Winners and losers with Delta’s new revenue-based SkyMiles earnings

22 Comments

1. Great analysis and data, Seth. Hard to argue with numbers.

   1. You’d think that. Hasn’t stopped lots of people so far though. 😉

2. This is what I’ve assumed to be the case with this change all along. The shorter the route, the better off you make out with the new system versus the old. However, longer routes really shift the equation the other direction. And, of course, buying the ticket closer to the date of departure helps across the board, but with so many travel policies being structured these days to encourage earlier purchases as much as possible, there are a lot of us road warriors that would be far worse off under Delta’s new system than the current rules.

3. We already know that Delta’s changes benefit short haul flying on expensive tickets, because those tickets didn’t previously earn all that many miles.

   I’m actually surprised we aren’t seeing more green in your charts, so this is a really helpful contribution towards understanding just how bad Delta’s changes will be for most flyers, even business flyers.

   These are predominantly short routes that SHOULD turn green, I would have expected that the 7-day fare chart for what are almost entirely short routes would be almost completely green but it isn’t.

   This illustration shows how high the break-even 20 cent a mile threshold is, even for short business routes. And remember, that’s a break-even average, you don’t just need to hit that on one trip or a few trips but it has to be your AVERAGE.

   So what you really want to know, if you fly on a mix of fares, isn’t whether you’ll do better on a given trip than you did before — but whether you will do ENOUGH better to offset losses from tickets flown on cheaper fares.

   1. I’m actually mostly surprised how low many of the “walk up” fares are in this set. I know that those fares are lower than what I used to pay. I think many are actually probably 3-day a/p given that none were Y/B/M. Plus there’s the whole segment of the market who buys flexible/refundable fares. I’m willing to bet that even with the 50% class-of-service bonus they’ll win here.

      There are a whole lot of people who will win. Making the changes out as the end of the world, something may have done, is myopic.

      1. Seth, they may win on individual flights. But if they also take connecting and long-haul flights, they will lose for the year as a whole, unless they spent over 20-22 cents/mile for their total spend. Delta only collects 14 cents/mile on average, including all the high fares. I suspect the number of winners will be quite small.

4. I think the ratio of passengers who will win vs. lose is less than 1:10

   Even Delta has already admitted that they will be awarding less miles under the new program

   The chart shows that it is mainly short non-stop routes (using the median chart) or ones where Delta has a near monopoly where fliers might come out ahead. And remember, that chart won’t apply if that short route is part of a connection. Passengers on short non-stop routes likely weren’t top level elites since that requires much more flying.

   There’s already a rough parity point around 20 cpm (excluding taxes) which applies close to equally well for non-status and for top status since the earning factors are 5 points/dollar for non-status and 9-11 points/dollar for the top two levels who also get 100% and 125% bonus today. (Golds need a substantially higher average fare than 20 cpm since they get 100% bonus today).

   I believe that Delta’s yield is about 14cpm (per passenger mile flown). There’s probably a bell curve around that which has a fairly small tail above 20cpm. Because even a pax that has a few LGA-ATL and LGA-DCA probably also mixes it up with JFK-LAX and LGA-DTW-NRT and gets a blended yield. If they are buying full C/J fares, then they’ll win, but even discounted business class fares sometimes yield less than 20cpm.

   I think Delta is counting on people finding mixed examples and not really understanding and doing comparisons that include taxes and/or credit card bonuses to keep themselves confused.

   The data would be more interesting if there were some travelers where you had access to their fare data from 2013 and did a comparative calculation. The winners are going to be the long tail. And if they are buying last minute non-stops, are they influenced by Delta’s frequent flyer program or by who has space on a nonstop flight on the route & time they need? Will it shift share?

5. Would love to see an anlaysis on MSP-BOS. Everything I can tell indicates it’s bad news.

   I’ll also note GMs seem to be taking it the worst here.

   /me disgruntled GM

6. ATL or DTW to LAS?
   Very wonky fares.

7. Great analysis. Even with the benefit associated with more miles with short routes, the elite qualification scheme still falls under the old rules, which means it’s still that much harder to earn Medallion status.

   Would be interesting to see the analysis with transoceanic business class flights mixed in.

8. Why not red for all the areas where SkyMiles customers are worse off?

   What percentage of DL’s revenue miles flown are from customers who only fly non-stop flights? DL’s still a hub-and-spoke carrier, right?

   1. No red because, quite frankly, getting the conditional formatting in Excel to work this well was too challenging after a few glasses of vodka last night.

      Delta has been pretty clear that a very large percentage of their revenue comes from a very small percentage of their customers. I’m betting most of those are O/D paying high fares.

9. All the whining and crying aside, this comes down to Delta wanted to RE-pin the “rebate” to the fare in a quantifiable manner. Known costs are easier to manage. They never know when a competitor is going to offer $200 transcons that they need to match, but they’re not going to be handing out a disproportionate rebate while doing it. Also, why should they hand out more of a rebate because someone wants to fly to NRT from LAX via DTW in a cheaper fare?

   I’m told that airfares used to more closely track distance flown hence the “miles” model worked. However with current revenue management charging $800 for CVG-ORD while JFK-LAX goes for $250 it was only a matter of time before the legacies started reigning in the awarded rebate. In 3 years, UA and AA will have done the same thing and frankly it’s the right thing to do. How many business owners here would offer a larger rebate on something that sells for less and has a higher cost basis?

   I would agree with those that say in the short term Delta will lose some flyers to UA and AA. But who are they losing? The bargain shopping, mileage running segment? And that’s only until the others match the program. Let me tell you something, a small business owner who is ultra price sensitive doesn’t rank FF program in his top 3. Delta isn’t losing that guy. I would argue that the guy who ranks these changes as important isn’t really price sensitive and will find a way to pay the higher fare whether it’s coming out if his pocket or not.

   This is the future. The old way was more generous, yes. But who can blame them for trying get to a fixed cost rebate per revenue dollar? It’s what smart people do.

10. Hi Seth,

    Do you plan to bring hack.travel back online?

11. Green, white, red. Nice data analysis. No doubt, some will win.

    But you didn’t address the point about whether or not you actually need to reward these customers who were going to fly your airline anyway, or whether you need to reward the margin.

    I still maintain that anybody who argues Delta is doing the right thing here doesn’t really understand airline economics.

    Sorry, but I side with Gary here.

    1. You don’t “need” to reward anyone. But if you’re going to give a rebate to customers doing it based on their value to the bottom line is a smart way to start. And the margin customers are far more fungible than the HVCs.

       You reward that customer who picked you for offering the cheapest flight by giving them the cheapest flight, not by giving them even more on top of that.

       And other customers take rewards in other ways. Some care more about the upgrades or extra baggage allowance than the points. And they’ll still get that.

       1. Should airlines be giving a rebate on the price, or should they be using the mileage program to shift market share and stimulate demand?

          For credit cards, a rebate makes sense as they are giving you an incentive to use a credit card instead of cash or instead of a competing credit card.

          For an airline, I don’t think it makes sense as a rebate in the same way, especially at the high fare level. The rebate is too small to make you take a trip you wouldn’t otherwise take (that could apply at the mile-run level, and it’s a fair argument that those customers aren’t very profitable and stimulating mile-runs isn’t what they want to do, although at a low demand period/time, even a mile-run that generates revenue on what would be an empty seat does have a positive contribution.)

          But the purpose of the mileage plan should be to shift travelers onto your airline, not to give a rebate when none is needed to get the business. So a traveler who is buying a high fare and picks based on non-stop service and schedule may *not* need a rebate (unless there is a competitive product at the same time.) Meaning that traveler was going to book that airline anyway, and the next time the traveler will pick the competitor because the competitor has the nonstop at the time needed. Instead to get that traveler on that flight, if the traveler values elite benefits and therefore will book the airline for all/most flights, including some expensive non-stops and other lower yield flights, is that the overall program over time needs to appeal.

          At the end of the day, making the airline programs too transactional means they won’t be useful to the airline on a consistent basis.

          Or maybe they are relying on the elite benefits to capture the customer, and want to reduce the reward costs. But how much does the HVC customer rely on the elite benefits vs. switching to whoever works for that flight?

          Reducing reward costs doesn’t necessarily mean that they need to be increased for the HVC. UA and US did go to the 25% 50% 75% 100% bonus model. DL never adopted that, did they?

          The jury is out on how this will play out. If either AA/US or UA don’t match, it will be interesting to see how share shifts.

          So far the revenue based programs have been heavily promoted by consultants with something to sell, and I’m sure they appeal to the accountants.

12. If Delta wants to boost earning on fares they make more profit on, I see the value in that. If they give an extra 5x on business class to attract a higher profit producing customer, that’s smart. But I don’t agree with Gary’s the rewarding the margins argument because Delta controls the capacity. If they’re losing Mr. MileageRun and his “I want to earn 20000 rdms on a $140 fare” to United, I honestly don’t think Delta is losing any sleep. Since they ultimately control the amount of seats on a route, they will fill the planes and do it at their price. That’s the beauty (or nightmare for us) of airline consolidation. If your planes are full there’s no need to reward the margins.

    There is one thing that I agree wholeheartedly with Gary on and that’s his assertion that the frequent flyer programs print money for the airline and Delta is risking a lot by messing with a good thing. Where I tend to disagree is when the argument bends toward the FF program is necessary to fill up the planes. I believe that the programs are defined by the redemption side for most people and that’s where Delta can really screw themselves if they get greedy. Remember that most of the members of FF programs are redeeming for domestic coach. That’s why the 25k seat is untouched.

    1. But the way that the FF program makes money for the airline is by selling miles to partners – mainly credit card companies, but also hotels, car rentals, shopping malls, florists, etc. So far, DL hasn’t devalued that aspect of the program. We’re not totally sure what the 5 levels will mean, but assuming there’s no drastic change, the economics of the miles they sell and people redeem aren’t necessarily in danger. What they’ve done is award a lot less for flying, especially discount flying. The danger would be that this leads to less engagement with their program, and people prefer to shift elsewhere, whether AA/UA or toward UR, SPG etc. But the savvy already know that Delta’s miles are Skypesos… I wonder if DL’s program is less profitable than AA, UA & US as a result? Is it broken out on their financials in any way?

       1. If they make the most money selling points to 3rd party partners then this doesn’t matter at all, does it? They’re still selling to those partners (most of them, anyways).

13. I flew LAX-SFO every week on 1
    week advance or walk up fares for 2 years, would I choose Delta now because my earnings would be better – not sure. I don’t like that I might be suspected of buying more expensive fares to earn more miles. I also don’t like that I would earn much less on personal travel. There are other ways to reward spend, like say prioritizing upgrades based on the previous years spend or having spend based bonuses. The 10% who spend the most may be the passengers you want to reward the most, but if a sizable portion of the other 90% loses interest that might hurt.

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