We seem to love collecting frequent flyer points. Perhaps it's the game of it – seeing where you might snaffle a few extra points. Or maybe it's the dream of one day having enough to score yourself a free holiday. Whatever the reason, more and more of us are getting on board, with Qantas and Virgin each adding more than 720,000 new members to their loyalty programs in 2014.

But is all this chasing of points worth the effort – and cost?

The frequent flyer schemes

We investigated two frequent flyer schemes for this article:

  • Velocity Frequent Flyer (Virgin Australia's program) currently has around 4.5 million members and is free to join. Points expire if no points are earned, redeemed or transferred within three years.
  • Qantas Frequent Flyer has over 10 million members and charges a one-off fee of $89.50 (although anyone can sign up for free through a Woolworths Everyday Rewards card). Points expire if no points are earned or redeemed within an 18-month period.

What are your frequent flyer points worth?

We took a deeper look at frequent flyer points to find out what they were worth. If you're redeeming them on flights, they're worth about one cent each, on average. This means it's probably not worth going out of your way or spending any extra money to earn points. However, your points' value depends on how you choose to redeem them – domestic flights, international flights and consumer goods all have different average rates of return. 

Broadly speaking, your points' value equates to:

  • 100,000 points = $1000
  • 50,000 points = $500

As long as you're getting back more money in equivalent rewards than you're paying to be able to earn the points – such as in credit card fees or by buying a more expensive plane ticket to earn the points – you may eventually save enough points to get a free flight.

If you're redeeming them on flights, they're worth about one cent each, on average.

How to earn frequent flyer points

There's any number of ways you can earn points these days, including using a credit card, shopping with the airline's retail partners, or by using the airlines' travel money cards.

But if you're trying to earn points through flying, you'll have to fly a lot. And ideally in an expensive seat as frequent flyer points are now strongly correlated with how much money you spend.

Figuring out how many points you'll earn on particular flights is confusing. For both Virgin and Qantas the earn rate depends on which airline you choose, which fare class you choose, whether it's domestic or international and whether or not you have status credits, which are earned through flying and take you on to different levels of membership.

Virgin

  • For domestic flights, Virgin gives five points per $1 spent which can be increased if you have more status credits. But given domestic flights aren't generally as expensive as international flights, unless you fly a lot, you probably won't be racking up points very quickly.  
  • Internationally, points are earned based on how far you fly as well as how much you spend (fare class). If you're purchasing the cheapest fare (such as Virgin's Saver or Saver Lite) the earn rate per mile is only half a point. 

Virgin Australia also has a range of airline partners you can earn points with, but the earn rate with affiliate airlines is low. A discount economy fare with Singapore Airlines will earn as little as 0.1 point per mile, meaning you'd only earn 391 points for the near 4000 mile trip from Sydney to Singapore. That equates to less than $4 worth of value in points, hardly enough reward to offset the $30 booking and service fee you'll be charged for the privilege of booking the flight on credit or debit card and PayPal in the first place.

Qantas

In the past you could earn Qantas points based on the number of miles you flew, but this is no longer the case. Qantas now gives points based on a complicated mix of how far you fly and how much you spend (fare class). Qantas does, however, have a minimum point guarantee, which is 800 points per eligible flight (lowered from 1000 in July 2014).

There is a catch – the cheapest Jetstar flights (Starter fares) aren't eligible. To earn points, you'll need to upgrade to the Jetstar Starter Plus fare. As for points earned with Qantas' partner airlines, it can be as little as 0.25 points per mile.

Credit card rewards points

As we found in our 2010 investigations into credit card-based frequent flyer miles, you'd have to spend big dollars on your credit card every month and pay the balance in full without fail to make it worthwhile. Our calculations showed that a $5000-per-month spend on your credit card would earn you a maximum of about $1000 worth of points a year on either Qantas or Virgin in the best-case scenarios. If you spend less than a $1000 a month with your card, in many cases the net value of any frequent flyer points will be eaten up by fees. 

For example, let's say you have a frequent flyer-linked credit card with an annual fee of $150 and the maximum earn per $1 spent is 1.5 points. If you spend $1000 a month on your credit card and pay it off fully each month, the value of your points at the end of the year would be $180 – meaning, you're really only $30 ahead if you deduct the money paid for the annual fee.

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The best way to redeem frequent flyer points

Let's say you have some points you want to use – how do you get the best bang for your point?

Even though the average redemption rate for flights is around one cent for both Qantas and Virgin, this can vary a lot. As a Virgin spokesperson told us: "The dollar value of a point varies depending on how the member chooses to earn and redeem their points". Depending on how they're redeemed, we found the value of points ranged anywhere from around half a cent to 14 cents.

  • The best value way to redeem your points is with seat upgrades. Our spot check found points used for upgrades could be worth as much as 5 to 14 cents.
  • Flights will generally be the next best way to spend your points – and domestic will generally yield a better point rate than international. Domestic flights also have better availability in terms of rewards seats. On average you'll get 1.4–1.5 cents for your points on domestic flights but that dips to almost half that on international flights to around 0.7–0.8 cents.
  • Products and gift vouchers are the worst value way to use your points. In both the Qantas and Virgin stores we looked at two TVs and a vacuum cleaner and found points, on average, were worth half a cent. Gift cards also have a poor redemption value, although slightly better. Exchanging your points in the Qantas store will see your points valued at around 0.7 cents and in the Virgin store at 0.6 cents.
  • On Virgin flights, points used to pay for the taxes portion of the ticket are reliably worth 0.6 cents and on Qantas flights that rises to 0.8 cents – not the best bang for your point.

Why the airlines love their frequent flyer programs

An industry insider we spoke to, Clifford Reichlin, argues that frequent flyer points are a "promotional and marketing currency" designed to get consumers to fly more, not help them save money. His online forum, The Australian Frequent Flyer, has been a busy stopover for travellers since 2002.

"What they really want to do is convert the occasional traveller into a frequent traveller," Reichlin says.

"It's not a loyalty program and has nothing to do with loyalty. The airlines aren't rewarding you for flying with them, they're trying to get you to buy more airline tickets, preferably the pricier ones. If it were a straight-up loyalty program, your points wouldn't expire and the programs wouldn't be so difficult to figure out."

Due to the complexity involved in accumulating points, many casual travellers understandably don't know what to make of frequent flyer points.

But what is clear is that the major airlines care a lot about points. In recent years Qantas has generated more revenue from points than from original ticket sales. Despite a loss in its international and Jetstar divisions, its loyalty arm turned a $286 million profit in 2014. While Virgin doesn't provide profit figures for its frequent flyer program, its loyalty division is valued at around $960m.

No matter how friendly an airline's marketing campaign may seem, an airline isn't just going to give you free flights. So how do they make so much money from their programs?

Here's how it works.

Airlines sell points to third parties, such as credit card companies, or businesses such as hotels and car hire companies, who use the points to entice customers. So long as the airlines sell the points for more money than it costs them for customers to redeem them, the airline is onto a winner. Or even better for the airline – if the points expire before they are redeemed. For example, Qantas earned $1.3 billion for the points it sold to partners in 2014.

As for who benefits most from the frequent flyer scheme? It's "definitely the airline", says Steve Worthington an adjunct professor at the Swinburne Business School. In addition to being a great money-maker, he says the real cost of loyalty programs to the consumer is the personal data that you give away almost for free.

When spending your points, you're sharing what you're buying through the airlines' online stores as well as through all the other frequent flyer incentives. This consumer spending data is very valuable.

"It's not really about loyalty, it's about gathering information. I don't think we realise how much information we give away when we join," says Worthington.

Rewards seats not always available

One simple reason that most of the benefits flow to the airlines is that there's no apparent correlation between the number of points sold and the availability of rewards.

Rewards seats offer the best value, but the airlines control how rewards seats are offered and there isn't a whole lot of transparency around it. Virgin has a pre-set allocation of rewards seats but doesn't disclose how many there are. A Qantas spokesperson said its rewards seats weren't released at any one time, "rather they become available at different points throughout the year".

This means airlines have the benefit of offering rewards seats whenever they have extra seats to offload.

Our investigation also found that availability wasn't always great. While 100% of Virgin and Qantas domestic flights we looked at throughout the year had rewards seats available, it was a different story for international flights.

Of the 24 international flights we looked at for each airline, only:

  • 38% of Virgin's flights, and; 
  • 46% of Qantas' flights offered rewards seats.

CHOICE verdict

Frequent flyer points won't buy you much unless you fly a lot. And with stiff competition for passengers, you may save more money than what the points are worth simply by buying the cheapest ticket. If you're thinking about spending any extra money to earn points, weigh up the reward benefit by multiplying the points by 0.01 – the result will be the average dollar value of your points. If you do have frequent flyer points, the wisest way to use them is for domestic flights or upgrades. Unless you fly often and are prepared to get your head around a very complicated (and ever-changing) system, don't let the pursuit of frequent flyer points dictate your itinerary.

Earn and use your frequent flyer points wisely

  • Don't let potential frequent flyer points sway your decision about which airline to choose. Just choose the flight with the most competitive rate.
  • If you're spending points you'll get the best bang for your buck on seat upgrades and domestic flights.
  • Do the sums on how much (roughly) the points you'll earn will be worth – times your points by 0.01 (1 cent).

How we investigated

Flights

To determine the value of a reward flight, we looked at the cheapest economy return flight (including baggage) to six destinations, over four different periods in the year for both Qantas and Virgin Australia (24 flights for each airline). We deducted the taxes portion of the reward flight from the standard flight and then divided the points by the dollar value of the standard flight (without taxes). Flights used were Sydney–Brisbane, Melbourne–Sydney, Perth–Adelaide, Melbourne–Auckland, Sydney–Bangkok and Sydney–London.

Vouchers and products

In both the Qantas and Virgin stores we looked at four gift cards/vouchers, two TVs and a vacuum cleaner.

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What's your experience?

What are your thoughts on frequent flyer points? Please share your experiences in the comments section.