The authors of a well-known but highly flawed annual award availability study have a new study out that’s much better. It’s titled Premium Class Rewards Provide Best Value for Frequent Flyers.

The conclusion is right, though I certainly stopped to wonder, we needed a study to know that?

How they reached the conclusion, though, is quite wrong.

Like with their award availability study, they refuse to pick up the phone. All of their data comes from award searches online. This time, though, they limited themselves to the United website which is actually pretty good and has access to most partners online.

They Don’t Know How Much an Award Costs

Two-cabin first class roundtrip to Hawaii is 80,000 miles roundtrip. However, the study confuses roundtrip and one-way award costs (perhaps because the United award chart shows one-way pricing) and then calculates value per mile on the basis of those incorrect mileage prices.

First class saver rewards to Hawaii, at 40,000 miles roundtrip, were found to deliver reward value of 4 cents per mile.

It then conflates business class and first class, because it moves on to compare domestic two-cabin first class with international first class as though the products were the same.

Even higher first class saver rewards to Europe or Japan starting at 135,000 miles yielded more than 5 cents per mile

It seems like, even abstracting away from the differences between domestic and international premium product offerings, that they should compare ‘one cabin up from coach’ rather than three-cabin first class with two-cabin domestic first.

“Cents Per Mile” Does Not Tell You How Much Value You Got From an Award

The study declares, “Mileage value is determined by applying retail prices” but this just isn’t correct when you are pricing what an itinerary ‘would have cost’ if you paid cash for it, and concluding that the ‘value’ derived from miles is the price of the ticket divided by the miles you paid for it.

• Awards are not as flexible as paid tickets when they are capacity controlled. You can pay cash for any flight with available seats. To use miles you have to fly only on those seats offering availability. (And even ‘double miles’ awards frequently cost more than double miles and no longer offer last seat availability with several airlines.)

• You may be selecting less valuable flights that are less convenient even if they price out higher. A four-flight business class award, stitching together available flights, may have a very high retail price — that you would never ever pay. In fact the itinerary may be ‘worth’ less than a coach non-stop flight.

• You have to account for taxes and fees for booking the award. United doesn’t add fuel surcharges but they do charge international taxes. There are close-in booking fees, and if you book by phone there are telephone booking fees. You at least have to deduct those amounts from the retail cost of the itinerary.

Globally, comparing award values using retail price makes sense since the market price presumably reflects what willing buyers and sellers value the seats at. And yet.. even that isn’t so, since the retail price of a business class seat is likely higher what many customers pay (think negotiated corporate rates).

To figure out how much value you got from your miles, the relevant ‘price’ comparison is what you would have paid for a ticket, not the retail price of that ticket.

The study gets the value of merchandise rewards right, though

Many frequent flyer programs offer merchandise for miles, and they’re more or less the same consumer products you would buy in a store. If they’re items you would buy anyway with cash, you’re just spending miles instead out of a virtual wallet. So the ‘value’ you get is the retail price of the item you would have paid (don’t forget to factor in coupons and shipping!) divided by the number of miles spent.

And the study properly concludes that merchandise rewards are one of the worst values for your miles.

That’s because frequent flyer programs are essentially paying cash for the merchandise. They pay cash to the airline for its seats, too, but they do so in much greater quantity (bulk discounts) and when saver awards are in play they are buying inventory at close to its marginal cost (because if the seat goes out empty it is worth zero to the airline). Merchandise doesn’t’ have these characteristics.

Credit Card Companies are the Consumer’s Best Friend — Protecting Us From Devaluations

Programs will still devalue, but the study makes an important point that bears repeating.

Very likely, $2.5 billion of the $2.8 billion generated by the sale of miles to program partners during 2012 can be attributed to credit cards. In almost every regard,
the success of MileagePlus is now linked to its credit card offer . . . and the success of the Chase card portfolio is tied to the attractiveness of the frequent flier program.

Airline Miles are Better than Bank Points for International Premium Cabin Awards

Again, stating the obvious.

A Capital One point will never be worth more than a penny apiece. An $8000 airline ticket will run 800,000 Capital One points, compared to perhaps 100,000 airline miles. This ‘study’ confirms basic math.

“Pay With Points” and Revenue-Based Redemptions are Bad, Whoops no Good, Whoops No They’re Bad

The entire point of the study is that premium cabin international awards represent the best value use of miles. You get the most out of award charts that way. And award charts offered by airlines can provide better value for high-end awards than is possible for bank programs like Capital One’s to offer.

In other words, the conclusion is that award charts produce value for consumers and that price-of-tickets based charts undermine this.

And yet despite these lessons that the study goes through pains to show, it concludes:

Lurking in the future is the threat of pay-with-points methods which IdeaWorksCompany predicts will eventually replace mileage-based accrual and redemption. The method is now embraced by Southwest and JetBlue and provides a lower cost for many reward itineraries. The arrival of pay-with-points could easily switch the advantage back to the airline co-branded credit cards. Fortunately for consumers, it’s a battle that should result in better reward values for all.

It’s as though the authors didn’t read their own piece.

They’ve just pointed out how it’s important to provide consumer value, how ‘pay with points’ revenue-based redemption systems like Capital One’s don’t offer much value for high-end rewards, and yet the arrival of these programs will be “fortunate” for consumers, offering “better reward values for all.”

(HT: @GlobeTrotScott)

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