Double Blind

Aeroplan used to be Air Canada’s frequent flier program, but the company was spun out and has gotten more into consumer marketing in general. Their approach is to be a generalized ‘loyalty card’ business and charge businesses money presumably because they would gain customers by people wanting to earn aeroplan miles. Anybody who shops strictly on the basis of points or miles should get their heads checked, but when the numbers are significant enough it actually warrants some careful thinking.

So over the past couple years I’ve racked up 70,000 aeroplan miles in my account and was just wondering what the most efficient way of liquidating them since all of these points programs dilute their value over time. They do this either by increasing the number of points/miles to earn a reward, or they make reward availability so restrictive that it makes cashing in such points difficult, kind of like a communist regime. Since inflation is so high with these programs, it’s best to liquidate early and liquidate often.

There are two types of reward categories that are worth considering: flights and anything else. With respect to flights, assuming you can earn them, aeroplan will pay the price for a round-trip ticket, but you have to pay everything else, including taxes and fuel surcharges.

For example, if I wanted to go from Vancouver to London and back, it would (currently) cost me $923 for the round trip plus another $271.91 in taxes, fuel surcharges and other garbage fees. You can also “buy” the $923 component for 60,000 aeroplan miles, assuming the flight was available which it most often is not during the most convenient times, i.e. from April to September every year. A “free” round trip ticket in this case would cost $272 plus 60,000 miles. This works out to a benefit of 1.5 cents per aeroplan mile paid for.

The difference between domestic (in this case Canada and the USA) and the rest of the world is that GST is charged on domestic flights. So if I wanted to fly to Montreal and back, it would cost me $528 for the base fare, plus $130 in fuel surcharges and GST. Aeroplan would charge 25,000 miles for the trip which would pay for $528 and this would leave me to pay $130 for the remainder. This works out to 2.1 cents per mile.

It turns out that the best “bang for the buck” is on really short-haul flights. For example, if I wanted to visit Fort St. John (a remote town in the northeast part of the province) it would ordinarily cost me $398 for the base fare plus $95 in taxes and fees. I can use 15,000 aeroplan miles which would have a value of 2.7 cents per mile.

Now the real economic issue here is that I don’t have any burning desire to go visit London, Montreal, or Fort St. John at present. It isn’t worth it for me to spend the aeroplan miles on something that is fundamentally useless to me, especially if I have to shell out hard cash in conjunction with redeeming the miles. Making matters even worse is that it is very probable that I would not be able to redeem such rewards at a time of my own choosing which would decrease the utility of the reward even further. Aeroplan has a system where you can pay 50% more miles to increase your availability of selection, but this just dilutes the value of the miles further.

Now that Aeroplan has started tinkering around with other awards, one has caught my attention: Esso gift certificates. Gasoline is something that I am guaranteed to use every year and they offer $50 gift certificates for 7000 miles and $100 gift certificates for 13500 miles. This works out to 0.71 and 0.74 cents per mile, respectively. These two numbers are significantly below the cash value you can get when booking flights, but this ultimately reflects what I consider to be the “base value” of the miles – if you don’t use your miles on anything else, it becomes much more economical to redeem them for gas certificates.

So according to this analysis, right now I am sitting on $518 worth of gasoline with my aeroplan miles which would pay for nearly 5 months’ worth of fuel for my car.

This also creates some interesting situations. For example, right now I am eligible to receive 50% extra aeroplan miles whenever I travel until February 28, 2007. If I were to take a trip from Vancouver to Sydney, that would work out to 23,280 miles which can be converted to $172 worth of gasoline whenever I get around to redeeming the aeroplan miles. This works out to be a non-trivial discount (about 10%) on the ticket price.

Future Shop also offers a $100 gift card for 13,000 miles, but there’s no point in redeeming for this since you can usually get electronics for cheaper prices elsewhere. Other places (e.g. Chapters/Indigo) offer their own gift cards, but again, I don’t have any burning desire to buy books from them. Gasoline is nearly impossible to get at wholesale prices and remains the best currency you can convert from the fiat currency of aeroplan miles especially since you are guaranteed to use it more than the aeroplan miles themselves.

For those of you that want to make money from the exorbitant fees that Mastercard charges merchants, you can finally invest in their profit stream. Mastercard is going public and at $39/share, the entire company is valued at nearly $6 billion (if you were to buy all the shares at $39). Considering that they will have a net income of nearly $300 million, this public offering will be worth looking at if it trades at the offering price.

There are worries that Mastercard (along with Visa) will be taken to court for price gouging by merchants, but other than Visa and American Express, there is a huge barrier to entry in the credit card market. Paypal will not be able to take care of the point-of-sale retail purchase market and as a result I don’t foresee Mastercard’s profitability to be compromised. They might have to pay a lot of money in an upcoming lawsuit, but the company should continue to take in an enormous amount of cash.

(Update February 6, 2007: Due to this article being the largest recipient of spam on the site, I have closed comments.)

Econobrowser has a good article on why crude oil and natural gas prices, normally correlated, have been diverging in the past few months.

I finished the book on the airplane flight from Vancouver. This book was written by Rodney Brooks, who is the artificial intelligence lab director in MIT. The book covers the evolution of robotics and the interactions that robots currently take in society and the future of our cultural acceptance of robots.

The book is an excellent read and I would recommend it to anybody that’s interested in one of many possibilities as to how life will be in 15 years.

In particular, the concept of remote presence is the important eye-opening topic which Brooks covers – with the world becoming increasingly wired up, it will soon be possible to operate robots that can perform most functions that humans can, except remote controlled by humans from the internet.

For example, if you had a remote presence bot at home and you were out on vacation, you could log into the robots and get it to move to the kitchen to make sure that you turned off the stove. Or you can get the robot to look into the refridgerator to see what groceries you need. Or you could get the robot to answer the door when the mailman comes and asks you for a signature while you’re sitting in your office. These are trivial examples as to the power of remote presence, but I highly suspect that this will become one of the “killer apps” that the internet will provide to people – just think of how you can control multiple robots. The concept of the physical avatar is not very far off.

The other powerful concept that Brooks was explaining was that our current understanding of biology, specifically how the brain functions, is still not very good and that there is likely a knowledge gap in our present understanding, opposed to a lack of computational power.

All of this leads to the trend of society becoming progressively more automated. It makes you wonder where the “human” factor is required in terms of decision making. It doesn’t take much brainpower other than to follow the directions in most jobs – it will continue to pay to be the people to maintain the machines. It’s ironic that we’re slowly becoming slaves to them.

I spent the bulk of last weekend in Hedley, BC. As you can tell from the satellite imagery, Hedley is a very small town (apparently a population of 350 people, although I saw more dogs than humans other than the group that went there). The good thing about spending a weekend in such an isolated area is that there is nobody there – the solitude is not for everybody, but for somebody like me that needs to recharge my batteries every so often it’s a good get-away.

Apparently one of the recent innovations that happened to the town is that they now have internet. They have a wireless transmitter perched up on a mountain and the houses can point their satellites toward the transmitter and be able to get a really decent internet connection. I clocked my connection at about 100 kilobytes per second which is pretty damn good for being out in the middle of nowhere. It’s also sort of an oxymoron that a town that looks like it came from the 1950′s will have such a sophisticated data delivery mechanism, but that’s for another topic.

The drive out of the lower mainland on Friday evening was fairly rough. The traffic was stop-and-go from the end of the Port Mann bridge all the way to 264th street exit in Abbotsford which added an extra 45 to 60 minutes to the trip than it would have if the traffic was free-flowing. There were only two lanes of traffic carrying the Friday eastern commute and the horde of travellers that are trying to get into the interior and obviously the freeway can’t handle the capacity. This is one of many reasons why I would support widening the road to 4 lanes in each direction, but my thoughts about road expansion will have to wait for another post.

After stopping in the Chilliwack superstore for cheaper gasoline and some groceries (no stupid GVRD fuel taxes in Abbotsford and east), the rest of the drive to Hedley was fairly routine. By the time we got to Hope it was already past sunset and the rest of the drive was smooth going. I prefer driving in the night than the daylight anyway as the roads are clearer and much easier to drive in.

The morning and half the afternoon of Saturday was drizzling, but for the rest of the day and on Sunday the weather was relatively sunny, but not too hot. I was anticipating much more hotter weather so it turned out fine. We walked around town on Saturday which took all of 30 minutes and walked along a large property boundary that one of my friend’s dad bought. That evening we made a nice dinner of a chick-pea spinach salad with a nice dressing and yogurt sauce (don’t remember the ingredients in that one), and vegetable shish-kabob with mango glaze, and finally the all-mighty grilled rib-eye steak. It was a nice and filling meal.

Sunday we hiked up about 2000 feet on some mountain that was next (west) of Hedley. I don’t think the peak has a name, nor was the final elevation that particularly high compared to the surrounding terrain (roughly 3800 feet), but at the end was a very nice view of the town off a cliff. Also between the final viewpoint and the base was a bunch of cattle grazing on the hill. They were all communicating with “moos” with each other and I decided to be a jackass and try communicating with them as well. Sometimes they would stop their patterns of mooing and probably were trying to figure out what the heck was going on, and then they’d continue. They’d stare at us whenever we walked by but were otherwise not too fazed at our presence.

About 90% of the way up were some entrances to some old mines that were dug into the rock. It looked like the mines that you’d enter in RPG games like Baldur’s Gate or Diablo in that you look into it and just see blackness. Unfortunately I didn’t have the proper equipment (like a hardhat and flashlight) but otherwise it would be a rather cool expedition to start exploring ancient mines, assuming it doesn’t collapse on your head!

We chose a different direction headed down than we went up, and the way we went down was much more direct and much more sloped than the way going up. I’d estimate that the grade of the slope we went down at points reached 40-45 degrees which was pretty much the limit before you start spontaneously sliding. We didn’t take any pre-made trails and this was probably a good small test for the future feat this August when we’ll try to make it to 51N124W.

Physically, I tried out my new shoes and they work well, so I’m happy about that. Also my endurance was good and I had good energy. I also went through about half of my 3L water pack over the 6 hours that we were hiking, so that’s also good news since I normally sweat buckets and need more water than that. The hike in the grand scheme of things wasn’t very aggressive, the slope headed up was quite mild (compared to the slope of our descent).

I’ll try posting some pictures whenever I get around to grabbing them from the digital camera. Hopefully they’ll turn out well. (Update, June 2: this has now been done)

It was a good long weekend and hopefully there will be many more to come this spring and summer. I intend to keep a brisk recreational schedule!

Yesterday I took the opportunity to wash my car. What happened a couple days ago is that some birds really took the opportunity to using my vehicle as target practise and there was a disgusting amount of bird poop all over the vehicle. It was getting quite embarrassing being seen in the vehicle, so I gave it a very thorough wash-down yesterday evening and when I went to it this morning it looked nice and clean. I also vacuumed the interior and got rid of a couple months’ worth of rocks, twigs and other debris that have accumulated over some expeditions.

For some reason birds like my car. I heard one friend say that they like the colour red and are unusually prone to dropping their cargo on red vehicles more than any other colour. I’m rather skeptical of this assertion, but even if it was true there isn’t a heck of a lot I could do about it other than covering it up with a tarp each day which is more effort than it’s worth.

I predict it will take three days before I will see bird poop on my car again.

My car is quite old, but as long as it’s running there’s no real point in getting a new one – older cars (with comparative engines) have roughly the same fuel economy as newer ones and cost much less in terms of depreciation. They are also much cheaper to insure and you also don’t have to worry about minor scratches and scuffs – you can be the psycho behind the wheel on the freeway while other people in their shiny BMW’s and Mercedes have to swerve out of the way to avoid your eccentrically aggressive driving tactics.

The only thing that is bad about an older car is reliability – you have no idea when the thing is going to break down. Older vehicles also cost more to maintain – they will often have more non-critical failures (e.g. passenger’s side window won’t open or close, air conditioning broken, etc.) than newer vehicles. Financially speaking, however, there’s no point in buying another vehicle until this one has fully broken down. Until then, there’s quite a good incentive to make sure that the vehicle is well maintained – the cost of maintenance should be lower than the price of purchasing a newer vehicle. One element of maintenance is washing all the bird poop off, which fortunately is a very low cost procedure.

I wish I could claim I was intoxicated or something when I wrote that “the Sharks will probably win the Stanley Cup” on Chad’s blog, but unfortunately I wasn’t. Recall at that point in the playoffs, San Jose was up 2-0 on Edmonton and the day after I made that comment Edmonton wins the next four games to take the series. Go figure.

Thankfully, I didn’t have any money on it which is what ultimately counts when doing these sorts of predictions. I’ll just stick to elections and current events instead.

No sooner than a month after I posted my original message about being happy with my cell phone and the relatively inexpensive costs, my service provider effectively jacks up the amount of money it takes to keep my cell phone active.

My last sentence on that post was the following:

I wonder if Virgin will try to screw it up for customers like me by jacking up rates or reducing the maximum time before you have to top up the phone balance.

A few days ago, Virgin Mobile sent everybody a text message saying that effective June 12 they would be changing the expiration dates on phone top-ups.

Before, you could fill the phone up with $15 every 120 days which meant a rough $3.75/month minimum expenditure. Now they have a scheme where the more you fill the phone, the longer the expiration dates. $15 gets you another 45 days, $25 gets you 90 days, $50 gets you 180 days and $100 gets you 360 days. If you do simple division, the $25 and $100 offers give you the most for your time ($8.33/month) so the de facto minimum cost to keep this phone just doubled.

The problem is that I actually don’t use my phone a heck of a lot which means that I’ll likely just end up keeping a lot of excess credit on the phone over time. Business-wise, this was probably a smart move for Virgin since no other cell provider out there has rates that come even close to the minimum cash expenditures as Virgin. The closest provider is Fido, which would require you to spend $10/month for a plan where minutes cost you $0.30 each and they would deduct the $0.50/month 9-1-1 fee (which Virgin currently does not do).

I’ll likely continue with Virgin due to the lack of competition, but it is not the great bargain that it used to be; now it’s just barely the lowest cost provider for low-volume cell users.

That said, I still don’t have a clue how Virgin would manage to make a profit from minimalistic customers like myself. I’m pretty sure with the contract that they have with Bell Canada that they would have to pay them for a per-minute charge, and a monthly charge (equivalent to the system access fee) and probably a per-SMS message and voice mail access charge. I’m guessing that Virgin would pay Bell $7/month per customer they sign up, so by increasing the top-up rates they are trying to directly recoup their costs. It’s obvious they were planning on their customers using a lot more volume on the network than they actually did. They probably ended up with a lot of customers like me despite their marketing campaign which was clearly indicating they wanted the (presumably talk-happy) teenagers to sign up.

The only feature Virgin Mobile in Canada doesn’t have that I wouldn’t mind having (but it’s not a critical one) is roaming within the United States. According to their site they are “working on it”. I go down to the US enough where such a feature would be nice to have, especially when trying to meet up with friends. Not having a cell down there is more of an issue of convenience since I’ve managed to live the first 26 years of my life without one and I can easily do it again.

For those living in Canada and using your credit card to purchase stuff overseas (e.g. in US currency), credit card companies will typically add a premium to the existing currency exchange rates, ranging from 1.8 to 2.5%. It effectively is a tax on foreign purchases using your credit card since the credit companies can obtain foreign currency at market rates, while they ding you with a huge premium. The difference is pure profit to the credit card companies.

The Government of Canada has actually compiled a list of Canadian credit cards and the various expenses of owning one. It can be found here (350k .pdf file).

Realize that credit card companies primarily make money in three ways, in descending order:

The costs of the following are from (in order):

In other words, profits from currency exchanges are completely cost-free for credit card companies. No wonder none of them want to introduce a card that has low currency exchange costs, it’s probably a huge cash cow and probably has such low visibility that nobody wants to rock the boat.

Looking at the last quarter’s financials of Mastercard, you can see a wildly profitable business, earning a net profit margin of 17.2% (that’s after taxes) with room to spend 25% of its revenues on “advertising and market development”. An amazing business.

If your IP resolves from a location in Canada or the USA, Skype is now offering free phone calls, at least until December 31, 2006.

From a competitive perspective, this is very interesting. It’s obvious they’re trying to judge how many people will be using their services and see if they (they being EBay, the owner of Skype) can diversify out into the telecom business. After the end of this year they will probably institute some sort of charge or limit to network usage and try to convert users into paying customers. I doubt it will work since telecommunications is a matter of a lowest cost marginal decision between a land line, a cell phone or VOIP solution. Skype will be part of the VOIP camp. There is nothing fundamentally inherent in Skype that forces people to entrench themselves to that particular system so I doubt they will be able to charge a premium for the service.

The only other service I recall offering free PC-to-phone service was Dialpad, which subsequently went belly-up during the dot-com bust sometime in 2001. Their original business model was to sell advertising while you talked, but this was replaced by a subscription model. Dialpad is now owned by Yahoo.

I don’t think any telecom providers will be profitable other than the traditional wireline and wireless providers.