Get Ready for Big Revenue-Based Changes at Delta Skymiles (With Other Programs to Follow)

Back in January Delta announced changes to how frequent flyers would qualify for beginning in 2014. Instead of just basing status on miles flown, there’s a second component at least for US residents — a requirement to spend a minimum amount on Delta tickets, or to spend a minimum amount on Delta co-branded American Express cards.

I then declared that Delta isn’t done making changes to their program and in fact there are more big changes to come.

Delta’s shift towards becoming a revenue-based frequent flyer program isn’t just about elite status, it will be able earning and burning as well. They just haven’t revealed the details yet, but I don’t expect it to be pretty.

When I sat down to put together nominations for the Freddie Awards, I struggled to find a promotion that I could include for the Delta Skymiles program. That was strange because it’s a category they’ve actually won in the past. Delta has historically been among e more active frequent flyer programs in the promotion space, bonusing partner activy, bonusing mileage purchases and transfers. Delta miles may be in general tougher to use than other major US currencies, but they’ve also been pretty easy to earn.

What I found was a few rental car promotions, a few hotel programs at a low level especially with Hilton, and a big bonus for high-fare London travel which basically just matched what everyone else was offering on the same route.

In the past there were frequently big bonuses for transferring American Express Membership Rewards points to Delta, as big as 67% and including elite status for big enough transfers (there was once an 80% bonus by stacking two different bonuses based on how the rules for each were unintentionally written, but that wasn’t purposeful). In 2012? Nothing.

And my understanding is that inactivity in the promotion space has been because they’ve been so focused on revamping the program itself. In the coming months I believe we can expect to see a dynamic award chart that bases mileage cost of award tickets on the price of purchased tickets.

There have been a lot of changes brewing across frequent flyer programs recently, and in how airlines are monetizing what they once gave to elite (and other) customers for free. Some of it is really smart. Monetizing upgrades more than ever before (granted there are good and bad ways to do it — offering cheap upgrades to non-elite members that you won’t offer to your own elites, the way United has done intentionally or not, is bad business) airlines have been letting the revenue potential of their premium cabins sit mostly dormant until now but that’s changing. Domestically they’ve given those seats for free to elites, and internationally for free to employees. When customers will may more than a de minimus amount it makes sense to take that money.

But some of it I do believe they’re getting wrong, undermining what is a profitable model already. The programs themselves are billion dollar enterprises, entirely apart from the airlines they’re associated with. Selling miles especially to banks (about 60% of miles printed) is bis business. It seems less sustainable at the moment than it has in the past because with really full flights redemptions become more difficult. A little bit of airline expansion, an economic downturn, and things don’t look as bad. There is this overhang of miles that makes programs worry about whether they can sustain long-term and are increasingly willing to do creative destruction.

Randy Petersen thinks that US Airways was on the verge of going revenue-based and that when they merge with American Airlines, the combined program will launch in such a way. I’ve been skeptical, thinking the merger puts off such a decision as the folks from Tempe take time to understand what they’ve bought and as they strive not to alienate customers during the merger process.

Nonetheless, there have been tons of predications that the future of US frequent flyer programs is a revenue-based one. American had been the program I tagged as least likely to go there, with Delta and Alaska and potentially US Airways at the forefront (all programs that had adopted three-tiered award charts for their own flights already) plus United which had been on the verge of implementing revenue-based requirements for elite status a year ago but didn’t pull the trigger when they merged programs with Continental.

Still I don’t worry so much because of international programs and worldwide competition, I can bail for AviancaTaca in the Star Alliance (plus potentially Aeroplan, Singapore, All Nippon), for British Airways or LAN in oneworld, for Korean Airlines Skypass in Skyteam. They aren’t in general as good as MileagePlus and AAdvantage, but the point is that there are tons of programs to choose from and they won’t all make the same changes.

But Delta will go first, others will watch how things develop there. Customers probably don’t flee in droves because few will even realize how devalued their Skypesos become until redemption time and even then won’t internalize differences in value across programs. If I had to guess they’ll succeed, and in the monkey see, monkey do world of frequent flyer programs others will follow.

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 InsideFlyer.com, 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. I suppose if you talk about the “upcoming” change long enough, eventually you’ll have it spot on.

  2. Along with the lack of promotions, the revenue based system is another reason the Award Calendar hasn’t and won’t be fixed. There’s no need to fix it when you’ll pay based on the flight cost in $$$! Sadly, I fear the new system will make existing high-band J awards look like good value!

  3. Gary, are you suggesting that we should start redeeming miles NOW, especially if we want long-haul business class award tickets, or just suggesting that we should start to alter our accumulation with the likely change in mind?

    It makes a big difference to my travel plans for 2013-2014 whether I am rushing to redeem something now vs. being able to wait at least a few more months. My vacation schedule is mostly done through the end of 2013 and I already have a good idea of what I’ll do in the spring of 2014. Ideally I’ll put off any big Delta redemptions until I can book something for Oct/Nov 2014, at which point I’ll be looking at Australia/NZ, French Polynesia, or possibly Africa, depending on availability.

  4. @Gary – you know they have already implemented this as you can now redeem Skymiles for 1st class travel at 1 cent per point and EARN both MQM’s and RDM’s for the trip (if you have a DL AMEX). IMO the results from this “testing” will be the benchmark for system wide move. As with any program – earn and burn as fast as you can 🙂

  5. @autolycus – I expect that we will get SOME notice even though Delta has a history of making award chart changes without notice (and falsely claiming they were legally precluded from giving notice) so I wouldn’t make redemptions now personally but i would be prepared to do so sooner than later.

  6. it will be a truly sad day when the entire world goes to pure revenue based earn and burn, making aspiration all awards unpractical (who would redeem JFKNRT in J if they quote you 600,000 miles??)

    But i do support alliance-wide 2-tier award – saver and 2x-priced “last seat” redemption

  7. @Gary– we’ve certainly been hearing about possible changes to SM for awhile now… is there any new information you have that makes you think the change is imminent/will be launched for 2014? Or do you think 2014 will just see the MQDs launched, with a full revenue program launched for 2015?

  8. They can’t have it both ways. If miles go to a strict 1 cent value on redemptions, then there are no sweet spots to tempt people. There are no aspirational awards people can dream about, and demand for skymiles goes down (even more than it has in the past).

    Also, with this new kind of valuation, people will use miles to buy seats that would otherwise pay for. With the current program that is not often true– skymiles get used to fill seats that would otherwise go empty. I don’t see how this helps DL.

  9. Maybe I’m being too hopeful here, but I actually do not anticipate that the big 4, soon to be big 3, will go revenue based. As you note, if I read you correctly, 60% of miles are bank issued. Add mileage shopping portals, idine affiates, etc., and the preponderance of miles issued are equally available in the form of cash – cash back credit cards, cash back mileage portals, and the idine cash back program. Perhaps 2/3 of miles are earned in lieu of cash? Miles are interesting, even to the most casual users, because they can be leveraged into something cool, or as you call it, “aspirational”. Cash is nice, but its just cash. Meh. But if my mileage plus card gets me a penny per dollar to spend on UA only while I can get a CC which pays me a penny (or more) I can spend anywhere, the choice is achingly simple.

    The only earned miles for which I cannot substitute cash are, pretty much, BIS miles.

    Now, the “independent” airlines (Virgin America, SW, Jet Blue, etc.) certainly have revenue based systems, but, by and large, they do not have redemption partners, VA being a bit of an anomoly more and more. A move on the part of US, AA, DL, or UA to a revenue based redemtion system could create havoc within their alliances – for example, would Skymiles be redeemable as a cash type instrument on DL, but still as a points oriented instrument on Saudia? If not, what kind of a fit will alliance partners pitch? This would have to create colossal anomolies, especially with premium cabins. Revenue based redemption systems just seem to create a thicket for the legacy airlines in fully integrated alliances.

    What I can see happening is perhaps more pronounced revenue based earning, either by reducing miles earned in lesser buckets or increasing miles earned in higher priced buckets, or, literally, having earning pegged directly to fare paid. Yes, yes, this conjures notions of “cockroaches”, but at some point people who game the system (cockroaches) have to be comfortable with the idea that the airlines want loyalty, not customers who are in it, somewhat, to work them over.

    Much of the pressure, of course, seems to be driven by the morphing of programs from being airline loyalty programs to becoming effective issuers of currencies which may be redeemed for airline products (or toasters). And now, it seems that perhaps at most 1/3 of the currency is issued for using the airlines’ products. I suggest that the legacies risk 2/3 of their production if they move to revenue based redemption.

    And I go a bit OT, but it does not necessarily help that in 2003, it took about 5 transcon r/t’s, or $25,000 in CC spend, to earn the basic 25000 r/t award, but now, it takes about t transcon r/t’s or 19,794 2003 dollars in CC spend ($25,000 in 2013) for the same award. Simply, in real money, its 20% easier to get those 25000 points on CC spend. Essentially, a $100,000 market basket, purchased on a miles earning CC, in 2003 would earn 4 domestic Y r/t’s, but the same basket costs $126,370, and if purchased on a miles earning CC would yield 5 domestic r/t’s [Yes, I assume no variation in availability, ancillary fees, etc., but work with me here . . . ]. There seems to be some tension here, as distance based BIS earning is fixed, absent a dramatic geological event, but inflation makes it easier to earn the same currency based on CC spend. Just my thoughts.

  10. @Gary, was wondering just how many miles (percentage wise) earned can be substituted out for cash equivalents, for example:

    Mileage Plus credit cards points substituted for a 1 or 2% cash back card.

    Aadvantage dining miles substituted for an idine cash back program.

    Delta Skymiles Shopping substituted for Topcashback.

  11. “Selling miles especially to banks (about 60% of miles printed) is bis business.”

    Freudian slip? Big business, BIS business, or bigger than BIS business?

    I think the banks are a key to how this develops, as they are so tightly wrapped up in using miles as incentives to gain market share and drive spend. If earning miles via credit cards is no longer much of an incentive to the customer, who might as well then just use a cashback card, how will that affect the banks’ strategies? I have no idea, but I’m going to be looking for good Delta redemptions (hard to find sometimes, I know) sooner rather than later.

  12. Interesting post and thanks also to jfhscott for his take on things.

    My husband has 48,946 Skymiles. I was contemplating including Delta in his next AOR. Given the uncertain future, is this a wise move? I am new at this game, so I can certainly find other cards to apply for instead. I have no specific trip in mind. We did use my stash of Delta miles very easily for a TLV-Milan-TLV jaunt two years ago. Are such routings easier, or were we just lucky?

    Thanks!

  13. If such changes resemble pay with miles, high value international premium cabin flying at attainable mileage levels will be history. Such changes would make it harder for airline cards to compete with cash back cards.

  14. @DJ, tru dat. And airline cards seem to have become the bread and butter of the legacies’ FF programs. If I cannot use my cards and get premium cabins at a decent redemption rate, I’m just gonna concentrate on cash back cards, which involve far less work. Show me the front of the plane or someone will show me the money.

  15. Gary, if the major programs go kaput, and then you go to ANA, Singapore, Lifemiles, Aeroplan, etc…. then it’s not that great to use credit card bonuses if you’re going to get tacked with bunches of YQ and shitty award levels. Not everyone is going to want to redeem for SQ F….

  16. Gary, you say “Customers probably don’t flee in droves because few will even realize how devalued their Skypesos become until redemption time and even then won’t internalize differences in value across programs.”

    I can see how customers might get a skymiles credit card, fly delta, or otherwise earn skymiles being way, way, too optimistic that when they reach 120,000 miles they will be able to get a business class seat to Asia without the slightest compromise with respect to dates of travel, itinerary, or just where in Asia they go. There must be thousands upon thousands of such optimists who just presume that low availability will exist to meet their needs. The current redemption system is well opaque enough to keep hopes alive.

    But if all they are promised from a skymile is one penny of travel, I think the same population will quickly learn just what that penny can be redeemed for well before they go to redeem it. Such a system is well transparent enough that anyone within one standard deviation of the median intelligence can get it – and realize that it sucks.

    There can be little doubt that a (revenue based) Rapid Reward point has a fixed value which can be sussed out pretty quickly. I think the only way Skymiles can retain customers in a revenue based program is to offer ENOUGH revenue (perhaps 1.5 to 2 pennies) for whatever activity generates a point, assuming a point buys 1 cent of travel.

  17. Thanks for your comments, jfhscott and DaveS in particular.

    I wonder to what extent airlines can kill off the traditional loyalty programs in favor of $$ spenders and still keep the program looking attractive for all of those profitable.

    I would be very interested in Gary’s thoughts on this.

  18. I love reading your posts because I see your CFO mind coming through. I have an economics background, and I enjoy following your financial logic.

    What revenue based method do you see as being the best fit for Delta? What would be the change that would most negatively impact fliers?

    I’ve been a Delta loyalist for about 10 years since college, and despite the challenges with the Skymiles program, the Delta product still seems heads and shoulders above the other domestic airlines. Making a switch to American means older planes, older flight attendants, worse cabin service, etc. Switching to United means more flights out of EWR and less out of JFK; JetBlue is worthless, etc.

    I appreciate any thoughts you or anyone else has.

  19. This makes sense for Delta, whose FF program is so @#* that no one who is serious about miles and points flies them anyway {“skypesos”}. Southwest did this awhile back, and neither majors nor minors rushed to follow.

    Delta relies on service and hub dominance to sell tix.
    AA and UA rely much more on their loyalty programs. I just can’t see them embracing this, as it would gut both their loyalty programs and their miles sales to banks. Billions of $ in sales, as noted above.

    And it would be a Mexican standoff between UA and AA, since the first one to implement would see a mass exodus to the other program. I doubt even Alaska would go this way. Alaska has been busy making their FF program more relevant thru more partners and allowing one way awards. I don’t see them suddenly reversing course either. But if I had a stack of Skypesos I’d be in a hurry to burn them.

  20. Seriously–as a PM on path to become DM in two months, the day Delta makes that change is when I will stop accuring miles on SM.

  21. I think their goal is for everyone to redeem (and pay with cash) for coach tickets, and then upsell premium cabins at T-24 for elites, and at the gate for everyone else. Only the truly cash rich, not points rich will secure premium seats months in advance.
    The optimist in me says once the airlines fall on their sword and go WN style redemption, cashback CC’s start offering $1k signup bonuses, and the signup bonuses for travel cards will have to go up to stay competitive. 🙂

  22. “A little bit of airline expansion, an economic downturn, and things don’t look as bad.”
    Very true. I don’t remember all these huge CC signup bonuses 10 years ago. All these 50,000 or 100,000 pt bonuses came after the Great Recession… perhaps to entice people to start travelling again and racking up credit cards again.

  23. @jeff – I’d rather have SQ/LH/BA F and YQ than a Southwest-style FF program, given the choice.

  24. In my mind, the REAL question is what happens to redemptions involving (in whole or part) partner carriers. I’m not that broken up about losing the ability to book an all-DL (or UA, AA, US) itinerary under the current award chart. Sure, it has uses from time to time (just as WN does now), but it’s not my primary interest in redeeming miles.
    But, it’s hard to imagine any sensible model for pricing itineraries entirely on a partner carrier, or even more complex – one that involves both, e.g., a DL flight connecting to KE. Seems to me that if you lose the ability to connect different carriers on the same itinerary, or if you try to price all-partner awards at some cash-derived value, you’ve really damaged (destroyed? given partner earning rates as well…) the whole FFP side of alliances.

  25. @NYBanker plenty of programs bonus paid premium cabin fares in a pretty big way, though i do miss british midland’s 625% for paid F when one had already re-qualified for gold status..

  26. After the Executive Travel Summit, I overheard Jeff Robertson telling a group of attendees that SM wants to reduce the number of SM in circulation (that’s why they haven’t run any big bonus promotions recently; and why we can’t expect any in the near future). He also insisted that Delta’s legal team has advised them that they can’t give advance notice of program changes.

  27. @UAPhil – If that’s REALLY what DL’s lawyers are saying, then we can’t fault him for following that advice. However, I would question where on earth DL’s lawyers are getting that from.

  28. DL has already moved toward this with low/medium/high redemption pricing. A 25K coach RT is a rare find in my experience and 32.5K, 40K and 50K are the norm. If fewer SMs in circulation is the corporate goal, you can be certain that they will not do this through selling fewer of them, so it has to be done through higher still redemption pricing.

  29. Another reason to not live in ATL, MIN, DTW or SLC.
    BTW – Bookyouraward.com is AWESOME!!!!!!!!

  30. Keep it coming. They’ll lose even more customers. I’ve already spent less with them this year than I normally would have. Taking away the MQM bonus for M-class tix did it for me.

  31. LAN/TAM have basically gone revenue based already.

    Securing an award at their basic levels is a test of patience.

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