Ordinary Gweilo

The Economist frequently has light-hearted leaders.  This week their subject is the large number of frequent flyer miles that are outstanding, and they claim (somewhat mischeviously) that they have replaced the dollar as the world’s main currency.  Shaky mentioned this a few days ago (based on a report in The Guardian). This sounds absurd, and of course it is, but I’ll come back to that shortly.

They are worried that the large number of miles in circulation is a problem to the airlines, and that it will lead to devaluation.  In practice the airlines have a more effective way of dealing with this problem – rationing.  It can be quite tricky getting the flights you want, and of course it suits the airlines very well if passengers end up redeeming their miles by flying on less popular routes or at less popular times.  Of course they have to be careful because if customers can’t get the flights they want then the value of having them does go down.  However, ultimately airlines do have that control in a way that central banks clearly do not.

I have to say that Virgin Flying Club have not devalued their miles at all – in fact they have made it easier to get miles, and reduced the number of miles you need for most flights.  Asia Miles has always struck me as a very poor scheme, but I haven’t noticed them making it any worse (or maybe that’s not possible).  So I think that the Economist’s fears about devaluation may be misplaced.

The Economist say that 14 trillion frequently flyer miles are in circulation, and that they are worth between US$0.01 and US$0.10 each.  That’s a big difference, and on top of that the best value is usually in upgrades (which they sometimes give away free anyway) and companion tickets, both of which mean that you have to buy a ticket to get the benefit.  As I’ve mentioned before, some people take this all very seriously and do their best to get the best value both in acquiring and spending miles, whereas others just fritter away their miles or lose them altogether.

Personally, I am only interested in one frequent flyer program (Virgin Flying Club), which is the only one through which I have managed to spend miles.  It’s also one of the most generous schemes, and on top of that I have had relatively few problems getting the flights I wanted (or at least something acceptable).  Locally, both Malaysia Airlines and Singapore Airlines (who own 49% of Virgin) offer Flying Club miles (as an option), and I’m afraid that my miles in other programs go to waste because I never get enough to take a flight.      

So what’s wrong with the claims made by the Economist?  Well, first of all we aren’t talking about a single currency – Asia Miles are not the same as KrisFlyer miles or Flying Club miles or any other type of miles, and worse than that there is no way to convert from one to another.  Secondly, miles usually expire after three years, and if you don’t have enough miles for a flight then your choices are to lose them, pay to renew them (if that’s an option) or use them for a cash coupon at a fraction of the value.  So valuing miles at the mid point (US$0.05) is probably inaccurate – my guess would be that, of the miles that are redeemed, most are at the bottom end of that value range.  Which means that rather than worrying about the possibility of devaluation, we should be valuing miles more realistically (and, of course, if the true value is US$140bn – or even less – then The Economist wouldn’t have their story)

Finally, as the Economist admits, they are comparing all the frequent flyer miles that are outstanding against the value of Dollar coins and notes in circulation.  That isn’t comparing like with like, and they should obviously be including dollars in bank accounts.

So, in short, the Dollar really hasn’t been toppled as the world’s leading currency.  But I guess you knew that anyway.