Delta Goes on the Record About Revenue-Based Frequent Flyer Programs

USA Today covers the impending risk of changes to frequent flyer programs, moving from rewarding miles flown with an airline to the amount of money spent — turning the legacy frequent flyer programs of airlines like United, American, and Delta into the much more modest offerings of Southwest and JetBlue.

The piece is titled Frequent-flier rewards: Change is in the air and Randy Petersen predicts this is going to happen:

“I would suggest by this time next year there’ll be at least one, if not more, of the major carriers that have adopted this kind of new normal among frequent-flier programs,” says Randy Petersen, publisher of Inside Flyer magazine, which closely follows loyalty programs. “I think in five years we will have forgotten about the old system.”

I’m quoted making the case, though, that the simple metric of ‘who spent most?’ as the smartest way to determine which flyers to reward is bad business.

“There is this belief that they’re rewarding the wrong customers,” Gary Leff, author of the travel blog View from the Wing, says of mileage-based loyalty programs. “I think it’s a mistake to say you want to reward whoever is spending the most.

“If I’m a business traveler at a company with a contract with United, I’ll fly United no matter what,” Leff says. “You want to reward people who are choosing to shift their business … and that might not be the person giving you the most absolute dollars.”

I also suggest that fundamentally upending a profitable business ought to at least receive significant scrutiny.

Most carriers won’t reveal exactly how much revenue the programs bring in, but some program watchers, such as Leff and Petersen, estimate that they translate into billions of dollars through the sale of miles to banks, hotels and other businesses that award them to customers.

And while the piece quotes Randy as saying revenue-based systems work for hotels, I think that misses an important distinction between revenue-based earning (in-hotel spend translations into the number of points earned — in some cases) and revenue-based redemption where a point is worth a fixed amount of money towards the cost of airfare. At a penny a mile a business class ticket to Europe might be 500,000 miles and a first class ticket to Asia might be 2 million miles. Even when you care about revenue, you still need award charts to price excess inventory at more logical levels.

The author of the piece even gets Delta’s Jeff Robertson on the record:

But a complete switch from miles to fares for a long-standing loyalty program would be daunting, some airline officials say. “We’re always anticipating the future,” says Jeff Robertson, Delta’s vice president of its SkyMiles program. “But the reality of that is, that type of change is massive. … It has massive implications, and it requires massive analysis and would not be something we’d do without a lot of analysis and prep work.”

… and me on the record getting a bit choked up and emotional over my beloved programs.

Leff and other program watchers say that such a move by any carrier would likely draw a backlash.

“A lot of people who are engaged with you because of what you’re offering now are going to be unhappy with something that’s fundamentally different,” Leff says. “People have been saving miles for dream trips for years. … All of a sudden people could find their miles don’t get them what they’ve been saving for, and that’s when people get pretty emotional.”

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 »

More articles by Gary Leff »

Pingbacks

Comments

  1. “People have been saving miles for dream trips for years”…….during that time the points have already been devalued by 30-50%. Save quicker!

  2. Would we expect that existing miles would be valued under the same rules they are today–similar to what happened with Southwest when they moved to revenue based? They had old points and new points side-by-side until everyone had used up the old points. In other words, someone who has 100K miles, expecting to use them (for example) on 4 economy saver tickets could expect to be able to do so even with the change of the program?

  3. The easiest first step in moving to a revenue model would be elite qualification. Top tier should be about $$$, not MRs.

  4. So say they make it revenue based and top tier (platinum exec/1K/etc) is somewhere between $20 to $30K. So you just eliminated 99% of your leisure travelers and a significant portion of your budget conscious business travelers as well. They may well walk to the competition. What about the business traveler who can now get top tier after 2 trips. She/He has no further need to be loyal either, might as well get elite in a few programs… This is going to get interesting.

  5. @Nick: That’s what tiers are for. Mid-tier could be $5-10K. As for the high-fare/premium class traveler, a minimum number of segments could address that group.

  6. Well crafted article. I think you hit the nail on the head with the revenue earning v. revenue redemptions. In some ways, depending on how DL (or another airline) works the revenue earning calculation, I could actually be doing better in terms of earning miles/points. Revenue based redemptions would be miserable though, even the BA (etc) mileage based charts are much better (compare 250,000 avios LAX-SYD with what would be ~560,000 miles for the revenue ticket).

  7. So this would be an end to cheap milage runs?

    Gary, I have many many delta mikes. I can’t (really) use them right now because my wife (who I would travel with) cant take the time off to really use them for what I want. If this switch to rev based happens, what about current milage balance? I

  8. This is not unexpected; anyone who is truly shocked needs a thorough mental health exam. Of Course they will migrate toward revenue-based award programs; that was, is and remains their primary function – loyalty AND revenue. While I won’t say that the amateur, hobbyist miles/points collectors have abused the many programs (The airlines’ rules try to prevent that), to be fair, one has to look at the motivation for some (many?) of those flights. Did you have a business or persona; purpose, other than collecting so many miles at such low fares? Would have made those trips – with those convoluted routings and/or higher prices? Would you have flown at all, without the hefty mileage gains? You are not supporting their bottom line. And when it comes to redemption, do you use your miles for a quick upgrade on the same airline, or do you ‘force’ them to buy front cabin tickets for you on a foreign-flag airline, ‘just for the experience?’ Your favorite Amerikan flag carrier does not pay full retlail for your award seat, but they do have to pay for it and they pay a lot. WHen the cost of that seat is more than you’ve really spent t o accumulate those miles, what is in it for the Amerikan airline? Your are NOT really loyal to them; only to t heir award program. You’ve don nothing to support their P&L, yet expect them to spend valuable cash to buy your award tickets.
    Just my guess here, but if you really do spend a lot with a given airline, and regularly, the rewards and awards will continue to flow down to you. If you spend only on mileage runs, or acquire points through other means, you can expect some major cut-backs.
    In the end, thy hobbyist collector or miles has had a wonderful run and for several years. You’ve enjoyed some wonderful ‘award’ trips. As the airlines continue to tighten their belts more and more, only those Frequent Flyers that contribute black ink to the quarterly and annual P&L statements will enjoy the serious rewards. While many may not like these changes, I beg you to consider the basics and try to remember why the airlines have these programs in the first place. From their perspective, it would be far easier to simply dump them, quietly reward the top 10% that do generate some profit and eliminate the rest. They CAN do it and they CAN revert to invitation-only programs such as United’s Global whatever. With some reasonable notice, I expect that many will. Now, more than ever, is the time to burn whatever you have and stop those silly mileage runs. They are on to you and no, they don’t really want you! They would much rather turn a small profit. It may take 4-5 years to affect the necessary changes, but I’d bet you my last bonus mile that it will happen. If/when they again need to compete, it will be on price and cabin service, not bonus plans. Think it through… It has been a fun run, but the days of easy miles are dying.
    On a different subject, that of ‘status,’ we need to talk. Some other time.

  9. For every one or us mileage junkies, there are 10 ignorant people who redeem for toasters or domestic round trips. I’m not saying that zone based programs aren’t viable, but at least they’ve managed to segment the market. And so if they can “price” discriminate properly, then it could be profitable. Why the hell did US have so many mile sales?

  10. Gary — you’re business partners with Randy. Why does it seem as though he’s advocating for a switch to a revenue-based program? Does he have a golden parachute?

  11. and btw the existing milage program can be a money making program if you manage it well. US airways has done it well….they sell miles, and then you redeem them for premium awards that ends up being a much cheaper price for you. it’s true that you got them for cheap, but the airline also made profit for doing….essentially nothing as they have fixed negotiated fares with their partners for award seats. They are not stupid to sell the amount of miles at a lower price then their negotiated fares with partners. That’s a wonderful business for some to be in. I can see Delta and make this move and AA might too. But US airways is certainly pretty satisfied with their current cash generating program.

  12. @Cook

    Every time an empty seat was paid for by the mileage runner at a higher rate than marginal cost, airlines made money. And that’s exactly what happens. To claim otherwise is to pretend that the airlines have been stupid all along and all of a sudden saw the light at the end of this “nightmare” tunnel of free-loading mileage runners, where the light is somehow the revenue based programs. Gotta be kidding.

  13. @Cook

    This is a crazy business, with extremely high fixed costs and very low marginal costs. Once the decision to fly a plane has been made, the actual cost of physically putting one person in one seat is quite low. It’s entirely possible to sell the last seat at a profitable margin, but have a flight that loses money overall.

    Crazy business I tell ya.

  14. Recently FlyerTalk member holtju2 pointed out that the shift to revenue-based programs may be motivated by accounting rules: Reducing the redemption value of existing miles produces a large one-time balance sheet benefit. This is true of any form of devaluation, so it doesn’t explain why airlines are choosing revenue-based structures to devalue their programs.

    Gary, is there some aspect of IFRIC 13 that works particularly well with revenue-based redemption?

  15. There once was a program with chart-based redemption and revenue-based earning: America West’s original Flight Fund. Wouldn’t it be ironic if US Airways’ new FF program were a near-copy of the old Flight Fund?

    More or less by accident, Southwest Airlines currently offers both revenue-based and fixed-price redemption. In the 2011 roll-out of the new Rapid Rewards, Southwest made it clear that the old “standard” Awards (16 credits for a capacity-controlled free round trip) were being phased out. Then this year the option to transfer points from Southwest to AirTran appeared. Now we can move points to AirTran credits for fixed-price redemption (also 16 credits per round trip) on AirTran, or transfer the 16 credits right back to Southwest for fixed-price capacity-controlled redemption at the same rate.

    Maintaining a fixed-price redemption option in the new programs preserves the value of miles being earned from credit card spending, allowing the banks to keep paying the airlines for miles. This money flow accounts for the entire profit of some airlines.

  16. One thing Robertson says that I think everyone can believe is, “That type of change is massive.” There are so many factors that go into it, so many types of customers flying and to be marketed to. Gary has a strong counter-argument to the, “They’re going to change” assumption, and I certainly hope his type of thinking prevails. I certainly don’t know all the economics of it, but I’m thinking that for every first class seat United has to buy on Ethiopian to satisfy a mileage hound’s expedition to Africa, they’re selling millions of miles to credit card companies that will be redeemed, if at all, to visit grandma in Schenectady. Perhaps I’m exaggerating, but a revolutionary overhaul of the programs still seems speculative, not a sure thing at all. If they were starting from scratch today, the outlook might be different.

  17. @hobo13 I am not aware of any financial interest that Randy has in a switch, I think he’s just talking to programs and hearing what they’re saying and sharing that back with us. Similarly I don’t have any financial interest in the status quo, other than a personal one (the value of my stash of miles, that I try to burn as fast as I can but I also earn too quickly…)

  18. Um, how many EARNED miles are flight miles these days? YM understanding is that it is precious few, what are the implications on cc miles, shopping portal miles, etc., if redemption becomes revenue oriented? All of these miles would essentially become cash rebates, but that cash could be spent only on the sponsoring airline. I predict Chase would pitch a fit if UA went to revenue redemptions.

    Also, any speculation on what this would do to partner reward charts? Would those go away, too? And what would alliances have to say if their US members opted for a model inconsistent with the traditional earning and burning schemes?

  19. This is why I think a hybrid approach is necessary at this point and slowly transition the program over the course of several years. Switching completely like a switch is going to be chaotic and create a lot of problems.

    WN’s program was very different since you had a fixed earning/redemption rate, no partners, no F cabin, etc. So the switch for them was not one bit complicated.

  20. It would certainly be good for me financially if the airlines went to a revenue based system. I waste a lot of time and money maintaining status (I fly on my own dime) and keeping my mileage balances high. People like Cook wouldn’t have to sit next to low lifes like me. Planes would be less full. Wow, the airlines should go for it.

    Except for the little issue of profitability and variable cost accounting mentioned by Dan and FlyingBear.

  21. this will finally end the credit card ponzi scheme. and the bloggers and such. Just think what people in Ohio, FL, and everywhere else in America would think of their “travel” credit cards? Think of them like Europeans they would. Trust me, 1 or 2 years of these new programs and the whole era will end for everybody good or bad. I agree with Chris Eliot, Ryan Air or the like, will rule European and American skies.

  22. And no one will own a travel credit card with worthless “miles” in 5 years time, except the hard core road warriors.

  23. Gary, I’m trying to follow this discussion, and I’m afraid it’s a bit above my pay grade. I have a miles stash and earning plan that keeps the two of us going MileSaver FC TA on AA every summer indefinitely. While earning no revenue miles at all. Are you suggesting that my current miles may be so seriously devalued that we end up having to spend our vacations in Orlando instead of Paris? :>{

    When AA seriously devalued their award program some years ago, they grandfathered classic miles with the better award valuations, apart from new miles with the inflated award valuations. Classic miles were automatically used first, and when you used them up you transitioned to the new award chart.

    Wouldn’t they have to do something similar here to avoid alienating long term loyal customers? Or should I be thinking of burning up my current miles with easy to schedule Anytime awards, instead of working so hard to find MileSaver awards, before they turn into pumpkins?

  24. Miles are not going to go away. They’re just going to be worth (a lot) less. It’s shocking that some posters think miles are simply going to disappear for all but a Global Services breed of flyer. That won’t be the case.

  25. Matt When you say “worth {a lot} less”… How much is “a lot”, and do you mean miles earned in the future, or also miles already earned?

Leave a Reply

Your email address will not be published. Required fields are marked *