Greekonomics 104 - Rational Expectations

In economics parlance, rational expectations is defined by Thomas Sargent as the following in “The Concise Encyclopedia of Economics”:

"The theory of rational expectations was first proposed by John F. Muth of Indiana University in the early 1960s. He used the term to describe the many economic situations in which the outcome depends partly on what people expect to happen. The price of an agricultural commodity, for example, depends on how many acres farmers plant, which in turn depends on the price farmers expect to realize when they harvest and sell their crops. As another example, the value of a currency and its rate of depreciation depend partly on what people expect that rate of depreciation to be. That is because people rush to desert a currency that they expect to lose value, thereby contributing to its loss in value. Similarly, the price of a stock or bond depends partly on what prospective buyers and sellers believe it will be in the future"

In frequent flyer terms, this has to do with whether or not to hoard your miles. If you observe that airlines have found their FF programs to be a piggybank which allows them to generate their own form of “fiat currency”, then you must expect that with the money supply increasing, the purchasing power will decrease over time, hence the move towards using miles now rather than booking them for later.

Points advance.

A little known feature of the American Express Membership Rewards program is points advance. You can advance yourself up to 60,000 points at a time. Then, you have 12 months from the date of advance to earn those points to offset. Otherwise, you revert to paying 2.5 cents per point for any “unpaid” points. This is a great program in that you have very little downside. I especially like it right now in that if will allow me to earn some free SWA tickets prior to June 30, which is the date that SWA ends its relationship with membership rewards. If you have 4-8 credits to go for a free SWA ticket, transferring Amex MR points could be a great move, especially since Starwood doesn’t allow transfers and other programs (such as Priority Club) require a relatively high number of points for credits (PC requires 10,000 points for 2 credits). Sorry, PC, but those 10,000 points can get me 2 Point Breaks nights (and have in the past, such as in Sydney).

Segment arbitrage:

I just noticed something very interesting on my last trip. Typically I fly CO from BOS to IAH, and get a $500-$600 R/T 7 day advance purchase fare. However, I forgot to book a trip the other day and didn’t realize it until 5 days out. Therefore, I needed a cheap O/W BOS to IAH fare. CO wanted about $700, so that was a non-starter. USAir, on the other hand, was offering $250 O/W with a 45 minute layover in Charlotte. Not ideal, but much more cost effective, and I’ve found CLT to be a very pleasant airport not typically plagued with delays. Since CO is now Star Alliance, I was able to get the flight miles credited to CO as well, which was nice. So, when I checked my CO account, to what should my wandering eyes appear but 2 flight segment credits, as opposed to 1. Meaning, if you fly USAir multiple segments, you get multiple flight credits and could rack up a lot of them to help get you to elite status. What I am not sure of is if I booked a three segment flight, would I have gotten three credits? If so, I can imagine mileage runs on USAir to get CO elite status quickly and cheaply. Just some food for thought.

Greekonomics 103.2 – Option Value Redux

Earlier I had posted about incorrect attribution of option value to frequent flyer miles. However, I do have a good example of option value for you through the Starwood Preferred Guest program. Starwood allows you to book room awards with points, which you typically can cancel without penalty up to 24 hours beforehand. Therefore, you can hold a room with points and wait to see if you can get a cheap cash room rate up to 24 hours before your checkin time. This is essentially a free option to hold rooms with points. The only cost is that you can’t use the points holding the room. But here is where SPG helps you out again. You can hold those rooms with cash and points, meaning that you don’t need that many points to hold a room. I’ve found this to be especially helpful when I have booked a trip far in advance with points and am earning promotional free nights. I can hold the room with the points, and then contact SPG to replace the “points” room night with the “promo” room nights. I just did this at the Westin Swan in Orlando. I had originally booked 5 cash and points nights for 4000 points and $60 per night (total outlay 20,000 points and $300). However, I just earned three free nights with the current SPG promo, so I replaced those 3 nights and then my total outlay was only 2 nights at 10,000 pts per night and no cash (savings of $300). Unfortunately, the cash and points option was no longer available, as I would have preferred $120 and 8000 points. However, my alternative cost me no incremental points versus my first option, so it was definitely a winner.

Getting Value from Delta Drachmas

One common complaint I hear from frequent flyers is that they feel like Delta Skymiles have very little value. I think that I may have cracked the code on this, at least for people who need hotel stays. Delta has added a feauture where you can book hotel rooms and/or car rental with your Skymiles. Go to the Skymiles tab and pick"Use Miles" on the dropdown. Then click on "Skymiles Marketplace" on the left side of the screen. Then, select "Book a Hotel/Rent a Car" on the left side again. As an example, for a 2 night stay next week in Houston, you can get the St. Regis for 30,204 Skymiles per night, or the Westin Galleria for 18,712 Skymiles per night. The St. Regis is listing a rate of $385 ($450 with tax) and the Westin is listing $289 ($338 with tax). These prices are from SPG.com. So, we're talking about 1.5 cents per Skymile.

They seem to have hotels worldwide - I noted some interesting options in places like Seville and Cartagena, Colombia. Check it out!

Posting from 35,000 feet

I'm learning the hard way that Delta can stand for "Doesn't Ever Leave The Airport". On a replacement plane from BOS to ATL (with onboard wifi). Landing 10 min before my ATL to BHM flight departs. Wondering if the Force will be with me at ATL. The flights are at adjacent gates, so as Bill Murray said in Caddyshack - "so I got that going for me."

Rapid Rewards Winter Wonderland - some good news

Kudos to Southwest Rapid Rewards Winter Wonderland promo. Despite mention in the fine print that you have to give your RR number at the time of reservation to qualify for the bonus credits, I was credited bonus credits for 3 car rentals that I had to get retroactive credit for. Those extra credits are helpful as I race against the clock to top off my account with Amex Membership Rewards points before SWA is no longer a partner of theirs.

Greekonomics 103 - Option Value

Many finance types who hoard their miles always talk about the "option value" pf having their miles, and in a rudimentary sense, this is the case. Having the miles gives you the option to either purchase a ticket or use miles for the ticket. However, what they typcially overlook is that in general, this option value is declining over time. The reason for this is based on a fundamental difference in how stock options are valued versus how I might value the miles in my account. Back in the 1970s, two prominent economists (Fischer Black and Myron Scholes) published an acedemic paper on how options are priced in the securities markets. In the interest of not having your eyes glaze over with literal "Greekonomics" in the form of the Greek letters used in their formula, suffice it to say that their option pricing model was based on a number of assumptions, one of which is that the price of the underlying security "follows a Geometric Brownian Motion with constant drift and volatility". In layman's terms, this means that pricing of the underlying security will be fairly random. And THERE is where the mileage option gurus have made their error, since we all know that when it comes to mileage awards, the only direction in terms of mileage needed for an award is up - meaning that the value of your miles is constantly drifting DOWN. This is not to say that you should burn through miles the instant you get them, but rather to be thoughtful and to occasionally follow the less scientific approach espoused by the phrase "smoke 'em if you got 'em."

NB: I don't espouse to be an expert on option pricing or statistical modeling using Geometric Brownian Motion. There are plenty of resources on the web that can do this topic justice. However, I'd be remiss if I didn't give a tip of the Greekquentflyer hat to Myron Scholes, for whom the aforementioned option pricing model is named and who won, with Robert Merton, the Nobel Prize in Economics in 1997. I had the privilege of working with Myron in the late 1980s, and his influence on my career trajectory was immeasurable.

Greekonomics 102 - Lunar Real Estate

I used to have a friend who worked for a private company. Part of his compensation was in what the company called "shadow stock." He used to joke that they called it this because "only The Shadow knows how much it's worth." (ok, those of you born after the baby boom have no idea what this references). Anyway, he went on to call these shares "lunar real estate" because he really couldn't cash them in, and they were of questionable value.

All of us have mileage in certain programs that we are tempted to call lunar real estate. And I am here to tell you that with few exceptions, that's not the case. Unless you are talking about a few hundred miles in some strange overseas program denominated in cubits rather than miles, you can probably squeeze some value out of them. You just need to know how.

What I've found is that magazine redemption often fits the bill in these cases. The reason is that you can usually get pretty good value. I know someone who hates his huge Delta Skymiles balance because they require so many miles for his trips to Asia. However, Delta offers 51 issues (a year) of the Economist for 3200 miles and 190 issues (6 months) of the Wall Street Journal for 2800 miles. The Journal costs $120 per year if you subscribe and the Economist is $127 per year. 3200 miles for $127 of value is about 4 cents per mile. If you were 1) planning on subscribing anyway and 2) your company won't reimburse you - as many are now cutting back, this is a pretty good deal. Additionally, you can give these out as gifts to others for things like graduations, birthdays, etc.

Delta also offers hotel night redemption for miles, and I will review that feature in a later post. Based on my preliminary review, it looks promising.

Empty Miles

You're probably familiar with the term "empty calories." Those are calories that have no nutritional value. Well, there are such things as "empty miles." These are miles that simply don't have value once you net out their cost. You can find these primarily at the car rental counter. Many rental agencies are now tacking on a "tax" for frequent flyer miles or credits. Some of these charges are $1 per day. So, let's say you rent for 5 days and get 5x50=250 miles for your rental, but you paid $5 to the car rental company. Unless you value the miles at more than 2 cents apiece, you're not coming out ahead. The solution - well, actually there are 2. First, read "Rental Car-bitrage" to see what the Greekquent Flyer does with Qantas. Second, get your credit retroactively, i.e., don't give a mileage program number when you rent the car. Instead, mail in a copy of your rental receipt - the agencies don't charge you their "tax" retroactively. Ka-ching!

What's in your wallet?

You probably recognize that line from CapitalOne credit cards. The question here is what are you using to make credit card charges and why. When I open up my George Constanza-esque thick wallet, I find a lot of cards - including the following:

1. A Starwood Amex card - which I try to charge as much as I can on under normal circumstances since I can either use the SPG points or convert them to AA for the trips to South America a la Alan Stanwyck (sans the private stunt flying jet).

2. Platinum Amex - Card gets me into the AA, CO and DL lounges, and when I want to top up some Amex Member Rewards points, this is the card I use. I also use it for car rentals to avoid the extra insurance

3. American Airlines Master Charge - used to be a great card when they allowed you to book reward travel for fewer miles, but that benefit has been reduced significantly. However, if you shop Sam's Club like I do, this is a great card for Sam's Club spend. Additionally, this is the card I have registered for the iDine AA program.

4. British Airways Visa - my current card of choice, since they have a 100,000 mile signup/spend bonus and you get a 2 for 1 cert for use on rewards travel after $30K of spend in a calendar year.

Sure, it's a hassle keeping track of these, but it's worth it in the long run.

Greekonomics 101 - Opportunity Cost

I had a flash of inspiration last night when trying to come up with what my approach would be with this blog. I've decided to come at it from the approach of an economist, and try to use frequent flyer examples to illustrate some fundamental economics concepts. Today's post will be the first, and it has to do with the concept of opportunity cost. Wikipedia defines opportunity cost as "the value of the next best choice available to someone who has picked between several mutually exclusive choices." Do you pick the cheesecake or the creme brule at your local eatery? You'll enjoy the cheesecake but you gave up the potential enjoyment of the creme brule. Do you pick the Lexus or the Inifiniti at the dealership? If you pick the Infiniti, you get the benefits of that vehicle but you give up Lexus' "relentless pursuit of perfection." (whatever that means - I don't drive a Lexus).

For the Greekquent Flyer, it's about whether I pay cash for the ticket or use my points. For example, if I use 25,000 Continental miles for a coach ticket from New York to Los Angeles, I'll be saving the cost of the ticket. HOWEVER, I will be giving up the miles I would earn in the FF program. If I am a regular member, then I would lose about 5,000 FF miles for the round trip. However, if I am a Gold or Platinum OnePass member, I lose about 10,000 FF miles AND the opportunity to upgrade for free on both legs of the flight. What you see is that typically, your opportunity cost is higher 1) the higher your status in a program and 2) the longer the flight and 3) on flights that are upgradable. Therefore, the Greekquent Flyer typically doesn't use miles for NY to LA flights, but will likely use them for a short hop on an all-coach regional jet between Houston and Pensacola.

NB: The Greekquent Flyer gives a shout out to his actual Economics 101 professor, Michael Boskin - Hoover Fellow and Economist Extraordinaire at Stanford. Professor Boskin has recently written some excellent op-ed pieces in the Wall Street Journal.

New Point Break list is out

Thanks to the One Mile at a Time blog, I've found that the new Point Break hotel list is out. IC Medellin is out, but Cali is in. IC Adelaide, Australia is in. So is the HI Express in Swindon UK, where once I spent two weeks --- in four days.

Thanks to View from the Wing for the shout out

Gary at View from the Wing was kind enough to give a shout out to my blog. He listed how many different blogs are out there covering this topic, which is reinforcing my belief that in order to stand out, I am going to have to offer something a bit different from the established blogs. Time to put on the thinking cap...

Choosing hotels - using Tripadvisor

I have found that one of the best sources for info and ratings on hotels from other travelers is www.tripadvisor.com. This is a great resource if you are trying to decide which hotel program points to use on a trip, or if you are heading to a city you've never been to before and need to make a decision on a hotel. It's especially good when you are faced with tough calls. For example - do you stay at the Sheraton Palo Alto (Category 4) or the Westin Palo Alto (Cat 5) which is next door? )In my view, the Sheraton wins out because of the staff friendliness and the club lounge). Do you stay at the Swan or Dolphin at Disneyworld, which are both SPG Cat 4? Tripadvisor's contributors weigh in on these and many other topics. The site also helps you avoid judging a book by its cover. For example, after reading TA posts about the Holiday Inn Express at Pensacola Beach, I realized that despite its name and the fact that it was only 15,000 PC points per night, it was a great beach hotel. I stayed there last month and the TA reviews were dead on.

View from the Wing and Frugal Travel Guy Blogs

There are some folks in the Blogospehere who have been up to this a lot longer than I have. I have links to two of them on the left ("Frugal Travel Guy" and "View from the Wing"). Please check out their blogs too, as they come at this from different aspects than I do. I travel far less and am trying a different tack so that I'm not redundant. FTG's blog is chock full of advice as well as an entertaining travelogue of his globtrotting jaunts with his wife. VFTW has great commentary and gets down into the nitty gritty of premium travel. If you want to know what Lufthansa First Class food from Dulles to Frankfurt looks like - he'll likely have the snapshots of it to satisfy your curiousity.

The economics of hotel program credit cards

OK, so when does less mean more? It does when you are looking at which hotel program credit card to get. Let me explain. All of the major programs (Starwood, Hilton, Hyatt, Marriott and Priority Club) differ in terms of how you earn points in their programs. Starwood guests get either 2 or 3 points per dollar spent, for example, while most Priority Club hotels get you 10 points per dollar or 5 points at Staybridge and Candlewood Suites. What equalizes the programs is how you redeem them. So, a Westin is typically 10,000 points per night while an equivalent Intercontinental at the Priority Club is 30-40,000 points per night. Think of these as exchange rates if that helps. So, this has HUGE implications for you when picking your point earning credit card tied to a hotel program since most of these cards offer 1 point per dollar spent on non-hotel purchases. It means that you would have to spend $10,000 for a Westin night with SPG versus $30,000 or $40,000 of spend with Priority Club for an Intercontinental night. You can look up Marriott, Hyatt and Hilton to see how they stack up. The two things to keep in mind are 1) specials, such as Point Breaks alluded to in my prior post and 2) the fact that Priority Club has run some great credit card promos in the past, including one that gave you 25,000 points for simply using the card something like 25 times in a specified period. Also, if you only stay at one brand of hotel either due to company policy or availability, keep that in mind as well. More on the SPG card later as it's my favorite and has served me well for many years.

Point Break

No, I'm not referring to the 90's movie with Keanu Reeves and the late Patrick Swayze. I am talking about Priority Club's option to book certain hotels for only 5000 points per night. The offers change periodically but can be checked out at http://www.ichotelsgroup.com/h/d/pc/1/en/c/2/content/dec/pc/0/en/points/us/hre/pointbreaks.html?rateCode=IVANI

This is a great way to use PC points, and since you can buy points for about a penny per mile, you could presumably buy points and then use them for Point Break redemptions. Hotels vary in type and quality, but my father spent about 12 nights at the Potts Point Holiday Inn in Sydney, which was a huge savings compared to 10,000 points per night for the Westin (part of the Starwood program). Note: if any of you are going to Medellin - the Intercontinental there is currently in the promotion - a huge savings.

Rental Car-bitrage

OK, you'll have to pardon the pun. That's the result of drinking coffee after 9 pm and too many fond memories of Econ 140 with Professor Zucker. So, here is a question for you. Imagine that you live in the US and never travel overseas. Why should you join Qantas frequent flyer program? The answer lies in whether or not you rent cars frequently. You see, while the US airlines have chiseled you down to 50 miles per rental day (or half a SWA credit per rental), our Aussie friends at Qantas still offer 700 miles per US rental from a number of agencies, including Hertz. So.... that means if you have a lot of one or two day rentals, like yours truly, get thee to the Qantas site and sign up for their program. Although I am not a big fan of their FF program in general (I still have memories of trying to use QF miles to book my honeymoon to SYD and was told the entire month had no availability) they do have one redeeming quality. They offer one way awards so that you can put the miles you earn from car rentals to good use in a relatively short amount of time.

Welcome to my blog!

Well, it took some time but I decided that The Frugal Travel Guy and View from the Wing shouldn't have all the fun. This is my blog about squeezing the most out of your travel dollar by using everything at your disposal - especially knowledge about frequent flyer and hotel amenity programs. I'll try to post something at least once a week - more if I've got time and more to share. So lock and load, and let the fun begin!