Reasonable Redemption Values. A work in progress

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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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