Trading upgrades for revenue – and winning


Delta’s latest quarterly earnings report, including a record $1bn profit, included very little discussion of the loyalty program. Which is not to say that nothing is happening in that aspect of the company, but the attention paid by most financial analysts is, well, less than towards things like fuel prices or ancillary revenue. And yet the discussion on ancillaries veered into the world of loyalty briefly, with a number which I’m betting many Medallion members probably don’t want to think about.

In detailing the revenue makeup the following was shared:

Total merchandising revenues and fees grew by 11%, led by incremental first class revenue growth of 17% and comfort plus growth of nearly 30%.

Anything growing that quickly is generally good news for the company. But it was the next line which will have some elites worried:

We increased our paid first class load factor to 57%, up 8% YoY, on a base of 7% more first class seats.

Around 5 years ago the paid first class rates on Delta hovered in the low teens. Medallion members, even at the lower tiers, could frequently find themselves in a premium seat without paying extra. And then the company decided that maybe it should make more money on those seats and the First Class Monetization (FCM) efforts launched. Since then the revenue is up significantly as more and more passengers are paying to sit there rather than taking the upgrades. And it worked. The company is selling more than 4x as many first class seats now and realizing a significant bump in total revenue for it.

Read More: Loyalty or Currency: The SkyMiles conundrum

Even more interesting is that Delta is not yet satisfied with the 57% paid number in its forward cabin. The target is 70% paid seats up front. And, based on the current trajectory, it seems that is possible in relatively short order. And, with that change, fewer Medallion upgrades will be seen.

Of course, with the so-called GAP fares, the cost to guarantee the seat up front rather than risk the Medallion upgrade is now much lower (on average) than it was 5 years ago. More and more travelers are deciding that it is worth paying the incremental amount to get that bump; even I did it back in March on a flight where it arguably made zero sense, and I’m not the type to typically buy up to first. But when, as a non-status customer, it was roughly the same as getting a Comfort+ seat, well, that made just enough sense for me to take it. And I know I’m not alone there.

Read More: Which type of loyalty junkie are you??

And Delta is very, very happy to take those incremental dollars from customers like me rather than upgrade a Medallion member. After all, the “free upgrade” programs were initially launched to fill the unsold first class seats, not to sell coach seats. And now the carriers are getting better about it. That’s good news for the airlines and for the “Want first, Buy first” customers. The only question still to answer is what it means for the Medallions who consider upgrades as their key benefit. Because odds are they’re going to see fewer going forward.

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, and LinkedIn.

8 Comments

  1. Fine by me. I did decently as a Delta silver, but with the MQD requirement there’s no way my wife and I can both make status. However, this way we still get some F action

  2. I suspect part of the revenue growth in C+ is also because Delta ‘enhanced’ away free EC/C+ for Gold members on domestic and the 50/25% discount on EC/C+ in advance for Gold/Silver respectively on international. OK, so it’s free close to departure, but who’s gonna risk that on a 9 hour segment?

    The other way they’ve grown C+ revenue is more C+ seats, mostly at the expense of pitch in the rest of Y. It really is getting to the point that standard coach is truly miserable for segments over 3 hours by cramming us in, thus forcing more C+ revenue. Great business plan, lousy flight experience in Y.

  3. So the maths isn’t quite as simple as they make it out to be. Sure they are upgrading less and selling/upselling more business/first class. But they have evidently lost some platinum and above level fliers based on the free platinum they are giving out freely as of late. However the loss of these fliers wont show on the balance sheet until there is a dropoff in travel. Or maybe they feel it now but it’s just a blip which they won’t advertise. United is in the same boat. Rah Rah making millions upselling first, but they have lost a few customers if they are honest and can track their customer data which I assume they can.

    Perhaps the playing field has permanently changed. The days of putting in a 100K miles on a carrier to make sure you get the upgrades may be gone. I have a Southwest companion pass these days which certainly saves a lot. And based on some conversations I’ve had I’m not the only one. If United was handing out upgrades like they used to (80%+ upgrade rate etc) I would still put in 100K miles with them, but they don’t and so I don’t stay loyal.

    1. Ahhh….yes, the belief that the reality of the numbers is not showing yet and that the “real” elites are leaving for greener pastures. I’m not buying it at all. I do not believe the numbers support that view.

  4. They don’t provide the data on elites so the only ones who know if they have a drop in elite traffic are them. And perhaps they don’t even care. My point is they provide this data as all upside, but there must be some elite attrition. Am I the only flyer who re-evaluated his/herloyalty when I saw my upgrade percentage drop from above 80 percent to around 20 percent. With the economy doing and loads factors high this won’t hurt them at this point anyway.

    1. What useful statistic are you using number of elites as a proxy for? Because just having a lot of elites doesn’t necessarily translate into profits or success.

      If the only thing which changed was load factors I could understand the disbelief a bit more. But it is more than just that. The company is selling all of its products better, not just unloading at the lowest fare to fill the cabin. That’s good business.

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