Last week Delta announced changes to how its customers will qualify for elite status this year, for their 2014 program year benefits. The information was quickly released after they mistakenly put it up online earlier than intended.
Delta is setting minimum spending thresholds for each elite tier for their US customers, and waiving those thresholds for such customers who spend $25,000 on a co-branded Delta American Express card.
The changes could be worse, and they aren’t entirely unreasonable (it’s not crazy to think that a customer would spend a minimum amount before receiving better treatment).
Although the way it’s being implemented: Delta flights or Delta tickets only count, not even tickets on joint venture partners, although I imagine that’s driven by technical limitations more than anything else (since it’s harder to know how much a customer spends on an Air France ticket for an Air France flight when that customer is simply crediting the miles to their Skymiles account).
And if they’re going to make the elite levels harder to obtain than their competitors do, you’d think they would at least make those tiers as valuable as their competitors are — as I noted when the changes were first leaked, a revenue-baed elite program should at least offer systemwide upgrades valid on any or most fares (rather than the nearly full fare “M” requirement currently in place), since they no longer have to worry about low fare qualifiers getting those cheap upgrades. Tougher elite tiers without even benefits that equal United and American doesn’t seem a winning formula.
In any case, Delta isn’t done with the changes. Many folks have been expecting a ‘revenue-based frequent flyer program’ to involve changes to the way redeemable miles are earned (somehow based on spending) and possibly even how those miles are redeemed (more closely aligned to the cost of a paid ticket).
Delta appears to be planning more changes in that direction.
President Ed Bastian said on Tuesday that Delta wants to shift its SkyMiles rewards program “to drive the type of customer behavior that we would like to encourage.”
“I think before we didn’t discern between a customer that was a high-yielding customer versus a low-yielding customer,” he said on the company’s quarterly earnings conference call. “I think that as we continue to evolve those programs we’ll be continuing to favor the higher-yielding customers over the lower-yielding customers.”
Delta declined to say more about future changes to SkyMiles.
So we don’t know how they will change earning, or if they will change burning. There are things they might do that could make good sense, like bonusing higher fares to the level that many international frequent flyer programs do (some offer double and even triple miles for premium cabin tickets). And there are things they could do that make little sense, like appearing to punish low fares.
Why does that make little sense? It goes against conventional wisdom to say, but customers flying on low fares can sometimes be very profitable for an airline. Low fares are offered precisely because an airline expects those seats to go empty. So every dollar they receive for the seat is truly at the margin, revenue that goes straight to the bottom line. In contrast, a customer buying a full fare ticket may be buying the last seat on a plane — a seat that might have been purchased by someone else — meaning that sale led to no economic profit at all.
And in any case you don’t want to ‘reward high revenue’ you want to ‘incentivize incremental revenue’. It makes no sense to spend money ‘rewarding’ revenue you will get anyway, tickets sold as part of large corporate contracts may be high fare but the customer has no choice. The frequent flyer program doesn’t make them more likely to make the purchase or choose the airline.
In contrast, what an airline looking to make money wants to do is encourage customers to choose it over its competitors for a given trip. They want to target rewarding of passengers where it will draw incremental business.
One way to do that is to measure how often a customer makes the choice to fly the airline. Miles flown and segments are two (quite imperfect) proxies for that.
American realizes this in its upgrade priority: a connecting passenger trumps someone flying non-stop on the upgrade list. If I fly Washington DC – Dallas – Tucson then I have priority on the Dallas – Tucson leg over another 100,000 mile flyer ticketed just for Dallas – Tucson. The idea there is the non-stop customer likely chooses the non-stop flight, American doesn’t need to do as much to compete for that customer’s business. But from DC there are no non-stops, I’m choosing from all airlines and connecting points. Take DC – Dallas – Phoenix, I could take the US Airways non-stop but American is competing to try to get me to connect.
In making changes to the elite tier, Delta has intimated that they want to make sure elite benefits like upgrades flow to the higher revenue passengers. But statements like that betray a misunderstanding of how their program currently works, remember that Delta prioritizes full fare elite passengers over discount fare passengers regardless of elite tier. A full fare silver trumps a discount Platinum now.
In saying that Delta wants “to drive the type of customer behavior that we would like to encourage,” I’m reminded of Ben Baldanza (of course now the President of Spirit)’s comment from 2002 when he was at US Airways,
Ben Baldanza, US Airways’ senior marketing executive, says his carrier is trying to reward coach-class passengers for the amount they spend, not how much they fly. He says the change will not turn away as many loyal customers as others think.
“Someone who flies a lot isn’t necessarily loyal if what they’re doing is buying the lowest-priced ticket every time they fly,” he says. “That’s not necessarily the kind of loyalty we want to reward. We want to reward those people who pay a premium for the services we offer.”
People buying the tickets US Airways was selling over and over — instead of similarly priced tickets from their competitors — weren’t ‘loyal’. That mindset didn’t help US Airways avoid bankruptcy twice in the last decade, of course.
It amazes me that there isn’t more of a bias against upending the business model of frequent flyer programs — programs which are themselves profitable multibillion dollar businesses. It’s still conceivable that Delta could simply increase earning rates for premium cabin fares and call it a day, that’s a move that could make sense. But there’s much trepidation that they’ll do far more than that.
As they say, they aren’t done..