Thinking about price compression

Travel hacking means never paying full price, whether it's for flights, hotels, rental cars, or any of the other travel expenses we develop techniques to minimize, evade or completely avoid. One interesting consequence of this is what I would like to call "price compression." There are two ways this phenomenon manifests:

  • More expensive itineraries don't cost more miles or points. The classic example here would be an economy itinerary that costs $150 and a first class itinerary that costs $350: both would cost 20,000 US Bank Flexpoints, so the passenger wouldn't incur any additional cost by taking the more expensive, higher-earning flight. Another fairly common situation is with American Airlines award availability: there will be only expensive AAnytime availability for economy seats, but SAAver availability for first class seats. The difference in miles, and the cost of manufacturing those miles, is often trivial.
  • The price ratio between expensive and cheap itineraries is the same, but scaled drastically downwards. For example, someone redeeming Chase Ultimate Rewards points earned with an Ink Cash, Bold, or Plus card at gas stations might pay roughly 1 cent for 2.5 cents in airfare. A $500 flight still costs twice as many Ultimate Rewards points as a $250 flight, but the numbers are scaled down, to $200 versus $100 in total out-of-pocket expenses. An even more extreme example would be Citi ThankYou points earned (starting April 19, 2015) with a ThankYou Premier card at 3 points per dollar spent at gas stations, then redeemed for 1.6 cents each on American Airlines or US Airways flights (with a ThankYou Premier card).

Think about out-of-pocket costs earlier, not later

Once you've earned miles or points, a common impulse among travel hackers is to assign value to them corresponding to their redemption value, rather than their acquisition cost. This was the theory motivating Frequent Miler's Reasonable Redemption Values, for example: the value of a mile or point is the value of the award that currency is typically redeemed for.

Only later, after booking an award redemption, do you hear people say "I paid $87.50 for a $5,000 BusinessElite ticket to Europe" (using Delta SkyMiles as an example).

What I would like to suggest is that price compression makes it worth considering your total out-of-pocket expenses earlier, rather than later, in the redemption process. It still makes sense to base your earning decisions on the imputed redemption values of your miles and points, but when it comes time to redeem them, it makes sense to look at your out-of-pocket expenses as well.

Price compression at work: paid tickets on American and Delta

Perhaps it's unsurprising why I've been giving this topic some thought lately: the recent massacre of Alaska Airlines Mileage Plan earning on Delta-operated flights.

On the one hand, the new Mileage Plan earning rates have made me more willing to book flights on American Airlines, since even slightly more expensive flights earn two to four times more Mileage Plan miles. On the other hand, it has made me more diligent about checking first class fares on the Delta flights I would, all else being equal, prefer to take.

An upcoming trip to Boston illustrates this point nicely (my earning as an Alaska Airlines MVP Gold 75k is in parentheses):

  • A Delta flight in the "V" economy fare bucket costs $386, and will earn 1,222 (2749) Mileage Plan miles;
  • An American flight in economy costs $540, and will earn 2,734 (6151) Mileage Plan miles;
  • The cheapest Delta first class flight costs $697, and will earn 3,055 (6873) Mileage Plan miles.

That's a fairly significant range of prices. But what about the "compressed" prices of those flights — the out-of-pocket cost of the spend manufactured in order to purchase those fares?

If you're manufacturing Ultimate Rewards points with a Chase Ink Plus at 0.49 cents each, and redeeming them at 1.25 cents each, the three flights cost:

  • Delta "V" economy: $151
  • American economy: $211
  • Delta first: $273

Here you can see the ratio between prices is the same, but the prices are compressed so there's a much smaller difference in the passenger's actual out-of-pocket expenses for the three flights.

Likewise, the three prices fall into three different US Bank Flexperks Travel redemption bands. If you're manufacturing Flexpoints at gas stations for 0.49 cents each (or grocery stores for 0.69 cents each), the three flights will cost:

  • Delta "V" economy: $98 ($138)
  • American economy: $147 ($207)
  • Delta first: $196 (276)

Knowing your out-of-pocket costs promotes clear thinking

I'm not arguing that it's worth paying $98 for 4,124 Mileage Plan miles. At 2.4 cents each, that's fairly expensive from the perspective of manufactured spend. But of course you're not just earning redeemable miles; you're also earning elite-qualifying miles, helping you qualify or re-qualify for elite status.

If the status in question is Alaska Airlines MVP Gold 75k, then you'll receive an additional 50,000 bonus Mileage Plan miles when you qualify. That doesn't mean booking the most expensive flights available is always a good idea, but those bonus miles do mitigate some increased out-of-pocket expenses, once those out-of-pocket costs have been transformed by the miracle of manufactured spend.

You'd also be flying in first class. Whatever you think about free booze, checked bags, early boarding, and so on, they're not worth nothing.

Are you redeeming your miles and points fast enough?

I relentlessly advocate earning miles and points with specific redemptions in mind. But I understand perfectly well that that's not always easy to do. Your upcoming travel schedule may not be knowable in advance. Award space you were counting on may not materialize, leaving you with an unexpectedly large balance. And of course you may simply have access to more manufactured spend than you can reasonably plan redemptions around.

That being the case, taking a look at your out-of-pocket expenses may help you realize you can afford to travel more and travel better than you thought. Instead of comparing each redemption against some ideal redemption you read about online, try comparing redemptions against the price you paid for those miles and points. When it's a matter of a hundred dollars to fly across the country or world in a premium cabin, your economy cabin may be a false economy after all.