There were a lot of bloggers last week frustrated by the latest announcements to Delta’s loyalty program. Enough that a friend who writes for NBC News asked me what I thought about it. And as someone who has often stated he doesn’t like the SkyMiles program, I said …Delta may be doing the right thing.
As I explained to her, it comes down to a fundamental challenge of loyalty programs. I think airlines generally want customers to be able to realize value from their miles. After attending a few conferences where loyalty is the main focus, I learned, for example, that one reason credit cards offer 25,000 miles as a sign-up bonus is so that customers can immediately use them to book a free domestic tickets. Retention rates for the airline and the credit card issuer show that someone who has used their miles is more likely to remain a customer and earn more.
That said, there are two ways a customer can find value. Some of us — the travel hackers — want to maximize it by waiting for opportunities to book otherwise expensive tickets with a fixed award chart. That same 25,000 miles can buy you a $1,000 or a $100 domestic ticket. Or 135,000 miles can buy you an international first class ticket costing over $10,000 if you can find a day when it’s available. A ticket purchased with cash can be purchased at any time, but the price varies due to demand and other factors. Meanwhile the price of an award ticket is fixed and it is the availability that varies.
The vast majority of travelers, however, just want to visit family for Christmas. That’s exactly when award space is least available in these conventional programs. So revenue-based programs like SkyMiles and Southwest Rapid Rewards make a deal: treat the miles like they have a fixed value so you can book almost any ticket, redeeming more miles for the expensive fares and fewer miles for the cheaper fares. Your miles will never be hugely valuable, but neither will they be worthless.
Although Delta is correct that it has made it easier to use SkyMiles, it has done this in a way that generally makes it difficult to maximize their value. They made steps toward a revenue based program when it created five different award tiers earlier this year. It’s not the same as assigning a cash value to SkyMiles, but it allows Delta to categorize individual awards in more expensive or less expensive tiers as it sees fit. Then it stopped publishing the award chart, but told customers it was still referring to those five tiers when it told them how many miles were required. The latest announcement effectively says it’s doing away with the tiers altogether.
Just as Delta uses demand and load factors to determine how many dollars to charge for a particular flight, they will now also use those factors to determine the number of miles for an award ticket. Customers should expect more expensive flights (in dollar terms) to also require more SkyMiles for an award. It also means that cheaper flights (in dollar terms) will probably require fewer SkyMiles for an award.
Such a strategy has worked well for Southwest Airlines, and I expect it will also work well for Delta. What frustrates many people, however, is that Delta has a variety of other less friendly policies: no first class awards (ever), no last minute bookings (when award space is most available), fuel surcharges on some partners (wait, I thought miles got me a free ticket?), and cancelation fees (Southwest offers great flexibility). I would mind Delta’s changes less if it made more effort to address these other concerns.
Delta is making this association between price and the value of its miles much more obvious with its new “Upgrade with Miles” option. This new upgrade option is only available at the time of booking, and Delta says it looks at the difference in price between each fare class and then converts that difference into miles. Customers can still use “Mileage Upgrade Awards” after booking a ticket. These upgrade awards charge a fixed number of miles, but availability will be limited.
Assigning value to the miles or points in rewards programs is a natural extension of other business decisions made in all industries to offer a la carte services with fewer included amenities. Lumping free checked bags and inflight meals into the cost of a ticket is a kind of subsidy when only half or fewer of passengers actually want them. So they no longer exist in the majority of economy class cabins on domestic flights. Likewise, miles that can be used for very valuable — or very poor — award redemptions are another form of subsidy.
The majority of people want to pay only for what they’re getting, and Delta feels similarly. So you’ll earn miles based on how much you spend and redeem miles based on how much you (don’t) spend. That’s why I don’t fly Delta. My opposition to SkyMiles is because I don’t think the miles offer many opportunities to book high-value awards, and these changes don’t address that at all. But I expect the majority of people — people who don’t read this blog — either won’t care or will be happy they can finally book that award to go home for Christmas.