Frequent Flyer Miles as Currency, the Coming Devaluation, and What You Should Do About It

Even if mileage values held constant, I’d rather spend miles now instead of money to get my tickets… and invest the money I saved for retirement (or something else). Money earns a rate of return when properly invested.  Airlines have never paid a return on miles held in an account.

But mileage values won’t hold constant. All we need to see that is a basic monetarist formulation, the very mv=pq that college freshman learn, without any other fancy tools.

If the quantity of airline award seats remains the same (because airlines aren’t growing capacity) or quantity is even going down (because airlines are selling the seats) while new miles are printed faster than they’re redeemed, prices rise.

Airline bankruptcies have sped up the rate at which awards are being redeemed. When loyalty program members are uncertain about the future of their points you get a run on awards — United and USAirways both experienced this when their frequent flyer members believed they needed to cash in their points while the airline was still around. Both lasted in the end, in USAirways’ case in spite of near-universal pundit predictions. But many frequent flyer program members didn’t wait — they wanted to travel for fear of winding up with nothing.

On the whole, though, 8% of airline seats go to award redemption (over time and across programs), and this has remained fairly stable.  But while the quantity of award seats being redeemed stays fairly constant, the quantity of miles outstanding rises.

Unfortunately, additional award seats aren’t made available and consumers simply experience more miles chasing a fixed pie of seats.

That’s why prices of awards do and will rise.

But airlines, especially in financial jeopardy, are loathe to alienate their best customers (the ones most likely to be earning mileage) through price increases, so we see some selective increases and also award seat shortages. Instead of achieving a new equilibrium by raising prices, airlines frustrate customers in a different way, turning them away when they look for awards.

(By the way, the Capital One ‘mileage cards’ are about the worst credit card decision you could make outside of earning no reward at all, that will be the subject of another post in the next few days).

Here’s where I part company with the rest of the pundits: this inflationary future does not mean you should walk away from mileage programs. It just means that you should earn and burn miles in the same period to the extent you possibly can. Don’t save for retirement, spend your miles just as quickly as you earn them before prices rise.

As for me I do have a seven figure mileage balance but I also spent 675,000 miles on a single three week vacation this summer.

This advice won’t change until Alan Greenspan decides that for a retirement job he’ll become the head of Mileage Plus (and Paul Volcker takes over AAdvantage).


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