Why Didn’t We Get a True Revenue-Based Frequent Flyer Program From Delta.. and What Comes Next?

At Frequent Traveler University, several of us were on a panel about the future of the hobby and what to expect next. The big elephant in the room for many has been revenue-based frequent flyer programs. I worry about them less on the earning side (although it will mean fewer miles for me from flying but I expect that non-flying activity will remain a significant part of the hobby and a hedge against these changes) than I do on the burning side (I want to continue to leverage the value of my miles by getting deeply discounted premium cabin international awards).

Randy Petersen talked about the Delta Skymiles changes – where they are shifting next year to accumulation based on the cost of a ticket, but merely adding award redemption categories rather than going revenue-based (number of points for a ticket based directly on the market price of that ticket) – and said that Delta was going to go revenue-based on the redemption side but one of their focus groups towards the end of their process scared them out of it, business travelers who all wanted to get value for their points instead of a fixed value per point. They were worried an important customer segment would defect if they went all the way revenue on the mileage burning side of the equation.

Randy also said we’ll see this change to pure revenue-based redemption eventually from Delta, that he expects the Skymiles changes aren’t done and that they’ll complete the project in the next few years.

I see those two claims as a contradiction, and it leads me to think that Delta’s reason for not going revenue-based was closer to the story I’ve gotten (second hand) all along that Delta wanted to go revenue-based redemption but had challenges with the IT.

They weren’t going to do a transparent fixed-value per point. They were going to roll things out at least six months earlier than they did but they couldn’t make dynamic (and opaque) award pricing in miles work correctly.

And they kept the award chart secret when the revenue-based earning changes were rolled out as much because they wanted to limit information to digestible pieces in order to have their messaging get through (high spenders rewarded more) as because they hadn’t actually finished piecing together what the chart looked like.

Despite big reactions to changes in the past, and like American, they had become insular enough about the changes after years of focus grouping that they were shell shocked by the reaction to the notion that they were hiding the ball on the changes. So they relented and quickly finished up the chart for travel to/from the US (only).

Now, Randy (along with a handful of others) had been briefed on the changes by Delta in advance under a non-disclosure agreement (or so Delta tells me). So he may know more than I do on this.

I expect though that what will happen is that the next couple of years will be crucial – because Delta will have real empirical evidence one way or the other about the efficacy of their changes, and that will inform their decision-making on whether to go all the way or not. And it will inform other airlines about their own direction, too.


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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Comments

  1. The big three would be stupid to go revenue based on redemptions. The current point based scheme gets people to burn miles on seats the airlines think will be empty anyway. If you go revenue based and points are just like cash, people will use them on the popular crowded flights and those empty seats will stay empty. Points based redemptions fill empty undesirable seats.

  2. Delta as a horrible program and I don’t really care what they do. But I would definitely be concerned if any other major airline made redemptions revenue based.

    The thing is, if award seats are truly revenue-based (like Rapid Rewards is now), international first class would cost so many miles that nobody would ever book it. (I’ve seen first class tickets from US to Asia as high as $20,000. I presume that would cost two million miles if miles are worth 1 cent each).

  3. Am I understanding you correctly?

    You think the only thing that kept Delta from switching to a revenue-based system on both the earning and redemption side is that they had IT issues and couldn’t “figure out” how to value miles at various dollar (or fraction of a cent) values? That seems somewhat hard to imagine. Awards already price variably based on availability, it seems absurd to surmise that they couldn’t find a way (albeit not without some difficulty) to do the same with a revenue-based system.

  4. They’re certainly testing the waters. I think they’ll introduce pure revenue redemptions with a mileage cap at some point. Earning caps are a feature of the 2015 program, so seems plausible to me.

  5. I’ve still never seen any remotely reasonable explanation for how a program that has so many partners, destinations, and classes of service might go revenue-based on the redemption side. It’s not just about the IT in terms of a multiplication problem – programatically determining the “price” of an airline ticket is a non-trivial problem, given the number of partners (not all of which are codeshares) and destinations (not all of which have published fares to everywhere else) involved – not to mention routing rules (which ones to use? MPM+x%?). Just use YY fares if they don’t have anything applicable? The challenges are really quite significant.

  6. Well, either you believe that Jeff Robertson stood in front of a room of his peers and lied openly about Delta’s plans and motivations or you believe what you’re attributing to Randy above because Jeff said it to 100+ people that Thursday morning.

    Also, your post says Delta was scared out of revenue-based earning where you mean redemption, I think.

  7. One reason why I’m moving toward BA/VS/Aeroplan, and other foreign FF programs.

  8. I’ve been thinking about this and I’m wondering if the problem with going to revenue based redemptions is related to the value of credit card points. If they go to a 1% back scheme (redeem miles for 1 cent each) then the “double miles” cards represent a much better value and that consumers will quickly figure it out and switch cards. If they go to a 2% cash back scheme, then award redemptions will end up “costing” them much, much more than they to today since they will directly replace revenue for purchased tickets. Plus there’s the loss in “value” to customers who want to redeem for business class.

    I think, as you’ve pointed out before, the airlines are, or should be, nervous about impacting their revenue stream from credit cards and don’t have a good way to solve this problem without significant risk. Selling unsold inventory for miles (as they do today) works for both the airlines, and us.

  9. @Nun – I did not know about the AA changes in advance. The day before I did get a call asking me to be available in the morning to talk about some AA news. But the news actually broke in pieces on the AA website many hours before that, and I had already written my first blog post on the changes before AA called to brief me in the a.m. So no, no NDA with AA.

  10. The thing is, as implied above, is that revenue based redemption does not necessarily work either. Points will be used to take out seats which would otherwise be sold for real cash.

    Meanwhile, those unsold seats which would historically have been released for miles will go empty.

    The credit card maths also fails. Either:

    A) Delta sells miles to card companies at 0.5c per mile and those miles get used for a revenue based redemption based on 1c per miles – so Delta has sold a rev seat for half price when it could have got full price in the market, or

    B) Delta sells a mile for 0.5c to a card company and gives you 0.5c of value for it. At which point everyone switches to cashback cards.

    At present, Delta is selling seats which notionally have no value to it – as they would remain empty – for miles. That will go away under a revenue system.

  11. i think a point is being missed:

    obviously the credit card business is hugely important to airlines. if redemptions go revenue based, then there will be ZERO motivation for someone to accumulate ‘miles’ using a branded airline card. plenty of cards have 2% cash back. if miles become ‘cash’ based, where will you put your spend- cash you control to use anywhere, or in the hands of Delta with zero flexibility, no real access to YOUR money and no control over its value from 1 day to the next?!?

    like everyone else, i’d be earning cash back on cc’s, shopping thru cash back portals etc- or via hotel branded cards.

    granted, the airlines are so arrogant now that they may give it a go anyway- relying on the Ray Zalinky truism:

    ‘What the American public doesn’t know is what makes them the American public’

  12. What’s the point of having an NDA with a blogger, to try to stifle rampant speculation?

  13. “Randy (along with a handful of others) had been briefed on the changes by Delta in advance under a non-disclosure agreement (or so Delta tells me). So he may know more than I do on this.”

    That could have been a very short time in advance. Companies often give reporters a short lead time (called an embargo) to write their articles. People other than reporters might be asked to sign an NDA whereas established media companies will comply with the embargo to protect their future access to advance information.

  14. The IT root cause theory would be more plausible if Delta had not ALREADY implemented pay-with-miles, which is precisely a fixed-value redemption system. No barrier to entry there.

  15. “If you go revenue based and points are just like cash, people will use them on the popular crowded flights and those empty seats will stay empty.”

    Southwest attempts to limit this effect by charging more points per dollar when the leisure fares are sold out. Presumably Delta would like to do the same thing, making the points price much higher for flights which are likely to sell out.

    “The thing is, if award seats are truly revenue-based (like Rapid Rewards is now), international first class would cost so many miles that nobody would ever book it.”

    That’s the situation with Southwest’s Rapid Rewards.

    “if redemptions go revenue based, then there will be ZERO motivation for someone to accumulate ‘miles’ using a branded airline card. plenty of cards have 2% cash back.”

    I believe that Southwest Airlines is facing exactly this challenge. The Southwest Visa card offers a boost toward elite status and toward a Companion Pass, but if you don’t need the boost or if you can’t reach these objectives even with the boost, then you might as well use a cash back card.

  16. Agree with Chris, could mostly care less about DL as I won’t focus my earn with a program where the lowest level saver awards are basically a lie.

    I am probably one of the few who would actually welcome a WN-type program where I know exactly how much my miles are worth and can spend them on any flight I want. Would be great to actually be able to use my miles on flights where cheap leisure fares are available as I do now with WN. Also means fewer miles used during frequent biz class sales.

    However as NSX notes this may finally be the tipping point for credit card users to defect to cash back cards, which would actually hit the airlines in the pocketbook. WN is close to the over/under @1.4cpm – anything less than 1.5% means cash cards are a no-brainer.

  17. “if redemptions go revenue based, then there will be ZERO motivation for someone to accumulate ‘miles’ using a branded airline card. plenty of cards have 2% cash back.”

    Correction: there will be zero motivation for educated consumers. Everyone else won’t even know about the cards with 2% cashback (and there are not plenty of those, anyway).

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