Value of Miles

Value of Miles

The question of assigning a value to a frequent flyer mile is important not only to frequent flyers but also to the airlines. Every year, the airlines look at the outstanding number of miles and measure the financial impact of deferred revenue from frequent flyers redeeming their miles. The value of miles is determined by using equivalent ticket value, based on expected redemptions of award tickets. To estimate the value of a mile, United Airlines says it looks at historical customer redemption patterns and “management must also estimate the expected redemption patterns of Mileage Plus customers, who have a number of different award choices when redeeming their miles, each of which can have materially different estimated fair values.”

In the airline’s 10-K report to the IRS, United indirectly reports its calculation of the estimated value of a mile. United reports that Mileage Plus members had approximately 508.8 billion outstanding miles in 2006 and assumed that 438.3 billion of these miles, 86 percent, would be redeemed. They recorded a deferred revenue of $3.7 billion miles, which means that they place the value of a mile at around $0.008. Their calculated value of a mile gives the impression that members are redeeming miles at lower values than what a mile could be worth — $0.008 is the equivalent of redeeming 25,000 miles for an award ticket valued at $200. It is interesting to note that United may value their miles at less than a cent but sells them for around $0.03 per mile — a two cent difference may not seem like much, but depending on how many miles they sell, the profit could be substantial. Members can purchase from 1,000 miles for $64.57 (including the taxes and $35 transaction fee) to 50,000 miles for $1,378.75.

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