Frequent Fliers: Make Sure You Don't Get Clipped
For millions of Americans, frequent-flier miles have become a second currency. In addition to piling them up by hopping on a plane, you can get them by making phone calls, buying toys, investing in mutual funds, taking out a mortgage, or renting cars. ''Get 5,000 Bonus Miles FREE,'' screamed a recent credit-card offer from Banc One (ONE) to United Airlines' MileagePlus members.
Some 18,500 U.S. businesses now hand out miles, and at major carriers, nonairline purchases account for more than half of all mileage earned. In 1998, about 2.5 trillion miles were distributed, and 15 million free tickets were issued, according to InsideFlyer magazine (www.webflyer.com). With the six biggest U.S. airlines now hitched in three different alliances, it's easier than ever to spend your bonanza (page 106). But before you do, ask yourself what those mileage freebies are costing you. You may be paying a heavy price to accumulate ''free'' miles. Indeed, you often can buy a ticket for less than the cost of the miles you are redeeming.
It's no big deal to figure out which deals are dogs and which are truly valuable. Start by putting a dollar amount on miles to see how much you're spending to buy them and how much they'll end up being worth. Then, analyze every credit-card offer, long-distance solicitation, and frequent-flier award claim.
Conventional wisdom says a mile is worth about 2 cents--around what major airlines charge companies that buy mileage for incentive awards to employees or clients. But a mile is rarely worth more than 1.5 cents to most travelers. Why? For one thing, airlines put heavy restrictions on redeeming miles for tickets, so you probably won't be able to travel for free whenever you wish. Moreover, mileage balances at some airlines, such as United and American Airlines (AMR), can expire after three years. And airlines can change award levels at will. All told, you probably should avoid paying more than 1 cents per mile. Aim to spend miles in a way that makes them worth at least 1.5 cents apiece.
NO BARGAIN. A few weeks back, on Delta Air Lines (DAL) or United, you could have acquired a free coach ticket from New York to celebrate April in Paris for 50,000 miles. You could have bought the same ticket for $630. That made the free ticket worth 1.3 cents per mile. That's pretty standard: On popular routes, say, to California, Europe, or Hawaii, you'll be lucky to find tickets that make your miles worth more than 1.5 cents apiece. And because of all the restrictions that come with miles, you should look to pay significantly less than that for them.
It's easy to pay more for miles. Take credit cards, the biggest source of miles in the U.S. after the airlines. If you have a good credit rating, you can get a basic card with no annual fee and a fixed rate of 12% or less. If you want mileage, you'll have to pay an annual fee and higher rates. US Airways' version, issued by NationsBank, costs $50 per year and has a rate of 9.9 percentage points over prime, or 17.65% currently. The average American household with annual income above $50,000 charges $700 a month on a credit card and carries a balance of $2,800, according to Auriemma Consulting Group, a Westbury (N.Y.) firm that tracks credit patterns. With a US Airways card, that would yield 11,000 miles in the first year--the sign-up bonus of 2,500 miles plus a mile for each dollar spent. But to get those miles, you'd have to spend $225 extra for the card fee and interest. The resulting cost per mile: 2 cents. It's even higher on other carriers' cards (table).
These cards can make sense if you charge a lot and carry no balance. If you go this route, look for special offers. Diners Club charges $80 for a card that awards 12,000 bonus miles in the first year. Diners also lets you apply miles to any major airline, so you can top off accounts that are close to a free ticket or have miles about to expire. For an extra $25 a year, American Express (AXP) lets cardholders earn mileage that can be used on many airlines or spent on merchandise or vacations.
Mutual funds are another area where you should think before taking the miles. American's corporate cousin, AMR Investments, runs funds that often charge higher fees to investors who want to earn miles. At AMR's American AAdvantage International Equity Mileage fund, the premium is 33 basis points. On an investment of $10,000, you'd earn 1,000 miles, worth $10 to $15, but pay $33 in extra fees. Other AMR funds charge smaller premiums, and a couple carry none at all.
Many hotel chains make you spend more than you should to receive miles. Hilton won't award miles to guests paying the lowest rate. That makes some travelers deliberately pay a higher rate to earn mileage. A typical trade-off is $20 extra for 500 miles. Cost: 10 cents per mile. You'd be better off saving the cash for your next vacation--or staying at a Marriott or Hyatt, which award miles at almost any room rate.
So what are the smartest ways to earn miles? Any way that doesn't charge you extra for doing so. MCI WorldCom's long-distance phone plans lead the list. You can call MCI, negotiate the best rates for long-distance service, and, at the end, give your frequent-flier number. MCI gives you five miles for every dollar spent, and at least 2,000 miles for signing up. MCI is affiliated with every major carrier except Trans World Airlines (TWA), which has a similar deal with Sprint.
WEB STRATEGIES. One of the fastest-growing ways to earn miles is to shop on the Internet. American, among others, now awards 1,000 bonus miles if you buy a ticket on its Web site (www.aa.com). Just be sure you've checked a price-comparison service such as 1travel.com (www.1travel.com) to confirm that you're paying a good price for the seat. Another painless way to earn miles is by buying online at Clickrewards (www.clickrewards.com), whose partners include Barnes & Noble. Of course, you can always use the old-fashioned method: Fly. Make sure you keep your boarding pass until you see the flight credited to your account.
Once you earn your miles, you've got to figure out how to spend them wisely. Fortunately, the Internet has made this task easier. Make a list of the trips you're interested in taking over the next couple of years. Then head to a Net booking service to see how much they'll cost. You might decide to spend $500 for a ticket to London and save your miles for next year's $1,000 trip to Tokyo.
NO THANKS. Meanwhile, don't be tempted by airline offers to sell you a ticket for a combination of miles and money. The deals are usually terrible. Every week, American sends E-mail to 1.8 million subscribers, offering last-minute specials for the coming weekend. You can buy a ticket outright or combine $39 with 6,000 to 13,000 miles to get a seat. These deals value your miles at half to nine-tenths of a cent each. Continental (CAI.A) and TWA have similar deals, with only slightly better terms. Save your miles and buy the tickets in cash.
There's one way to spend miles and be sure you're getting good value: Buy first-class tickets or upgrades, which can make miles worth about 8 cents apiece. It's not a common way to redeem miles, though, because most people prefer getting two coach trips to one first-class journey. And travelers who truly care about sitting in the front of the cabin generally fly so often they're flush with free upgrade coupons.
Whether you use your miles for a bunch of domestic trips to visit family or a vacation in Thailand, one thing is the same for everybody: Spending 2 cents for something worth a penny is no great deal--and it certainly doesn't fit the definition of free. Have fun playing the frequent-flier game--but do it cautiously.
Updated Jan. 7, 1999 by bwwebmaster
Copyright 1999, Bloomberg L.P.