Yesterday I wrote about revenue-based programs and how I think it’s likely that Delta will change it’s frequent flyer program to align both earning miles and the cost of redemption with the price of airline tickets — and how I think that revenue-based programs are bad for both travelers and for the frequent flyer programs themselves.

Joe Brancatelli also expects to see a revenue-based program next year — on one or more of Delta, US Airways, and Alaska Airlines.

I had written about the speculation of US Airways in addition to that of Delta in the past. I hadn’t seen it written about Alaska Airlines previously, although now that I’ve seen that speculation it resonates as at least plausible (more so than if the speculation were about, say, American AAdvantage for sure). I’d have put Frontier into that category as well, by the way, although I haven’t heard recent rumblings in that direction out of Denver.

Joe echoes advice that I give all the time: that you should earn and burn miles in close proximity, not save your miles for some far off future trips. Miles will never be worth more in the future than they are now. Airlines devalue award charts. Rules change.

And he gives another reason unique to new developments in the space: the conversion from the current award charts to the new revenue-based ones will not be generous.

A year from now, at least one and possibly two of the traditional carriers—Delta Air Lines (NYSE:DAL), United Airlines, American Airlines, US Airways (NYSE: LCC), Alaska Airlines (NYSE: ALK)—will have scrapped their decades-old mileage plans and adopted a revenue-based scheme.

This isn’t conjecture on my part. I’ve been shown the so-called “earn and burn” structure one carrier may introduce and been informed by another that they will switch next year. The change is coming, and it’s coming next year.

Joe actually thinks this will be good for business travelers.

Unlike some talking-head experts, whose financial and psychic interests are tied to the status quo, I think a switch to revenue-based programs will be good for genuine, live-their-lives-on-the-road frequent fliers. We spend the most for our airline tickets and are the biggest spenders on the credit cards and other products aligned to our frequency programs. In revenue-based plans, our spending patterns will guarantee we earn the most new scrip and, logically, be the biggest beneficiaries of a reward chart tied the real-time dollar cost of an airline ticket.

I wonder if I’m the sort of talking head he has in mind here? :) (Although perhaps not because among the two “things you can do immediately” to protect yourself is to contact my award booking service.)

We don’t really know what will happen to current miles in terms of conversion, or in terms of their usability under old charts…

I’m much less sanguine about the conversion value of any existing miles you have in your woebegone frequent-flier bank, however. Some of the models I’ve been shown are distressing, to say the least. Other models grandfather the existing miles and existing award charts,..

But the fact that conversion could occur won’t be good for folks trying to make the most of their points for aspirational awards.

That said, I think Joe is right that plenty of business travelers will like the revenue model. I got emails yesterday from folks saying it’s great ‘because I accumulate all of these miles and then can’t get 4 first class awards to fly with my wife and kids to Orlando for Christmas.’

I’m not sure that many folks will like the award charts for premium cabins, even domestically, but this idea certainly resonates — ease of redemption, you can always use your points (although you can now in most programs at a higher rate than saver awards).

But the honeymoons to Thailand, the anniversary trips to Australia, the stuff that dreams and lifelong loyalty — the stuff that really connects you to a brand — will come at a more unattainable cost.

I do get the pressure that the programs feel to deliver on awards. There are too many miles chasing too few seats, they’ve printed the miles and planes are full, the current model is that saver seats should only be released when there are seats that would otherwise go empty. That leads to many disappointed members and the worry is that’s unsustainable. Though Delta is quite poor in offering awards on its own flights, the Skymiles program itself would no doubt want to offer more saver inventory if the airline’s revenue management would make that available.

At the same time, there are plenty of award seats out there, the problem is just as much technology that doesn’t do a good job searching and finding all of the available flights and routings and agents who are not well trained and don’t work particularly hard to find seats for members. Folks often go to an airline website thinking that whatever they see there is what’s available, or they believe phone agents who tell them nothing is available, when in fact there are seats out there.

With all of those unredeemed miles, we get expiring miles and we inevitably get award chart inflation. The major programs are due for a devaluation — it’s been 3 years since we’ve seen one with United or US Airways. Much longer for American (though for the most part their awards are already priced competitively or a bit higher than their competitors and it’s unthinkable that the devaluation would come while the airline is still in bankruptcy). Airlines don’t want to touch the 25,000 mile domestic coach award level, but they’ve been disappointing more and more members at that level. It isn’t really business class to Asia that’s the problem.

Still, it boggles my mind that businesses making huge margins on billions of dollars of sales would consider walking away from their entire business model having convinced themselves it’s unsustainable. Reminds me of Coca Cola ditching their golden formula for New Coke out of fear of Pepsi and taste tests.

Which is why, if it were me, I’d offer the revenue choice alongside the current award chart model. I’d make any ultimate change or phase out gradual over a series of years as I tested and got feedback.

We’ll know soon enough. I don’t see all of the programs switching right away, I don’t see them all offering only revenue-based redemptions instead of award charts. Someone will go there, my hunch is it won’t be American, so while I’m trying to keep my account balances below seven figures across the board (and not in all cases doing a great job of that) I’m not walking away from the programs by any means.

  1. DaninSTL said,

    Some great points. I’m not sure the airlines or those that would be in favor of such changes see the real effects. Southwest can say they haven’t lost any business over changes but I feel it cost them in growth rate. They are growing so its easier to maintain a level and say that. I feel the airlines will lose mile runners, mile buyers,credit card revenue and shopping partner revenue. They also won’t fill as many empty seats with award flyers that still paid something for the seat.

    Also I agree AA won’t make changes until after bankruptcy. They would be more likely to offer so deals on buying miles cheap to get a temporary short tem cash influx. Also I doubt Frontier will make any changes until they are sold.

  2. Beachfan said,

    Well, that certainly will be a bummer for folks who have big mileage balances; I can’t burn them quick enough – already doing two F seats twice a year.

    Makes Starwood card more attractive to me since I love Starwood and have status.

    What’s your take on how Chase UR will fare? Will it just defaut to a Capital One type card?

  3. Jay said,

    Could someone please direct me to a place where I can learn in-depth the meaning of revenue-based programs ? :(

  4. Gary said,

    @Jay my previous post on the subject, linked at thetop of this post? But roughly speaking, think Southwest and Jetblue

  5. Gary said,

    @Beachfan – Chase Ultimate Rewards will be even better — because (1) United won’t be the first to go revenue-based, and (2) they partner with NON-U.S. airlines, which will still offer superior value for international premium cabin rewards. American Express Membership Rewards and Starwood PReferred Guest will have similar charactieristics/benefits.

  6. smitty06 said,

    I think Southwest fared well since they dont really have aspirational flyers. They have the 25k domestic flyers. Most people dont think about international first class cabins. For those of us who dream of Lufthansa first class, we are frightened by the thought of the changes.

  7. dale m said,

    Brancatelli has been preaching the “use them now, they’re gonna be useless” for the 5 yrs or more since I started even vaguely paying (i.e., prolly longer).

  8. dale m said,

    oops -edit

    Brancatelli has been preaching the “use them now, they’re gonna be useless” for the 5 yrs or more since I started even vaguely paying attention (i.e., prolly longer).

  9. Beachfan said,

    Thanks Gary. Maybe delta will end their air France embargo before the change. I’m hoping for Tahiti

  10. Jay said,

    @Gary – !!!! Sorry!! I completely missed that link! :facepalm:

    Thanks! :D

  11. greek2me said,

    Gary, I am still accruing DL miles where I can do so cheaply as I view it likely they will retain a 1cpm min redemption value post any rev model conversion. Love your thoughts on that? Thanks.

  12. Sil said,

    I don’t understand how this affects Awards travel with this revenue based program. I have read what your wrote on the links. If an awards travel for United is 100k points for Biz to Europe, would the revenue based program have an affect on redeeming 100k points? Or does this program affect upgrades for the awards program?

  13. Gene said,

    I guess it is time to stop earning elite status and flying miles (no reason to ditch the mileage-earning credit cards yet). I’ve got about 8 million airline miles to burn, so I might as well use them on all (including domestic) flights now and for upgrades after the programs switch. I’m guessing that one of the “good” (relative to what will remain after the carnage) surviving uses of miles will be upgrades. This is all very depressing…

  14. Gary said,

    @Sil – if they go with a revenue-based redemption system where awards are based on price of ticket, that could make premium cabin international awards much much more expensive

  15. Gary said,

    @greek2me – I don’t think you get hurt accumulating Delta miles at under 1 cent apiece.

  16. Gene said,

    @greek2me — If you are referring to Pay With Miles, DL miles don’t have 1 cpm value now since you do not earn any miles or status and cannot upgrade when you travel on a PWM ticket. Maybe they are worth .8-.9 cpm when used this way.

    If Delta leaves the 1 cpm PWM rate the same and adds mileage earning and upgrade capability to PWM tickets, that wouldn’t be the worst thing that ever happened.

  17. iahphx said,

    The irony, of course, could be that most folks reading this forum who aren’t high-revenue biz travellers winds up loyal to foreign carriers. Are we all going to post our miles to Aegean?

    Seriously, I don’t see the foreign carriers moving to this model anytime soon, so why won’t folks just collect foreign ff miles? Maybe the airlines will figure it won’t be enough people to matter.

    If someone does make the leap, it’s like to be Delta. Or perhaps AA after a US acquisition (but US management will likely have enough on their plate to keep them preoccupied for a few years).

  18. Sil said,

    Gary-”premium cabin international awards much much more expensive” ….so you mean instead of 100k Biz class ticket to Europe on United Airlines, it will be 120k or most likely more to redeem????

  19. Gary said,

    @Sil – one version would be that the price of the ticket on a given day determines its price — not saying every program does this, or that they scrap award charts entirely, but under that model you could easily see 250k pooints instead of 100…

  20. Gene said,

    @Sil — If miles are assigned a fixed value, such as 1 cent per mile, a $250 domestic coach ticket will cost 25,000 miles, and a $15,000 international F ticket will cost 1,500,000 miles. I think that is what Gary is referring to.

  21. Gary said,

    @iahphx – bingo, this is another post i need to write, how i learned to stop worrying about revenue-based programs and began loving South American frequent flyer programs

  22. Gene said,

    @Gary — I’ll take 250k over 1.5M!

  23. Sil said,

    Ughh!!!

  24. Gary said,

    Fair!! (Delta often charges 360k+ now…)

  25. jfhscott said,

    It may be important to note there are two general types of “frequency program” participants. One type is the type that knows it is generally wise to sign up and get the goodies. They often will even get an affiliated credit card, and when they go to spend “points” they do so haphazardly. They make me cringe. But they do not want to invest in learning the ins and outs of getting the highest and best use of their points – some of them even buy toasters with their points. Then there are the folks who invest time and effort in extracting everything they can with the smallest input. (You know, cockroaches). The former participants may be the more attractive customers for frequency programs. I do hate to say it. Revenue-basing seems to be about those people.

    I do take some solace, however. Jet Blue, Southwest and VA of course have revenue based programs. But, with the exception of first class on VA, none of them have that much to which one might aspire. No upgrades, no free premium travel, no partner awards. A glorified rebate is more logical for them. And I do wonder what the alliance partners of US, DL, AA, and UA would have to say about US legacy carriers, who pioneered frequent flyer programs, gutting their allure. I’d indeed welcome specualtion as to how much moving to revenue based systems would antagonize them.

    And, yes, some dilution is likely due. Face it, most miles issued are not from flying. Credit card miles are the most popular earning vehicle now, and in 2000 or so, one had to spend 25000 2000 dollars for a coach seat, now, one must spend 25000 2012 dollars for a coach seat. (Of course, in each case, one would get $25,000 worth of stuff). But those 25000 2000 dollars are now 33,595.67 2012 dollars – for the same coach seat. And there is an interesting dichotomy – as long as there is inflation, earning free trips will get easier with credit card miles, but absent a geological event of the first order, the number of miles from JFK to LAX will remain constant. Eventually, something has to give. Is it possible that the give will be that the credit cards will only earn .5 miles per dollar after a while?

  26. greek2me said,

    @Gary- thanks, I’ve come in off the ledge now :)
    @Gene- was just referring to a general cpm concept for DL miles and was not familiar with PWM, as I have never used those. Thanks for your comment and est value.

  27. Michael Hopkins said,

    I don’t see this happening without major tweaks. If this change occurs, I’d expect load capacities to go down which is going to kill the bottom line unless fares go up. I just don’t see people using their awards as quickly/frequently and I also don’t see a plane full of paying passengers to some of these TATL and TPAC routes. The current structure at least allows airlines to recapture FF miles which represent a liability on their books. No idea how they’re going to address this issue.

  28. Ozaer N. said,

    if the RBS goes into effect, I doubt I’ll be able to make these international first class/business class trips in the future for free…..oh well, it was a fun ride, while it lasted.

  29. Nick said,

    @Gene It could also be that they leave the award table untouched and just change earning. So a $250 flight earns you 250 points and a $15k trip earns 15k points. This is more likely IMO.

  30. Gene said,

    @Nick — I certainly hope you are right. I would finally join MRA (mile-runners anonymous), and start burning off my miles.

  31. Jo said,

    With RBS on the horizon, I’m totally fascinated by how this will unfold and impact not only the business traveler, but the leisure passengers as well; meaning, how are the airlines going to manage the PR on this? Won’t there be much gnawing and mashing of teeth from brand devotees? Won’t there be throngs claiming baiting and switching? Can you imagine the protests from the LGA-PBI winter retirees? I’m practically pulling my chair up closer my monitor and popping the popcorn and so wishing we still had Tim Russert and Nora Ephron around to sweeten the discussions. When one considers how deep and wide FF miles are in this culture, I’m pretty sure a conversion to RBS ain’t going to be pretty.

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  33. Guy said,

    There seem to be two sides to converting a traditional airline program.
    A) Converting the earning to a scheme that gives you some particular number of miles/points per dollar spent.
    B) Converting the redemption scheme to a model that gives you a certain amount per point towards an airline fare.

    You can do A, while still having a points based redemption chart. This is how most hotel chains have designed their programs.

    Or, you can do A and B, and you end up with something like Southwest, jetBlue, or Virgin America

  34. Anon256 said,

    On the earning side, accrual based on miles flown was always a gimmick that didn’t make much sense. The number is not particularly well correlated to revenue, marginal spend, profit, or anything else relevant. If it weren’t for the strong status quo bias of an oligopolistic industry I would have expected the programs to switch to some sort of revenue-based earning structure long ago.

    On the redemption side, however, traditional award charts (either region-based or distance-based) are extremely useful to airlines because they provide a means of price discrimination. Premium cabin and last minute seats that would otherwise go empty can be sold to leisure travellers at reasonable rates without undercutting the airline’s attempts to gouge business travellers. The possibility of “aspirational” awards also helps attract customers. (This applies less to WN/B6 due to their lack of premium cabins and low numbers of business travellers.)

    For an idea of what a re-thought frequent flyer program would look like, we have as a clear example the hotel programs. Earning is mostly revenue-based, but redemptions still operate on the basis of award-chart-like categories, with aspirational redemptions requiring far fewer points than their cash price might suggest. Amtrak and several foreign rail providers have similar systems.

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  38. CJ said,

    Who is Joe Brancatelli? Why should we care what he thinks? As someone who reached this article through a link elsewhere, the name carries no meaning, no weight, and no credibility without any disclosure of who he is.

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