### valuation of miles and points

As with any currency, the true value of various miles and points is determined by their trade value on a unified, liquid, and open market. Unfortunately such a market does not exist publicly — there is an underground secondary market with sometimes stale prices, minimum trade requirements, and counterparty risks, but generally speaking there is no notion of transparent prices. So you often see “Mileage Blogger” sites like this bandying about valuations pulled out of thin air. There should be a much more principled way to determine valuation that helps to make transaction decisions easier.

First, let us assume that redeeming for the primary intended product is liquid for the holder, e.g. if we’re talking about miles then suppose we do indeed travel a lot; otherwise all sorts of discounts due to time value of money, depreciation, and illiquidity would have to be taken into account. Let us focus on the market of airfare. Let us suppose there is a suitable notion of substitutable fares (e.g. a fairly reasonable one might be: If two flights have the same starting and ending locations, the same number of stops, and are within one hour in total duration, starting, and ending time, then they are substitutable.).

Then suppose Airline A has a fare of $380, which may also be bought with 15800 Airline A points and $5.60 in fees, while Airline B has a substitutable fare of $250, which may be bought with 12500 Airline B points and $20 in fees, and Airline C has a substitutable fare of $227, and these form the entire set of substitutable fares. A naïve so-called “Mileage Blogger” may say that

- Airline A points are worth $380/15800 = 2.41 ¢/pt while
- Airline B points are worth $250/12500 = 2.00 ¢/pt.

A slightly more astute but no less naïve so-called “Mileage Blogger” may say that

- Airline A points are worth ($380-$5.60)/15800 = 2.37 ¢/pt while
- Airline B points are worth ($250-$20)/12500 = 1.84 ¢/pt.

But really, the valuation of Airline A points is ($227 – $5.60)/15800 = 1.40 ¢/pt while the valuation of Airline B points is ($227 – $20)/12500 = 1.66 ¢/pt. Note here we take the **minimum** of the set of substitutable fares, regardless of which airline it is from, and deduct the point redemption fees to obtain cash value.

This equally applies to the much beloved high-value redemptions for First Class international fare, where claimed valuations of 3 ¢/pt, 5 ¢/pt, and other outrageous numbers are seen. Are these valuations real? Well no. First of all there is often no two-sided market for these fares, as there is either no demand for the cash prices, or there is no supply for the point redemption. It is indicative of a much lower than claimed valuation from simple “award chart” calculations. In this case, the lower substitutable fare is often in the travel agency market. The valuation can also be bounded from prices in underground secondary markets, where eventual high value redemptions are the norm. Cash prices for a variety of points range between 1.4 ¢/pt to 1.6 ¢/pt, rarely going much higher. (Some points are inherently doubled of halved in nominal value, adjust accordingly.) Even taking into account the spread by the scalper (ahem, agent), these are likely closer to the upper bound than fanciful imaginations.

If we had actual airfare sales volume data, it would be easy to aggregate all fares into equivalence classes by substitutability, calculate valuations, and apply weighting according to volume. This would give a trade weighted currency value. Without this, one could conduct a survey into the type of “trades” that would make up one’s “basket” in any given year and figure out the personal value of all the points out there. After all, the paper value of a trade that would never occur — viz. a fare that one would or could never obtain — is completely meaningless.