A rumor originated this past weekend on Airliners.net about potential major changes in Delta Skymiles: moving from a mileage-based program to a revenue-based program.

The Southwests and JetBlues of the world offer fixed earning based on revenue, with points spent as money to redeem for flights. They’re less generous than the mileage programs, and aspirational awards to the extent they’re offered under these sorts of schemes — premium cabin international offerings — become exorbitantly expensive.

(Of course in many cases Skymiles awards are indeed exorbitantly expensive, although there are strategies to successfully make Delta’s Skypesos work for you.)

Not a single person seems to like the idea in the discussion over at Milepoint.

Goodness knows such a change would make my upcoming debate with The Points Guy on the value of Delta’s miles a slam dunk.

He quotes extensively from what’s purportedly an internal document describing a rollout plan for the changes:

The Loyalty Program is comprised of two projects that seek to increase revenue and customer loyalty along with decreasing liability related to unused award miles. Coordinated communication to the general public regarding the intentions of these changes is paramount to acceptance.

Revenue Based Mileage Accrual (RBMA) project shifts the basis for awarding miles to a revenue based accrual approach Release 0: Support the communication/announcement of upcoming SkyMiles program changes (targeted 1Q12).
Will no longer display distance flown miles for departures after new miles accrual effective date (targeted for 3Q12)
Release 0.5: Provide Mileage Calculator to calculate approximate revenue based mileage accrual based on travel
after launch ((targeted 2Q12)
Release 1: Convert SkyMiles System from flown miles to revenue based mileage accrual (3Q12)
Release 2: Reward SkyMiles members with miles for all non-air purchases (i.e. SkyClub, Seats) (currently On Hold)

Fare Based Award Ticket Redemption (FBATR) project
Fast Track Release – Provides limited base functionality to align with the Polaris Chicago release timing

Phase I at Launch introduces Fare Based Award Redemption Model, Single Shopping Experience for Customer, New Award Inventory Controls, Cash + Miles Award Redemption Product, Award Redemption for OA, Modifications to the automated Award Refund, Redeposit, and Reissue and Exchange Process

Phase II – After Launch includes Bid for Price Award Redemption Product, Buy It Now Award Redemption Product, Volume Discount Award Redemption Product, Modifications to SkyMiles Branded Mileage Upgrade Products, and Modifications to SkyMiles System-Wide Upgrade Certificates.

The memo has not been authenticated. And even if it’s real, we don’t have context for its purpose — is it an actual rollout of changes that have been decided upon, or part of an overall strategy discussion for a plan that was considered or rejected? Delta certainly hasn’t commented.

When Air New Zealand came out with changes to its frequent flyer program from points to dollars in 2004, I worried about what it would mean for the future of frequent flyer program value, although they kept both a points as money idea and a traditional award chart (with saver awards also continuing to be made available to partner airlines).

When United and Chase introduced “Choices” in 2006 that extended the miles as money concept. Here it was likely a reaction of Chase to the perception that miles weren’t useful, the Capital One commercials hammering on how you couldn’t use your miles but that points were worth more when they could pay for any ticket. But I worried that this would be a direction more programs could go, to the exclusion of traditional award charts.

That’s where the real value comes in from frequent flyer programs — not as a rebate system to be spent as cash, but as a rebate that is then spent on a value basis, airlines unloading excess capacity at a deep discount to buyers who participate in their points programs. It’s a rebate and a deep discount, and that combination allows members to leverage their loyalty for aspirational awards they couldn’t otherwise afford or achieve without those programs. It’s Hawaii, Europe, and Australia that motivate members.

When you reduce the program to a rebate, points based on spend, you demystify it and remove the romance. You get Greyhound Road Rewards, every 10 bus trips buys you a bus trip. There’s little emotional connection.

And while it’s tempting to say that you’re tying rewards to revenue, that’s misguided:

  1. Because it isn’t revenue you want to reward, there’s no reason to reward revenue you’ll get anyway, you want to incentivize marginal dollars, influencing spend of any kind you wouldn’t otherwise get (and even low spend is hugely valuable because it fills seats that would have otherwise gone empty rather than taking up a seat that would otherwise have been sold for almost as much).

  2. Because the mileage programs themselves are hugely valuable and profitable, they’re collectively the most successful marketing endeavor in history, and this is largely due to the romance, these sorts of changes risk undermining the entire value proposition and profitability of the programs

So while these sorts of ideas are often lauded as common sense moves for profitability they have the opposite effect.

I have no idea how likely such a move would be for Delta. I have no special knowledge. But it’s an active rumor. Certainly it’s something that’s been considered, on the table at one time or another, by most programs. So far the idea has been rejected by all but the Southwests and JetBlues. Thank goodness.

Here’s hoping it’s rejected by Delta as well!

  1. Andrew Fielding said,

    Just thought of something.

    Would this actually even be allowed under the terms of the SkyTeam alliance interconnected milage agreements? How would non-delta people book award flights and how would paid Delta flyers receive MQM (if that’s what they were to call them) on partner flights?

    If there is a memo on this, then I’ll believe it.

  2. Katherine said,

    The job descriptions for a Senior Business Analyst, Sr Developer, Senier C++/Java developer to work on FBATR seem pretty convincing. I am finding it difficult to believe that these job postings would be a plant.

    Maybe someone at Delta leaked the changes in order to gauge reactions and hopefully they will keep the aspirational awards.

  3. Scott said,

    I agree w/ the last comment as that causes issues. I think the idea of a hybrid system to earn status CAN and WOULD work, you’ll draw revenue from people willing to spend $$$ but do not earn enough miles for a higher status, but certainly deserve it; so you get revenue loyalty.

    Additionally, you don’t alienate your other elite base, yes, you do increase the nr of elites, but an airline could just limit certain benefits and also the revenue based may not fly that often to really truly effect elite per flight nrs.

    Someone flying F DCA-ORD 5x a year may bring an airline 5000 in revenue, but no status 6,120base+100% F bonus would still bring someone short, to me that deserves Silver status

  4. Austin said,

    I generally agree with everything you say. However, one of the most important points you make is almost a throwaway: “airlines unloading excess capacity at a deep discount to buyers who participate in their points programs.”

    This worked well when average load factors were at 60%, 70%, 75%. However, as airlines continue to ‘right-size’ capacity, we’re seeing average load factors closer to 85%. With this being the case, its no wonder that people feel like they can never redeem award seats anymore–because there is no more excess capacity! And of course, this is even more true for the dates on which people actually want to travel (which I imagine are the same for both revenue and reward tickets).

    Unless load factors drop back down, and I don’t think that is likely in the near future, I think that this is an inevitable change to FF programs for them to even be feasible, without turning into a giant pyramid scheme where you can earn miles but not redeem them…which some would argue is already the case today.

  5. Adam said,

    These are interesting points, and candidly, so much more thoughtful than the debate that is happening on FlyerTalk. Let’s face it, there is probably something here, but we do not know the extent of it or how DL plans to integrate it into the existing program. And let’s face facts, DL competes in some of the nation’s most competitive air markets: New York, Atlanta (w/WN-AirTran), Los Angeles. They have to be cognizant that they cannot devalue their experience to the point that travelers defect to UA or AA. That said, if they succeed at such an endeavor, there is no doubt that UA and AA will follow.

    My objection is with FlyerTalk right now. Whether it’s on this question of the current technical fault in Skymiles’ ability to book AF/KL premium class or the hundreds of angry, panicked, self-righteous posts devoted to a rumor with some tiny shred of evidence, what is the value of this “community.” It seems to me to be more of a haven for people with too much time on their hands to vent and fantasize, rather than a discussion forum where informed people share information.

    Honestly, I don’t see the value in Flyertalk. Sifting through the dreck for the tiny nuggets of good information takes so long and delivers so little. Whereas spending twenty minutes with Gary, Lucky, Aramean, etc. each evening delivers so much value.

    Some people want to learn and share knowledge. Some people want to listen to themselves rant. I’m with the former.

  6. raf said,

    gary – your point on incentivizing the marginal dollar spend hit the bulls eye. thank you for thinking like an economist.

  7. nycman said,

    Someone that is able to book an award flight to Hawaii, Europe, Asia or some other exotic destination, or as Gary says, Aspirational award, is going to brag about it to everyone who listens. That kind of word of mouth marketing is very powerful. Nobody is going to brag about getting a NYC-ORD award on economy, one that could’ve taken years to accumulate for an infrequent traveler. And even for frequent travelers, getting what amounts to a 1 or 2 percent rebate (in points) on your travel spend is hardly worth worrying about much. Once the true value of a point/mile is easy to calculate, people can easily compare programs, and I doubt airlines really want that. There’s an incentive to keep it vague.

  8. Randal L. Schwartz said,

    Delta already adjusts Skymiles (but not MQMs) based on class of flight. I sometimes get half the skymiles, sometimes full, and sometimes double.

    (I’m a million miler and diamond mediallion, if I need credentials here. :)

  9. chitownflyer said,

    I think there would be a mass defection from Delta elites if they implement a revenue based frequent flyer program. There were rails of protest when lucky released the revenue and mileage proposal United-Continetal were considering for their elites in the new merged Mileage Plus program. I think it was a major factor in United backing down.

    AA would have the potential to benefit from this enormously by keeping their current program and poaching Delta flyers. If frequent flyer programs decide to gut their benefits and loyalty, then they will loose many customers and lots of revenue.

  10. uga_travel said,

    It really all depends on how you accrue points. Delta currently gives about 5 “Miles” per dollar spent on average. If you’re Gold/Platinum, you’re getting 10 “miles” per dollar on average.

    Image an earning structure similar to the current structure…
    5 points per dollar = Medallion
    7.5 points per dollar = Silver
    10 points per dollar = Gold
    12.5 points per dollar = Platinum
    15 points per dollar = Diamond

    Plus a 5 point bonus per dollar for Business or Non-Refundable Fares.

    In that scenario, earning domestic and international COACH travel would be very obtainable for someone who primarily flies coach fares.

    For someone who flies Business Fares internationally…the international business rewards would also be obtainable.

    What would not be obtainable would be international business fares for folks primarily flying coach domestically.

    Scenario…you fly Business to India from ATL twice per year and then log another 50k domestic coach miles. You probably spent $30k for those combined fares. Given the distance…that would be 100k MQM Miles, Platnium Status and 230k Base Miles.

    In the proposed model, that same PM flyer would get about 350,000 points flying those same routes. Which using the Pay for Miles math of today would be worth $3.5k worth of credit.

    Enough for 2-3 coach class tickets to Europe from ATL. About the same as today. But not enough for 1 business class ticket to Europe unless he found a ridiculous sale.

    it’s big devaluation on business internationally…but it’s not as traumatic as some have made out.

  11. uga_travel said,

    SORRY — in the math above…you would get 475,000 points instead of 230k miles. (Not 350k as I stated earlier).

    So…that’s $4.5k in credit for an international biz ticket. Not unreasonable.

    is it ideal for me? No. It sucks for me.

  12. Dan said,

    Gary,

    Do you happen to know how much $ airlines generate from selling frequent flyer miles to the general public? I’m just talking about the miles I can buy from AA/UA/DL for 3cpp when I need to top off an account. Is that revenue in and of itself significant? It’s going to get cut to zilch if the airlines move away from that.

    You are absolutely right. The airlines will marginalize their FF programs when they switch to revenue based spend. Even when WN had their “buy 4 tix, get a free ticket *anywhere*” it was only useful if you wanted to go where WN went. And there’s no glamour in getting a $250 rt ticket to LA for free.

    “Fly with us and earn 3% discount on future travel” just doesn’t have a good marketing ring to it.

  13. nsx at FlyerTalk said,

    I disagree that Rapid Rewards 2.0 has been a loser for Southwest. It has apparently persuaded customers to buy the more expensive unrestricted fare more often. The Business Select fare often sells out now where it did not under the old program.

    A revenue-based program is fundamentally different from traditional programs. This can benefit us if we maintain diversity in our program memberships. We can redeem for cheap short-haul tickets on cash-based programs and we can keep redeeming for expensive long-haul tickets on the traditional programs.

    One hidden benefit of Southwest’s cash-based program: When you redeem points for a flight, the point cost is based on the nonrefundable fare. Yet the ticket is fully refundable, for free, back into your points account. You get refundability and the nonrefundable price. DL will probably add obstacles and fees to make this refund option less valuable, but it’s a fundamental feature of Southwest’s program.

  14. nsx at FlyerTalk said,

    The biggest worry I have about this change is the transition. Typically companies attempt to increase breakage by forcing you to top off awards under the old program within a limited time frame. That would suck, but from DL that’s what I fully expect.

  15. Mitch said,

    @Randal L. Schwartz Actually, the MQM accrual rate also varies by fare class. YBM are 150%, for instance.

  16. Nick said,

    The problem is that Joe Public has a general frustration with being able to redeem miles in the current legacy system. So switching to a revenue based system makes the airlines look better and also costs them less. A no-brainier unfortunately. hopefully United doesn’t do the same thing.

    A friend proudly told me he redeemed for west coast to Hawaii for the first time, when I pointed out there were flights for less than $300 it didn’t matter to him, he was just happy to use his miles.

  17. Will said,

    Re: Marginal dollars. I’ve been in the equivalent of the silver tier of Via Preference (Canadian railway loyalty program) for over 5 years. The equivalent silver tier requires $1000 in spend per year. Each year I’ve purposely topped up my spend if I was short to get over the $1k mark because I value the tier in the program.

    With a mileage based program I would always try and be over XX miles to reach a certain tier so I may take an extra trip to get over the threshold.

    I don’t see how a revenue based program drives marginal revenue any less than a mileage based one. Via Preference has various bonus points for taking specific trains or specific times which also serves to drive marginal revenue if you will.

    Let’s face it, the FT/MP bias is towards mileage programs because we can best exploit them. Everyone knows distance != revenue or profit, and people take advantage of that to get to top tier status. There’s of course nothing wrong with it, I’ve done it. The part I don’t buy into is the elaborate explanations of how this makes people more loyal.

    A revenue program could work fine and deliver decent value, it all depends where the thresholds are set. Thats the part we don’t know.

  18. John Hanson said,

    Randal,

    I’m also a DM. I never get half nor do I ever get double RDMs. I get 125% on top of the actual mileage flown except for J,I,F,P,A,C,D,S,Y,M,B fares where I get 125% on top of the 150% of the actual mileage flown (with a minimum of 500 miles).

  19. Erik said,

    The fact is these FF programs were designed when there were 3 fare classes, First, Coach and Economy. With minimal tweeks, they have remained unchanged ever since. Then, made sense and was an easy metric to determine status based on mileage traveled with an extra percentage for First. Now, with a whole alphabet of fare classes, and even discounted First and Business, a metric that is fare based makes much more sense and is probably long (20 years or so) overdue.

    As a marketing plan, the airlines cannot keep rewarding BIS miles if what they want is more revenue, will this be popular? No, at least not with those currently being rewarded, but if higher fare passengers are rewarded and status and more award seats become available to them, the airlines will likely meet their objective.

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  21. mg said,

    I work in an industry where people travel a lot, including significant amounts of international travel, and where the general policy across firms is that flights over ~5 hours are taken in business class. All tickets are purchased at the lowest price point at which they are fully refundable, which is generally a fairly high price point.

    As a consequence of the amount of travel involved, many people in the industry have high status on multiple airlines and accumulate enormous piles of frequent flier miles.

    While I think better mileage accrual and reward availability for their travel patterns would be appealing the my coworkers, I think the biggest factors that drive them to pick one airline over another are how frequently and easily they can get upgraded on the significant number of <5 hour flights they take for work, and how well the expedited security lines work for them. The truth is, they fly much more often for business than for pleasure and they're comfortable enough financially to pay for premium seats on one or two personal trips a year if they want.

    I think these are highly desirable fliers for airlines – perhaps among the most desirable fliers. They are enormously concerned with dilution in the value of their status as many people manage to get enough butt-in-seat miles to match or in some cases exceed the level that they attain. I think my coworkers would significantly prefer a dollar-based program that would increase their relative likelihood of good treatment.

    Of course, whatever the metric used for determining rewards and status, the benchmarks and accrual rates across all fliers can be set wherever the airlines want – DL could certainly construct a program where "miles" were handed out based on dollars spent but with a ratio that made them directly comparable nonetheless to other carriers programs – it's just that in such a configuration the lions share of the miles would be earned by full fare rather than discount travelers.

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  23. ES said,

    Revenue based is *closer* to marginal dollars as the cheap rates are money losers while the expensive (business) class are money makers. With revenue-based you get more business class and make more money.
    (Whenever I fly business, I would be careful to select an airline with revenue based as it will give me 5x the points of economy, rather than 1.5x.)

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  28. bonney said,

    go to the Delta website…it’s a done deal. I am very frustrated and will not no longer use DELTA as my primary carrier. I have never had a problem using my FF miles…you have to plan in advance…I save for 2 years and then travel.
    So, someone like me will be punished for being loyal…

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