Airline miles
Frequent-flyer economics
May 2nd 2002
From The Economist print edition
One of the world's main currencies is heading for a fall
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THE world has a new international currency,frequent-flyer
miles,Launched exactly 21 years ago,they are a lot like
money,Collectors check their mileage statements as
keenly as their bank statements,American courts often
place a value on mileage balances in the course of divorce
settlements,In a recent poll of frequent travellers,two-
thirds said that they see frequent-flyer miles as the next
best thing to actual cash,almost half even thought they
should earn interest on their accounts,Will they still be as
keen a year from now? Maybe not,This peculiar new
currency has not been well-managed,Devaluation is on the cards,
Frequent-flyer miles started as a marketing gimmick,but they have become a lucrative business,
Airlines sell miles to partners,such as credit-card companies and car-rental agencies,Roughly half
of all miles are now earned on the ground,not in the air,This makes them ever easier to acquire,
At the end of April,the worldwide stock of unredeemed miles was probably close to 8.5 trillion
(see article),Miles can be worth anywhere between two and nine cents apiece when they are used
to buy an air ticket,Valued at the mid-point of this range,the total global stock of frequent-flyer
miles may now be worth almost $500 billion,
Comparing this with all the notes and coins in circulation around the globe,frequent-flyer miles
could be said to be the world's second-biggest currency after the dollar,Indeed,at its present
pace of growth the stock of miles is likely to overtake the physical stock of dollars within two
years,Of course this ignores the much bigger stock of dollars sitting in bank accounts,But
frequent-flyers care more about liquidity—preferably a glass of champagne after take-off—than
about the precise differences between M0,M1 and M3,
Miles outstanding have risen by an average of 20% a year since 1995—two-and-a-half times as
fast as the supply of dollars,Central bankers would suffer sleepless nights at such reckless
monetary expansion were it not for the fact that they are usually up in first class collecting double
or triple miles,The plain truth is that airlines have been printing too much of their currency,They
are issuing more miles than they can ever supply in free seats,(Only a small fraction of miles are
used to buy other goods and services.) As any first-year economics student knows,excessive
monetary growth can lead to hyperinflation and devaluation,
The airlines will be all right,The small print allows them to restrict seat availability and to change
the rules of their schemes at will,Inflation hurts the mugs left holding the currency,Either airlines
will increase the number of miles required for a free flight (not for the first time),or travellers will
find that booking the flight of their choice becomes even harder than it is already,Both are a form
of devaluation,Spend them while you can,
Copyright? 2003 The Economist Newspaper and The Economist Group,All rights reserved,