Tag Archives: airline miles

Fuel Surcharges + Forfeited Cash and the Value of Award Redemptions

In this post, I described how I choose to value redemptions relative to how difficult they would be to earn with a cash back card. I wanted to go into pretty fine detail, since I often see people argue that if an annual fee is X and a cash back card pays Y, then every redemption has to be at least Z pennies per point or you’re losing money. And most of the time that people make this argument, they do so in the context of travel rewards cards ultimately being less lucrative than cash back cards. My goal, therefore, was to test whether this idea that cash back cards are usually better is true for me by creating a calculator that would help me value each individual redemption.

However, since I wrote that post, two additional points came to mind that I wanted to address. First is the issue of “forfeited cash,” which is cash that I’d get from using a cash back card if I never took trips and instead put it in my investment account. Clearly the most frugal strategy would be to use cash back cards exclusively and invest the money, since even the most wildly valuable redemption wouldn’t outperform 2% of all credit card spend invested in dividend-paying stocks over a 40 year period. However, I do kind of want to see the world before I retire, so that option is out. Still, I should at least account for the cash that I’m forfeiting by using a travel rewards card when I value redemptions. This is difficult, however, since it’s really tough to pin down points per dollar that I earn. (And that figure is necessary, since I’d use it to determine the amount of credit card spend I needed in order to earn enough points for the reward.) First of all, it changes every month, and second, most redemptions are made using a combination of points from different programs, plus points I earned “for free” (AKA through a shopping portal or some other method not mutually exclusive with using a cash back card). So, I can ballpark it, but it’s incredibly difficult to know for sure. Overall, I view it as one of the costs of trying to redeem points for premium travel that I couldn’t afford with cash, although it doesn’t ultimately factor into my valuation of an individual award redemption.

Fuel surcharges, on the other hand, are tricky to account for. I’ve gone back and forth on this, trying to figure out where to account for them. Here’s where I get hung up: fuel surcharges are paid on a revenue ticket or an award ticket (assuming the carrier doesn’t waive them on the award ticket), so right off the bat, it seems like they’d be equivalent costs. However, in reality most people don’t redeem fixed value points just for the fare portion of a ticket; since the airline bundles all the fees together, the flexible points award uses enough flexible points to cover the total price. In my calculator, I identify the “net value for comparison,” which includes the equivalent costs, but not the non-equivalent costs. My thinking was that it’s an apples-to-oranges comparison if you’re looking at the amount of fixed value points required to pay for an entire ticket, since only the award redeemed with miles would have a cash component as well. This is open to debate, though, since you *can* pay for fuel surcharges with fixed value points, but you can’t with flexible points.

I played around with the calculator a little bit to run some different scenarios to see which produced better data. Here are two scenarios:

comparison

This is a fairly simple hypothetical redemption, with the only difference being whether the $500 fuel surcharge goes into equivalent or non-equivalent costs. The net value per point is the same, since that value takes into account all costs. However, putting the fuel surcharge into non-equivalent costs distorts the point-per-dollar rate required metric in an undesirable way. Since non-equivalent costs don’t deduct from the net value for comparison, the fixed value redemption is for a higher amount. And, if the net spending required amount goes up, the points per dollar rate goes down (because each dollar can earn fewer points if there are more total dollars to spend in order to reach a fixed number of points). So, after looking at it this way, it becomes clear that fuel surcharges should be accounted for as equivalent costs, since doing so has no effect on the net value per point metric and it presents a more accurate picture of whether the points-per-dollar rate of the travel rewards card is actually beating the cash back card.

Requisite question designed to spur a flurry of responses in the comments section: Do YOU give a shit about any of this?

My Intro to Points & Miles

It seems crazy that a year ago I had no idea that distance/region-based miles even existed. For most of my early adult life, I had a hard enough time holding down a job and a place to live, so earning miles was a distant concern. Then, when I did start putting effort into flying the same airlines in order to accumulate points, my airlines of choice were Southwest and Virgin – both of which have fixed-value points. As a result, I always just assumed that all airline miles were like this, and I never put much thought into which loyalty program I used. I got a Chase Sapphire card, but I didn’t see the point in transferring points to United when I could just use Chase to get 1.25 cents per point. In other words, I was the rube that most credit card companies market to. This is probably why I was targeted for a 100,000 point sign-up bonus on the American Express Platinum card, and it’s also why I threw the application away thinking, “What the hell would I do with 100,000 American Express points?”

platinum dumbshit

Finally, a friend of mine sent me a link to United’s redemption chart, and I realized that most carriers do indeed assign award prices based on either distance or regions… then all hell broke loose. This was right after United’s devaluation, but I wasn’t savvy enough at that point to be pissed, since 110,000 miles for a business class ticket to Europe at least made business class attainable to me when it previously wasn’t. See, I’ve been obsessed with long haul business class products for years, and I always thought that maybe I’d splurge on two seats for my wife and I on our 20th anniversary or something. I simply had no idea you could get these seats by accruing miles.

So, step one was to kick myself for how many Ultimate Rewards Points I had pissed away using Chase’s travel portal. Step two was to start hoarding points with an eye on an eventual United business class redemption. I realized it would take at least two years to get the 230,000 points we’d need for two round-trip tickets, but at least it would no longer be a one-time extravagance. However, once I got into it, I really got into it, and as I read travel reviews on sites like One Mile at a Time, I also started to pick up tips on other credit cards and faster ways to earn award tickets. Fast forward to today… I just got approved for my seventh card of 2015, and I’m already looking past our next trip, since I have all the miles we’ll need for that one.

Requisite question designed to spur a flurry of responses in the comments section: How did YOU get involved in the points/miles game, and did you used to be as clueless as me?