Opinion: Examining the cost of air miles

Michael Prentice discovers not all loyalty programs fly as high as you might think

Question: Which of Canada’s two leading loyalty programs is more rewarding, Aeroplan or Air Miles?

Answer: It all depends.

Another question: Is it worth collecting both Aeroplan and Air Miles?

Answer: Absolutely, since they both offer something for nothing.

Close to half of all Canadians – some 15 million – collect either Aeroplan Miles or Air Miles. Many collect both. Yet it’s a safe bet many have only the vaguest idea of the value of the reward they hope to earn.

True, the rewards on an individual purchase basis may not be great. But they add up over time, especially for frequent flyers and those who spend lots of money on their credit cards.

Finding the best way to collect loyalty points is challenging. And the rewards are not really free, since you have to buy something to get them. But if you have to buy an airline ticket, groceries or a tank of gas, you might as well take the Aeroplan Miles or the Air Miles that go with the purchase.

How you pay for the purchase, however, is the secret to profiting to the maximum extent from your loyalty points.

Banks, credit card companies and retailers compete fiercely, and some of their favourite weapons are loyalty programs. The cost of these programs is shared among participants, who figure it’s money well spent.

We may give our business to a certain chain of gas stations, pharmacies or grocery stores because the chain offers Aeroplan Miles or Air Miles. So what if we pay above-market price for the gas, drugs or groceries?

We choose a certain credit card because of its loyalty program, often without calculating the value of the benefit we’ll earn from the loyalty points. I’ve done this more than once, and after a while discovered I could earn more for my loyalty by switching to another card.

Some people save for years for a “free” flight, sometimes only to discover that the reward no longer exists because they took too long in building up enough points or in deciding when and where they wanted to go.

Indeed, it gets harder every day to earn a “free” flight. The Air Miles program announced in February an increase in the number of points required, with the average increase sitting at around eight per cent. But the number of Air Miles required for some destinations was raised by a much more notable 14 per cent. Program operators blamed higher costs, notably what they pay the airlines for tickets.

Aeroplan, created by Air Canada in the early 1980s to reward its frequent flyers, has become less generous in recent years in offering Aeroplan Miles. Aeroplan now operates in much the same way as Air Miles, offering many rewards besides air travel.

Retailers have loudly complained that they now pay higher fees to credit card companies to cover increased costs of loyalty programs. That may very well be so. But it’s no reason for the government to intervene, as some have suggested it should.

After all, if retailers want the convenience of accepting payment by credit card, they must pay the cost. If retailers want to pass on this cost to customers, they can – by charging higher prices to those who pay by credit card. Of course, that might lose customers.

Consumers are lucky they do not have to choose between Aeroplan and Air Miles. In reality, each is a tool of the retailer that offers them. What counts is the generosity – or otherwise – of the retailer.

Once it comes time to cash in the loyalty points – by taking an airline flight or purchasing almost any consumer item – the question is: What will I get for my points?

Some people I know don’t look upon loyalty points the way they view money in the bank, and I think that’s a mistake.

I only cash in my loyalty points when I believe it pays to do so.

For example, my accumulated Air Miles can take me twice as far on some flights as on others. Why is that? Probably it’s the same reason that some people pay twice as much as others to sit in the same section of the plane.

Before using accumulated Aeroplan Miles or Air Miles, I look up what I would have to pay to buy a ticket on that flight. On a recent check, I found my Air Miles were twice as valuable – kilometre for kilometre – if I flew from Ottawa to New York City than if I flew from Ottawa to Vancouver.

It’s simple, really: If 1,150 Air Miles will pay for a round trip from Ottawa to New York in May, and the price quoted by Air Canada for that flight is $338, then each Air Mile is worth about 29 cents.

With both Air Miles and Aeroplan Miles, you still have to pay taxes and surcharges. In the case of that Ottawa-New York ticket, that would mean paying $127 for that “free” flight.

If I’d been flying from Ottawa to Vancouver in May, it would have cost 3,125 Air Miles and the ticket price before taxes and surcharges was $458. At that rate, my Air Miles were worth just 15 cents each.

Which leads to another question: Should one choose a certain credit card just because it offers Aeroplan Miles or Air Miles?

Answer: Again, it all depends.

It depends on answers to several questions, including: How much will I probably spend on the card each year? What is the annual fee for the card? How much do I have to spend on the card to earn each Aeroplan Mile or Air Mile? What other benefits does the card offer that might be useful to me?

Several major credit cards offer benefits that together are worth about one or two per cent of the total spent on the card. This is after paying the annual cost of the card, if any.

One outstanding deal I found was on the TD Canada Trust GM card, which has no annual fee. Up to three per cent of spending on this card can be used toward the purchase of a new GM vehicle. For anyone planning to buy a new GM car in two or three years’ time, that could be a better deal than using credit card spending to accumulate Aeroplan miles or Air Miles.

Of course, we cannot be certain that General Motors will still be in business by the time we are ready to cash in our reward. But there are no certainties in life. You have to decide whether it’s worth the risk.