Frequent Flyer programs and Personal Financial Plans

[admin]

Earlier this week I was invited to make a brief presentation at a Macquarie-hosted event. The presentation was entitled "Integrating Frequent Flyer programs into Personal Financial Plans". Given the obvious interest in this topic to AFF members, I thought it would be worthwhile to summarise the presentation for the benefit of all our readers:

1. Frequent Flyer points is a currency. They are earned and can be spent (redeemed). Unlike regular currencies the cost and value of points is not definitive and will vary depending on individual circumstances.

2. While some may think that points are free, they are not! Qantas earned over $1B last financial year by selling points to its partners. This cost is obviously passed on to the consumer. AFF estimates that consumers effectively pay between 1c and $2 per point.

3. Calculating the value per point can be incredibly complex and again depends on how each individual uses their points. At the presentation, I referred to THIS GREAT POST by Gold Member to illustrate this point. Putting complexity aside, we estimate a "good" value to be between 2.5 to 3.5 cents per point.

4. I then presented the "AFF Cost/Value" Matrix (see image below), which plots cost versus value. The whole idea is to move to the WOW! Quadrant where you pay a low price, but get a high value for your points. Importantly, if your individual cost per point exceeds it’s value to you, you should get out of the Frequent Flyer game completely. This situation is represented in the (Get out) NOW! Quadrant.

5. Some tips to reduce cost per point include: don't incur unnecessary expense just to earn points, use premium credit cards for everyday purchases whenever possible, and use ASA as opposed to Classic awards whenever possible.

6. Some tips to increase value per point include: don't use points to purchase products from associated stores, such as the QF Store, avoid using points on domestic Economy tickets on discounted routes. It is generally best to use points for upgrades, premium class tickets or Round The World tickets.

 

[Fruitcake]

1. Frequent Flyer points is a currency. They are earned and can be spent (redeemed). Unlike regular currencies the cost and value of points is not definitive and will vary depending on individual circumstances.

Hopefully I don't appear to be arguing semantics but most "regular" currencies don't have a definitive cost or value either. The cost to buy an Australian Dollar varies continuously (whether you're buying them using another currency or buying them by working for them) and the value to me of any marginal dollar I acquire is likely to be different to that of the next person on the street.

 

[Melburnian1]

Fruitcake, you make an important point that is true, but there's a perception with FF points that we are individually not as much 'in control' as we are with our normal earnings because airlines can unilaterally make changes to terms and conditions, such as what I'll call 'burn' rates (i.e. how many points we need to purchase a seat, an upgrade or anything else that is available through the FF program).

At least with regular earnings, we have a fair idea of how much our basket of groceries may cost from week to week. Of course, if interest rates go up or down and one has savings or loans, that is also an occurrence outside our direct control, but often there's a bit of notice from commentators. With FF programs, changes can be announced without warning.

 

[paultiffen]

Maybe FF programs could provide "forward guidance" to keep inflation in line

Or a targeted rate of decreasing in value at 2-4%

 

[Robert K]

Are ASAs better value than classic awards? you get SC and points on the flight, but aren't you supplementing the points spend with cash too?

 

[NM]

Are ASAs better value than classic awards? you get SC and points on the flight, but aren't you supplementing the points spend with cash too?

Yes. but it depends on the number of points earned on the ASA flight (so the "net" points cost) and the value you place on the status earning.

 

[samh004]

Yes. but it depends on the number of points earned on the ASA flight (so the "net" points cost) and the value you place on the status earning.

Yes, because you might use points for a J classic award enough times a year, but you'll always be in the J lounge and have a smaller baggage allowance than if you used points for a JASA instead and found yourself with Gold or even Platinum status, giving you access to a better lounge and increased luggage allowance. Perhaps even a better chance of an op-up if that's a metric.

The value increases.

 

[harvyk]

Hopefully I don't appear to be arguing semantics but most "regular" currencies don't have a definitive cost or value either. The cost to buy an Australian Dollar varies continuously (whether you're buying them using another currency or buying them by working for them) and the value to me of any marginal dollar I acquire is likely to be different to that of the next person on the street.

True, but if I have $10 in my pocket, that $10 will probably buy me lunch at most take-aways I go to, and if I gave you that $10 you'd probably be able to purchase lunch with it regardless of the day. Where as if I have 30,000 points, those points may be able to fly me on a short haul J dom flight (saving me all of $450) or may be able to upgrade me to J on a long haul int (saving me $5,000).

Whilst yes products which are purchased with cold hard cash can vary in price a little, it's not like I will get 10x the saving just because I transferred that cash into NZ$ prior to making the purchase. With FF points you just might.

 

[MelbMan]

Sorry could someone enlighten me to what ASA stands for?

Thanks..

 

[blackcat20]

Sorry could someone enlighten me to what ASA stands for?

Thanks..

Any Seat Award

 

[JessicaTam]

There is a full list here.

 

[mono88]

Earlier this week I was invited to make a brief presentation at a Macquarie-hosted event. The presentation was entitled "Integrating Frequent Flyer programs into Personal Financial Plans". Given the obvious interest in this topic to AFF members, I thought it would be worthwhile to summarise the presentation for the benefit of all our readers:



View attachment 19869

Thanks for updating us on this topic.

Good to see Macquarie being proactive in asking acknowledged experts i.e. AFF to present on this topic.
What was the feedback from the audience? Did they understand the benefits of FF programs? Was there any good discussion of note?
Good to see AFF on the "presentation circuit".

 

[doctau]

Hopefully I don't appear to be arguing semantics but most "regular" currencies don't have a definitive cost or value either. The cost to buy an Australian Dollar varies continuously (whether you're buying them using another currency or buying them by working for them) and the value to me of any marginal dollar I acquire is likely to be different to that of the next person on the street.

That's true, but freely-tradeable items (currency, shares, commodities, etc) that have non-trivial trading volumes can be assigned an approximate value at any given point in time, based on recent trades. Any small trader will have different buy and sell prices due to the middleman taking their cut. Different trades will obviously give the items different values, but arbitrage mean they can't drift too far away from the "concensus" value or someone will offer a better price as a middleman.

Frequent flier points are different because they are not freely tradeable. In schemes like QF's, you aren't allowed to trade with anyone other than Qantas (and family members, ifyou could transfer them points and they give you something outside). That means that Qantas gets complete artificial price setting on the market. If a company wants to offer you points in return for something, they have to buy them from Qantas. If you want to sell your points for a flight/upgrade, you have to do so to Qantas.


Qantas has major incentives for them to be deflationary, since if it increases the cost of everything bought with QFF points by 1% it makes a pile of money. There are very few ways to convert QFF points to freely-tradely items, buying items (or gift cards) from the store is about it. That's why you can't easily assign a dollar value to QFF points - the things that are most valuable to buy (flights, upgrades) are not tradeable.


If you were going to pay for business flights but used points instead (either for it all or paying for Y and then getting an upgrade) you can assign a value easily. If you're like me and a lot of others who wouldn't/can't pay cash for business (and unfortunately my work doesn't either), and the realistic choices are pay for Y or pay for Y and upgrade with points, it's different. Saying points are worth 5c each because I used 40k to upgrade to business and paying for business would have cost $2k more might make be feel great, but it's isn't really saving that much because I was never going to pay for business.

 

[geoffl]

"and use ASA as opposed to Classic awards whenever possible."

I always look at ASA when planning trips, but, the Points required has always been astronomical compared the a Classic Seat, is there any clever way to find ASA Seats at a reasonable Point Level ??

 

[JessicaTam]

"and use ASA as opposed to Classic awards whenever possible."

I always look at ASA when planning trips, but, the Points required has always been astronomical compared the a Classic Seat, is there any clever way to find ASA Seats at a reasonable Point Level ??

Have a look here: http://www.australianfrequentflyer....t-flyer-program/asa-change-summary-52004.html

And here: http://www.australianfrequentflyer....rogram/has-anyone-had-success-call-51720.html

 

[burmans]

Thanks for updating us on this topic.

Good to see Macquarie being proactive in asking acknowledged experts i.e. AFF to present on this topic.
What was the feedback from the audience? Did they understand the benefits of FF programs? Was there any good discussion of note?
Good to see AFF on the "presentation circuit".

Being a cynic and this cynicism at least partially borne out of being a former employee, can I suggest their interest is in maximising their own benefit rather than ours. Part of me is not so convinced that getting AFF on the presentation circuit is such a great idea for us as individual members.

On the ASA question, surely you are refering to marginal ASA's, some normal ASA's are abysmal value. Not a statement I'd be making that these are "always" better.

 

[geoffl]

Thanks Jessica, I have read these and they are very helpful, next step will be to try it !

 

[mono88]

Being a cynic and this cynicism at least partially borne out of being a former employee, can I suggest their interest is in maximising their own benefit rather than ours. Part of me is not so convinced that getting AFF on the presentation circuit is such a great idea for us as individual members.

.

There is no problem with being cynical, whether being an ex Macquarie employee or not. Most of us are ex-employees, or will be at some time.

I would expect both Macquarie, as a bank etc, and AFF, a public forum and business, to act in the interests and benefit of its shareholders, stakeholders and owners.
This does not mean that Macquarie is wrong to use acknowledged experts in presenting information to their clients/attendees, in fact it would be bad business practice not to. It shows in this case that they made the right decision.

AFF would have had its reasons to accept the presentation opportunity.I do not see a problem with it.

 

[TonyHancock]

There is a full list here.

On the ASA question, surely you are refering to marginal ASA's, some normal ASA's are abysmal value. Not a statement I'd be making that these are "always" better.

...but alas still no MASA in the abbreviations list.

 

[geoffl]

"and use ASA as opposed to Classic awards whenever possible."

Was the statement used by Admin in his presentation, not mine...