Frequent-flyer miles
Jan 6th 2005
From The Economist print edition
http://www.economist.com/printedition/displayStory.cfm?Story_ID=3536178
IN DECEMBER, we warned that the dollar's role as the world's main currency was under threat if America continued in its profligate ways. Yet the dollar has been dethroned even sooner than we expected. It has been superseded not by the euro, nor by the yen or yuan, but by another increasingly popular global currency: frequent-flyer miles. Calculations by The Economist suggest that the total stock of unredeemed frequent-flyer miles is now worth more than all the dollar bills in circulation around the globe.
By the end of 2004 almost 14 trillion frequent-flyer miles had, by our estimate (updating figures from webflyer.com), been accumulated worldwide. But what is a mile worth? Airlines sell them to credit-card firms at an average of just under 2 cents a mile; their value when used to buy a ticket or to upgrade to business class can be anywhere between 1 cent and over 10 cents per mile. Using the mid-point of this range means that the global stock of frequent-flyer miles is now worth over $700 billion, more than all the dollar notes and coins at large. Pedants will complain that we have ignored dollars sitting in bank accounts, but after a couple of free in-flight gin-and-tonics, most frequent-flyers care little about the difference between M0 (the narrowest measure of the supply of miles, or rather, money) and M3.
Frequent-flyer miles have long been a form of "money", used as a means of exchange and a store of value. Mileage junkies check their statements every month; divorce settlements often place a value on frequent-flyer miles; and corporate high-flyers look forward to spending their huge balances in retirement. It has never been so easy to earn miles. Airlines offer special triple-mile bonuses at certain times of year--such as, in the northern hemisphere, January and February--and half of all miles are now earned not in the air, but on the ground, notably on credit-card payments. But as a result, airlines have been printing too much of their currency. The number of miles outstanding has risen by almost 20% a year over the past decade. At current rates of redemption, even if no more miles were issued, it would take 25 years to use up the stock. In 2002 The Economist predicted that such inflationary policies would inevitably lead to a devaluation of frequent-flyer miles. This has indeed started to happen: several airlines have increased the number of miles required for a free flight, or made them harder to use at the time you want to travel.
High-powered money
Making it harder to use frequent-flyer miles today merely raises airlines' future financial liabilities from unredeemed miles. Were it to exist, the IMF (the International Mileage Fund) would by now repeatedly have warned that these growing external liabilities are unsustainable in exactly the same way that America cannot keep borrowing from the rest of the world. If the new global currency was left entirely to the market, the value of frequent-flyer miles would plummet in order to match the demand for and supply of free flights--just as the dollar would be weaker if Asian central banks stopped intervening. Frequent-flyer miles are no better as a reserve currency than the greenback.
But this misses a crucial point. Central banks and finance ministries have a far greater interest in defending the value of frequent-flyer miles than in propping up the dollar. After all, their officials are continually criss-crossing the globe to attend meetings, racking up miles in their personal accounts. If their free first-class flight to the Caribbean is at risk, they are likely to fight to the death to stop a devaluation. Against such competition, the dollar does not stand a chance.
Jan 6th 2005
From The Economist print edition
http://www.economist.com/printedition/displayStory.cfm?Story_ID=3536178
IN DECEMBER, we warned that the dollar's role as the world's main currency was under threat if America continued in its profligate ways. Yet the dollar has been dethroned even sooner than we expected. It has been superseded not by the euro, nor by the yen or yuan, but by another increasingly popular global currency: frequent-flyer miles. Calculations by The Economist suggest that the total stock of unredeemed frequent-flyer miles is now worth more than all the dollar bills in circulation around the globe.
By the end of 2004 almost 14 trillion frequent-flyer miles had, by our estimate (updating figures from webflyer.com), been accumulated worldwide. But what is a mile worth? Airlines sell them to credit-card firms at an average of just under 2 cents a mile; their value when used to buy a ticket or to upgrade to business class can be anywhere between 1 cent and over 10 cents per mile. Using the mid-point of this range means that the global stock of frequent-flyer miles is now worth over $700 billion, more than all the dollar notes and coins at large. Pedants will complain that we have ignored dollars sitting in bank accounts, but after a couple of free in-flight gin-and-tonics, most frequent-flyers care little about the difference between M0 (the narrowest measure of the supply of miles, or rather, money) and M3.
Frequent-flyer miles have long been a form of "money", used as a means of exchange and a store of value. Mileage junkies check their statements every month; divorce settlements often place a value on frequent-flyer miles; and corporate high-flyers look forward to spending their huge balances in retirement. It has never been so easy to earn miles. Airlines offer special triple-mile bonuses at certain times of year--such as, in the northern hemisphere, January and February--and half of all miles are now earned not in the air, but on the ground, notably on credit-card payments. But as a result, airlines have been printing too much of their currency. The number of miles outstanding has risen by almost 20% a year over the past decade. At current rates of redemption, even if no more miles were issued, it would take 25 years to use up the stock. In 2002 The Economist predicted that such inflationary policies would inevitably lead to a devaluation of frequent-flyer miles. This has indeed started to happen: several airlines have increased the number of miles required for a free flight, or made them harder to use at the time you want to travel.
High-powered money
Making it harder to use frequent-flyer miles today merely raises airlines' future financial liabilities from unredeemed miles. Were it to exist, the IMF (the International Mileage Fund) would by now repeatedly have warned that these growing external liabilities are unsustainable in exactly the same way that America cannot keep borrowing from the rest of the world. If the new global currency was left entirely to the market, the value of frequent-flyer miles would plummet in order to match the demand for and supply of free flights--just as the dollar would be weaker if Asian central banks stopped intervening. Frequent-flyer miles are no better as a reserve currency than the greenback.
But this misses a crucial point. Central banks and finance ministries have a far greater interest in defending the value of frequent-flyer miles than in propping up the dollar. After all, their officials are continually criss-crossing the globe to attend meetings, racking up miles in their personal accounts. If their free first-class flight to the Caribbean is at risk, they are likely to fight to the death to stop a devaluation. Against such competition, the dollar does not stand a chance.
