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.