Shutdowns, devaluations, and resiliency

One travel hacking blogger who never disappoints is Vinh at Miles per Day (his Twitter account is a must-follow as well). Vinh attracts shutdowns like an office supply store promotion attracts Ink Plus cards. He's been shutdown by PayPal, eBay, Best Buy (huh?), Chase, and that's just in the last two months.

On the other hand, Vinh is incredibly resilient, judging by the fact that he seems to buy a new car every 6 months or so.

That got me thinking about different ways to approach shutdowns and devaluations. In other words, how to become as resilient as Vinh.

Shutdowns are another kind of devaluation

If, like me, you think the point of travel hacking is to pay as little as possible for the trips you want to take, then there's no conceptual difference between a shutdown and a devaluation.

When American Express Membership Rewards points changed their transfer ratio to British Airways Avios from 1000:1000 to 1000:800 in October, 2015, that was a 20% devaluation. If you have both a flexible Chase Ultimate Rewards account and a Membership Rewards account, losing the Ultimate Rewards account with its 1000:1000 transfer ratio is also a 20% devaluation, since you'll have to pay 25% more Membership Rewards points than you previously paid in Ultimate Rewards points.

You can adjust the numbers depending on how you value Ultimate Rewards points relative to Membership Rewards points, but the point is that an account closure makes trips more expensive, just like a change to an award chart or the elimination of a credit card bonus category does.

I don't think there's any one right answer to how to think about shutdowns and devaluations, but here are three different approaches, each of which suggests a different way to build a travel hacking practice.

Approach #1: Pretend you're safe

This is by far the most popular approach advocated on mainstream blogs and in fact practiced by many travel hackers. When someone tells you to buy American AAdvantage miles at their lowest price ever, they're not just telling you the price you can buy them at, they're also telling you to pretend they'll maintain their value until you redeem them, or at least to factor in only a small risk of a short-term devaluation.

Likewise when someone tells you to earn Ultimate Rewards points "because they're so valuable," they're also implicitly telling you "and ignore the risk of your Chase accounts being shutdown and you being forced to liquidate your points on 30 days' notice."

There's nothing inherently wrong with this approach, as long as you know that's what you're doing. Acting as if you're safe from devaluations and shutdowns would lend itself towards running up big balances in just a few programs where you get the most value. Someone pretending they're safe might use just two or three credit cards issued by a single bank.

A combination of a Chase Freedom Unlimited, Chase Ink Plus, and Chase Sapphire Reserve would give you easy access to bonused spend with the Ink Plus, unbonused spend with the Freedom Unlimited, and high-value redemptions with the Sapphire Reserve, all without setting foot outside of Chase's ecosystem.

After those cards are closed and your Ultimate Rewards points have been liquidated, you could switch to an American Express Business Platinum card combined with an Amex EveryDay Preferred and/or Preferred Rewards Gold card.

The point is that pretending you're safe creates a permission structure to focus as heavily as possible on the very most valuable rewards currencies. Ironically, this approach of ignoring the risks of shutdown and devaluations is best suited for someone who is convinced that travel hacking is dying as a hobby!

The reason is obvious: the more certain you are that travel hacking will no longer be possible in the near future, the less you have to lose by risking shutdown, and therefore the more value you can extract from the most valuable programs by ignoring the risk of shutdown and devaluation.

Approach #2: Equal-weight the value of your rewards

Another approach might be to admit that there is an unknown risk of shutdown and devaluation across all your rewards currencies. If the risk were known, you would be able to weight your earning rates by value and risk: if Delta SkyMiles were twice as valuable as United Mileage Plus miles today, but were certain to be worth half as much a year from today, you could earn and burn them in the precise ratio such that your remaining, post-devaluation balances have the same value in one year.

Since the risk of shutdown and devaluation is unknown, you can't make that precise calculation. Instead, you can assume that more valuable currencies are more likely to devalue than less valuable ones, and more lucrative credit cards are more likely to shutdown heavy hitters than less lucrative ones.

This approach lends itself to the counterintuitive practice of earning fewer of more valuable rewards and more of less valuable rewards. If one card earns 5% cash back and another earns 2% cash back, you could earn 2.5 times more rewards on the second, less-lucrative card. This would theoretically raise the risk of shutdown on the less-lucrative card (which would hurt less to lose) and lower the risk of shutdown on the more-lucrative card (which would hurt more to lose).

While it sounds slightly bizarre when I frame it this way, a version of this approach is actually practiced by those of my readers who leave comments on my posts about manufacturing spend with a Chase Ink Plus card. They'll frequently say, "I value my relationship with Chase too much to manufacture spend aggressively on my Ink cards." In other words, the more valuable they find a rewards program, the less risk of a shutdown they're willing to run.

Approach #3: Set earning and burning goals, and change course as necessary

If you asked a representative sample of travel hackers, I suspect a slight plurality would say this is their general approach to the game: combine a broad awareness of as many opportunities as possible with a realistic view of your own travel goals and time constraints, and do your best to earn and burn the "right" miles and points.

When framed this way, the approach has a lot to recommend it: by earning the miles and points you need for the trips you want to take, you can keep your balances low enough that you're unlikely to be devastated by a single shutdown or devaluation. There's no way to "protect" yourself from an overnight devaluation like the one inflicted on Emirates awards booked with Alaska Airlines Mileage Plan miles back in March, 2016, but under most circumstances if you restrict yourself to planning 6-12 months in advance, you're likely to be able to redeem your miles under roughly the same terms as you earned them.

While this is certainly the approach I take, it's also far more difficult to implement successfully than the previous two approaches. We call rewards currencies "loyalty programs" because they are designed to cloud precisely the judgment needed to make good decisions about them. While devaluations reduce the value of your rewards currencies for future redemptions, months or years in the future, they don't affect the value of rewards you've already redeemed — and you're more likely to judge a program based on your past success using it than prospectively based on its current and future earning and redemption structure.

The annual free night certificates offered by hotel credit cards are a great example of this. The Marriott Rewards Premier credit card currently has an 80,000-point signup bonus. Even in Marriott's miserly program, that's enough for 2 nights at a Category 8 property. After the first year, you receive a free night certificate good at a Category 1-5 property. During that second year you may find a Category 5 property that fits your needs, and still feel like you're getting a good value for your $85 annual fee. Now your third year rolls around and your annual fee is due: you're likely to look at your past success redeeming your free night certificate than look at your future plans when deciding whether to pay the annual fee or not. And as more and more properties migrate up and out of Category 5, you'll find it harder and harder to use that free night certificate each year.

The point here is simple: it's not enough to draw up a strategy to earn and burn the points you need for the trips you want to take. To use this approach successfully you also have to periodically revisit your plans and programs to decide whether the techniques you're using still offer the straightest path towards your goals, or whether it's time to add a new program, cut out an old program, or change your strategy entirely.

Conclusion

Every travel hacking practice is ultimately a hybrid of calculation, opportunism, and habit. My own relentless focus is on those currencies I'm most likely to redeem as soon as possible. I start with cash back, then build on that with fixed value currencies like US Bank Flexpoints and Ultimate Rewards points, then add Delta and Hilton points thanks to their combination of accelerated earning and ease of redemptions — Delta SkyMiles and Hilton HHonors points are both relatively easy to redeem as long as you are willing to redeem them at "break even" rates instead of swinging for the fences with each redemption.

For example, an upcoming Hilton redemption over the holidays yielded 0.5 cents per point — nothing out of this world, but the equivalent of 3% cash back on my grocery store manufactured spend, and 57% off retail, after accounting for fees.

But my strategy only works for me because I'm willing to keep my rewards balances as low as possible. If you're the kind of person who likes seeing 7 or 8 digits in their loyalty accounts, you may want to consider figuring out whether you actually have a travel hacking strategy at all.