The True Value of Miles - Why I believe the "Experts" are Wrong

Discussion in 'General Discussion | Miles/Points' started by brucewil, Nov 24, 2012.  |  Print Topic

  1. brucewil

    brucewil Silver Member

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    I really never understood why anyone would buy miles for their Frequent Flyer account. If I could “earn” 1 mile per dollar spent on my credit card (or sometimes more), paying more than a penny per mile to purchase them never seemed to make economic sense. OK, I understand there might be times that you need to top off an account to purchase an award ticket that you would like to book NOW! But, to go to the airlines and say “I want to buy 50,000 miles” seems crazy to me! I don't care that you use it for aspirational award travel and can get 5 cents per mile for your 1st class seat.​

    I was reading one of my favorite blogs the other day. The author is one of the most respected Bloggers on the subject of points and miles. He is widely considered to be an expert on the subject. His blog has some great tips and he seems to really know how to work the system. In this particular post he was touting this great American Airlines promotion to purchase miles. He went through all the calculations in detail showing how the cost was just slightly more than 2 cents per mile. He then said this is the lowest price he’d EVER seen from AA! He did stop short and say that unless the price was about 10% less, even he still wouldn’t buy them. That brings me to today’s point. ​
    What are the TRUE value of miles and points? In reading several different travel blogs daily, there is a general consensus about which points are the most and least valuable and approximately how much each mile or point is worth in dollar value. They all have different valuations for the various programs, but everyone seems to AGREE that Hilton points are among the LEAST valuable and that Ultimate Reward points from Chase, and Starpoints from American Express and Starwood hotels are among the MOST valuable. This becomes important when it comes to booking award travel. You want to know should I use my points and miles, or should I pay with cash? (Well no one reading this would EVER pay anything with cash!)​
    Universally among all the Bloggers is the concept of “my points are worth X cents each, and I need to use Y number of points, so X times Y = $Z. Therefore using my points will cost Z dollars. If the room charge or flight is more than Z dollars it makes sense to use points. If the room charge or flight is less than Z dollars, it makes more sense to use cash. Now it’s slightly more complicated than this because you have to factor in things like taxes, resort fees, etc. You also have to factor in things like miles or points earned for the stay or flight if you pay cash. Award stays and flights generally don’t earn stay credit or award miles toward status. ​
    I believe that this kind of valuation is completely wrong! Our parents taught us, and we have taught our children the value of a dollar. We make purchasing decisions every day for small items and big ticket items based on intuitively what we know is the value of a dollar. When it comes to points and miles, we aren’t quite so well versed in their value. ​
    One Dollar means vastly different things to different people. To someone who has an 8-figure net worth $1 means very little. To someone who just makes ends meet $1 is very valuable. Something is only worth what someone else is willing to pay for it. The ONLY reason something doesn’t sell is that the price is too high. At some price everything will sell. We see this all the time in real estate. Someone puts their house on the market and it sits there for 60-90 days. What does the realtor tell them to do? Drop the price. When the price drops to the point that someone is willing to pay, the house sells. That's what it was worth. So how do we make these decisions about the value of something? We subconsciously think to ourselves “how hard do I have to work to replace the dollars that I need to spend for the item I am purchasing”? We make these decisions every day. Most of them are intuitive. If the item costs a $2, you don’t think about that decision the same as if the purchase price is $250,000.
    OK, so how does this apply to points and miles? Let’s use an example. I want to book a flight that costs $450, but I can only find an award seat for 50,000 miles. so I use $450 from my bank account or do I use 50,000 miles from my FF account? Let’s assume for this demonstration, it is last minute and you really need to book that flight right now. Using the conventional method of valuation, it would probably be best to just pay dollars for the flight. You would also earn miles for the flight toward status. Placing the standard valuation of 1 point per mile you would be “spending” $500 in miles. Points and miles are just like any other currency. You earn them, and you spend them. The difference here is that you can only spend miles on limited forms of travel. In general, the longer you hold them, the less they are worth due to devaluation by the airlines. Dollars on the other hand are a universal currency. If we think of points and miles in the same way we view dollars, valuation takes on a different meaning. How hard do I have to work to replace the miles or points I am about to spend?
    Let’s say that you have $5000 in your checking account and 50,000 miles in your frequent flyer account. If you purchase an award ticket with 50,000 miles, you still have $5000 in your checking account, an airline ticket and an empty FF account. On the other hand, if you purchase the ticket, you will have $4500 in your checking account, an airline ticket and 52,500 miles in your FF account. (Let’s assume that you earned 2500 miles for the flight).​
    Now how hard to you have to work to recover those 50,000 miles or the $500? I will leave the $500 portion of the question up to the reader. If I apply for a new credit card that has a 50,000 mile sign up bonus with a minimum spending requirement of $2500, I need to spend $2500 from my checking account to obtain those 50,000 miles. What if I don’t need $2500 worth of stuff right now? Here’s the simplicity of it all and why I believe the “experts” are wrong. If I purchase $2500 worth of VISA or MC gift cards with my new credit card, (assume each gift card costs $5) I will have met the minimum spending requirement and will have replaced the 50,000 miles in my account. Now, what do I have left? I have $2475 in my checking account ($5000-$2500 in gift cards -$25 fee for the cards). But I still have $2500 in gift cards to spend. Since gift cards are almost exactly the same as cash, I have really only "spent" $25 to obtain the 50,000 miles! By my calculation, that’s a cost of just under .05 cents per mile as you actually now have 52,500 miles in your account. As far as I can tell .05 cents per mile beats 2 cents per mile any day. The airlines have to be laughing at us when we purchase miles for 2-3 cents each!​
    As far as Hilton points being the least valuable, on a point per point basis, yes they are not worth the same as a Starwood or Ultimate Reward point. I can however EARN Hilton points by the boatload! I get 6X Hilton points per dollar on purchases at supermarkets and drug stores and 3X points on everyday spending. With the new Bluebird card, I can purchase Vanilla Reload cards at CVS or Walgreens and earn them back at a very rapid rate. Again the question comes down to, how hard do I have to work to earn back Hilton points?​
    In the end, we all have to be comfortable with the purchasing decisions that we make. I would never pay cash for a hotel or airline ticket if I could earn back those points easily. Obviously this strategy will not always work as there are not always deals available when you need the points. The points and miles don't post right away either. There are times that paying for a flight or hotel room makes perfect sense. We just have to make an informed decision about the true value of points and miles.​

    About The Points Doctor

    The Points Doctor is Bruce J. Wilderman DDS of Artistic Expressions Dentistry. Dr. Wilderman has a practice limited to Cosmetic Dentistry, serving patients of the Philadelphia Area since 1986. He and wife of 30 years enjoy traveling the world for little or no money with the points and miles they have earned from the credit card companies.Dr. Wilderman would love to teach you how to do the same.You may reach him at ThePointsDoctor@comcast.net or www.ThePointsDoctor.blogspot.com
     
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  2. newbluesea
    Original Member

    newbluesea Gold Member

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    So basically what you saying is that you are make the same decisions most of us here have been making for many years (most of it without having to slog through a single blog.)
    Though I must say I find some of the statements quite silly ...prime example....

    "I really never understood why anyone would buy miles for their Frequent Flyer account"

    Heres an example for you relative desires to to lock in two one way tickets J MIA/MAD for Sept 2013.
    Only date available for all Aug/Sept 2013 is Sept 19 or Sept 30th. He has only 30k AA miles so he buys 50K (+25k bonus) for $1350 and bingo hes off to Spain.

    Now you tell me what would you have recommended ? Apply for a Citi AA card?:rolleyes:
     
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  3. brucewil

    brucewil Silver Member

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    Except that the next line after that says. "except to top off an award that you want to book right now"

    You missed my point entirely. What I am saying is that when given the choice of booking with miles that we have in an account already vs paying with dollars, we are not placing the correct valuation on miles and points. There real value is determined by how easily we can replace the miles or points into an account and not by some formula of these points are worth 1 cent or 2 cents or a half cent and I need 50,000 of them to book something. I am saying that I can't see buying miles for some future undetermined use.

    Sorry if I didn't make myself clear
     
  4. daemon14

    daemon14 Gold Member

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    I think you're mixing up value with cost. Something can be more valuable to me than the costs associated with obtaining it.

    Some people (outside USA) cannot earn miles from CCs. For them, US Airways miles are best since they're so easy to buy. It's already assumed that anyone who can get a credit card has already gotten a specific credit card to earn miles. These "buy miles promos" are all about supplemental miles. However, there are only a finite number of sign-up bonuses for a particular currency of miles, and once those are exhausted, you might find yourself in need of more miles.

    Other issues are that miles are needed IMMEDIATELY, something a CC signup can't help (that has a time-cost).

    I've bought US miles before, but only because I'd just applied for the US Airways MC and needed more miles. I paid $295 for 20K miles and used 150K for an F/J ticket to Asia. If I had not purchased those miles, I would not have been able to make that trip. I couldn't apply for another card, paying close to 1.5cpm was the best thing I could do. I don't value US miles that high, but it was a sensible transaction to do. Without the miles, I couldn't have booked that trip (market price over $18K, personal value over $2200).
     
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  5. newbluesea
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    newbluesea Gold Member

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    Well what difference does it make if one wants to top off an account or use the miles later?
    I am not sure that there are a lot of people out there just buying airlines miles just to say "I have a million miles in my account" ( in fact even buying that much miles even with the relaxed maximums is going to take a number of years anyway)
    I might decide to buy miles now on the off chance that the only awards from Tampa to Atlanta at Xmas are F only
    Coach tickets normally run $600 so I spend $1700 on buying miles I have no idea I might use but if I do being able to spend Xmas at Grandmas is worth every penny.

    Everybodys situation is different and saying others "valuation" is incorrect just because it differs from yours is pretty presumptuous.
     
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  6. marcwint55

    marcwint55 Gold Member

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    One Dollar means vastly different things to different people. To someone who has an 8-figure net worth $1 means very little. To someone who just makes ends meet $1 is very valuable. Something is only worth what someone else is willing to pay for it. The ONLY reason something doesn’t sell is that the price is too high. At some price everything will sell. We see this all the time in real estate. Someone puts their house on the market and it sits there for 60-90 days. What does the realtor tell them to do? Drop the price. When the price drops to the point that someone is willing to pay, the house sells. That's what it was worth. So how do we make these decisions about the value of something? We subconsciously think to ourselves “how hard do I have to work to replace the dollars that I need to spend for the item I am purchasing”? We make these decisions every day. Most of them are intuitive. If the item costs a $2, you don’t think about that decision the same as if the purchase price is $250,000.



    While I do agree with some of your points, I highly disagree that $1 means very little to someone with an 8 figure net worth. It may be easier for one to obtain that dollar, but I can assure you that it means no less. If the dollars were not important, one would not obtain the net worth unless having the good fortune to be born into it, and many who are born into wealth manage to squander it away as they do not learn the value of the dollar in time.

    That is almost the same logic that the politicians use to justify a punitive tax system that punishes one for success. Those who are successful surely should not mind paying more than their fair share, since they have it to pay according to many of our elected officials.
     
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  7. gleff
    Original Member

    gleff Co-founder

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    If you are putting spending on a card that's earning one mile per dollar, you are buying that mile for two cents since you could put the same spending on a 2% cash back Fidelity Investment Rewards American Express.

    That might have been mine. So.. blush :)

    Indeed, I said that I would not buy the miles at the price being offered, because in my case I have a 7 figure balance with American so I wouldn't be topping off an account. But that in some cases, such as to bump up to a mileage level for an award you want to redeem, it can make sense.

    And even occasionally it can make sense to buy miles to book an award instead of a ticket you would otherwise purchase, generating a net savings.


    Best,
    Gary
     
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  8. artvndlay

    artvndlay Active Member

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    I'm not sure where to start, but I have to disagree strongly. I will concede that the values everyone/most bloggers put on points are somewhat subjective and imprecise. However, they have close to universal application because bloggers have done the work to estimate what 1 Starwood point will purchase in U.S. dollars. Could that estimate be off by a couple tenths of a cent one way or the other? Sure. What is important though is having some type of valuation that allows for practical comparisons between programs and USD or between two different programs.

    I think there are many more problems with valuing miles at their replacement cost. To begin with, your valuation method does not allow any meaningful comparison between programs, or if you really stand by it, the "comparisons" can end up being laughable. I think this is because the mileage has no opportunity cost in your model? It does not factor in that while AA miles may be easier to replace, the opportunity cost of using them is probably huge compared to BA Avios or even cash. I do not think the following scenario is extreme or an outlier in anyway, it just shows that most bonuses can throw this model wildly off course.

    For example, suppose I have 200,000 AA miles and 200,000 BA miles. I have no easy way to generate BA miles, just unbonused spending on a BA credit card I already have. I can get AA miles easily because I do not have the Citi AA cards yet. I could apply for 3 of them and get a 50,000 bonus for each card, and let's say $2500 in spend each.

    My short hop domestic flight is either 9000 BA miles or 25,000 AA miles, which should I use? Under your model, I calculate the cost to replace the BA miles ($9000 in gift card spend, one BA Avios per dollar) or to replace AA miles (1 credit card sign up bonus of 50,000 after $2500 in gift card spend). Clearly, I should use AA miles then because they are cheaper to replace? More worrisome, using your method, I should spend 150,000+ AA miles instead of 9,000 Avios because in my unique situation AA miles are pretty easy to come by. Additionally, your method calculates the value of those 150,000 AA miles as $375...right?

    While I think most readers here immediately see how silly it is to spend 150,000 AA miles instead of 9,000 BA Avios, "replacement cost" valuation could be extremely confusing and dangerous for newbies who really do not know what to do with their miles. There are real world situations where 9000 miles from one program might be worth more than 150,000 in another program. (I can't think of many, but I think El Al's point system is odd for example).

    Besides being wildly inaccurate, IMHO, your calculations would take a long time. Any time I spent miles I would have to calculate the replacement cost (based on any possible bonuses I could use etc) for every program I was considering. That replacement cost changes every time there is a new bonus available or an old bonus goes away or is used. And that replacement cost is "personal" in that it is different for every person because everyone qualifies for different bonuses, unlike the bloggers' estimation of a point's value in USD which is meant to be close to universal.

    Also, the dollar example is not applicable here - everything is priced in dollars so everything is easily priced in what it costs to replace that dollar (or 100,000 dollars), there is no decision between types of currency to use that have to be replaced, its all in dollars. Points really are not like every other currency because there is no legal market to sell them in - which is why we have to speculate on their value instead of just looking it up on yahoo finance. Currencies are a good comparison, 1 euro is worth ~1.3 dollars. If there was no market to trade dollars for euros, we would have to guess at the value. How would we do that? We would find something we can buy in both dollars and euros, and see what the price difference was. Which is exactly what bloggers try to do when they value loyalty program points.

    Finally, I don't think your method does allows for any valuation of points unless there is some spending decision occurring. How do I choose between different rewards portals when I do my day to day shopping? Chase or Hilton rewards portal for a $500 purchase? There is no replacement cost to start your calculations with and there is no way to calculate some kind of intrinsic value for each point.

    A couple thoughts, which are interesting, to me at least...
    1.) I'd have to think about this some more, but I think if one could somehow know every cent or mile they planned on spending for travel and every bonus or mile they could generate until they died, I believe you could use this valuation method to minimize your total spend. Of course, this is totally impossible since you can not predict future bonuses even if you could predict all future travel and cost of the travel.
    2.) I think if you only travel on miles, and never spend cash for travel expenses, I think the replacement cost model would also be useful to minimize your costs if you did all the calculations in advance and knew all of your travel in advance. You could figure out exactly how many dollars you would spend for each part of the trip based on the cost to generate (or replace) the miles used. I think these two examples work because they eliminate the opportunity costs that the replacement cost model ignores.
     
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  9. dayone
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    dayone Silver Member

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    Off-topic and spurious.
     
  10. rdudaddy

    rdudaddy Active Member

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    I think the assumption you're missing is that people have already maxed out (or to the level they are comfortable) applications for credit cards for miles. Given that one has already done this, the experts' valuations allow for comparisons between programs and times where you cannot replace those miles with applications (for example if you need AA miles and you already have all the AA cards, etc). If you can get all the miles you need from these very cheap methods, great, but not everybody can do that all the time. Also, by valuing these different methods it helps people decide which credit card bonuses offer the most value (or promotions for points, etc.)
     
  11. NYCUA1K

    NYCUA1K Gold Member

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    Some people know the 'price' or 'cost' of everything but the 'value' of nothing. My sense is that most people who are in the mile/point business have developed their own calculus for deciding whether to use cash, miles/points or a combination thereof, which invariably involves assessment of the cost-to-benefit ratio -- loosely translated as 'price' to 'value' ratio. The situation is no different than when dealing with cash only. At one time or another each of us may have purchased something that others might have thought was "too expensive" but we felt otherwise because emotionally or intellectually we felt that the item had a much higher 'value' . Transactions at an auction house also come to mind...
     
  12. brucewil

    brucewil Silver Member

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    A few things have become abundantly clear to me.

    1) I clearly struck a nerve with some people
    2) I did not articulate my point very clearly
    3) maybe this isn't the best forum(by forum, I do not mean MILEPOINT specifically) to discuss the topic. I mean over the Internet by posting. So I won't be responding on the topic after this.

    What I am trying to say is that a dollar has no intrinsic value. It is a piece of paper. We exchange it for something else based on the relative value we are placing on the object we are exchanging it for at the time we "buy" it.

    I will try to clarify one point I was trying to make that I still did not articulate in my second post. I did say earlier I understood the purchase of miles "for an award you want to book now"

    This is what one of the respondents said to that.

    "Heres an example for you relative desires to to lock in two one way tickets J MIA/MAD for Sept 2013.
    Only date available for all Aug/Sept 2013 is Sept 19 or Sept 30th. He has only 30k AA miles so he buys 50K (+25k bonus) for $1350 and bingo hes off to Spain."

    My original post was trying to say that we make our purchasing decisions at the moment we agree to exchange cash or points/miles for a ticket based on how easily it will be to replace either the cash in our account or the miles/points in our account. In the respondent's post above, did he pay for that flight with miles or dollars? He paid for that ticket with miles because at that moment in time it was easier to replace the miles in his account (albeit he exchanged dollars for miles prior to that to top off his account) than it was to replace the cash in his account for the cash ticket. Nonetheless he "paid" with miles.
    I was trying to say that purchasing miles without a SPECIFIC PURPOSE RIGHT NOW was foolish to me because the value of those miles at some point in the future is undetermined. Why pay 2cents or more for something that may go on sale in the future for .05 cents?

    Thank you all for your input. There were some great points brought up.
     
  13. eponymous_coward
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    eponymous_coward Gold Member

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    That's unfortunate that you won't participate in the discussion any longer. Dialog (over the Internet, even) often helps us learn things we didn't know before and allows us to clarify our lines of thinking- perhaps even change them as we are exposed to new perspectives and information we didn't consider previously.

    Also, I'd have to say this is the wrong way to think of money. Money is valuable because it's fungible for MANY types of objects or obligations (and it's backed by a government). Miles and points are considerably less fungible (though as a pseudo-currency it has many of the potential problems of money, such as inflation, as you pointed out in your initial post). What we often do here in the frequent flyer forums with those miles and points is try and use arbitrage of these pseudo-currencies to maximize our return: we take miles or points that we acquire to fly in premium cabins/hotel rooms at an effective cost much less than what we would pay in cash for the same flight/hotel room.

    This is why some people will spend 1-2 cents a mile for US Airways miles, for instance: they are in effect buying a round-trip business class ticket to Hong Kong with a stopover in Europe for $1500-2000 (or a first class ticket for $1800-2200). I submit that this is indeed a good bargain compared to retail cost of a similar ticket. While yes, there are credit card churns that can give you much the same thing, Gary is right on when he mentions that there is opportunity cost in not using a straight cash-back card for spending.
     
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  14. rodeojones

    rodeojones Silver Member

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    The fact that your post struck a nerve is all the reason to continue the dialogue. I frankly enjoyed your thesis and it has many valid points.

    When we get comfortable and cease to think outside of the box is when we quit growing.

    "Iron sharpens iron, so one person sharpens another." Prov. 27:17
     
  15. brucewil

    brucewil Silver Member

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    "The fact that your post struck a nerve is all the reason to continue the dialogue. I frankly enjoyed your thesis and it has many valid points".
    Once again, I find myself in the position to explain myself. I am not saying I don't want to continue this conversation. I am saying I don't want to participate in it via a messageboard. I think I wouild be spending more time re-explaining what I meant just as I am doing now. I have a couple of rules regarding email and text that apply here. If an email or text is going back and forth more than a few times, I pick up the phone. typing takes too much effort and you have to be very careful how you word something as things are frequently misinterpreted by the reader as is happening here.

    I will use this as an example."I did not say he stole the money." this sentence could have multiple meanings depending on how it was said. the reader of the sentence could interpret it in a way not intended by the author of the sentence.

    Most people interpret this as denial that I said something. That is one possible meaning of many. However if we were having a conversation face to face or over the telephone it might take on a completely differnt meaning depending on the inflections or emphasis of a certain word. The nuances of conversation are lost with the written (or typed) word.

    Here are other possible interpretations of the same sentance:

    I didn't say he stole the money - someone else said it.
    I did not say he stole the money - emphatically denying that I said it.
    I did not say he stole the money - meaning that I might have implied it, but not actually said it.
    I did not say he stole the money - meaning I said someone else stole it.
    I did not say he stole the money - meaning he did something with the money, he just didn't steal it.
    I did not say he stole the money- meaning he stole something, it just wasn't the money.

    I did not say I wanted to stop the conversation... Now what did I mean by that? Lol.
     
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  16. NYCUA1K

    NYCUA1K Gold Member

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    Perhaps the OP doth protest a bit too much when there is no reason to?;)

    It is the nature of the beast...
     
  17. TRAVELSIG
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    TRAVELSIG Gold Member

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    It really depends on your discount rate relative to the NPV of future earnings. The higher your discount rate- the more you will choose to use mileage instead of money now.
     
  18. Steven Schwartz
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    Steven Schwartz Gold Member

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    I imagine your case presentations are right on the money!

    FWIW, I wrote the following on FT 5 years ago and I pretty much still agree with myself! I was wrong, though, about it being the last such trip. Those miles and points have taken us very far, and in January we will fly First Class on Cathay Pacific to Bangkok with a stop in Hong Kong on the return.

    http://www.flyertalk.com/forum/starwood-preferred-guest/719215-new-take-point-value.html
     
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  19. newbluesea
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    newbluesea Gold Member

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    This discussion seems to have gotten so far off track that I cant even recognise (or remember) the original topic.:)
     
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  20. sharris503

    sharris503 Silver Member

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    +1

    I think it is time for this thread to die.
     
  21. boondr

    boondr Gold Member

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    Why do you think I stole the money?
     

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