Who’s Behind the Delta’s Move to a Revenue-Based Program, and What’s His Next Target?

The people who were selling airlines on the revenue-based moves that Delta is in the process of making are now beating the drum for others to follow.

Talking to Delta about their changes, they talk about Jay Sorensen’s IdeaWorks study on award availability, how they scored so badly. Sorensen is apparently one of the people they talked to as they developed their new program.

Never mind that Delta’s award inventory is as much a revenue management problem, and subsidiarily a website/technology and a training problem, as it is a frequent flyer program problem. And never mind that the annual IdeaWorks study is so fatally flawed as to be useless. They take it seriously because the exposure hurt them. And Sorensen is one of the people they talk to about improving their program.

And now Sorensen is pushing the idea that awarding more miles to higher fare tickets is obviously better for other airlines too.

Jay Sorensen, President of IdeaWorks, a consultancy firm working in airline loyalty marketing, expects Delta’s competitors to make similar changes to their programs.

“Why would you fly on United to Paris in business class to earn 13,000 miles instead of flying on Delta for more than 50,000 miles?” he said.

Just because Hilton awards about twice the points that Hyatt does doesn’t mean that Hilton is more generous. An 80,000 point HHonors hotel in New York isn’t better than a 25,000 points Gold Passport room there.

In other words, more points aren’t always better. It depends on the value of those points, what those points buy you. Delta is making changes to their award chart, not just to points-earning, and they refuse to tell us what those changes are. It’s a secret award chart.

Furthermore, the conventional wisdom that Delta is rewarding business travelers and awarding fewer miles to leisure travelers really isn’t true.

Delta is requiring minimum spending of 10 cents per mile to earn elite status now, as part of their new revenue-based requirements for frequent flyer benefits (25,000 mile status requires $2500 in spend, 125,000 mile status requires $12,500 in spend.)

The break-even point, where you earn the same miles as before under Delta’s new mileage-earning scheme, is double that at 20 cents per mile.

You have to average 20 cents per mile in airfare over the course of a year just to break even. It's not until you're spending more than that where you'll come out ahead.

  • Most business fares aren’t actually that expensive. Many discounted first class domestic fares Delta offers are only a little over that 20 cents a mile price point.
  • And business travelers also travel for leisure, bringing down their average.

Now, the IdeaWorks study that Sorensen peddles says that revenue-based programs are better from the get-go because you can use your points for any seat based on the price of that seat, ignoring that many traditionally frequent flyer programs already offer last seat availability for incrementally more miles. Southwest and JetBlue always have award space available, no comment on how many points it takes at the extreme. But Delta does too, already.

But Sorensen pushes anyway —

“If American and United want to make lower-fare-paying people happy, they certainly can continue to do that, but it’s going to cost them money,” said Sorensen, adding that customers on high-value fares and branded credit card users are the big money-spinners for airline loyalty programs.

His studies are flawed, the implementation of the idea Delta is pushing is flawed, and it’s imperative that the word gets out. Consumers shouldn’t get duped, other carriers follow at their own peril.

Besides, there’s a very simple way to reward high spending customers without upending the fabric of programs that are already the most successful marketing vehicles ever developed, and that are themselves aleady profitable on a standalone basis.

  • Many foreign airlines already reward premium passengers more generously than US programs do. They offer 100% and 200% mileage bonuses for paid business and first class fares, compared to the 25% or 50% bonuses that are standard in the U.S.
  • United, having drastically increased its award pricing should just bonus premium fares more heavily. American’s award chart in many ways is already expensive, with significant fuel surcharges added to awards on its primary transatlantic partner. They could follow this model as well.

It’s the changes on the redemption side of things that are going to be key, and you don’t have to change redemption to reward high spending customers (to a crass ‘points per dollar’ system that directly pits employee interest against those of their employers).

Redemption is the part of Delta’s changes likely to hurt the most, or else they wold be willing to share the details of what they’re going to do.

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 see big changes coming across the board. I was talking to somebody this weekend about points and we discussed American airlines redemptions. I have done many with them. Since its been several months I checked some flights on American and see big changes. Now they are pushing many US air flights over the more desirable American non stop flights on the same routes. We already know about the BA flights to Europe being offered with the huge surcharges. Plenty of availability with those costs and there is pushback. All the majors will go revenue based. American can say we will award the same miles for the flights and not follow Deltas program. They can merely adjust all the redemptions up. Again the value of the point or mile. I don’t think this will be done due to the credit card programs. More likely it will follow Deltas plans. When the smoke clears it will be harder to get those good redemption values. Only a matter of time.

  2. The real deal behind Delta’s move is the US/American takeover/merger. One less competitor means not having to compete as ferociously.

  3. What I don’t really get in this change (which I don’t really like even though I can see why Delta wants to do it), is why they are keeping the MQD requirement. I could see the rationale when Medallion levels were based on only miles flown so Delta felt that they needed a minimum spend requirement as well. Now that they are proposing a straight revenue based system, what possible rationale can there be to keep an additional dollar benchmark. Curious what your thoughts are on this Gary.

  4. IdeaWorks NEEDS the other airlines to move to this model. If United or AA keeps their current model, the Delta money-grab will go over like a fart in church. If Delta customers defect to AA or United, IdeaWorks will be finished. They’re plan will decimate Delta’s passenger volume and revenue, Delta will have to backtrack and the only customer IdeaWorks will have is Bob’s Beef Jerky Emporium.

    IdeaWorks entire reputation is on the line, and that’s why they’re so adamant about the others switching. If I were running AA or United, I’d take a ‘wait and see’ approach. Or run promotions to get Delta flyers to switch.

  5. @Gaurav, I’m not Gary, but the answer is pretty simple: The dollar benchmark is related to Medallion status, whereas the 2015 changes are related to earning redeemable miles. Delta wants their highest spenders to have the highest status and to have the most redeemable miles. But as it stands right now, Medallion status is still determined first by the miles you fly and then by the dollars you spend.

  6. @robertw: American already has a revenue-based option: pax who buy higher fares can qualify more quickly based on points. Folks who buy discount economy fares still receive full mileage credit but often only half the points, so they may have to fly as much as twice the miles of first-class pax for the same status. (to round out the program, the segments option lets those who fly frequent short hops qualify by number of flights flown).

    A small number of FF fanatics qualify by accumulating miles on super-discount/sale fares, but I doubt that’s enough to seriously affect AA’s bottom line.

    AA’s FF program gets high marks in part for its fairness. I sure hope the merger won’t make them like all the others (though I’m not holding my breath).

  7. @robertw, I noticed the same thing as you did with US Air availability vs AA availability. If you go to United.com, you will notice the same thing and it’s really apparent on first/business awards. I don’t think it is a conspiracy. Rather, US with it’s smaller FF program and thus smaller base of elites simply has more seats to give away as award seats. That will change when they become part of the new AA. As for BA availability, it’s okay, but not great. The problem is AA’s own metal has little availability as you note, but that’s because people prefer to redeem on AA metal to avoid the fuel surcharges. Except for flights operated with the new 777-300ER to London, BA’s business and first class products are better than AA’s.

  8. Gary,

    Really could use your wisdom here. I’m currently a SFO-based DL DM and sitting on 85k MQM. (Once I hit my spending on the DL Amexes, I’ll requalify for DM again for 2015). Except for a few ANC mileage runs later this year, I will no longer be flying domestic, but instead, I’ll be flying about 80-90k miles in transpac C each year. Each ticket costs on average $4-5k. At six trip annually, this would net 300k DL miles ($4,500 x 6 x 11). I already have over a million miles across the four airlines that I can’t burn fast enough, even though I redeem close to a million a year. I also expect to see my MS rates going down with my new job. Which FFP do you recommend a business traveler like me to join? And one that I don’t have to start from scratch… I really want to hear an argument away from DL, but the numbers speak otherwise…

  9. The other side of Euro/Asia FF programs is awarding 10-25% RDM of the flown miles for discounted economy and all the way down to zero EQM. That could have been much easier for Delta to implement, while capping the distance earned for high end tickets. If a TATL/TPAC J cash ticket earns 50-75k SkyMiles, I can’t imagine the J award chart would be a good one.

  10. @Ken Y – 300,000 Delta miles, we don’t know what those will be worth in the new system at all. Personally I’d take 200k American miles over 300k Delta miles in a heartbeat. Which you’d earn as an American Executive Platinum. You’d also get 8 confirmed at booking international upgrade certs valid from any fare, good to upgrade to business or from business to first on American.

    Of course American doesn’t have international flights out of San Francisco, though they have partners who do. If you’re flying enough for top status, and not flying domestically, my usual case would be American.

    Based in San Francisco you might be better off flying United, since they’ve got non-stop transpacific service on their own flights, and you can upgrade from business class to first class plus their miles are still more valuable than Delta’s are or likely will be in 2015 and beyond.

    I really don’t see the argument for Delta as a San Francisco-based flyer. Just because you expect to earn lots of miles? Have to look at the burn side too. And the flight options. And what status will get you. More flights on other carriers and alliances, and better upgrade options, including upgrades to first make a strong case for switching from Delta — and as a top tier on another carrier you’ll earn miles at least as value as what you’ll get from Delta, even with a high earn rate from premium fares.

  11. I’m sure UA and AA are seeing some of the positive effects. Since Delta change my Wife and I have started a AA challenge. We had been GM and PM over the last 10 years. My brother just told me yesterday he has started with UA. He had been a PM for over 10 yrs.
    So I sure others have also looked or started the same thing. Which means DL will have to get more PM’s and GM’s from other airlines or attract more kettles with lower prices to fill their planes? This probably won’t show up until fall because summer is always a busy season.

  12. I’m guessing the other benefit Delta sees is that it may be able to sell more miles through other channels if it gives away less miles for flights. So their mileage program in theory becomes a bit more profitable. Hopefully this doesn’t work for them, we really need to yell from the rooftops about this.

  13. I believe the public discussion is missing the main point: major airline elite status and miles earned are being shifted towards those who spend more…but even more to those who spend more on co-branded credit cards in the US. THAT is where the largest increases in earned miles have come in the past decade, and airlines are shifting their programs to account for that.

    We do not know exactly how much airlines earn from their co-branded credit cards, but we can speculate that it is pretty significant. That is why airlines have given their best benefits to those having/using those co-branded credit cards.

    I assume that the revenue generated from co-branded credit cards is SO substantial that it has pushed both airlines and frequent flyers and consumers towards certain cards and concomitantly towards certain airline spend. THAT is what the new airline program changes are geared towards.

    Frequent flyer/airline loyalty programs have BECOME mileage earning programs. Frequent flyers and those loyal to an airline do not account for as much revenue as those who spend on co-branded credit cards (and the airlines they therefore tend to fly because of that bonus).

    So many of you are living in the old fantasyland where those who flew more earned more miles. That hasn’t been the case for a decade now, except in very rare, limited exceptional instances where the most frequent business flyers ALSO likely spend much on co-brnaded cards ANYWAY.

    Delta is moving accordingly–based on where it sees its revenue increasing and not hurting. Might it err? Of course it might.

    I do agree with those who believe that United and American will wait to see what happens with Delta. American is still likely to devalue its award chart after completing its merger with US, since it has the best values and has room therefore to devalue and be on par with its 2 competitors. Delta is also flighting Alaska for market share in the Pacific NW, something that United already has, and which American is in no position to gain. United and American may ultimately gain if too many people abandon Delta for the award chart, status, and secrecy issues–which therefore might mean they also abandon the co-branded credit cards for others usable for United/American. I still see Chase and Citi winning big here, too.

  14. The IdeaWorks consultant is a small pawn in this. McKinsey, LEK, Bain, and Oliver Wyman drive this stuff.

    Delta has been looking at this since at least 2009.

    The study conclusion that Delta was harder to redeem fits perfectly with your own recommendations. And United was genuinely easier.

    Manufactured spend was part of the reason United had to make as draconian a move as it did on First Class awards. The biz class price change was a more organic move driven by fuel surcharges.

    And Delta is still dealing with the excesses of the 2011 Membership Rewards bonanza, fueled in no small part by blogs posting ‘private’ promo codes, which led Amex to rewrite its breakage assumptions.

    Marketing depts were not quick enough to learn how viral offers spread, and now both them and programs are adjusting.

    There aren’t that many int’l premium seats to go around, so a small percentage of people suddenly earning 3-5x what they used to in miles makes a big impact on programs.

  15. @greg Oh come on blaming manufactured spend for UA devaluing its charts is ridiculous. I would blame airline consolidation primarily. They can do it now with less fear of losing fliers – where exactly can they go?

  16. I hate to say this but Delta is doing what they believe is good for the bottom line. I bet studies will show that when it comes to purchasing decisions, most customers don’t take earned miles into account. I DO, but most DO NOT.

    So delta will retain the ignorant customer who don’t care about earning miles, while American get the customer who maximize their miles. Who do you think will win out in the long run?

  17. @Autolycus, thanks for responding even though you’re not Gary :). I guess I am really confused then. Do you think Delta will now have three measures to keep track of: mileage flown and dollars spent for Medallion qualification and the the calculated fare based mileage awarded for redemption? I guess my first reaction was that the new mileage figures would be the ones used to calculate Medallion eligibility.

  18. According to posts on TOBB, Delta will cap the amount of miles from its “high value customers” to a maximum of 75,000 starting 1/1/15.

    Which, according to the calcs over there, means if you’re spending over somewhere around $7k on a ticket, spending more won’t get you more SkyMiles.

    They are livid. Popcorn, please!

  19. @Gaurav, I hope you subscribed to follow-ups or check back. The answer is yes, there will be 3 separate measures: MQM, MQD, and RDM. All 3 exist currently, the only difference is that right now you earn the same MQM and RDM from flying on Delta tickets.

    This is probably one of Delta’s biggest misses in the way they made this announcement. They didn’t emphasize enough that status qualification wasn’t changing. I’ve seen tons of comments over the interwebs with people decrying the fact that they will never be able to maintain GM/PM/DM under the new system and how that’s driving them to another carrier where they’ll still be recognized. But… status qualification isn’t changing.

    About halfway down the Delta.com page announcing the 2015 changes, there’s a heading, “How Will These Updates Affect Medallion Status?”. The very next line is: “The updates to the 2015 SkyMiles program will not impact how you earn Medallion status.”

  20. @Autolycus, I did read that part about qualification too but as with the whole announcement, it wasn’t clear to me what it meant. I read it to mean that the levels to reach SM, GM, PM, DM would be the same but that RDM would be the new metric used to reach those those benchmarks. I guess we will see as more details come out.

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