Delta Isn’t Done With Changes to Make Skymiles More Revenue-Based

Last week Delta announced changes to how its customers will qualify for elite status this year, for their 2014 program year benefits. The information was quickly released after they mistakenly put it up online earlier than intended.

Delta is setting minimum spending thresholds for each elite tier for their US customers, and waiving those thresholds for such customers who spend $25,000 on a co-branded Delta American Express card.

The changes could be worse, and they aren’t entirely unreasonable (it’s not crazy to think that a customer would spend a minimum amount before receiving better treatment).

Although the way it’s being implemented: Delta flights or Delta tickets only count, not even tickets on joint venture partners, although I imagine that’s driven by technical limitations more than anything else (since it’s harder to know how much a customer spends on an Air France ticket for an Air France flight when that customer is simply crediting the miles to their Skymiles account).

And if they’re going to make the elite levels harder to obtain than their competitors do, you’d think they would at least make those tiers as valuable as their competitors are — as I noted when the changes were first leaked, a revenue-baed elite program should at least offer systemwide upgrades valid on any or most fares (rather than the nearly full fare “M” requirement currently in place), since they no longer have to worry about low fare qualifiers getting those cheap upgrades. Tougher elite tiers without even benefits that equal United and American doesn’t seem a winning formula.

In any case, Delta isn’t done with the changes. Many folks have been expecting a ‘revenue-based frequent flyer program’ to involve changes to the way redeemable miles are earned (somehow based on spending) and possibly even how those miles are redeemed (more closely aligned to the cost of a paid ticket).

So as expected, Delta isn’t done making changes to their program. (HT: sobore on Milepoint).

Delta appears to be planning more changes in that direction.

President Ed Bastian said on Tuesday that Delta wants to shift its SkyMiles rewards program “to drive the type of customer behavior that we would like to encourage.”

“I think before we didn’t discern between a customer that was a high-yielding customer versus a low-yielding customer,” he said on the company’s quarterly earnings conference call. “I think that as we continue to evolve those programs we’ll be continuing to favor the higher-yielding customers over the lower-yielding customers.”

Delta declined to say more about future changes to SkyMiles.

So we don’t know how they will change earning, or if they will change burning. There are things they might do that could make good sense, like bonusing higher fares to the level that many international frequent flyer programs do (some offer double and even triple miles for premium cabin tickets). And there are things they could do that make little sense, like appearing to punish low fares.

Why does that make little sense? It goes against conventional wisdom to say, but customers flying on low fares can sometimes be very profitable for an airline. Low fares are offered precisely because an airline expects those seats to go empty. So every dollar they receive for the seat is truly at the margin, revenue that goes straight to the bottom line. In contrast, a customer buying a full fare ticket may be buying the last seat on a plane — a seat that might have been purchased by someone else — meaning that sale led to no economic profit at all.

And in any case you don’t want to ‘reward high revenue’ you want to ‘incentivize incremental revenue’. It makes no sense to spend money ‘rewarding’ revenue you will get anyway, tickets sold as part of large corporate contracts may be high fare but the customer has no choice. The frequent flyer program doesn’t make them more likely to make the purchase or choose the airline.

In contrast, what an airline looking to make money wants to do is encourage customers to choose it over its competitors for a given trip. They want to target rewarding of passengers where it will draw incremental business.

One way to do that is to measure how often a customer makes the choice to fly the airline. Miles flown and segments are two (quite imperfect) proxies for that.

American realizes this in its upgrade priority: a connecting passenger trumps someone flying non-stop on the upgrade list. If I fly Washington DC – Dallas – Tucson then I have priority on the Dallas – Tucson leg over another 100,000 mile flyer ticketed just for Dallas – Tucson. The idea there is the non-stop customer likely chooses the non-stop flight, American doesn’t need to do as much to compete for that customer’s business. But from DC there are no non-stops, I’m choosing from all airlines and connecting points. Take DC – Dallas – Phoenix, I could take the US Airways non-stop but American is competing to try to get me to connect.

In making changes to the elite tier, Delta has intimated that they want to make sure elite benefits like upgrades flow to the higher revenue passengers. But statements like that betray a misunderstanding of how their program currently works, remember that Delta prioritizes full fare elite passengers over discount fare passengers regardless of elite tier. A full fare silver trumps a discount Platinum now.

In saying that Delta wants “to drive the type of customer behavior that we would like to encourage,” I’m reminded of Ben Baldanza (of course now the President of Spirit)’s comment from 2002 when he was at US Airways,

Ben Baldanza, US Airways’ senior marketing executive, says his carrier is trying to reward coach-class passengers for the amount they spend, not how much they fly. He says the change will not turn away as many loyal customers as others think.

“Someone who flies a lot isn’t necessarily loyal if what they’re doing is buying the lowest-priced ticket every time they fly,” he says. “That’s not necessarily the kind of loyalty we want to reward. We want to reward those people who pay a premium for the services we offer.”

People buying the tickets US Airways was selling over and over — instead of similarly priced tickets from their competitors — weren’t ‘loyal’. That mindset didn’t help US Airways avoid bankruptcy twice in the last decade, of course.

It amazes me that there isn’t more of a bias against upending the business model of frequent flyer programs — programs which are themselves profitable multibillion dollar businesses. It’s still conceivable that Delta could simply increase earning rates for premium cabin fares and call it a day, that’s a move that could make sense. But there’s much trepidation that they’ll do far more than that.

As they say, they aren’t done..

About Gary Leff

Gary Leff is one of the foremost experts in the field of miles, points, and frequent business travel - a topic he has covered since 2002. Co-founder of frequent flyer community, emcee of the Freddie Awards, and named one of the "World's Top Travel Experts" by Conde' Nast Traveler (2010-Present) Gary has been a guest on most major news media, profiled in several top print publications, and published broadly on the topic of consumer loyalty. More About Gary »

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  1. Gary, this is why I like your blog as opposed to bloggers like the Points Guy, you give real researched news,I don’t always agree with what you say, but I appreciate the fact that you research and report.

  2. I just booked a business flight with Delta and noticed they no longer show how many MQMs you will earn after you select your flight. I certainly don’t like that. Looks like they’re not wanting to show any mileage runners what they’ll earn before they purchase the ticket, assuming they didn’t use ITA to search.

  3. UA and AA are currently in a more precarious position than DL, so the offerings they have for their elites naturally differ. A FFP is one of the pillars an airline builds the customer value proposition with, and I’m sure careful analysis has shown that most of the customers they earn their money with primarily credit DL tickets to Skymiles, spend x $/yr etc. I doubt AA will copy any of this while in ch 11 and UA will probably sort their systems a bit more before tweaking things further.
    The collective wailing of the FTers pretty much shows that the FFP analysts did a good job spotting the non profitable elites 😉

  4. Writing as a Delta Diamond, I have an idea that would make sense for the most loyal fliers and for the airline. Let top-tier status holders redeem miles at low levels for companions when flying IN TANDEM with a revenue fare.

    For instance, I’d spring for a premium cabin trip to Europe if I could take my spouse along at low-level redemption. So, that would be more incremental revenue for Delta (my ticket) and a good reward for my loyalty (my wife’s ticket for 100K miles). But I’m not going to take the trip at all when their mileage redemptions are often 200K or 300K miles. In short, Delta is not distinguishing rewards for people who earn miles primarily by credit cards versus people who earn with butt-in-seat traveling….much of it, as you say, done via connections in which we choose Delta over nonstops or more direct connections on competing airlines. With their current routine high redemption levels and dearth of low-level space, even for their most loyal customers, SkyMiles is flirting with being irrelevant…and I say that as someone who has spent tens of thousands of dollars on Delta annually in recent years. If they don’t change, I’ll fly them to MSP when I go there, but will not direct discretionary dollars to them.

  5. Well said.
    Many (if not most) “high-yield customers” either don’t care about elite benefits (they either buy J/F, or expensive Y and thus get higher upgrade priority than others), or have no choice of carrier. They will continue to fly DL even if the entier Skymiles program is canceled.

  6. “The changes could be worse…”

    Good lord, Gary, don’t keep encouraging Delta like that!

  7. Delta still gets regularly criticized for having the worst award availability and I don’t see them addressing that until they move to a revenue based redemption system, like Southwest.

  8. Gary your are dead-on in your analysis.

    First – the frequent flyer programs are profitable for the airlines, not just based on flying but particularly due to the credit card tie-ins and other partners. The airlines should not kill the goose that lays the golden eggs. Part of what makes these programs successful is the aspirational awards that don’t tie miles to price. Most people will never redeem for these awards, but the potential is there.

    Second – if the airline’s revenue management is doing their job properly, every customer is valuable at whatever fare they pay. If they pay a high fare on a full flight at a popular time, or if they pay a lower fare at a low demand time, they ought to all be profitable to the airline. And while it sounds great to want to incent the full fare customer, the purpose of the loyalty program is to motivate the customer at the margin, not to reward a customer who had no alternative or would have purchased the last seat in the market anyway.

  9. Hope DL learns their lesson by having egg in their after this change. This would prevent AA/UA from attempting to follow their footsteps and simultaneously devalue all loyalty programs we have domestically.

    I have 18K SkyMiles that I can’t even redeem for any domestic flight (since they don’t offer one-ways). Talk about skyrupee

  10. Could you provide some more explanation as to how someone buying a full fare ticket yields no profit?

  11. @jbg…you are right, no MQM info before booking. Thats horrible (and hopefully an oversight during website updating by Delta). I use that info EVERY TIME when planning flights. Thanks for noticing and sharing

  12. @Coby if that person take the last seat on the plane and that seat would have otherwise been purchased by someone else at full fare

  13. It’s not just the el cheapo mileaga run people, I posted this earlier today on FT, Delta just makes no sense at all sometimes:

    I am in my late 50’s and will probably retire within the next couple of years, I am not gaming the system, I actually spent $47,800.00 on international tickets in 2012.

    I carried over 258,000 miles and I have been extremely loyal to Delta. When the Delta Business Class fares were higher than competitors, I downgraded to a B or M fare so I could meet company requirements and fly Delta (and then use upgrades) thus meeting the lowest fare company requirement. Of course my intentions were to build up as much carryover as possible and retire with maybe two or three extra Diamond years so I could enjoy retirement travel a little better.

    Ok, so Delta has probably screwed me, after the fact as they always do, and should I retire this year I will lose Diamond probably in 2016, when I thought it was locked in already.

    My first trip to Asia this year has now been booked on UAL, since they gave a company status match to me. I will spend the $50,000.00 this year on United and American, since I also received an EXP challenge match.

    Why would Delta, if they believe people are gaming the system, not carry over their “best” customers dollars spent as well as the mileage…Delta loses, I lose. If I spend $50k, in one year as opposed to $0k forever, how does Delta win.

    Jeff Robertson’s marketing skillset is extremely lacking or this whole plan has not been well thought out. Death by a thousand cuts is not meant for me, I have now moved on because I feel extremely foolish for believing in the “carryover” myth and misunderstanding what loyalty meant to Delta. I am the proverbial baby they threw out with the bath water…nice job Jeff.

  14. Maybe they don’t really want to incentivize anything, but are thinking that draconian revenue yardsticks will thin the ranks? Just guessing, as their rationale doesn’t make sense, I agree. Or maybe DL SM folks are just not very good at their jobs.

  15. “Tougher elite tiers without even benefits that equal United and American doesn’t seem a winning formula.”

    Not that I understand the “how” in all this, but it seems to be working just fine for Marriott

  16. I wouldn’t be surprised to see redemption tiers somewhat tied to elite status. Also I know the pure butt-in-seat elites cringe at the idea, but Delta makes a ton of money from the credit card program and they would probably offer a way get the low redemptions through a spend threshold.

  17. I actually think that what the Delta president says DOES make sense: as a business, they should incentivize the customers that contribute the most to the profit. Figuring out who those are is tricky – and starting with the highest revenue is the simplest way. Your cost of operating a flight ist mostly fixed (some fuel, food savings for an empty plane), so you need to maximize the revenue per flight. And the full-fare, business and first class passengers contribute the most per booking decision made.
    Also, I disagree with the assumption that travelers on business contracts don’t have a choice – most contracts include multiple airlines, allowing for choice, especially on profitable international routes.
    While low-fare travelers contribute to the revenue picture, the ones that solely make a purchasing decision on price shouldn’t be incentivized: they are likely to fly with the lowest bidder, little loyalty involved. The ones that buy tickets smartly and are loyal, will still get benefits.
    Lastly, I don’t think Delta (or UA, AA,…) is going to kill the goose that lays golden eggs – they are more likely to make incremental changes like $ for status levels, higher bonus for expensive tickets, etc to reward the high-yield customers. And they will probably get better at it over time.
    Unfortunately, that makes life for everybody who makes it a hobby to get the most miles/points/status for the least amount of money, a lot harder! Sad, but likely…

  18. Your argument about low fare revenue being profitable for an airline makes sense in theory, but is inconsistent with the way airlines actually price. Airline yield management is entirely based on saving a certain number of seats for the last minute so that they can be sold at a high cost to business passengers. Aside from rare exceptions, the airline doesn’t really end up with a bunch of empty seats close to the flight time that it dumps at a discount, because revenue management systems accurately model the demand for last minute seats. In fact, airlines will sometimes take a loss on some of the “junk” fare classes for competitive reasons to maintain market share (although these days, they can make that up through ancillary fees).

    Perhaps there is something I’m missing here, but I’m afraid that what the airlines are doing makes good economic sense for them (unfortunately for someone like me, who often flies on lower fares); to date, competition in the industry has just prevented them from doing it. I think if Delta’s changes are accepted by the market, it will represent the beginning of a significant reordering (similar to when AA took the first “leap” into bag fees, which were once unthinkable (and even thought to be in the worst interest of the airline) but now the norm).

  19. @Gabe they don’t wind up with last minute seats to dump at a discount (the way the used to, say, 10 years ago) precisely because as you say they’re pretty good at yield management. They sell the cheap seats early. But if they didn’t those seats would tend to go unsold. By selling the cheap seats early they extract maximum revenue — selling cheap to leisure travelings, and more expensively to less price sensitive travelers, extracting the most revenue possible out of each customer.

    But none of that changes the notion that the seats sold cheaply wouldn’t have likely been sold at a higher price, so if not offered cheaply would have gone empty. So those seats are sold at the margin with the revenue going straight to the bottom line.

    Perhaps not on the same or every flight, but there’s an equally plausible story that when an airline sells last seat at a premium, and then is sold out, that having sold that seat denies it to someone else who would have paid same price. So there’s not incremental revenue compared to what the airline would have otherwise received when it sells the full fare ticket.

    I’m not saying this happens every flight. And I’m not saying “the low fare passenger is always more profitable than the high fare passenger.” Instead I’m saying it is not nearly as simple as the claim seems to be made “we want to reward high fare passengers” because they are everywhere and always profitable, whereas low fare passengers are a tax on the airline. The standard formulation is just plain wrong.

  20. Trying to argue that a low fare passenger is as valuable as a high fare passenger is like trying to argue up is down. You can write a lot of words to try and argue the point, but in the end it still doesn’t make sense.

    Very few people are willing to purchase a Y fare, therefore their business is valuable. Nearly everyone will purchase a discount fare, therefore there isn’t really a need to target any particular individual in the low fare market, someone will be willing to buy the discount ticket.

  21. @Will if you would read the comment just above yours, you’d see you’re sort of charicaturing what I’m saying. I think I end that comment fairly clearly —

    “I’m not saying “the low fare passenger is always more profitable than the high fare passenger.” Instead I’m saying it is not nearly as simple as the claim seems to be made “we want to reward high fare passengers” because they are everywhere and always profitable, whereas low fare passengers are a tax on the airline. “

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