Dynamic award pricing is good for passengers and good for the business. That was the message Delta Air Lines delivered this morning in its quarterly earnings call. The company continues to slowly open the kimono with respect to how its credit card co-branding relationship contributes to the overall revenue and cost aspects of the operation with details of revenue and engagement trickling out. The American Express partnership contributed an incremental $70mm to the company’s quarterly revenue in 2Q’17 and is expected to hit $300mm for the full year. By 2023 Delta expects that American Express will deliver $4bn in total “value” annually to the carrier, assuming growth targets remain on course.
That’s significant but how does it stand up in the face of an ever more crowded points-based credit card market? Delta’s not worried at all. The carrier points out that card acquisitions are continuing to grow at record rates year over year and that consumers continue to express high satisfaction levels with the product. And a key factor to that satisfaction may be from an unlikely source, at least to the most ardent players in the frequent flyer points game: Dynamic Award Pricing.
Speaking in the Q&A portion of today’s call Delta’s President Glen Hauenstein noted that the company has “been in a dynamic pricing environment now for multiple years” and suggests that this is compelling to consumers because there are sweet spots and great values to be found.
That’s one of the successes of our card in the marketplace. There are incredible value propositions out there for customers who acquire and use our card and we have no intention to degrade the total value proposition. We may adjust in the margin the value of peak seats versus off-peak seats or particular days but the value that we’re creating seems to be greater and greater. That’s being recognized in the marketplace. Really, when you’d think that the market is saturated with airline cards we have posted three record acquisition years in a row and we’re on track to produce another this year.
In other words, the program is on target overall, with additional growth to come in new segments.
Most redemption options today are centered on seats or 3rd party merchandise. CEO Ed Bastien noted that the carrier issued the most award tickets ever last year. But Delta wants to add another category and get closer to a scenario where points are treated as a truly fungible currency within its suite of products. The carrier wants passengers to be redeeming more. Says Hauenstein, “As we think about new ways for people to use their miles we really don’t want them to save them forever. We want people to control their own travel experience and find value in [their points] today instead of storing them away.” And that’s not because it wipes a theoretical liability off the books. Ample evidence exists showing that those who redeem are more tightly tied to the brand and more likely to earn again, often at a higher rate. The “rush” of getting the redemption triggers a reaction that consumers want to repeat and they work even harder to do it again.
To that end Delta expects many other internal “ancillary revenue” products to become available for purchase with points as the program evolves:
On a more broad perspective we’re excited about using miles for all ancillary revenues, not just for seat products but for things like unaccompanied minor fees or pets in cabin. And really make that currency come more alive to our customer base.
Sure, the dynamic pricing means that at the high end of the spectrum award seats may no longer be a reasonable opportunity. But opening up more options at the low end seems to keep lots of consumers happy, many of whom also carry co-branded credit cards. And that’s a very, very high revenue segment of the business.
It is also worth noting that United Airlines is now slowly entering the dynamic award pricing game, with the expanded inventory “Everyday” awards rolling out later this year. There is a cap on the price, published in an award chart (Delta no longer offers such) but the company says it will price some below that cap. We’ll have to wait until November to find out how that works in reality.
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