How to Value Avios – Part 1

flying piggie logo One of the reasons for starting Flying Piggie was to give myself both a reason to analyse and an outlet for all the miles-related stuff circulating around my brain!

One of the areas I thought would be really interesting to analyse would be that eternal question – what is an air mile worth?  And, since my most-used programme is British Airways Executive Club, I’ll base my examples on that particular programme (including some examples where you should “Combine My Avios” to an Iberia Plus account and make a booking on Iberia). The methodology, of course, would work fine for any other airline frequent flyer programme, with just the inputs changing.

But for my first of two posts on the subject, I wanted to cover some of the errors that I think some other bloggers have made when attempting to place a valuation on an Avios.

Forgetting or ignoring the opportunity cost of a reward booking

In general, everybody (with enough miles) has two options for acquiring an airline ticket that will take them where they want to go – to pay with cash, or to “pay” with miles and a smaller amount of cash (to cover taxes & fuel surcharges – “TFS” for short).  The cash ticket will earn them even more miles, and the reward ticket will cost them miles.  The number one reason in my mind for wanting to know the value of an Avios, is to avoid making the mistake of spending those precious miles on a flight that would cost relatively little to buy with cash.  So, as far as I’m concerned I have two choices for the following example:

  1. I can redeem 100,000 miles for a return business class ticket from London to Los Angeles
  2. I can pay GBP2100 in the latest BA sale for a business class return, and earn an additional 27,210 miles as a Gold card holder (as well as those precious tier points!)

This means that my opportunity cost of redeeming miles instead of buying a ticket is 127,210 miles. This leads to a rather counter-intuitive argument – an Avios is worth less to those of us with status, because we can earn a 100% bonus (at least on flights with BA, American Airlines and Iberia).  This partially explains why I often redeem my Avios on partner airlines, as my perception of the opportunity cost is lower.  (i.e. all other things being equal, I prefer to spend cash on BA/IB/AA and redeem on the other Oneworld partners – which is surely what BA itself wants!  It also helps that there are lower TFS on partner airlines…)

Assuming that a flight is “worth” to you what the airline is charging

Apple will sell me their latest IPhone for GBP529 or EUR669.  That’s doesn’t mean that an IPhone is “worth” that to me (and, as such, I don’t own one and quite happily use my Blackberry).  Since I don’t “need” an IPhone, equating value with its retail price is a mistake.

Travel is quite often the same.  Nobody NEEDS to take that holiday to Cape Town and even fewer NEED to pay the GBP3100 that British Airways currently charge for a business class return flight from London to Cape Town.  So, to say that someone redeeming miles to Cape Town in business class has “saved” GBP 3100 (less TFS for a reward ticket) by redeeming miles is not reflecting reality since many of us would never pay GBP3100, and faced with that cost would make alternative arrangements, either by flying in a different cabin, or choosing a different holiday destination.

The only exception I would make it for trips you NEED to take (and perhaps you are collecting miles just for those special few trips you do indeed NEED to take).  Perhaps your sibling is getting married in the Caribbean, or you own a small business and you NEED to get to New York in good shape for that important meeting, but otherwise most uses of Avios are not requirements but instead desires or luxuries…

As a result, instead of looking at the retail price of the flights, you should look at “how much would I be willing to pay for that flight”.  I call that “perceived value” and will use that as the basis of Part 2 of my methodology for valuing Avios.

Ignoring that a reward booking is quite flexible!

Even if you’re quite happy paying whatever an airline charges for a ticket, and cleverly wait for a fare sale before making your booking, you are still usually committing to an inflexible ticket which means you can’t change destination, and date changes, if allowed, will come at a cost. An Avios booking, on the other hand, is really rather flexible, particularly if you are in the habit of booking one-way redemptions to maintain maximum flexibility.  You may struggle to find reward availability in the cabin you want for a date or route change, but at least you can cancel your ticket and get a full refund, less a small service fee for those without gold-level status.

So, whereas in the section above I argue that the ticket price may be higher than your own perceived value of the ticket, here I also argue that your perceived value of an Avios booking might be higher than a fare sale ticket, because you have the option of cancelling and changing your itinerary (although limited by reward availability).  So, again, you should think about your perceived value of a fully-cancellable, somewhat flexible ticket, rather than the inflexible, fare sale, cost of a ticket.

 Including a 2-for-1 voucher in the analysis

This one drives me crazy!  American Express in the UK and the US, and perhaps elsewhere, offer certain credit/charge card holders a certificate good for a free companion ticket (you need to pay TFS) if you spend a certain amount each year.  This is a great perk, and the best reason to get one of these cards.

However, to include this in your valuation of Avios seems a bit crazy to me.  The value of an Avios doesn’t change because you have received a 2-for-1 voucher, simply you have been given a certificate that is worth 80,000 – 300,000 Avios.  (80k being the minimum I would say is decent value – a business class return from London to New York or similar, and 300k being a First Class return from London to Sydney)

Having a certificate that is potentially worth 300,000 Avios means that I would be willing to spend substantial sums (Tesco, buying miles, mileage runs, etc.) in order to accumulate sufficient Avios to be able to maximise the value of the certificate (by having enough Avios for the redemption I need to “pay for”), but it doesn’t mean that my base valuation of an Avios changes at all…

Using Upgrade Using Avios as the the basis for your valuation

There is very little question that one of the best potential uses of Avios is to upgrade a ticket in World Traveller Plus (Premium Economy).  Not only does it cost relatively few miles to upgrade, but you’ll also receive the Avios and tier points for your original ticket in WTP.  So, for a lot of long haul bookings, your net cost of Avios is quite small.  Take London to Hong Kong for example…  It will cost 30,000 to upgrade a return booking from WTP to Club World, but, if you have silver or gold status, you would earn almost 27,000 Avios from your original ticket.  A net 3,000 miles for a flight upgrade to Club World – fantastic value!  Taking your perceived additional value from business class over premium economy, you’ll surely come out with a very high value for an Avios.  But I ask you these questions…

  • Are you ONLY going to redeem on British Airways using UUA?  If so, you probably don’t need very many Avios to be “self-sustaining” and so their value doesn’t matter much, just the base cost of WTP and the availability of Club World reward seats
  • What happens if you want to redeem on a partner airline, because BA don’t travel the route?
  • What happens if you are thinking about using some Avios for a Reward Flight Saver European flight where upgrading is not a priority?

SO, by all means, take advantage of Upgrade Using Avios as much as possible, but don’t use it as the basis of your valuation of an Avios…

Perceived value and your aspirational redemption

There is no single “right answer” to the question of how much an Avios is worth, as that is a personal calculation based on every individual’s travel preferences, income/wealth, and aspirations.  Some may look for First Class travel to exotic destinations like the Maldives, others may simply be aiming to get a couple of free trips to the Med each year.  So, when it comes to determining the value YOU PLACE on an Avios I recommend the following:

  1. Decide on a few aspirational destinations / routes for the use of your Avios, and the cabin in which you wish to travel.
  2. Decide how much you would be willing to pay for each of those destinations / routes / cabins.  Feel free to use what BA charges as a guide, but decide for yourself how much that flight / cabin is worth to you!
  3. Calculate how much British Airways Executive Club will charge you for taxes & fuel surcharges for those aspirational destinations / routes.

Armed with that, I’ll proceed in my next post to showing you how I calculate the value of MY Avios based on my answers to those two questions…

P.S.  If you think I’m right, or just full of ****, please leave a comment!

 

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