“Look at all those naive folks out there with their slow building mileage balances and run of the mill credit profiles,” say the Conventional Wisdomers. “They save up their frequent flyer points over years and years to take that big trip of their lives, and then just before they’re going to make the redemption…. wham! A devaluation! Earn and burn, people! Earn and burn!”
“Earn and burn!” is the time honored cry of the points and miles community. We’re told not to hoard our miles because we’re bound to be disappointed when we finally go to redeem and can’t get the trip we’ve been hoping for. But what’s the rationale behind this strategy, and does it make sense? How long are we allowed to hold our miles? Are they really that volatile?
Do we always have to be earning and burning?
Conventional Wisdom says our points are worth more today than they’ll be worth tomorrow.
Lately we’ve had a nasty rash of program devaluations. Hilton, Delta, United, Southwest, Delta (again), Hyatt, Club Carlson, Delta (again? come on already!), US Airways and American have all changed their programs in the last 18 months alone. With every program change there’s been at least one “enhancement” that makes some redemptions cost more, often by a significant amount. Sometimes even by an absurdly ridiculous amount. Yes, I’m looking at you, Hilton and United. Don’t sit there acting like you don’t know.
The obvious conclusion is that our points today are worth the most they’ll ever be worth, and therefore we’ll want to spend them when they’re at that height or risk getting less for them tomorrow.
But what other currency can we think of that also devalues on a regular, long-term, ongoing basis? Some other currency which is always worth more today than tomorrow?
Like maybe… cash?
“No, no, wait a minute,” pipe up the Conventional Wisdomers. “We see where you’re going with this. But cash devalues at a much slower rate than points and miles.”
Really? How do we know that? In fact, how can we even speculate on this point without a systematic analysis of the inflation rate of cash versus the devaluation rate of each individual frequent flyer program over standard historical periods of, say, 6 months, 1, 5, 10, and 20 years? Plus we’ll need to factor in the rate of inflation specifically for airfare over the same periods, include foreign currency fluctuations for foreign carriers, and further take into account the recent moves towards dividing the base fare into a la carte fees for items that used to be automatically included such as checked bags and mediocre meals.
Luckily I had some extra time this week and put together this comprehensive chart…
OK, so maybe I didn’t quite get around to it. But that’s exactly my point — we don’t actually know that cash inflation is not as bad as points inflation over time and proving it would take a massive months-long study which no one is ever likely to do. Even whatever timeframe we used to make such a comparison would potentially alter the result. Yes, the general U.S. inflation rate has been historically low over the last several years. But it was rampant just a couple decades ago in the late 1970’s and early 1980’s, easily running into double digits, while at the same time airfare was dropping as a result of deregulation. If we had a similar period today, it’s actually possible the value of our miles could outpace the value of the cash in our pockets.
But aren’t loyalty program devaluations unpredictable?
“OK, hang on,” grouse the Conventional Wisdomers. “Another reason you should earn and burn miles is because you never know when a devaluation is coming.”
Yep, that’s true. We cannot control or predict when the value of our points and miles will drop. You’ve got me there.
Except we can’t control or predict the future value of cash either.
Luckily this is not Venezuela and we live in a country where our government and the value of our dollars are relatively stable (go U.S.A.!). But ask a dozen economists what the inflation rate will be 2 years from now and you’ll get a dozen different answers. The economic crash just a few short years ago demonstrates that the predictive powers of even economic experts are not particularly great when it comes to cash.
Airlines and hotels control loyalty program devaluations, so for the folks working at those companies, the next “enhancement” is predictable. For the rest of us, we can try to read the tea leaves and buy and sell gold, but we’re not going to be able to predict cash devaluations appreciably better than points devaluations. Perhaps we might note that in recent years cash has held its value better than points, but as those folks on Wall Street who work so hard to
steal our money invest our money wisely like to say, past performance is no guarantee of future results.
The Devil’s Advocate says it’s okay to hoard your miles… just not forever.
“OK, Mr. Advocate,” sneer the Conventional Wisdomers. “Why don’t you put some skin in the game then? Let’s say you’re booking a flight and you have the opportunity to use miles at a decent but not great redemption rate. Do you do it, or do you save your miles for some random unknowable future use?”
Of course, frequent travelers like those reading this blog are confronted with this dilemma on a regular basis, and most of us won’t hesitate to hold off on a middle-of-the-road miles redemption and pay cash instead if we think we can do better somewhere down the line. By definition, that’s a form of hoarding. We’re not earning and burning when we have the opportunity. But we do it.
Why? Are we just being overemotional about hanging onto our miles? Not at all. We do it because at that moment we are partially predicting we can get a higher future value for our miles than we can for our cash.
Would we be wise to hoard our points for years on end, saving up for that big trip we’ll take the day after we retire? No, probably not, because we likely can’t predict future values accurately that far out (and in all fairness to the Conventional Wisdomers, that’s often what they’re referring to when they advocate earning and burning). But we also don’t need to be panicked about quickly spending our points any more than we’d be panicked about spending our cash before it loses some of its value. So don’t be afraid to keep a healthy balance of miles and be selective when picking your spots to use them.
Revisiting Cash versus Points… and a Giveaway!
Thus far in the Devil’s Advocate series we’ve had several discussions about the relative value of cash versus points and miles. When I was writing today’s post, I was reminded that we haven’t talked about one big obvious advantage that money in the bank has over points in the bank. I thought someone might bring up this particular advantage when I wrote about cash and points as competing currencies in my post “Yes, You DID Get 10 Cents Per Mile for Your Award Redemption” back in April. But despite dozens of comments on that post and related posts since then, no one’s mentioned it and neither have I, though today’s post might have gotten a few people thinking about the advantage I have in mind.
I’ve got a pair of one-time United Club passes that expire on June 30th, and Scott’s got 4 United drink coupons to make up for the fact that United has managed to devalue even the well spirits in their clubs. So let’s have some fun with a quick guessing game giveaway on this topic here in today’s comments.
To enter, tell me what’s one big advantage cash has over points that we haven’t talked about yet in the Devil’s Advocate series or the related comment threads? You can click here or on “Devils Advocate” in the byline at the top of this post to see all the Devil’s Advocate posts so far. All comments on this post and only this post with the answer I have in mind (which I’ve already told Scott so he can keep me honest) will go into a random drawing and one winner will get both the passes and drink coupons. So even if you think the correct answer has already been posted, you can offer the same answer and still have a chance at winning (and if no one gives the answer I have in mind, I’ll put all the comments in the random drawing).
Deadline for entering this giveaway is Sunday, June 1st at 11:59pm Pacific time, and I’ll announce the winner and the correct answer in next week’s Devil’s Advocate column. One guess per person, please.
(Disclosure: United didn’t give me any consideration for this giveaway. Not a single dime. Really disappointing. I’m looking at you again, United. Let’s step it up.)
Devil’s Advocate is a weekly series that deliberately argues a contrarian view on travel and loyalty programs. Sometimes the Devil’s Advocate truly believes in the counterargument. Other times he takes the opposing position just to see if the original argument holds water. But his main objective is to engage in friendly debate with the miles and points community to determine if today’s conventional wisdom is valid. You can suggest future topics by sending an email to firstname.lastname@example.org.