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Mar

A comment by Seth regarding Delta’s new pay with miles program encapsulates the real fear behind this program, that it represents a move towards the end of the ‘award chart’ in favor of fixed value redemptions (which means the end of valuable premium class travel for a small number of miles):

[T]his is just going to embolden other carriers to shift the paradigm of the reward schemes to prevent the higher redemption values of long-haul premium cabin travel. If that sticks then the entirety of the miles game may just pack up and go home.

I actually raised and dealt with this issue 21 months ago, in the context of United’s Choices program which predates Delta’s offering in this space.

I contended it wouldn’t happen, and so far I’ve been right… but I was worried about it.

First, killing the award chart undermines the value proposition that makes these programs so profitable.

Miles hold sway now not just because they offer something back. Plenty of other programs do that too. They hold sway because of the romanticism associated with free vacations and aspirational awards.

I wouldn’t even spend money to fly international first class on an Asian carrier, but I can spend miles to do it. Each time, it’s a dream come true. Domestic coach tickets sans capacity controls, or miles for merchandise, just don’t capture the imagination in the same way.

If United expands this program, replaces traditional awards, and if other airlines follow suit they’ll be killing the goose that lays the golden egg – both of loyalty feeding the airline and of the dreams of their members that fuel truly valuable and profitable loyalty programs.

Second, the current award chart model is just too profitable.

Capacity controls mean that an airline — at least in theory — only makes mileage awards available for seats that would otherwise go unsold. In the roughest of terms, this means they only have to book the marginal cost of transporting a passenger as the cost to the program of that seat. If they sell 25,000 miles at 1.5 cents apiece they bring in $375. If those 25,000 miles are redeemed for a domestic coach award the program sees an expense of perhaps $25. The $350 spread is tough to walk away from.

(Of course, that doesn’t guarantee a continuation of international premium class awards in such a chart.)

United’s move nearly two years ago raised the specter of moving away from award charts. Two years later only Delta has made the baby step of offering a miles as money add-on feature. And there aren’t any signs at the moment that the award chart is dead.

Rather, Kiwi Flyer‘s comment in the same thread nails it, I think.

I don’t think it is a non-issue. More and more programs are moving to this method instead of the old style double points for availability.

(emphasis mine)

This is exactly the point that I made in May, 2006.

Perhaps the defined-value plans will replace standard awards which offer last seat availability, which is truly unfortunate. But the capacity controlled awards are, I think, going to stick around.

3 Comments

  1. Seth said,

    Thanks for a whole new post dedeicated just to me :)

    I think that there are a couple things in your math that don’t add up completely.

    The first is that very few people are paying 1.5 cents per mile. Certainly the vendors buying the miles in bulk, namely AmEx from Delta, are paying WAY less than that. The consumer may pay more, but they are a much smaller volume of miles, so the spread isn’t as high.

    The other bit is the double miles availability. Delta is now apparently increasing the cost of those 20% (25K -> 30K each way). For the premium tickets they’re going from 200K just a few years ago to 300K this year on Continental (or at least they were supposed to). That is still way less than a full J fare in the summer from NYC to Paris ($3000 at the 1 cpm number), but it is a huge increase in the cost for redemption. And the switch to this flat rate penny/point plan makes those rewards incredibly expensive from a redemption perspective.

    And just because it took Delta 2 years to copy United doesn’t mean that the next one will be so slow. It only took US Air a couple weeks to copy the charge for the second checked bag. And there’s no telling how long the next one will take.

    The carriers can’t afford to kill the cash cow that is their FF programs, but they also can’t actually afford to keep selling so many seats below cost or a lot of the other things they continue to do, and no one can tell how they’re going to try to make it up.

    I hope you’re right that they don’t kill the redemption options, as I take advantage of it too, but I’m not sure this going to last forever.

  2. EugeneV said,

    http://www.cnet.com/8301-13739_1-9884111-46.html

  3. Chris Guillebeau said,

    I agree that this is concerning. It’s not the end of the world, sure– but as others note, it’s an ominous sign. I feel like the whole process of mileage redemption is getting harder and harder.

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