This Year Delta and United Are Requiring Minimum Spending to Earn Elite Status for 2015

Delta made their announcement back in January and United followed with theirs in June.

Both require spending on airline tickets, not just flown miles, in order to reach status. And they’ve tied that spending at 10 cents per status mile —

• 25,000 mile status level requires $2500 spend
  
• 50,000 mile status level requires $5000 spend
  
• 75,000 mile status level requires $7500 spend
  
• United’s 100,000 mile status level requires $10,000 spend
  
• Delta’s 125,000 mile status level requires $12,500 spend

These requirements apply to frequent flyers whose accounts list addresses in the United States. Somewhat surprisingly I haven’t heard of accounts being shut down (yet?) for “moving abroad” to skirt these spending thresholds.

It’s Not Just Total Revenue That Matters

It’s a basic mistake to think that customers who spend a lot of money are profitable, and those who spend less money are unprofitable. That thinking fails to understand the difference between average and marginal.

An airline offers low fares precisely because it’s already incurring almost all of its costs, nearly every dollar improves its bottom line when it does. (An airline could find in the long-term a given flight is unprofitable, and shouldn’t be operated, but the customer buying the cheap ticket still sends nearly all of the revenue to the bottom-line.)

A customer buying a full fare ticket might be taking the last seat on the plane — a seat that someone else might have purchased. In that scenario, the customer isn’t giving a single dollar to the airline that the carrier wouldn’t have otherwise gotten.

That isn’t to say that a low fare customer is necessarily more profitable than a high fare customer. It’s just that what a frequent flyer program should do, to contribute to an airline’s bottom line, is incentivize purchases at the margin, get a customer to choose the airline when they might not otherwise, capture as much of a given customer’s wallet share as possible.

Airlines Adopting Revenue-Based Models Implicitly Realize This

It isn’t just high fare tickets that contribute to a carrier’s bottom line, the frequent flyer program itself is a driver of profits. And there’s no larger customer of an airline than its credit card co-brand partner bank.

That’s why both Delta and United have carved out exceptions for earning elite status based on miles flown alone, rather than miles plus minimum revenue, for those customers who spend at least $25,000 in a year on their co-brand credit card.

That’s actually not a ton to spend, just over $2000 a month. Sure, that’s more than the average American puts on their credit card but it’s not really more than the average traveler does. And there are so many ways to ‘goose’ spending as to make this almost a non-issue. Get the co-brand card and get out of the spending requirement.

Of course, Delta exempts credit card customers meeting this requirement completely.

United only allows its cardholders to earn up to Platinum (and not 100,000 miler status) if they hit $25,000 in spend. United has been clearly moving away from its co-brand credit card partnership’s tight relationship — they’ve killed the ability to earn top tier status based on spend (the old “Presidential Plus MasterCard” can now only help a member earn up to Platinum) and no newly issued United co-brand card even comes with the ability to earn status based on spending on an ongoing basis.

What’s more, United’s award chart devaluation hits its co-brand partner pretty badly, the points that Chase is buying on behalf of its customers are now worth less to those customers, meaning they’re less incentivized to stay loyal to Chase’s United card.

The Spending Thresholds Are Actually Quite Low

The most reasonable thing about the spending thresholds is the level they’re currently set at.

In the current pricing environment it’s unlikely they’ll be excluding a substantial portion of their elite base on the basis of lack of spending.

It might take 21 roundtrip cross country flights — at a minimum — to earn 100,000 qualifying miles. (Folks who don’t live on a coast would need more trips most of the time, and not every trip is likely to be a cross country round trip in any case.) Even a $500 average fare is going to be enough to meet the minimum spending threshold, and it’s fairly difficult to beat that pricing on a consistent basis for most business travelers.

Of course if capacity discipline erodes, more flights drive down prices, or if the economy turns south and with it prices fall, airlines can always run ‘double elite qualifying dollar’ promotions just as they have run elite qualifying mileage promos in the past.

The Biggest Problem is That Spending Requirements Put the Big Lie to Airline Partnerships — And Expose Fragile Airline IT Systems

Only Delta flights or partner flights on Delta tickets count towards the minimum spending requirements. Buy business class tickets issued by Air France and those won’t count towards minimum spending.

United has a similar rule. Lufthansa business class tickets don’t count towards elite qualifying revenue on United.

Here we have joint business venture partners, who operate transatlantic flights in tandem, the concept is that they’re supposed to be “revenue neutral” and buying that partner airline ticket gets you nothing.

The best explanation here seems to be that when it’s a partner airline’s ticket, the revenue isn’t reported back so can’t be credited. In other words, it’s not a business decision (“we don’t value that revenue and don’t want to reward it”), it’s an IT limitation.

Put a different way, the new system that is intended to focus rewards on higher spending customers is now excluding higher spending customers from that very recognition!

What’s more, it gets worse. Many business travelers don’t book their own tickets, they go through corporate travel agencies. Those agencies issue tickets in a variety of ways, none of which are transparent to the passenger (who really shouldn’t have to care). An agency may just sell a ticket outright, taking its cut back from the airline. Or it may be buying the ticket at a discount, and effectively marking it up. In this case it can be a “BULK FARE” where the price of the ticket isn’t being passed through to the airline for crediting elite qualifying spend.

BULK FARE tickets are not just ‘cheapies’. They can be pricey, premium cabin tickets. You might buy a $2000 domestic first class fare through a corporate travel agency, and the nature of how that agency issues the ticket could preclude the revenue from being reported. And as a result that spending — even for paid domestic first class (what more in the world could an airline want?) — wouldn’t count towards elite status.

This last has been a reported issue with United. This is an airline whose computer problems have generated hours long telephone hold times (go try buying a ticket if you wanted to!). And that has problems passing ticket numbers properly through to their alliance partners and as a result customers can wind up with cancelled reservations through no fault of their own. It’s an airline whose computers can’t properly run a continuous upgrade waitlist.

So they undertook a new IT project to weed out a small subset of customers from their elite ranks. But since their systems don’t appear up to the task, or haven’t been sufficiently well thought through, they’re punishing some of their highest revenue customers instead — customers who buy premium cabin tickets on their joint business venture partners, and customers who buy premium cabin tickets through their corporate agencies.

And that leaves me wondering, was the gain here really worth it?

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