Revenue-Based is a Catch-All Term, Don’t Misunderstand It

People use the term ‘revenue-based’ for three separate things and often mix them up.

• Revenue-based requirements for elite status. Delta and United require minimum spending amounts (12 cents per mile) to earn a status level.
  
• Revenue-based mileage-earning. Points earned based on ticket price, as Delta, United, and the low cost carriers do.
  
• Revenue-based redemptions. This is something that low cost carriers and a couple of international airlines have done for their own flights.

Even Delta Isn’t Headed Towards True Revenue-Based Redemptions

Delta thinks award charts are a thing of the past, and fixed mileage redemption amounts are, too.

That may be true at Delta.. sort of. But it’s not true for the industry.

Even at Delta, where they’re reducing the mileage price of cheap tickets and increasing the mileage cost of more expensive tickets, they’re still using fixed mileage amounts (5000, 10,000, 12,500, etc.) even if they don’t publish a chart with those amounts any longer.

No Airline With International Partner Awards Has Gone Revenue-Based

No airline has done revenue-based redemptions for international partner awards. And yet many people fear it and think it’s inevitable. Because they believe:

• Delta seemingly wants to go there
  
• United does whatever Delta does
  
• It’s a monkey see, monkey do industry. Why would American hold out?
  
• Members’ vision is often limited to programs based in their own country.

Delta is profitable and respected in the industry. If Delta does it, it must make sense. Though Delta’s profits have largely been earned under a traditional frequent flyer program model, not a revenue-based one. (And they haven’t gone fully revenue-based, minimum spend is an add-on requirement for status that still requires miles flown and redemption is still based on opaque fixed amounts based on route or region.)

Revenue-Based Programs Have a Limited Past at Best

In June 1987 America West (which later acquired US Airways and then American Airlines) introduced the very first revenue-based frequent flyer program.

In September 1989 they dropped the idea. It was too complicated, and it failed. They went mileage-based.

Air New Zealand went revenue-based in 2004. And yet they retained capacity-controlled saver award inventory. Sure, they became especially stingy with long haul premium cabin awards in the past few years. But revenue-based earn and redemption didn’t eliminate saver award inventory, and Air New Zealand continued to offer Star Alliance partner awards via an award chart.

Southwest and JetBlue, while offering revenue-based redemption, do not have international airline partner awards.

Virgin America has a revenue-based program — but when they introduced partner awards they introduced… award charts.

Why Award Charts Make Sense

Delta believes more expensive tickets should cost more miles. There’s a certain logic to it. But it’s wrong, and bad business.

We’re living in a unique moment in airline history where airlines have practiced capacity discipline, they’re profitable, and planes are full. So there’s not a lot of excess capacity. Though even that’s beginning to change, with modestly falling load factors this year.

But the ‘saver award’ idea is that seats going out empty are virtually costless to award to a frequent flyer. The program buys the seat for next to nothing from the airline, the value proposition of the program is access to distressed inventory that’s worth more to the consumer than to the airline which wouldn’t otherwise sell it. And capacity restrictions help prevent customers from obtaining frequent flyer tickets cheap that they’d have otherwise purchased for cash.

The relevant benchmark isn’t what the airline is selling the ticket for, it’s what the program has to pay the airline to obtain the seat.

Second, if there’s no longer an opportunity to get ‘outsized value’ from miles, there’s no reason to accumulate miles in one program over another, or in the currency of miles versus cash or other rebates. The very success that made these programs billion dollar entities is that they can tap into dreams by providing customers with something they wouldn’t be in a position to otherwise buy for themselves (outsized value) that they connect with emotionally (travel). A mere rebate for travel is better-earned in the form of cash back.

Delta’s Wrong, But Not Replicable by Other Airlines in Any Case

Delta sees it can fill its planes without incentivizing filling marginal seats through their frequent flyer program, so they don’t have to offer a lot of value.

And the program itself can remain profitable, since they can sitll do $2 billion deals with American Express even as they reduce the value of the miles they’re selling to Amex.

Long-term this isn’t sustainable because:

• Load factors won’t always remain so high
  
• The value of their miles will fall which will impact Amex’s volume through the co-branded Delta card. They can renew it based on historical data, but that may not hold into the future.
  
• New payment technologies will likely push down interchange rates over time, reducing the ability of banks to incentivize transactions via expensive mileage purchases. So it’s back to fundamentals for the program to remain billion dollar businesses.

Even if Delta decides it doesn’t need a rewarding frequent flyer programs, that doesn’t mean other airlines don’t. “Doing what Delta does” only works when you have the same business, same operations, and same customers that Delta has.

See also: The State of the Hobby: Frequent Flyer Miles in 2015