Monday, August 30, 2010

Tempted by Bonus Miles? Do the Math

Investors who follow the adage buy low, sell high may want to avoid airline "bonus mileage" programs. Travelers who buy frequent-flier miles pay about 3 cents per mile, but then they typically redeem them for tickets at 1.5 cents each—or even less.

Mileage bonus programs—in which consumers buy frequent-flier miles directly from the airline—are popular with travelers. US Airways says about 5% of its customers are opting to pay to double or triple their miles when they buy tickets, and that revenue from mileage sales was up 236% in the first six months of this year compared to the same period of 2009.

Sales on AirTran Airways' program are up 40% this year, a spokesman said. Alaska Airlines said its mileage sales are "very robust" and now top $1 million a month. United says it's doing 700 double- or triple-mileage transactions per day.

American Airlines won't say how many of its customers are buying since its May launch of the "Mileage Multiplier" promotion, where ticketed passengers can pay a fee and earn double or triple the miles on a trip. But some are going in for 10,000 and 20,000 miles.

"Many folks are just crazy for more miles," said Derek DeCross, president of American's AAdvantage frequent-flier program. "Some people just really, truly want to have as many miles as possible."

Donald Adam, a top-tier elite frequent flier on American, was curious about carrier's offers pitched this summer that for a fee would let him double or triple the miles he earned on a trip. He didn't do the calculations at the check-in kiosk, but passed, sensing that was it wasn't a good deal.

He's right. Double miles between New York and Los Angeles would cost $81 one-way, including an excise tax, for example. But that's 3.3 cents for each of the extra 2,475 miles he'd get.

Frequent-flier miles hold a special place in the consumer psyche. People cherish them, hoard them and arrange their buying and spending to maximize them. But they rarely deliver real value: It can be hard to find the award tickets or upgrades you want, and travelers often cash them in for cheap tickets, getting minimal return for their precious assets. When frequent-flier programs began more than 25 years ago, airlines found they were powerful incentives to keep travelers loyal to their brand.

Then they found they could sell miles to credit-card companies, hotels, florists, charities and other merchants who wanted to give out miles as rewards to their customers. (They sell those miles in bulk at roughly one cent per mile.)

Every major U.S. airline, except Continental and Southwest, sells additional miles to members of its frequent-flier program., which processes mileage-purchase transactions for a majority of U.S. carriers, says it sells about $250 million worth of miles to consumers annually.

Most airlines charge between 2.5 cents and 3 cents per mile; some add a $25 or $30 processing fee, and all collect a 7.5% federal excise tax, putting the total cost at more than 3 cents a mile in most cases. For a 10,000-mile purchase, United is the most expensive at $358. Alaska and US Airways are the cheapest at $296.

Purchased miles don't count toward elite status, and sales at airlines are non-refundable. Most airlines limit how many miles you can buy each year to 40,000 to 60,000.

Airlines, being airlines, do offer sales on miles. Currently American offers a 3,000-mile bonus for every 10,000 miles you buy through Aug. 31. Each customer is limited to 12,000 bonus miles. United has been offering its double- and triple-miles at prices reduced by 20%, but that offer ends Friday.

Consumers typically buy miles to top off accounts and reach awards faster, airlines say. In most cases, buying 25,000 miles for a domestic coach ticket wouldn't make sense—you'd spend $841 at United, for example. "If I can spend $250 to top off an account or spend $480 and buy the ticket, the miles look attractive," said Christopher Barnard, president of Points International Ltd., the parent of

United believes savvy road warriors, not just infrequent fliers, are taking advantage of the bonus mileage offers. When redeemed for upgrades or for last-minute tickets, miles can deliver more than 3 cents of value apiece, sometimes up to 10 cents a mile or more. "We're seeing more of our elite consumers taking this offer,'' said Tim Simonds, United's managing director of marketing.

If you really work it, getting a ticket by buying miles may be cheaper than paying the regular fare. Alaska sells a lot of miles to people topping off accounts, and a lot to people making huge purchases. The reason: Alaska miles, which have no annual limit on purchases, can be converted into tickets on partner airlines, such as first-class seats on British Airways that go for 140,000 miles round-trip.

It turns out buying 140,000 miles for $4,139 and redeeming them for an award ticket (you have to pay a fuel surcharge, too, of up to $600) is cheaper than buying a first-class ticket, which starts at more than $12,000 for a Seattle-London round-trip. You buy miles for 3 cents apiece and redeem them for a ticket worth at least 8.6 cents per mile.

One big catch: There's limited availability of first-class award seats on British Airways.

"If the value wasn't there, they [mileage sales] wouldn't be so popular," said Rick Rasmussen, Alaska's director of customer loyalty and marketing programs. "Customers do the math."

The math works for business-class tickets, though not as dramatically. For Seattle-London tickets, British Airways tickets start at $5,037. Buying 120,000 miles from Alaska costs $3,548. Even after the fuel surcharge, you'll save more than $1,000.

Alaska offers bonus miles a different way as well: The airline gives customers the chance to pay extra when buying a ticket to add 1,000, 2,500 or 5,000 "Fly and Buy" miles to the mileage earned. Paying for an extra 5,000 miles costs $117 tax included, or 2.3 cents per mile. That's a discount to outright mileage purchases—buying 5,000 miles separately from a ticket on Alaska costs $148 tax included.

Another way to push accounts over award redemption levels is to transfer miles from another account, either a relative or even someone you're willing to pay for their miles. Most airlines charge a penny per mile for transfers and add a $25 or $30 fee. United is most expensive at 1.5 cents a mile, plus $30. Transferring 10,000 miles costs $185.

Through the end of the month, Delta Air Lines is offering a 50% mileage bonus for transfers—transfer 10,000 miles to someone and pay Delta $130, and the airline will put 5,000 miles into your account.

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