Exchanging miles is possible, but pricey

While miles can indeed be earned and used as payment for various goods and services, just like dollars and yen and euros, the currency comparison fails in one important respect: convertibility into other currencies.

Go to a bank or to an airport currency exchange booth, and it’s a simple matter to transform Indian rupees into Mexican pesos, Icelandic krona into Russian rubles, or U.K. pounds into Malaysian ringgits. There are ways of converting some miles and points. But it’s not easy. And whereas national currencies can be exchanged for a nominal fee, the cost of converting miles is prohibitively high.

How to convert

There are several ways to convert miles or points from one program to miles or points in another.

Mileage aficionados have long taken advantage of the Reward Exchange feature of Hilton’s HHonors program to convert miles. Conversion is a two-step process. First, redeem miles from any of 12 participating airline programs for HHonors points. And second, redeem the HHonors points for miles in another of the participating airline programs. The round-trip from miles to points and back to miles can take weeks. And more than half of your original miles will be lost in the conversion (see table below).

A second option is Diners Club Rewards, which like HHonors’ Reward Exchange, has both miles-to-points (American AAdvantage and United Mileage Plus only) and points-to-miles (26 airline programs, nine hotel programs) capabilities. As with HHonors’ Rewards Exchange, members convert from one airline’s miles to another’s by way of an intermediate currency?in this case, Diners Club Rewards points. And as with the HHonors option, much of the original miles’ value will be sacrificed in the conversion process.

The third option is the dedicated mileage-exchange service, Points.com, which launched in 2001. Unlike HHonors and Diners Club, Points.com is in the business of facilitating mileage conversion, so the process of exchanging miles and points among the participating airline and non-airline programs is quick and easy. But like the alternative conversion options, after the exchange, you’ll be left with only 10 to 20 percent of the miles you started with.

The cost of conversion

We’ve alluded to the cost of exchanging miles, in the guise of what I call conversion loss. Exactly how much is lost in the process? A lot.

To illustrate, the following table shows the beginning and ending miles when 10,000 American AAdvantage miles are exchanged for Midwest Express miles, and vice versa, using each of the three conversion programs:

Over and above the conversion loss, Points.com users must factor in out-of-pocket fees as well. Signing up for the service is free and includes one no-cost conversion. Thereafter, exchanges cost $5.95 each. Or for $14.95, an annual membership including unlimited conversions can be purchased. There are no extra fees for exchanges made through Hilton HHonors and Diners Club.

When to convert

Having done the math, and with an appreciation of the high price of converting miles, you might be wondering whether it makes sense to do so ever. If it does, it is in the following situations:

Converting orphan miles

Orphan miles are those small numbers of miles you’ve accumulated over the years in airline and hotel programs that you don’t participate in regularly. The defining characteristic of orphan miles: They will never add up to enough miles to qualify for an award. So they sit and sit and sit, and perhaps eventually expire unused.

In some cases, either through the programs directly, or through a third-party service like MilePoint, these odd lots of miles can be redeemed for magazine subscriptions or other low-value awards. From a return-on-investment standpoint, that’s probably better than the conversion option.

As a last resort, however, using Points.com to convert 5,000 Alaska Airlines miles?which would otherwise expire?into 460 American miles is better than nothing.

Converting endangered miles

If your preferred airline is in bankruptcy and all signs point to eventual liquidation, your miles are officially on the endangered list. Depending on how severe you judge the danger of losing your miles and on how comfortable you are with that risk, you might consider converting some or all of your miles into a program with better long-term prospects.

Conversion: the convenience factor

Sometimes conversion is a matter of simple convenience. It often happens, for example, that you’re just a few miles short of an award in Program A, and have more than enough miles in Program B to make up the shortfall. If only you could transfer your Program B miles into your Program A account.

As we’ve established, you may indeed be able to make the transfer. The question is whether it makes economic sense to do so.

Behind the exchange scenes

It’s no accident that conversion is difficult and expensive. And for at least two fundamental reasons, it will remain so.

First, from a marketing standpoint, easy inter-convertibility of miles and points robs airline and hotel frequency programs of some of their power to keep consumers’ loyalty focused. If, for example, American AAdvantage miles are freely interchangeable with United Mileage Plus miles, there’s no compelling reason for an AAdvantage member to choose American over United when the two carriers offer similarly priced flights on a given route.

In addition, from a financial perspective, conversion requires a series of costly steps: first, buying miles from the consumer; next, selling them back to the airline which issued them originally; then buying miles from a second airline; and finally, selling them back to the consumer in place of the original miles. There are fees and markups associated with each of the several steps in the transaction, which ultimately trickle down to the consumer.