Paid flights are not a strategy for earning redeemable miles

This week as the blogosphere erupted like a school of piranhas around the bloody calf of the American AAdvantage devaluation, I quipped on Twitter that "'Where to credit your paid flights' should be of tertiary interest to travel hackers. Interesting question, but not very lucrative."

Let's break that down.

Primary interest: how much are you paying?

Due to the phenomenon I call price compression, how much you pay for your flights has only a glancing connection to the retail price.

• If you manufacture spend on a US Bank Flexperks Travel Rewards card, you'll enjoy a discount of 62-75% off of retail, depending on where in a redemption band your flight falls.
• A Citi Prestige credit card gives a 37.5% discount off ThankYou point redemptions on paid American flights, which increases to 79% if you're able to manufacture spend with a Citi ThankYou Premier card at gas stations.

Paying less for your travel may not be your only interest, but it should be a primary interest for the simple reason that the less you pay for your travel, the more of it you can afford!

Secondary interest: what are you getting?

Of course there's a difference between being frugal and being cheap: what you get for your money matters too, or we'd all be flying in the back of Spirit Airlines planes with our knees pressed against our chests (once — never again!).

In my experience, Delta Airlines is the domestic carrier most likely to get me where I'm going on time and in comfort. That doesn't mean I'll go out of my way to book Delta flights, but once price compression levels the differences in fares, Delta is far and away my preferred carrier.

Tertiary interest: where should you credit?

The reason I call the decision of where to credit paid flights of tertiary interest is that it's difficult to imagine a situation in which it would outweigh the factors of cost and convenience. In other words, there's no reason a travel hacker should pay more for less convenient flights that happen to earn a particular rewards currency.

There are two reasons for this. First, redeemable miles are cheap. When you can manufacture spend to earn exactly the number of redeemable miles you need, whenever you need them, miles earned through paid flights should be a rounding error in your overall rewards portfolio. Admittedly, it's a rounding error in your favor, and I'm not suggesting flying without a frequent flyer number attached at all. But if you have an award redemption in mind, it would be strange to count on your revenue flights to earn the needed miles.

Second, I'm happy to admit that elite status is valuable. But under most circumstances, it's unpredictably valuable. Here's a real-life example: I'm currently booked in economy on a United award reservation to Europe. I've been occasionally checking for business class award availability, and yesterday it suddenly appeared. For 40,000 more United miles, I can move to a premium cabin on a flight over 10 hours. Good deal! But as a MileagePlus general member, United also wants to charge a $100 change fee for each ticket. As a Premier Silver, I'd pay $50 per ticket, a Premier Gold would pay $25, and Premier Platinum and 1K members would pay nothing. That's real value: not some kind of squishy mental accounting, but cold hard cash that would be left in my pocket due to elite status.

The same example shows the problem with counting on elite status to generate big savings: to get predictable value from elite status you would need to know in advance which reservations, booked with which miles, are likely to require changes. If you spread your award reservations around between Alaska, Delta, American, and United, let alone the other transfer partners of your flexible rewards currencies, you will be left paying change fees (or keeping suboptimal reservations) on all the ones you don't earn elite status on.

Conclusion

When elite status is the natural byproduct of your travel hacking practice, it's a fine way to stretch the value of your rewards. As a checked-bag enthusiast, I enjoy my Delta SkyMiles Silver Medallion status, which saves me a few hundred dollars a year in checked bag fees.

But the less a person flies, the less value they receive from elite benefits. The problem with chasing elite status is not that there's anything wrong with elite status, but that it's expensive and inconvenient. If you live in a city where two or more airlines battle each other constantly on price and convenience, then it makes sense to pick one with which to run up your elite-qualifying tally.

Otherwise, chasing elite status and redeemable miles is playing the airlines' game, not ours.

You should always book one-way tickets, except when you shouldn't

Not just among travel hackers, but also in the civilian population, the conventional wisdom for a long time has been that it's usually better to make roundtrip airline reservations than book one-way tickets. There are a few reasons usually cited for this:

• In the case of a trip interruption or cancellation, you'll only pay change fees once on a roundtrip ticket booked on a single reservation, while you'd have to pay the corresponding fee in each direction if the tickets are booked separately.
• Since "only business travelers book one-way tickets," airlines take advantage of the opportunity for price discrimination to charge more for one-way tickets than roundtrip reservations. They may charge less for tickets with a Saturday night stay, a discount you can only secure if you book a roundtrip ticket.

I book virtually all of my airline reservations as one-way tickets these days, and thought it would be worth explaining why.

Some airlines compose all reservations from one-way segments

Alaska Airlines and Southwest Airlines treat all reservations as the combination of two or more one-way tickets. So you'll never save any money booking a roundtrip ticket on those airlines, rather than two one-ways.

In an extreme case, if you're tracking the price of your Southwest Airlines reservation in order to rebook at a lower fare, you might miss the opportunity if your outbound segment goes down in price and your return segment goes up in price by the same amount or more.

Keeping your reservations separate will make sure you capture any downward price difference in either direction.

Some airlines don't let you change your frequent flyer information after travel has commenced

If you want to credit one segment of a Delta-operated itinerary to SkyMiles and another to Alaska Mileage Plan, you're out of luck: once travel has commenced, you can't change the frequent flyer account linked to a Delta-operated reservation.

If you make two reservations instead, you can easily credit one of them to one airline's frequent flyer program and another to a second program.

Booking one-way tickets allows you to capture low-level redemptions, where available

Consider a $600 ticket, the individual components of which price at $350 each. While the roundtrip ticket is $100 cheaper than two paid tickets, if low-level award space is available on one segment, but not the other, you can buy one $350 paid ticket and redeem 12,500 miles, getting 2 cents per redeemed mile.

And of course, you can redeem 20,000 US Bank Flexpoints for the $350 ticket, which brings me to...

Price compression means more expensive tickets don't necessarily cost you any more

In the case above, the $600 roundtrip ticket (well, assuming it's actually $600.01) will cost 40,000 US Bank Flexpoints. But two $350 one-way tickets will also cost 40,000 Flexpoints! Furthermore, booking the tickets separately may reveal that a first class ticket in one or both directions costs only marginally more, allowing you to book yourself in greater comfort (and in a higher-earning fare class) without redeeming any additional miles or points. That's the phenomenon I refer to as "price compression."

When you should definitely consider booking roundtrip reservations

There are a few key exceptions to my rule of thumb that most trips should be booked as a series of one-way reservations:

• Complicated reservations. If you're booking multi-stop itineraries in one or both directions, you want to be accommodated if you miss a connection or a flight is cancelled. If your airline can't see your onward connections in their system, they probably won't accommodate you.
• If you're booking a revenue ticket in either direction of an international itinerary. With all of its marvelous pricing technology, the airline industry often charges less (sometimes much less!) for roundtrip tickets to and from Europe than for one-way reservations. So make sure you're actually saving money before booking one direction with cash and the other direction with miles and points.
• If you are buying travel insurance (and actually might use it). If you buy two one-way tickets, and your outbound trip suffers an event covered by your trip insurance, your return flight may not be covered. In any case, it means paying two trip insurance premiums for a single trip and a single covered event.

Conclusion

There are obviously a lot of moving pieces here, but the key take-away is to check the award and revenue pricing for all flight reservations as both one-ways and roundtrips. You may end up saving a lot of whichever currency you end up deciding to use.

How much do you charge friends and family for travel?

Travel hacking is a specialized combination of knowledge, skills, and opportunities, plus of course making the time to take advantage of them. For those willing to invest in this world, the payoff is tremendous: the ability to pay for travel at a steep discount, whether you're buying luxury accommodations for the price of a Motel 6, or getting a Motel 6 for the price of a youth hostel.

Once you've invested the time and attention to learning those skills, it's natural to want to share the rewards with friends and family who, at least in my case, treat travel hacking as a curious combination of magic and fraud.

While I'm always eager to help out, being both a businessman and a poor person means I like to look for mutually beneficial arrangements when booking travel for my loved ones. In that spirit I think there are basically three models one can use when trying to help people save money on travel.

Offer a fixed discount off retail

This strategy makes the most sense for "arm's length" transactions. If you have more miles and points than you have near-term plans for, you can offer to book travel for friends and family at a fixed discount off the price they're already planning to pay.

If someone wants to book a $600 domestic flight, and you discover there's low-level award availability (or, better yet, discounted award availability like that offered to Citi AAdvantage credit cardholders), you can offer to book the flights for a mere $450. This is a classic win-win situation: the traveler gets a 75% discount off retail, and you get 1.8 cents or more per mile in cash — a pretty good redemption!

The drawback of this method is that there are situations where it simply doesn't apply: if a flight is cheap enough, or the mileage cost is high enough, there may simply not be a middle ground in which the booker and traveler can meet to mutual benefit.

Charge the opportunity cost of earning (or redeeming for cash) your points

This is the strategy I usually follow when offering to book travel for my close friends and family. If a hotel room costs 40,000 HHonors points, I'll offer to book it for $141, since that's the amount of cash back I could have earned manufacturing the same $6,667 on a 2.105% cash back card. In other words, I want to be "made whole," but I'm not interested in extracting any profit out of the transaction. If that's a discount off retail they'll usually be interested, and if not, there's no harm done.

But there are two pitfalls here. The first is figuring out what your actual opportunity cost is. In the case of hotel points or airline miles earned with a credit card (at the expense of cash back), the calculation is simple, as shown above. But if you're redeeming Ultimate Rewards points for a friend's Hyatt stay, the relevant cost isn't how much cash you could have earned instead of earning Ultimate Rewards points, it's how much the Ultimate Rewards points are worth if redeemed for cash. The same is true of any rewards currency that can be directly redeemed for cash, like US Bank Flexpoints.

The second wrinkle is valuing instruments that are, due to price compression, worth manifestly less than their face value to the travel hacker. For example, a $400 American Airlines voluntary denied boarding voucher is worth much less than $400 to me, since I can redeem 20,000 US Bank Flexpoints, worth $200 if redeemed for cash, for the same flight (in reality it's not quite that bad since the voucher has the added flexibility of being combinable with cash for flights at the bottom of a Flexperks redemption band).

When deciding the opportunity cost of something like that, you could either think about the actual delay that earned you the voucher in the first place (how much is 5 hours in a Chicago airport worth? Did you have to buy lunch?), or simply assign it the value of the points you would use to book a flight of the same value. In the above example, that could be the $200 cash value of 20,000 Flexpoints.

Travel is free (for other people)

The third option, of course, is to just give travel away! What are you, some kind of cheapskate?

For children, grandchildren, nieces, nephews, parents, grandparents, and anyone you're about to propose to, the best option is not to charge them anything for their travel. Your miles and points didn't cost you much, you have too many of them, and it'll mean the world to them to get to see the world.

This is the strategy I use when booking vacations for my partner and I, and it's fun. I heartily recommend occasionally splurging on your loved ones, the operative word being "occasionally."

I don't mean to get all philosophical this close to the end of the post, but people basically don't value stuff they get for free. Or, to put a slightly finer point on it, people quickly get used to getting stuff for free and quickly come to accept it as the natural order of things, rather than a gift or treat for a special occasion.

That's why I think for kids or siblings it's probably better in the long run to offer a big discount off retail rather than spread free trips around like gelt at Hanukkah.

Conclusion

So, what did I miss? Do you charge your loved ones for "free" travel, and if so, how much?

Price compression and mileage running

I like to use the term "price compression" to refer to the interaction of two benefits to travel hacking:

• The out-of-pocket price paid for travel is lower;
• The difference between the out-of-pocket price paid for more-expensive and less-expensive travel shrinks, even if the ratio between them stays the same.

The ideal cases are more-convenient or more-luxurious award redemptions that cost the same fixed number of miles and points, but you also see price compression when redeeming cheaply-acquired, fixed-value Ultimate Rewards, Membership Rewards, or ThankYou points: more expensive flights will cost more points, but the out-of-pocket expense of acquiring those points will be (in some cases much) closer than the cash prices.

Theory of mileage running

A traditional mileage run is a flight taken exclusively to earn airline miles, and will ideally cost less than 4 cents per mile flown if credited to a distance-based frequent flyer program. Personally, I understand the logic behind the traditional 4-cent-per-mile cap in the following way:

• a high-level elite will earn at least 2 redeemable miles per mile flown due to elite mileage bonuses;
• a travel hacker will attempt to redeem miles for at least 2 cents each;
• so by pre-paying for future, non-elite-qualifying travel through mileage runs, the mileage runner receives elite-qualifying miles in the present, which help them maintain high-level status and the perks that go with it.

Of course it's possible to mileage run speculatively or purposefully: someone can take every sub-4-cent flight available with the goal of earning the highest elite status possible, or they can take one or two mileage runs in order to top off an award or earn the last few elite-qualifying miles needed to reach the next level of elite status.

Price compression and mileage running

Looking at mileage runs through the lens of price compression results in some interesting conclusions.

In programs like Alaska Airlines Mileage Plan and American AAdvantage, which still feature distance-based redeemable-mile earning, price compression has no effect (besides making mileage runs cheaper): since booking more expensive flights (within a cabin of service) doesn't yield any additional redeemable or elite-qualifying miles, the goal of minimizing the cent-per-mile cost of each mileage run is still paramount. Reservations in excess of the 4-cent-per-mile "breakeven" point may still be worth making, but more expensive flights would have to be justified by an unusually high value placed on elite-qualifying miles — perhaps if you're a single flight away from the next elite status level.

In revenue-based programs where mileage earning is based strictly on the amount paid for tickets (although with a multiplier for elites in the case of Delta and United), it's only ever worth mileage running for the benefits of elite status (for example, free award changes and redeposits). In such programs, since more-expensive flights also earn more redeemable miles, part of the increased price is rebated in the form of more redeemable miles earned.

Consider the following stylized case: a United Premier 1K with the American Express EveryDay Preferred and Business Platinum combination wants to maintain her top-tier elite status with United. She manufactures spend at gas stations at roughly 1 cent per dollar in manufactured spend, and is able to redeem her Membership Rewards points for 4.29 cents on United flights after her 30% Pay with Points rebate. In other words, she is able to buy United tickets at a roughly 77% discount. As a MileagePlus Premier 1K, she earns 11 miles per dollar spent on United fares. Valuing each United mile at 2 cents each, as above, she's receiving a 22% discount on (the fare component) of each United revenue ticket she buys, meaning her net cost is just 1% of the fare, plus taxes and fees, which don't earn redeemable miles.

Let me be clear: this result only holds for someone who actually values the benefits of elite status, and is sure they'll redeem each one of their United miles for at least 2 cents (remember, unredeemed miles and points are worth nothing). But for someone positioned in this way, the cent-per-mile calculus is almost irrelevant, given the up-front discount and redeemable-mile rebate they receive on each revenue ticket they buy.

Conclusion

I don't fly United or credit my paid Delta flights to Delta, and I don't hold any super-premium credit cards since I don't find their annual fees worth paying. Still, I wanted to share this analysis to demonstrate the power of price compression when applied to a range of everyday problems in travel hacking.

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.