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How Low Oil Prices Affect Your Frequent Flyer Miles

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Every so often award travel enthusiasts are reminded that loyalty programs don’t exist in a vacuum, and that global events have very real effects on the value of our points and miles. Today TPG Senior Points & Miles Correspondent Jason Steele looks at the recent decline in the price of oil, and discusses how it might impact your travel rewards.

Do you know what your frequent flyer miles are worth? While the monthly valuations TPG puts together each month provide a useful guide, the value of miles (in most programs) depends somewhat on the cost of airfare. Award redemptions are more valuable when flights are expensive, but redemptions become less valuable when prices dive.

For example, If you redeem 25,000 miles for a flight that would have cost you $500, then you’re getting 2 cents per mile in value (which would generally be considered a decent redemption). However, if that same flight instead costs $350, then you’re only getting 1.4 cents per mile, which is average at best.

Fuel accounts for about one third of operational costs for most airlines, and the price of oil has fallen by half in the last six months. If the price of airfare starts to fall along with it, then your miles may experience a corresponding decline in value. Today I’ll examine this connection between fuel and frequent flyer miles to see how you can respond to lower prices in order to maximize your award redemptions and minimize out of pocket expenses.

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Fuel accounts for one third of operational costs for airlines.

Looking at the data

There have been several reports indicating that airfares have not been falling despite the decline in oil prices—no doubt to the dismay of many travelers. There are several factors that contribute to airfare prices, and oil is just one of them. For example, airline industry consolidation has reduced competition among the major airlines, while an improving economy has kept passenger demand strong.

At the same time, anecdotal evidence (and my own observations) suggest that increased competition from ultra-low cost carriers like Spirit and Frontier seems to have substantially reduced fares on some routes, but there are reasons why most data won’t show a decline in airfares just yet.

First, it takes time for a drop in oil prices to work its way into the airfare market. There’s a lag between the price of crude oil and the price of jet fuel, and between the fuel being sold and the actual fuel being used. Next, airlines need to take this new cost savings into account, first by increasing capacity to maximize profits, and then by reducing prices to stimulate demand and compete with other carriers and fill their new capacity. In addition, the Department of Transportation’s Bureau of Transportation Statistics’s only supplies its most recent data from the second quarter of 2014, which predates the current oil price drop.

But we don’t have to see into the future in order to predict what will happen to airfares; just look at the past! In 2008 and early 2009, oil prices spiked and then fell rapidly to a fraction of the previous high, before rebounding later in 2009.

2008 Crash
Oil prices from 2005-2011

Now, let’s compare this data to DOT statistics for the U.S. airfares in both current Dollars (blue), and inflation adjusted Dollars (red):

National level domestic average airfare (courtesy of the DOT)

As you can see, airfare dropped rapidly in the first half of 2009, and took about two years to fully recover. Therefore, analysts are predicting lower airfares in 2015, despite very little current data linking low oil prices to lower airfares.

What this means for your miles:

Most of the major airlines have undergone some sort of mileage program devaluation in the last few years, and it’s unlikely that there will be significant “revaluations” of their award charts other than a few temporary mileage sales, such as this one by United. What this means is that your miles in traditional zone-based programs are about to become even less valuable, at least in the short term. So here are some steps you can take to continue to get the most value from your points and miles:

Fixed value points are just as useful when flights are cheap.

1. Reconsider fixed value airline programs. Unlike miles in traditional zone-based frequent flyer programs, fixed value points and miles (like Southwest Rapid Rewards) don’t fluctuate with the cost of airfare. Rapid Rewards are always worth 1.4 cents each (or 2.8 cents if you have the Southwest Companion Pass) toward Wanna Get Away fares, with no need to search for scarce award seats. According to TPG’s latest valuations, Jetblue’s Trueblue points are worth 1 – 1.7 cents each, while Virgin America’s Elevate points are worth 1.5 -2.3 cents each.

2. Take another look at earning fixed value credit card points and miles. If you primarily travel on domestic flights in economy class, you’re more likely to be better off with a fixed value mileage program if airfares do start to fall. The Capital One Venture Rewards card offers double miles on each purchase, and each mile is worth one cent toward travel statement credits. The Barclaycard Arrival Plus has a similar program, and it offers a 10% rebate on miles redeemed for travel statement credits, for an effective return of around 2.2%.

ThankYou Points from the Citi Prestige card are worth 1.6 cents each toward flights with American and US Airways, which also earn miles and are eligible for upgrades. If you’re unable to consistently earn more value from your airline miles in zone-based programs, then it makes sense to earn these fixed value points for when highly discounted airfares are available.

3. Look more closely at how you redeem your miles. When airfare is highly discounted and airline miles are worth less, consider alternate uses. For example, Chase Ultimate Rewards points are worth 1.25 cents each toward airfare, hotels, and car rentals, so there’s no need to transfer these points to miles unless you’re getting significantly more value from the miles, especially when you consider that flights redeemed directly from the Ultimate Rewards travel center still earn mileage, count toward elite status, and are eligible for upgrades.

When flights are cheap, consider paying for them outright. Photo courtesy of Shutterstock.

4. Use cash occasionally. While this may be blasphemy to die-hard award travelers, when highly discounted flights are available, you should pay cash and earn more miles; save your existing miles for more expensive tickets that offer a greater return.

5. Diversify your portfolio of points and miles. Having a diverse portfolio of reward points and miles is always a good idea, but never more so than during such uncertain times for award travel. Programs like Chase Ultimate Rewards, American Express Membership Rewards, Starwood Preferred Guest, and Citi ThankYou allow you to convert points to miles when you need to redeem for an award, so you can always use the most valuable programs when you need to.

6. Focus on using miles for last minute awards and premium class travel. These expensive flights have always been the best use of frequent flyer miles, and the contrast becomes even more stark when the price of discounted economy class tickets falls.

A guest room at the Hotel Santa Teresa.
While airfare costs might be declining, hotel costs are on the rise.

7. Consider hotel awards. The price of hotel rooms has climbed or remained steady as the economy has rebounded and occupancy rates have risen, making these awards more valuable. You could save more money by purchasing discounted airfare and using points toward hotel awards rather than flights.

8. Look for drops in fuel surcharges. So far, Japanese carriers JAL and ANA have announced plans to reduce fuel surcharges (by about half in early 2015). Nevertheless, several other foreign airlines such as Air Canada and Qantas have been absorbing mounting public criticism for keeping their fuel surcharges high, and it’s possible we could see some movement on these lines in 2015.

9. Don’t expect oil to remain cheap for long. After the price of oil collapsed in 2008, there were reports of consumers buying less efficient cars in the belief that low prices were here to stay. If history is any guide, we can bet that prices will rise again within a year or two. Just as you shouldn’t hoard points or miles for years, you should look at the low price of oil as a temporary phenomenon and expect the status quo to return before long.
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