I used to think that miles would always be worth at least a penny. But even that’s not a guarantee. Like most things in US aviation, Delta is at the forefront — including with devaluations.
It’s useful to think of miles as a currency. They’re a proprietary currency with no currency board or independent central bank. And there’s a huge incentive to devalue, to monetize the debt.
Last week I was telling a past award booking client they’d do better using their American Express points to buy flights to Europe they wanted to gift their friends than transfer those points to Delta and redeem an award. That’s because they could use their Amex points at a penny apiece, but Delta wanted too many miles to even get that.
Matthew wrote about this phenomenon.
Let’s look at a simple award calendar for one-way Los Angeles – Honolulu in first class. Most days awards run around 62,500 and up. There’s one saver ward available on the calendar at 40,000 miles.
You’d think that 80,000 mile awards (82,500 even!) are going to correspond to really expensive tickets under Delta’s faux-revenue based program, right?
So I simply flipped over to “money” rather than “miles” and got this pricing:
In fairness to Delta, I went looking for a more expensive ticket closer to high season, figuring you could get better value for this expensive award pricing in December.
I got the one-way ticket price to go up to $565:
How many miles did that cost?
90,000 miles to save $560 and not earn miles, those SkyMiles are worth 6/10ths of a cent apiece.
On that rare one day in the calendar where you could book a one-way for 40,000 miles — you can hunt for a needle in that haystack — to get your miles up to a penny in value.
At Delta you can certainly still get a 2 or 3 cents per mile redeeming for international premium cabin travel at the saver level, and Delta’s transatlantic award availability is reasonably good compared to their US competitors. When they’re running redemption sales you can do well (although not always), and redeeming miles for partner travel you can do similarly well even though Delta continues to increase award prices without notice.
Delta wants you to use your miles for Dom Perignon in their club and in the future perhaps for haircuts.
They are trying to create the perfect company town. They pay out SkyMiles, and then set the prices of goods in their company-owned store. And here’s the thing, they have a monopoly in this town. So while they tell you you’re getting 1 cent per point (as though that’s a good thing!) redeeming miles for Dom Perignon, that’s based off of Delta’s inflated prices. $250 for a bottle of Dom Perignon is nuts, and so is 25,000 miles.
In the past airlines would offer retail choices as a mileage redemption option, and would try to price as close to a penny apiece based on the street price of the item. They’re buying something real and selling it to you, and they get some leverage buying in bulk (usually through a third party), which is why you don’t get 2, 3, or 10 cents a mile for those redemptions.
The goal of retail options was to provide an alternative to customers who didn’t want to redeem for travel (which was to remain the core of the program) and to provide a relief valve for the high demand for limited saver award seats. The goal wasn’t to get people not to even bother with travel redemptions, and it wasn’t to overprice the retail.
Perusing Delta’s SEC filings, they share in their most recent 10-K:
At December 31, 2015, the aggregate deferred revenue balance associated with the SkyMiles Program was $3.9 billion . A hypothetical 1% change in the number of outstanding miles estimated to be redeemed would result in a $29 million impact on our deferred revenue liability at December 31, 2015
If that 1% increase in the number of outstanding miles is redeemed for the same things they’re being redeemed for now, just at a higher mileage price, then Delta is able to recognize $29 million for no additional cash outlay.
The downside of course is that existing customers who have accumulated those miles may feel they are getting less value from Delta and might become less likely to give revenue to Delta in the future (either ticket purchases or mileage-earning transactions). In theory that should be reflected in a downward adjustment to goodwill. But it’s not obvious enough that this will happen.
- Several months into Delta’s revenue-based program, survey data suggested that less than 1 in 4 program members even knew that changes to the program had been made. Perhaps that is why Delta removed award charts, if they don’t even have to announce changes many consumers won’t be aware of them — and go blindly on buying tickets and engaging in mileage transactions with the program only learning what their miles are worth in the future when they go to redeem.
- American and United have devalued their own programs, so there’s less of an obvious gap between Delta and their competitors. Delta may be able to remain on the forefront of reducing the value of their miles if other programs continue to ‘manage by doing what Delta does’.
In fact Delta is earning a revenue premium and doesn’t believe SkyMiles is the reason. That suggests they’re doing well in spite of devaluations to the program. Which seems like a Green Light on Virginia Avenue to keep doing this: