The problem with Delta’s new revenue-based mileage earning (rewarding you points based on the price of your ticket instead of the miles you fly) isn’t actually that it:
- Doesn’t actually reward high spenders, since the “break-even point” for earning the same number of points in 2015 as in 2014 is a ticket price of 20 cents per mile flown, which is twice as high as the revenue required by Delta to earn elite status in that element of its revenue-based reforms, and Gold elite members and higher will have to spend more per ticket than general members just to remain even. And Delta actually limits the miles that can be earned by top spenders.
- Misses the point on how to incentivize incremental business at the margin and contribute to the airline’s bottom line. Business travelers whose companies have contracts with Delta and pay for premium cabin and last minute tickets are locked into flying Delta, rewarding them doesn’t earn more business from them. And paying the highest prices for the last seat available on a plane may just displace another passenger who would have done the same and thus contributes zero to economic profit. Filling seats, on the other hand, that would have gone empty is nearly pure profit.
- Upends the most successful marketing innovation in history which is, itself, wildly profitable on a standalone basis. This is a billion dollar business – which isn’t actually in ‘trouble’ in any conventional understanding of the term — that’s being turned on its head.
No, the real problem with the program is that it destroys the romance.
There’s nothing inherently magical about ‘miles flown’. Earning points based on miles flown is a proxy, however, for time out of your life spent with an airline. With significant days, flights, hours, and trips you develop a relationship with an airline. And it’s an emotional relationship.
This isn’t S&H Green Stamps and it isn’t your neighborhood sandwich shop punch card. It’s a reward for your loyalty. The time spent with an airline becomes your reward, “you give us your business travel, you give us your paid leisure travel, and you become like a good friend that we will take care of down the road in the best way we can – with that free trip to Hawaii, with a business class trip to Europe for your anniversary.”
Frequent flyer programs changed what are essentially a commodity to be sold at the lowest price – an airline seat between any two cities – and turned them into a differentiated product with brand identity and customer loyalty.
But in explicitly rewarding the precise dollars that you spend rather than the time with spend with the airline (of which miles flown are an imperfect proxy), they’re re-commodifying the experience. They’re reducing points-earning to a transaction; a rebate instead of a reward.
They’re also further pitting employers against employees, creating incentives where folks spending someone else’s money explicitly are rewarded for spending more of that money. Elements of that already exist, of course – programs try to get customers to choose their associated airline independent of best price, in many cases they require higher fares to upgrade internationally for instance – but this makes the arrangement specific and explicit.
Instead of a romantic loyalty relationship, they reduce the frequent flyer program to a crass commercial transaction – which undermines the genius marketing insight that’s made programs so successful in the first place.
Delta has gotten its fundamental message out, I think, that they’re now going to reward their best customers even though they are not really rewarding their best customers.
To a large extent the media storm has passed. They’re likely feeling better about themselves on Virginia Avenue this week.
But the real storm is what’s to come, as they break the emotional bonds they’ve built with their customers over decades.
In this monkey see, monkey do industry other programs follow Delta’s lead at their peril.
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Delta has been ruining the enjoyment of travel for decades. This is simply the greedy monopolistic company with a leading the way example of why airline mergers are so bad for customers. All I can possibly do is continue to do my business elsewhere and ban all employee travel on them as well.
I will be cutting up my American Express Membership Rewards card too with the changes
Chase is the largest beneficiary of the Delta spiral downhill
Great that you’re delving into the details of Delta’s frequent flyer program devaluation, Gary. But this has nothing to do with romance or relationships. It’s about an oligopoly that in many respects no longer has to worry about competition now that the industry has been “consolidated.” Until and unless competition returns – perhaps by more options and ownership by foreign carriers, though I’m not optimistic about the latter being allowed – we’ll see the United and eventually American programs deteriorate along the lines of what Delta is doing. Oh, and in the absence of competition, higher prices and often poorer service as well.
Hey Gary, you sound sad! Hang on a sec while I call the WAAAAMBULANCE.
The “romance” of flying vanished with Pan Am. It’s been steadily downhill ever since deregulation. Now that the oligarchy is firmly in place Delta(and AA & UAL soon) simply ran the numbers and derived their ff program metrics.
Like Skynet, the computer determined frequent flyer participants fate in a nanosecond. At least in airline terms.
Someday, in my humble, uninformed opinion these programs will simply cease and there won’t be a thing (most)anyone can do about it.
Well, as the guy who opined in your comments section that airline loyalty programs has become S & H Greenstamps with some outsized aspriational prizes avaialble, I read, with interest your comment:
“Instead of a romantic loyalty relationship, they reduce the frequent flyer program to a crass commercial transaction – which undermines the genius marketing insight that’s made programs so successful in the first place.”
I submit that FF programs became crass commercial transactions some time ago when so many miles became available through other sources, with CC’s being the primary culprit.
Delta moving to a revenue based miles granting system, to me, merely confirms what has been true – that the game has become a crass transcation – for some time. It was a fait accompli long ago.
This does not mean, however, that there is no romance in goosing the system, identifying sweet spots in earning and redeeming to maximize value and working, whether through flying, CC spend, CC sign ups, flower purchases, etc., for aspirational goals.
Romance?? For many years SkyMiles has been more like a bad marriage!
I would appreciate an opinion. Please respond. I am in ATL sonDelta made sense. My husband and I fly once a year to France and one to the West coast. The rest of our flights are not too significant. I’m a Gold Medalliam withan AMEX Reserve Card and 208 K sky miles.
Suggestions please.
Thanks so much
I appreciate any ideas you would be willing to impart.
The executives who invented miles-based FF programs grew up under the Standard Industry Fare Level (SIFL) formula, which provided a distance-based formula for calculating fares based roughly on industry-level costs, a 12% rate of return and target load factor of 55%. SIFL-based fares were intended to better align the fare structure with the distance-based economies of modern jet aircraft. (see http://www.nber.org/chapters/c12570.pdf)
So those executives naturally and correctly correlated distance (miles) flown by a customer with revenue in creating those programs, designed to reward those customers who flew the farthest and therefore, by regulation, paid the most. The tactics (rewarding flyers based on miles) was closely correlated to the goal (making your most profitable customers happy).
But it has been two generations since the US airline industry was regulated. And price has been divorced from distance for over 30 years. Miles flown by a customer is now a totally irrational way to measure revenue from that customer.
The whole notion of mileage running is/was simply a result of this enormous lag in FF program tactics keeping up with their goal (rewarding the most profitable customers).
If I ran an airline frequency program it would be dollar based, not distance based. Because the distance based model only made sense in a regulated environment where price and distance were directly correlated by regulation/law. Today revenue from a customer is only correlated to…revenue from a customer.
FF programs were always meant to be commodity based: reward those customers who spend the most. But two generations of incompetent airline execs were simply employing outmoded tactics to achieve their goal.
So what you call romance, I call airline executive incompetence. Incompetence that worked out in mile grinders’ favor, to be sure. But incompetence nonetheless.
And it’s kind of hard to berate execs for trying to be rational and competent.
I hope the new American and United decide against this disloyalty ploy on the part of Delta. If Delta truly wished to reward high value flyers, they could choose to implement a mileage earning chart like Lufthansa does for internetional worldwide premium cabin travel. http://www.miles-and-more.com/online/portal/mam/us/earn/flight/offer?nodeid=2507840&l=en&cid=1000390
If Delta truly valued elites, they could still keep an arrangement of 1 mile flown earns 1 redeemable mile and then allow for the current elite level bonus miles to be added for their frequent travelers. Then award those buying Business and First class premium cabin fares and expensive coach tickets a 100-200 percent mileage bonus, including on SkyTeam partners. Instead, SkyPesos is seeking to transform the frequent flyer program into an earnings program that reduces the level of award miles for general members and elites by 50 percent and a maximum mileage cap per ticket at 75,000 miles! Why would anyone stay loyal to Delta, unless the company is paying for their premium cabin international travel? Why bother with any loyalty anymore, when one can earn miles much more easily through spending on a credit card at 1 mile per $1 spent?
Delta: Driving Every Loyalty Traveler Away!
Gary, just wondering, you make a good case thatthis is not optimal for either the customer or the airline. In particular, it doesn’t create additional business (as it rewards business customers who are more or less captive) and breaks the lucrative business of the rewards programs themselves.
So why do you think they’re doing this? Is it purely short-term accounting?
@Menashe – clearly they have convinced themselves this is good, and are not persuaded by my arguments 🙂
@kokonutz those executives stumbled onto a multi-billion dollar perpetual money machine, even though they did not expect that they were doing so at the time.
Gary,
I agree with your point that many “high fare” passengers are carrier captive due to being on corporate contracts which dictate the airline used. Government passengers (while generally not particularly high fare) are the perfect example of carrier captive passengers. And, of course, high fare pax like their non-stops, which may make them carrier captive in practical respects, too.
Do data exist which identify how many high fare passengers have discretion with respect to carrier? And, of them, how many are informed enough such that Delta will poach them from other carriers with a richer “rebate”?
@Sherry it is hard to imagine that an Atlanta-based flyer whose primary international destination is France would leave Delta. Although if you were not going to earn elite status, or did not value that status, you would fly Delta and credit miles to Alaska Airlines (for as long as that partnership lasts).
“@kokonutz those executives stumbled onto a multi-billion dollar perpetual money machine, even though they did not expect that they were doing so at the time.”
To be sure. But doesn’t this move just make those miles they sell to credit card companies (and others) MORE valuable…allowing Delta to RAISE the price for them since they are making it harder for low-rev flyers to earn the miles by actually flying?
And of course, it reduces the number of miles/points/whatever they want to call them that Delta GIVES away to actual flyers without earning actual cash revenue as they do with CC and others who pay cash money for the miles/points/whatever.
All while making their high-rev customers feel special.
Maybe I am missing something, but isn’t that a win-win-win from Delta’s perspective?
And if they lose some low-rev, high mileage customers in the process? Well, those are ‘over entitled elites’ anyway, to coin a phrase. 😉
@kokonutz – it doesn’t make credit card-generated points more valuable, holding the award chart constant (which isn’t what’s happening) the value of the points stay the same. Except that most Delta co-brand credit card holders are also Delta-loyal, this is actually a big risk to American Express as well and to the revenue stream from the sale of miles to them. American Express was nervous throughout the process and I’m told pushed back on quite a lot of ideas. The version of the program Amex was reacting to a year ago was materially different, apparently, at least on the redemption side of things.
As a high value flyer who stuck with Delta I am so glad they did this. Now I can make rational decisions based upon schedule rather than loyalty and elite earning. I can take my corporate account and fly more un-affilated airlines that offer better experiences like Emirates. I can go private more often. And I cannot wait till the day comes when the domestic air market in the USA is opened to real competition from Emirates. Two can play that game, can’t we if the airlines enjoy less regulation then maybe they should have more competition? Bring it on! Please.
Sorry if I am being dense, but….
If I am a low rev Delta flyer and I want to get an award ticket I now need credit card miles more than ever because I am getting fewer miles for actually flying.
IOW, supply of flying miles go down, demand for credit card miles goes up in order to get enough miles for an award ticket.
….. But Koko, if you no longer believe that Delta miles have value, because you earn so few when you fly, you won’t want to earn more fro, a credit card.
“…And paying the highest prices for the last seat available on a plane may just displace another passenger who would have done the same and thus contributes zero to economic profit.”
This argument doesn’t make sense to me – the airline’s bottom line is independent of who purchases the last-minute walk-up fare. People who fly on such tickets earn more miles (in fact, they already did with the fare class bonuses) the higher their status for the same ticket, which is the point of a revenue-based earning structure. As an elite flyer myself, I think that a revenue-based earning structure is actually more rewarding for loyalty to an airline because I’m not on equal ground (earning wise) with those who are only flying DL because they had the lowest price (which is most of the plane anyway).
Loss of long-term loyalty means that customers will focus even more on price and convenience,
Congrats DL, you’re now competing, even more so, with WN.
(And we all know competitors fare when battling Southwest.)
Delta= Driving Every Loyalty Traveler Away!
Advice Run!!!!!!!!!!!!!!!!
To any other program you can
I don’t believe I’ve credited a single trip to DL since the NW merger. I’m fairly certain that every mile in my account came from NW, which no longer expire.
I don’t care what DL does at all. The only revenue tickets I buy with any regularity are on AirTran 🙂 I will buy the one-off on UA/US.
*ALL* of my travel comes from credit card miles, and I’ve done some wonderful things. Whenever this game is up, it’s up.
Oddly, I can’t complain about how actual frequent flyers are getting screwed over, because I don’t buy tickets.
It’s kinda weird really.
I agree with your advice to Sherry. Fly Delta if you must, but credit the miles to Alaska. I am done with the Delta FF program.
Just got my Alaska status match from Delta!
Also, we officially updated our corporate travel policy last week (about $1.5 mil per year on airline spend) to state that Delta bookings must now be reviewed when requested and will not be reimbursed if out of line on spend. With DL pushing employees to bump up the spend, you can bet we won’t be the only once forcing their hand back.
Well said!
United and American will have a huge chance to gain competitive advantages once this all sinks in and Delta FFs realize what they are losing. Anyone not in a DL hub would be foolish to stay, whether they buy pricey tickets or not.