Delta Air Lines has announced major SkyMiles changes designed to push consumers to use their credit cards and spend more on those cards, to avoid falling behind on the elite status treadmill.
For years they’ve been taking away from the program, sometimes a little at a time and sometimes a lot. And they’ve been requiring more and more from customers to get less and less. Like the proverbial boiling lobster, SkyMiles elite members went along for the most part every step of the way. And that was very good to Delta, generating around $7 billion from American Express at around a 40% margin and accounting for the vast majority of the airline’s profit.
Not satisfied with that, they’ve changed how elite status will be earned starting next year so that only qualifying dollars count – no more miles or flights flown – and qualifying dollars can be earned through spending on their credit cards. So far so good, that’s really just copying what American Airlines already did. But there are fewer activities other than card spend that will count towards status compared to American, and the threshold for top tier status is 75% higher than American’s too.
SkyMiles members have shown they’ll put up with a lot, but what Delta is asking for now is beyond the capacity of what most of them are able to give. And in response, the airline has simply said stop being poor.
Airline Credit Card Deals Are An Eleven Figure Golden Goose
With consolidation there are fewer big airlines for banks to partner with. That gave airlines more leverage as they negotiated co-brand credit card deals with banks.
Selling miles to banks has been important since Diners Club Rewards launched in 1985, and the first airline credit card – the Continental TravelBank MasterCard from Marine Midland Bank (now HSBC) – launched in 1986. This business grew in importance to the point that when United Airlines entered bankruptcy in December 2002, it was said they had to continue flying through Chapter 11 to support the underlying credit card business (Mileage Plus was then the only profitable division of the company).
The underlying value of these programs became clear when airlines were able to tap their loyalty program for up to a billion dollars in cash during the Great Recession.
Once Costco dropped American Express, Amex scrambled to keep their then-second largest co-brand deal, putting more money on the table than an airline had ever seen for a credit card. That set a new bar in negotiations, that led to American’s split deal with Citibank and Barlcays; to United’s pre-pandemic renewal with Chase; and to Delta one-upping with its pre-pandemic Amex deal extension through 2029.
These deals became so lucrative that United, Delta, and American were able to raise $6.5 billion to $10 billion apiece in financing backed by the income streams largely from their credit card deals during Covid.
However, there’s a problem. Banks have shown that it’s possible to build large rewards card portfolios without co-brand marketing partners, and in general the best ones are far more rewarding than airline credit cards.
- Banks are now paying so much to airlines for these marketing deals that there’s not enough cash left to reward the consumer.
- When banks don’t have to pay for branding and databases and myriad things on top of rewards, entirely apart from customer acquisition expenses, they’re able to compete aggressively with rich rewards.
Delta expects to generate nearly $7 billion in revenue from American Express this year. They want to see that grow to $10 billion (as a result of things other than inflation, although they’ll take inflation and claim success when they hit the number). That implies an eleven figure enterprise value for the mileage programs.
Airline Miles Can’t Justify Increased Consumer Card Spend
Customers would be foolish to spend more money on Delta co-brand cards when,
- Delta’s miles are worth less than miles in most other airline programs
- Airline miles are themselves worth less than bank-issued transferable currencies
- And you generally earn fewer of the less valuable airline miles with an airline card than you’d earn with a bank’s card. Less of your spend generally falls in accelerator (2x, 3x, 4x) categories with airline co-brands.
Spend on a Delta credit card simply is not valuable compared to spend on other cards. Spend on Delta cards is less valuable than a no fee 2% cash back card, and less valuable than a Chase, American Express, or Capital One premium transferable points rewards card. Banks can give more back to the consumer when they aren’t also paying a cut to their airline partner for things other than the miles.
It can make sense to get a Delta card when they’re incentivizing doing so enough (big bonus) and it can make sense to keep the card for benefits. But the only way to incent spend is with the elite program.
Elite Benefits Are The Only Way For Airlines To Move The Needle On Card Spend
Delta is leaning hard into its elite program to encourage spend on its co-brands.
- They want customers to upgrade to their premium co-brands to earn qualifying miles
- And earning status is going to require a lot of card spend for most members
Here are the new status tiers, earn in 2024 for 2025 benefits:
- Silver: $6,000 qualifying dollars
- Gold: $12,000 qualifying dollars
- Platinum: $18,000 qualifying dollars
- Diamond: $35,000 qualifying dollars
But every dollar put on a Delta credit card comes with a big opportunity cost, it means a dollar not spent on another card that would award more and more valuable points.
Delta Used To Be A Good Enough Airline And Brand For Devaluations To Work
In the past Delta has been able to devalue SkyMiles and not see cardmembers reduce their spending, in contrast to other airlines that have seen their cobrands take a hit from devaluations.
And the airline has been good enough (not cancelling mainline flights for months on end, good catering, and friendly staff) that even those who aren’t hub captive have stuck with them in spite of miles that are worth less than peers.
But Delta devalued their miles several times during the pandemic, and now even charges exorbitant prices for partner awards even when those are only offered at the same older saver style as before. And Delta is no longer as reliable as they were (they cancel flights now) and no longer offers as strong an inflight product (though their crews are still marginally friendlier).
Delta has eroded the advantages that have allowed them to retain loyal customers even with low value miles. And they’ve eroded the advantages that have allowed them to retain loyal customers even while they’ve made status worth less, for instance no longer allowing elite upgrade certificates to be used from coach to business class where premium economy is offered and now selling most domestic first class seats so upgrades on the most desirable routes are rare.
- The miles are worth less
- The status is worth less
- And Delta says they aren’t done making changes to the SkyMiles program and they plan to segment the first class cabin like they did to coach to maximize first class revenue, so expect upgrades to become even harder going forward.
There’s just too little left from Delta or SkyMiles to stretch card spending for status except at the slimmest of margins.
Card Spend Used To Make Sense For Delta Elites, But Now They’re Asking Too Much
Delta used to require $25,000 spent on their cards to waive ticket spend requirements for status. That was a reason a Delta flyer would spend on their American Express cards. They’ve eliminated this reason. And the new status requirements are out of reach for many, so they’ll stop spending instead of spending more if they’re even able to spend more.
The Delta Platinum would require $700,000 in annual spend to earn Diamond. Upgrade to the premium Reserve and it’ll take $350,000 in annual spend. Or, say, $20,000 in ticket spend and $150,000 in card spend.
They used to waive the spend requirement for Diamond with $250,000 card spend. Then it didn’t matter how much you’d spend on tickets. Now card spend on the Delta Gold card does not even count towards status at all. They want more spend and they want it on the high annual fee cards. And if you get the highest fee card without spending $75,000 a year on that card you’ll no longer even get unlimited visits to their lounges.
Even if you spend $75,000 or $350,000 on their $550 annual fee card you will get turned away at their lounges if you’re on a basic economy ticket. Delta is alone in booking their cheapest award redemptions into basic economy.
Could Delta Know Something We Don’t?
Airlines have a golden goose in loyalty programs, an annuity worth several billion dollars a year. Delta and American Express rolled the dice that they could generate 50% more from that portfolio over time, the dice haven’t landed yet, but they were willing to risk snake eyes.
Or maybe they didn’t realize they were taking this risk? A lot of analysis and interviews went into this project. There are a lot of spreadsheets and a lot of people signed off on it both at American Express and Delta. But maybe the spreadsheet function they used was finding numbers to backfill assumptions that this would all work out?
The best argument for the changes I’ve seen is,
- Sure, Delta is angering and effectively ‘firing’ a bunch of customers
- And these changes give less to consumers, while asking them for more
- And don’t even come with any sweeteners, promises that those who give Delta what they’re asking for will really benefit (remember, upgrades are going to get harder, not easier going forward)
- But Delta has done this same thing before and it worked!
- They have the data and we don’t!
The problem is there is some gutting of SkyMiles that would push consumers too far, even if almost unfathomably we haven’t hit it yet.
- If they made the program worth literally zero it would not be a motivator
- Some amount of value prior to reaching zero is enough to push customers away
- And no one knows where that line is
Delta is self-consciously encouraging a certain subset of their cardmember base to cancel or at least stop spending, betting that other cardmembers will increase their spend not just to offset but to grow total spend on the products over time. That could happen!
But a $7 billion annual annuity is a big bet to make, and it’s not an asymmetric one – in fact the reverse is true. They’re risking the current co-brand value for incremental gains. And everything says they’re the smartest people in the room.
It’s a gamble, and as with most gambles it is possible to win, but that doesn’t make the bet smart on a risk-adjusted basis.