|Quoting DLPMMM (Reply 3):|
If you calculate the miles needed per flight times the cost per mile, you would see that the price per award seat is more than the average discounted Y fare, even approaching a full Y fare.
To put some numbers to it, I posted a link to a PDF a few months back that gave the following scenario for how Delta calculates it:
They sell miles at about a penny each to their big affiliates. That's $250 in revenue booked per free domestic coach award. On the liability side, they only account for a $40 hit for every 25,000 miles in accounts holding over 25,000 miles as an available balance, a net $210 gain.
Once a year they go through and wipe off the books all the accrued mileage if the account hasn't had activity for 3 years, in effect giving them revenue for a service they never had to provide.