you’re left to your own devices. Etzioni said he found in user surveys that in addition to appealing to quantitative types, another group of regular users said Farecast gave them “peace of mind.”

The key takeaway, for me, is the observation that purchasing airfare can be stressful due to “second-guessing” your decision to buy now or later.  The argument is that Kayak’s service can relieve some of that stress basically by deciding for you.  That’s nice, but in my mind, the stress involved in buying nonrefundable airfare goes well beyond concerns about price fluctuations.  My biggest concern tends to be worry that my plans will change and I’ll have to pay a hefty change fee.  Or, something will come up and I’ll want to change my plans, but I won’t because I’ll feel locked in to the ticket I’ve already purchased.  Of course, most airlines offer refundable fares for much steeper prices than non-refundable fares for the same flights.  Paying extra for refundable fares would eliminate some sources of stress, but introduce larger concerns (such as quickly depleting bank accounts). 

Southwest, Miles, and Status to the rescue

Southwest Airlines has no change fees.  There’s very little risk in buying a ticket since you can make changes to it anytime before departure.  The only small risk is with cancelling tickets.  Southwest will refund your money in the form of airline credit that must be used within 12 months.  The risk then is that you may not ending up using that credit unless you fly Southwest often.  A better solution is to use points to book a Southwest flight.  Flights paid for with points are fully refundable.  And, if you use points for a “Wanna Get Away” fare, you’ll get decent value from your points (see “The new true value of Southwest points”). 

Another option for almost fully refundable fares is to use British Airways Avios to book awards on BA partners that do not have fuel surcharges.  For example, you can use British Airways Avios to book a non-stop one way flight on American Airlines / US Airways.  If the flight is 650 miles or less, you’ll pay only 4500 points plus a $2.50 security fee.  If you later cancel that flight, you’ll get all of your points back, but not the $2.50 fee.  In my mind, $2.50 per segment is a small enough fee to feel comfortable booking flights like these even when plans remain up in the air.

Most other airlines do charge change and cancellation fees for both paid and award flights.  With mid to high level elite status, though, these fees may be waived.  Hack My Trip has a terrific document (found here) that shows the benefits of each tier of elite status with each of the major US airlines.  None of the airlines listed offer free changes at their entry-level elite tier (typically requiring 25,000 flown miles per year), but at the next level (requiring 40K or 50K flown miles) Alaska Airlines gives their MVP Gold elites free changes and cancellations for both revenue and award tickets.  The rest of the players (American, United, US Airways, and Delta) require near top-tier status (75K to 100K flown miles) to get free award changes and cancellations.

Valuing Free

In my recent post, “The new true value of Southwest points,” reader PSL commented:

Booking a flight with points certainly gives you more flexibility if the price is reduced – you get points refunded on the difference instead of cash which must be spent within a year after the flight was initially booked. That’s the real beauty of Southwest points.

I couldn’t agree more.  There’s a real added value to freely refundable / changeable flights.  PSL pointed out the value given by the possibility of price drops.  Even better, to me, is simply the reduced stress that goes with it.  And, best of all, is the ability to book flights prospectively.  For example, I currently have high level (Platinum) elite status with Delta.  Since I can change or cancel award flights for free up to 72 hours before departure, I frequently book awards when I find them just in case I end up wanting them.  Or, I’ll book a partial award (e.g. one leg of a longer itinerary) when it is available at the saver level in the hopes that the other legs of the trip will open up later at the saver level too.  A similar trick is if you want to book an award for two but can only find award seats for one.  If the award is fully refundable, then go ahead and book the award for one person, and keep checking back afterwards to see if a second award seat opens up on the same flights.  For more on this latter technique, see “Booking Delta awards when you love your spouse”.

Wrap Up

While I highly value the ability to have free changes and cancellations, I can’t think of any way to estimate this value in terms of dollars and cents.  All else being equal, I’d far prefer an award with free changes over one that would charge for changes, but I can’t think of any way to put numbers to this.  For me, given my current elite status, that means I prefer Delta and Southwest awards.  And, this feels like a big deal.  But, how big?  Is it worth flying exclusively on Southwest for this?  Or, is it worth seeking high level elite status with the traditional carriers for this benefit?  I have no doubt that the answers to these questions will vary tremendously from one person to the next.  Some will see little value in this, others will see a lot.  Where do you fall on this spectrum?  

About Greg The Frequent Miler

Greg is the owner, founder, and primary author of the Frequent Miler. He earns millions of points and miles each year, mostly without flying, and dedicates this blog to teaching others how to do the same.

More articles by Greg The Frequent Miler »

Comments

  1. Speaking of BA Avios, a friend of mine booked and canceled a BA award ticket for 4 online (LAX-HNL)and was charged $160 fee for the cancelation. The fee was called channel fee ($40 per per ticket). Not sure if this is new.

    • BA instituted some new/increased fees at the end of March/beginning of April. Would be great to get confirmation that indeed there is now an award cancellation/re deposit fee beyond forfeiting the value of taxes/fees paid.

    • Do you know how they went about canceling the award? When I’ve cancelled online in the past, I’ve simply lost the security fees. I wonder, though, if you have to call to cancel if the agent will charge the official cancellation rate instead.

  2. The best answer here does depend heavily on your flying habits, which is always true when it comes to valuing miles or status, but when you’re determining how to analyze the situation when no change fees trades off with something else, I think there’s a potential problem that doesn’t crop up in the same way if you’re trying to figure out the value of Marriott points or whatever. I think it’s likely that most people tend to overvalue not having to pay change fees, due to a well-known psychological bias that’s been heavily researched in behavioral economics and behavioral finance. Generally, people are more loss-averse than they should be if they were purely rational and trying to choose the course of action that would give them the best expected outcome. It’s rational to be risk-averse in many circumstances, but in particular it’s losses, or the possibility of losses, that we react to irrationally. For example, people who actively trade stocks tend to sell their winners too early and hold on to their losers too long. Similarly, the value someone places on an item is higher if they own it (known as the endowment effect). I might be unwilling to purchase something from you for $10, implying I value it at less than $10, but then if I got it for free, I might also be unwilling to sell it to you for $10, even though that would imply I value it at more than $10, which is contradictory. But in the second situation I have to give something up that I already own, so the bias kicks in. This is also why people buy the extended warranty, or any number of other things where they pay far more than the expected value to reduce or eliminate the possibility of a loss, even a loss that would be small in the greater scheme of things which they would be much better off just absorbing if necessary. I was at my CU waiting in line to deposit MO the other day and overheard a conversation with someone who was taking out a car loan. The borrower was offered, and did not require much convincing to accept, a scheme whereby if the car is totaled and the value of the car that the insurance company pays out is less than the remaining balance on the loan, any remaining balance is forgiven. I didn’t hear what they charge for that but I’m sure it’s just as inflated as the extended warranty price at Best Buy because all they have to do is get the borrower to picture losing the car, but still owing money on the loan. I’d also guess that borrowers in that situation would be more likely to default, as it’s not like the CU can repo the car anymore, so the CU reduces the loan risk and gets more money for it at the same time.

    I look at avoiding change fees in a situation where it trades off with something else very much like buying insurance against the risk I will want to change my flight. There are differences, obviously, between this and a commercial insurance product, but the cost-benefit analysis works the same way. My auto insurance policy is liability only and doesn’t cover anything that happens to my car. That could mean I’d have to replace it out of pocket tomorrow. But I’ve saved substantially more than the value of the car in the years that I’ve owned it by not paying for anything but liability. And I know that the worst loss I could experience by doing this is the value of my car, which is an amount I could deal with losing if I had to. (Plus, this way I can rent cars with credit cards that provide secondary insurance and it’s the same as if I had primary insurance from the CC, because my personal auto insurance will only cover liability when I’m driving a rental car, just like if I’m driving my own car, and CC insurance doesn’t cover liability anyway, only the rental car.) Just because I self-insure my car doesn’t mean I would do the same for a house, though, as the potential loss is orders of magnitude greater, and likewise, I carry substantially more liability coverage on my auto policy than I’m required to by state law. The expected value of the liability coverage and the homeowner’s insurance is also negative, unless the insurance company is doing a really bad job of estimating the risk, or there’s something that makes you unusually high risk that they don’t know about, but because the potential loss is too large to absorb, it’s worth it to accept a negative EV because it’s rational to be risk averse when large amounts of money are involved, but if it’s a small risk, you should be risk neutral and maximize expected value. If you offered me the chance to pay 49 cents to play a game where I have a 50% chance of winning $1 and a 50% chance of getting nothing, I’ll play that game over and over until you’re broke, just like a casino will let you play as many rounds of roulette as you want. But I wouldn’t play if I had to bet my entire life savings on the first round, even though my expected value is still positive, because I’d be risk averse if we’re talking about all my money (and casinos have maximum bet sizes for the same reason). It’d cost me a lot more than a change fee or two to replace my car, and anyone who couldn’t absorb a change fee if they had to probably can’t afford to travel anyway. So for something the size of a change fee, it’s rational to be risk neutral, or pretty close to it.

    In the case of insurance against change fees, the potential loss is much smaller, although also a lot more likely to occur. Unlike getting collision/comprehensive coverage for a car, the expected value might be positive, making it a good idea even if you’re risk neutral, as both the cost and the benefit depend heavily on your individual circumstances, but the problem is that even if the expected value is negative, you may convince yourself it’s positive and end up doing it anyway, because of the psychological bias at work that doesn’t come into play in the same way when considering most questions about how best to earn and redeem miles. It hurts to fork over $150 or $200 to change a ticket, and it’s really nice to have the peace of mind of knowing that you can change your ticket without paying a fee if you want to change your plans. And it’s easier to succumb to that bias when it’s change fees than when it’s car insurance or getting the extended warranty, because you don’t have the certainty that the expected value has to be negative or the insurance company would go bankrupt, so even if you’re a savvy consumer who would never buy the extended warranty it’s easy to convince yourself that you’re getting more benefit out of avoiding change fees than you really are, because you know you’re gaming the airlines’ system in general. Of course, for some people avoiding change fees is really valuable. If it’s a good deal for you, great, just think twice about why you’ve decided that’s the case and about what you’re giving up for no change fees. Maybe keep track of how often you either change a flight or decide not to because the change fee isn’t worth it, and in the latter case, try to estimate how much you would have been willing to pay. Even if you’re not going to keep the exact same travel patterns over time, having some concrete numbers can give you at least some guidance. The less concrete information you have, and the more you rely on your gut, the more prone you are to being misled by this type of cognitive bias. Of course, you might decide that it’s worth giving up a little bit in terms of expected value for your peace of mind even if you know you’d be better off eating that fee if it came to it. Just know that’s what you’re doing if that’s the case, which is exactly the same as someone who plays roulette at a casino knowing the expected value is negative and views that negative expected value as a purchase of entertainment.

    • Great comment. Thank you. I think that extended warranties are a good analogy. Just as I wouldn’t pay extra for non-refundable flights, I would never pay extra for a warranty, but if I can get the warranty for free (such as when I pay for something with a credit card that offers extended warranties), I’m happy to have it.

  3. Re: BA award cancellations: this month my online cancellation was done for no-fee. But on another award I wanted to cancel 2 of the 3 travellers, which can be done only on the phone. That agent wanted to charge me $40 for each of the 2 travellers.

  4. You quoted another reader who wrote the following:

    Booking a flight with points certainly gives you more flexibility if the price is reduced – you get points refunded on the difference instead of cash which must be spent within a year after the flight was initially booked. That’s the real beauty of Southwest points.

    Are you and/or the reader saying that Southwest will automatically refund you the difference if their price is reduced? Or do I have to observe the reduction and then cancel my original flight and rebook it?

  5. My husband and I are planning to fly from SFO-LIH (SF to Kauai) in August for our belated honeymoon. I’ve been researching the best way to get us both there; we have more than enough UR and MR points to get both of us there.

    Right now, I’m leaning towards transferring UR’s to United to take advantage of their free-oneway, which we could use to go somewhere warm for the winter (Miami or Key West, etc).

    Although potentially, I could take advantage of the MR 30% transfer bonus to Virgin (which mitigates the lame 1:2 rate), since we’re flying from the West Coast.

    Any thoughts on what we should do? Is there anything I missed?

    Thanks in advance!

    • Are you planning to fly economy or first? If economy, you may be able to get good value from transferring UR or MR to BA if there is any saver awards space available on AA or Alaska. For first class, if I remember right, Singapore Airlines has good award rates for going to Hawaii. You can transfer MR to Singapore for that option. That said, its hard to beat the value of a free one way with United.

Leave a Reply

Your email address will not be published. Required fields are marked *