How to evaluate frequent flyer promotions

Consumers are barraged with special offers. And no segment of the universe of buyers is more relentlessly pursued by sellers than frequent flyer program members.

Indeed, that’s part of the marketing power of rewards programs—they generate a repository of actual and potential customers, whom the airlines and their partners can selectively target with special offers.

Like marketing promotions generally, some mileage offers truly add value to the sales proposition; some are innocuous from a value standpoint; and still others tilt toward the rip-off end of the scale.

Following is a list of several representative types of special offers, with some thoughts on how they should be evaluated.

Launch promotions

The airlines’ marketing materials typically use the term ‘celebrate’ (as in, “to celebrate the launch of new service between Akron and Bangor…”), but the reality has more to do with desperation than celebration. Airlines routinely deploy bonus miles to generate awareness and, bottom line, sell seats on new routes, which can be slow in reaching profitability. These are limited-time offers, usually for three months or less.

In most cases, the proffered miles—which may be double or triple the actual flight miles, or a set number of extra miles—amount to a net gain for the consumer. As a new entrant, the airline will have no choice but to match incumbent airlines’ fares, so the traveler won’t pay any price premium to earn the miles.

There can still be trade-offs, however.

The downside may, for instance, be a shift in allegiance away from one’s primary airline in order to earn a bonus in another carrier’ program. In a practical sense, miles earned in a secondary program (viz. a program in which you participate infrequently, and thus may never reach an award threshold) have less value than miles earned in one’s primary program.

Another possible trade-off: comfort and convenience. As an example, American some time ago offered double AAdvantage miles to promote its new Long Beach-New York service. (JetBlue eventually drove American out of the Long Beach market.) As I was scheduled to travel from Los Angeles to New York during the promotion period, the double miles caught my attention. The drive to Long Beach is 20 minutes longer than the drive to LAX, so that entered into the analysis. But what ultimately turned me away from the miles was the aircraft variable. At the time, American flew narrow-bodies from Long Beach, versus the twin-aisle B767 from LAX. On a five-hour flight, the spacious plane outweighed the extra miles.

But that’s just me. Someone with a higher tolerance for claustrophobia might have switched to the Long Beach flights and pocketed the extra miles, without feeling particularly deprived by the tighter quarters.

Sign-Up bonuses

Internet service providers, banks, telecom companies, credit card companies… many businesses use frequent flyer miles in their customer-acquisition efforts.

Credit card companies in particular covet frequent travelers, with their upscale demographics and big-spending ways. So it’s no wonder that co-branded cards, offered jointly by issuing banks and airlines, often come bundled with generous mileage offers.

Case in point: As we go to press, Continental is offering 21,000 bonus miles to new OnePass MasterCard cardholders after the first purchase, plus two lounge passes and travel discount certificates after the first year.

By any standard, this is a generous offer. But it’s not for everyone.

First and foremost is the usability question: Of what value are Continental miles to me? While 21,000 miles is a good start, I’d still need another 4,000 miles to reach a meaningful reward level. Is that an attainable goal? Assuming it’s attainable, is it worth the time and effort?

Then there are the specific terms of the credit card. The annual fee is $85, and the annual percentage rate is 15.24% (variable, Prime + 9.99%). Since there are credit cards available with no annual fee, it could be argued that in effect you’re buying 21,000 miles for $85, or 0.4 cents (four-tenths of a cent) per mile. That’s good value… again, assuming you can boost that initial balance to 25,000 or more miles.

Miles-Plus-Cash offers

One of the newer wrinkles on the face of rewards programs is the combining of money and miles for goods and services.

Northwest, for example, periodically sells tickets for various combinations of cash and miles. Earlier this year, the offer was $198 plus 10,000 miles, or $89 plus 20,000 miles, for domestic tickets. Europe and Asia tickets required greater cash outlays.

For the airlines, these promotions serve to generate extra revenue and to reduce their mileage liability.

Whether they make economic sense for consumers depends on the details of the specific offer—how many miles and how much cash on the buy side, and the market price of the ticket on the sell side.

So if you’re contemplating exchanging $198 and 10,000 miles for a ticket with a street value of $300, you’d be getting about a penny in value for every redeemed mile. I’d suggest aiming higher.

Miles for merchandise

As frequent-flyer programs have widened their scope to become frequent-buyer programs, mileage-earning opportunities have expanded to include all manner of goods and services. It is the rare purchase indeed which cannot be made in mile-earning mode.

All of the mainline U.S. airline programs now feature mileage malls, extensive networks of online retailers that generally award one or a few miles per dollar spent. When the participating retailers shift into promotional mode, offering double or triple miles, the earnings can be substantial.

And because there’s no difference between the price of a pair of Gap jeans, for example, whether they’re purchased with or without frequent flyer miles, the miles are truly free. It’s simply a matter of remembering to register one’s frequent flyer number before shopping at participating merchants.

As it happens, I am in the market for new laptop computer, for which I’ve budgeted $1,500. Naturally, I plan to charge the purchase on an airline-affiliated credit card, earning 1,500 miles into my primary mileage program. If possible, I’d like to earn miles directly from the retailer as well.

Dell participates in the mileage malls of several programs, including those of American, Continental, Northwest, and United. Normally, Dell awards one mile per dollar spent in each of those programs. But as part of a current back-to-school promotion, that earning rate is doubled to two miles per dollar. So if I decide to go with a Dell computer, I have the option of earning 3,000 miles in the program of any of four airlines.

If you’re not paying extra for the miles, as in the above example, go for ’em. But it sometimes comes down to a choice between a rock-bottom price without miles and a higher price with miles.

If the item you wish to purchase is available elsewhere for less, but without earning frequent flyer miles, divide the price difference by the number of frequent flyer miles you would earn for buying from the more expensive retailer. That gives you the cost-per-mile price. If you’d be paying more than 2 cents per mile, ask yourself whether you’ll be able to recoup that investment when it comes time to redeem the miles.

The bottom line: your mileage may vary

As the preceding was designed to illustrate, the considerations and calculations which should be brought to bear when assessing promotional offers are highly variable. What makes sense for me, value-wise, may be financial suicide for you. And vice versa.

There’s another dimension to that variability worth mentioning: personality.

Frequent flyer miles are, when all is said and done, a rebate. And some of us are more obsessed with rebates than others. Those with a coupon-clipping disposition sign up with whatever phone company is offering the most miles, and then switch as soon as possible. They’re continually shuffling credit cards to qualify for the latest promotion.

Marketers refer to promotion-driven consumers as flippers, and to the turnover among customers as churn. Ironically, while mileage programs can engender long-lasting loyalty among some consumers, they foment churn among others. In fact, in dollars and cents terms, the flippers are the winners in the race to squeeze value from the programs.

But intensive flipping and double-dipping require time and effort.

Remember the Pudding Guy? David Phillips received his 15 minutes of fame in 1999 by cleverly leveraging interlocking discounts and mileage offers to earn more than a million miles for 12,150 cups of Healthy Choice pudding. At the end of the day, he spent $3,000 to earn roughly $20,000 worth of free tickets.

As Mr. Phillips was the first to acknowledge, however, he devoted many hours to crunching numbers, strategizing, and executing his plan. “Free” fails to account for the value of his time.

As I said to him at the time, I admire his energy and focus. Like him, I enjoy the challenge of earning miles. But it’s not the primary focus of my life. And, given my personality, it never will be.

But whether you’re a member of the Pudding Club or just an average consumer looking to do the smart thing, mileage-wise, it pays to do the math.