The Other Shoe Drops at Delta: Revenue-Based Program Starts Next Year

As though Delta’s recent award chart devaluation wasn’t bad enough (and Delta thought it wasn’t, since they announced a no-notice devaluation to tied them over to the previously announced devaluation), the Skymiles program has come out with the major restructuring we’ve all been fearing for the last couple of years. Details are now up on the Delta website.

  • For Delta marketed or ticketed flights (purchased from Delta, or with a Delta flight number) earning will be based on ticket cost beginning January 1, 2015.
  • We’re getting 5 redemption tiers for bookings made January 1, 2015 onward, but Delta hasn’t shared details on what those will look like — and won’t until the fourth quarter.

Delta’s been pushing towards revenue-based programs for years, they made changes to the earning structure (that they backed off from) 11 years ago and their three tiered redemption structure was a move towards revenue-based as well.

Revenue-based programs take away the ability to derive extraordinary value. And this undermines loyalty.

I’ve been saying that revenue-based changes are coming to Delta, that the minimum spend requirement for elite status wasn’t the end of their changes. Internal memos about upcoming changes were leaked two years ago, but then when the changes came many members got complacent.

I kept beating the drum to remind that this was not dead. In fact the system was supposed to be ready to go last summer. I understand there were some tech problems, and some nervousness among senior leadership. Looks like they’ve finally come close to overcoming those challenges.

Earning Miles Will Be Based on Spending, With Fewer Miles Earned – For Everyone – Than Today

Here’s the new earning structure for tickets purchased from Delta:

  • Base members earn 5 miles per dollar spent
  • Silver Members earn 7 miles per dollar spent (40% elite bonus)
  • Gold Members earn 8 miles per dollar spent (60% elite bonus)
  • Platinum Members earn 9 miles per dollar spent (80% elite bonus)
  • Diamond Members earn 11 miles per dollar spent (120% elite bonus)
  • Purchasing ticket with a Delta co-brand credit card earns an additional 2 miles per dollar spent (additional 40% bonus on top of base earn)

​Qualifying revenue is base fare and “carrier-imposed surcharges” (fuel surcharges), but excluding taxes.

But distance-based earning isn’t entirely going away. Tickets purchased from third parties, and travel on other carriers credited to Delta Skymiles, will earn a percentage of miles flown based on fare class, details of which haven’t been announced yet (and may not be for awhile).

Let’s have a look at current fares for a long haul trip to Singapore. It’s about 20,000 flown miles roundtrip.

Fares vary wildly, though I have no problem pricing tickets a few weeks from now at the lowest fare listed below ($1060.20 all-in with tax).

But let’s take the highest coach fare on this list, not the lowest, to portray the idea of “Delta rewarding its best customers” under the new system and see how it compares.

In every case for this trip, the new revenue-based system earns fewer miles under this system:

Of course, expensive short haul flights will show a different result. And expensive business class fares may as well.

We Know Very Little About Redemption, But That’s Changing in a Big Way Too

We’re not getting pure revenue-based redemption the way that Southwest and JetBlue have, with floating mileage prices based on ticket cost for a particular flight. Instead we’re getting more award levels, a more complicated program, that tries to more closely align with ticket costs.

While Delta won’t share their full new award details until the fourth quarter (remember, Delta plays dirty pool and won’t respect their members enough to give advance notice of award chart changes as a matter of policy), here’s what we know:

  • There will be (5) redemption tiers, up from three
  • Flights will track the cost of tickets. We can expect premium cabin awards to go up markedly
  • They’ll introduce one-way awards and a “miles and cash” option for all members

And don’t forget, that revenue-based programs devalue, too so don’t expect whatever details come out to be a consistent value proposition into the future either.

So How Bad Is It?

We don’t know what the final composition of the changes will look like, since we don’t have details on partner airline earning or on the five redemption tiers. But the changes clearly aren’t overall good for the majority of members.

The changes to earning are purely prospective. One fear was — and Delta looked at this — existing miles would convert to a new currency, and not at a favorable rate. That isn’t happening. So it could have been worse.

And the changes are not all bad, I like the introduction of one-way awards and there will be some flights that get cheaper (although these would also be the ones cheapest to buy that you shouldn’t have been using miles for anyway). And though opinions are mixed, I see recent changes to elite upgrades as a net positive.

Overall though most members will earn fewer miles, and the tickets where it made sense to redeem miles (because they were costly relative to mileage cost) will go up in price. Worse on the earn, and worse on the burn.

If all they wanted to do was reward premium business, they could have increased bonus miles for premium cabin fares. They’re not doing that. And many premium passengers will be worse off under the new system, though changes make the program increasingly complicated and as a result many won’t realize it.

I think that revenue-based programs can be bad for the airlines, not just consumers. They kill the golden goose. Frequent flyer programs are the most successful marketing innovation in history, and they are profitable.

Frequent flyer programs devalue. It’s best to diversify mileage holdings as a hedge against revenue-based changes and look to some international programs for outsized value. And while other airlines will look at changes like this, it’s far from a foregone conclusion that they all follow.

Developing..


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