Delta’s CFO Talks About the Economics of SkyMiles Rewards and Credit Card Deal

Delta CFO Paul Jacobson spoke at the Bank of America Merrill Lynch 2017 Transportation Conference and spent some time on SkyMiles. The way he talked about it is very telling. And it reminds me of the way Mark Weinstein talks about the Hilton Honors program.

Jacobson says that “loyalty took off” with the change to a revenue-based program, although he doesn’t give any numbers or examples of what that means. For Delta, they “got more clarity on how much a mile costs” so they make offers to members where they “truly are indifferent whether someone spends a dollar or a mile.” In other words, they’ve driven all value out of mileage redemption, there just aren’t awards which are costly to Delta anymore.

Weinstein once told me that there’s a certain amount they’re willing to spend on an elite at Hilton Honors, and they don’t really care how they spend that money. Long-term they want to empower the member to spend that fixed investment however they want. Perhaps it’s no surprise that changes to the Hilton Honors program create greater flexibility in how points are used, but offer absolutely no leverage in redeeming points for higher value (and in fact in the process by eliminating class cash and points awards, got rid of one of the few elements of the program that offered outsized value).

Delta’s Jacobson gives examples of being indifferent to members spending points versus cash for “buying drinks in SkyClub, using miles to upgrade across branded fares initiative” and says this flexibility means “miles are much more valuable to our partners.” He says the “Delta relationship with American Express is the largest portfolio in the world” although American Express was unwilling to make the claim that SkyMiles are more valuable, not less valuable.

Delta’s deal with American Express runs through 2021. It set a new bar that United, Southwest, and American have since re-upped their own deals towards. They expect to drive “another billion dollars in value” through that program by 2021.

Like American’s Doug Parker, Delta’s Jacobson says that SkyMiles “absolutely represents… [a] more stable revenue base” because third party mileage sales ‘track GDP’. What none of them seem to acknowledge publicly is that:

  • The bulk of revenue comes from credit cards, but in the long run interchange fees (which along with APR fund rewards) will fall either through regulation, court decisions, or most likely competition from new technology which reduces the cost to transfer funds

  • Competition in the credit card rewards space has heated up significantly, with bank programs engaged in creative destruction — outcompeting their own co-brand products with proprietary programs like Chase Ultimate Rewards and Membership Rewards. In any case, bank reward spend is at an all-time high and this will either drive up loyalty program costs at airlines to compete or will drive down revenue as consumers opt for better deals.

Delta plans to “continue to monetize” SkyMiles. However there’s really not that much more room for Delta to monetize (inflate) their mileage liabilities, having killed about the only good use of SkyMiles left last month. Just take a look at their hidden partner award chart to see that.

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. Sign up co-brand CC
    Meet MS
    Put away in closet
    Cancel before 1 year anniversary
    Put rest of spend on MR/UR products and SPG

  2. You and he are on very, VERY different pages with regard to the program’s prospects. Only one of you will be right.

  3. Actually stvr – Gary and Jacobson are not on very different pages at all.

    Gary fully agrees with the short-term forecasts and estimates that Delta has made public, including the increase in partner revenue from Amex – this deal is done, and those estimates/forecasts have been disclosed to the market.

    However Jacobson (nor AA/UA) doesn’t discuss the issues that Gary raises nor their long-term likely impacts to the program nor DL’s risk assessment of them.

    The Street pressures DL for short term increases in RASM, so DL responds by milking the cow as much as is possible.

    Gary just points out that if you over milk your cows – some of them will become less productive.

    Both can in fact be right – and are.

  4. Gary’s right. When there’s no out-sized value, there’s no incentive. For example, WN absolutely wastes Rapid Rewards rebates on me. I fly them to see family because they are the only airline who offers non-stop service in that market. Whatever RR rebates I get are just putting money back in my pocket, they’re not driving additional spend.

    With mileage earning by flying at all time lows, and mileage earning by credit card sign ups and spend offering much better value propositions, I’m loyal to nobody. Plus, with the instability in their mileage value, DL gives me absolutely no reason to earn miles in their program.

  5. Gary’s right on the mark here. I only
    Started using credit cards once I experienced both the utility and comfort of miles. I had to cancel a ticket last minute to see my girlfriend because of passport issues. My friend who was a miles and points evangelist (unsuccessful so far in converting me), used 60,000 United miles (that I got from the chase United MileagePlus sign up years ago. The only card I was willing to open on his advice) and his own AA miles to book me a round trip ticket on EVA and Cathay.

    After seeing the value of booking a last minute ticket and the comfort of flying biz long haul, I was hooked. Now I put all my spend on credit cards, so these banks like chase and Citi and making money off me they weren’t getting before. I also don’t MS.

    I only got into this because of outsized value. I definitely would not have gotten hooked if it was just miles for wine or a discount off an Econ ticket. Even a free Econ ticket would not have made me so excited.

    As Gary has rightly pointed out many times – it’s the promise not just of saving some money, but the promise of travel and luxury that these airlines and hotels are promoting. That drives increased revenue and changed behavior. Not a simple rebate.

  6. Being SFO based I feel quite fortunate that UA hasn’t copied DL in terms of mileage redemption as much as they did in other aspects. UA miles is still quite valuable to me.

  7. Great thing for Delta is that UAL and AA are driving theirs into the ground faster.

  8. Yeah, what these executives don’t seem to factor into their models is that while they are becoming indifferent to whether or not a customer uses miles (because they have devalued the currency) the customer has also become indifferent to loyalty since there are no more outsized reward opportunities.

  9. This will all eventually bite them in the A**. Decimating loyalty programs has a finite lifespan before the less nuanced loyalty members catch on and shift to credit card loyalty programs or cashback products.

    I’d say the same for actual butt in seat miles but they have decimated earning to the point that loyalty is even less valuable (especially when combined with deteriorating loyalty benefits).

    They are currently seeing the effects of accounting magic by pulling the rug with devaluations (either by points or availability) but when those members leave for credit card loyalty programs it will be just as difficult to get them back.

  10. I’m consistently amused that so much hatred is issued toward loyalty programs that actually seek the best interests of the parent business. Why is it such a problem for the miles and points world that outsized or over-generous awards are being done away with (other than the fact that we all can no longer redeem for such huge value)? And I’d argue that, while revenue based programs can limit some of the value of loyalty, companies like DL are doing much better than the competition at putting forward a quality product. Loyalty should be based on the total picture and not just over-generous award opportunities. For those who argue that DL is worse off than AA or UA I’d say that both the other two are busy driving product, service, and loyalty programs all into the ground. DL doesn’t seem to be so focused on having a terrible product…there must be some reason that DL and Skymiles are doing so very well, especially compared to the competition.

  11. @Robert – personally I find that my experience with DL has been less than UA, and they are no great shakes. Today I flew Austrian biz from VIE – EWR. What a massive difference in product all the way around from the US carriers. They should learn something from little Lufthansa. Personally I think DL has been resting on it’s former laurels

  12. “Delta plans to ‘continue to monetize’ SkyMiles.” I associate the word “monetize” for selling a parts of a business for cash. Obviously, they are not selling the miles business, so the term suggests cannibalizing the future value of the SkyMiles program for current cash flow and profits.

    I personally believe that the Delta management realize that there is no such thing as a free lunch but they do not care.

  13. If you’re not a “road warrior” and only fly occasionally, putting miles into a FF airline program makes no sense (other than getting to the status that allows seat selection in advance). If I can spend on Chase or another CC, get a better value than the airline itself, what is there to make me loyal?

    I used to be DL Diamond. Now, I get to maybe Gold, and then put all spending on Chase or SPG.

  14. What’s good for business in the short term may not be what’s good for business in the long term. I’ve ended involvement in SkyMiles. I have a no-fee Delta card I never use (I keep since it helps the age of my portfolio), but AMEX and Delta are realizing zero from my card membership. Delta has as many flights out of my airport as anyone else, but I haven’t flown it in over a year. I’m getting increasingly mystified as to why the big banks are putting so much money into their credit card relationships with these airlines – not just Delta – for deals for miles that are losing their value fast.

    Don’t people realize you can get cash back cards with a commodity (cash) that remains pretty stable and widely usable? Indeed, options for getting around the world with paid tickets are getting better than they used to be and indirectly drive down the value of airline miles. I’m working on a Middle East trip late this year; it’s going to cost 80,000 miles, or $700 paid. So how much is a mile really worth anymore?

  15. Jacobson says “loyalty took off”, eh? Well, in a manner of speaking, I suppose he’s correct. My loyalty certainly took off. I stopped voluntarily accruing Skymiles, burned my accumulated stock, stopped flying Delta, and cancelled my Delta Amex card.

  16. I have thought about this whole rewards program and why the Big 3 make it difficult to fly their best routes without spending a lot of miles and always seem to shove miles redeemers onto partner planes.

    IMO

    They want the revenue from the CC annual fee, but they do not want the liability of miles customers earn.

    They want loyal PAX’s but they do not want to reciprocate.

    The 3M’s (mindless marketing morons) put out all kinds of literature about their FF program and how great it is, they themselves are never forced to use it, they all for free with their families in Business or first class and chose the sweetest most direct routes, nor do they go through the frustration of trying book tickets short notice or well in advance and see that if the use they use miles for international trips for their families, that the airlines wants use 80k miles one way for 1 layover vs 40k miles for 2 layovers. In our case going from DAY or CVG to TLV it means 4 – 6 more hours, with a small child, those 4 – 6 hrs, DAY or CVG to MNL same thing another 4 – 6 hrs and not 2 layovers but now 3 or more, as most here probably knows can mean a somewhat smooth trip turn into a very frustrating one with the added pressures and anxiety buildup in a small child.

    Heck I do not want to do the extra layover or airport dash because I get in at one gate and have to run to the other gate, no fun by myself. A fricking nightmare with a small child.

    I hope the 3M’s at the Big 3 read the comments on this and other sites.

    THE WAY THE BIG CURRENTLY TREAT FREQUENT FLYERS SUCKS!! I hope the CEO’s at all three of these airlines get fired along with their 3 M’s

  17. I don’t understand why the banks keep the airlines in business with their absurd ff miles purchases when they all have their own travel cards that are much better.

    Cap One is the only one to promote their’s as being better because they have no airline card.

  18. Lot of whining here. Boohoo we can’t game the system anymore. Personally, I hit $25k on the Delta card for the MQD waiver and then leave it in the drawer the rest of the year.

    Anyways,
    A) Delta has the best product of the legacy carriers.

    B) The airlines are doing very well right now, so why would they change anything? They can spend on incentives or improving redemptions to retain lucrative travelers if the economy turns south. It’s a business!

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