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As much as I rag on Delta SkyMiles, there’s no denying that Delta is an extremely well run airline. It also seems rather apparent that Delta isn’t worried if they lose some customers through various changes to their SkyMiles program. That’s probably why they were the first US legacy airline to introduce a revenue requirement for status, begin awarding miles based on revenue rather than distance flown, and also to eliminate award charts altogether.
As much as I don’t like those policies, I really can’t blame Delta for many of these changes. The airline is really well run, and they think that’s enough to get people to fly with them. The customers choosing Delta for their frequent flyer program aren’t customers they typically want to have anyway.
Which brings us to an interesting Bloomberg article published today, entitled “Airlines Really Don’t Want to Upgrade People for Free.“ It has some pretty fascinating quotes from Delta’s incoming president:
“We want people to be able to use those miles not to fly for free but to control your experience,” says Glen Hauenstein, Delta’s incoming president and architect of the airline’s revenue plans. To do this, Delta plans to adjust the pricing of seats at the front of the plane so more are sold. While Delta currently sells just 57 percent of its first- and business-class cabins, the company said in December that it will boost the figure to 70 percent by 2018.
“Historically, the domestic first-class cabin was a loss-leader,” Delta’s Hauenstein said. Most of the industry’s premium seats went unsold on domestic flights and were assigned at the gate, “and there was no real compensation to the airline.” He said the traditional airline upgrade system amounts to “winning a prize” and leaves many customers displeased.
“We were really making nobody happy except the person who won the lottery at the gate,” Hauenstein said. He said the changes have improved customer satisfaction scores among the top tiers of elite SkyMiles members.
I don’t blame airlines for reducing upgrades
The above perspective largely makes sense, and I think that’s true both for customers and the airlines.
Several years back airlines would consistently charge exorbitant fares for first class, where it might be 10x more expensive than economy. They weren’t offering any sort of value there, given that almost no one would find that worthwhile. So what ended up happening was that only a very small percentage of first class seats were sold, and then the rest were filled with upgraders. That’s not a smart system.
I see a lot of merit to airlines charging more reasonable premiums for first class. If we’re being fair about the value proposition of first class, it should cost maybe 2-3x as much as economy, on average.
And largely I’m finding that Delta’s pricing is spot on. For example, take the below Tampa to Atlanta fare. It’s $71 for basic economy, and then the premiums above that seem very reasonable:
- For an extra $15 you can select a seat in advance and receive full Medallion benefits
- For an extra $25 you can upgrade to Comfort+ and get more legroom and free drinks & snacks
- For an extra $45 you can outright buy first class, and receive a larger seat
My point is that I don’t have a problem with airlines outright trying to sell products at prices which are reasonable. That’s smart on their part, and in many cases it even makes sense to outright pay for first class as an elite member, when the premium is minor. Hell, it can even be good for consumers, because it makes status that much less valuable, when you can buy what you want outright.
What does that have to do with “free” travel?
What I have a harder time following is the logic when it comes to preventing people from redeeming miles towards “free” travel. The way I see it, that’s a completely different subject than how domestic upgrades work.
Sure, I think there’s value in being able to redeem SkyMiles for all kinds of things. Delta is even letting you redeem SkyMiles for premium drinks in SkyClubs, so they’re clearly trying to set the miles up as a currency worth a penny each.
More options are a good thing, since a vast majority of people are redeeming miles in a sub-optimal way. And that’s a good thing, because it lets those of us “in the know” redeem miles more efficiently.
But the danger is if Delta is going to start viewing miles as a discount program rather than a rewards program towards free travel (or a number of other things). Airlines make huge amounts of money off their credit card arrangements, and consumers aren’t stupid.
If Delta wants to have a co-branded American Express Card and the only way to redeem those miles is for one cent each towards the cost of travel on Delta, consumers won’t stick around. There are much more rewarding cards, like the Citi® Double Cash Card, Capital One® Venture® Rewards Credit Card, and the Barclaycard Arrival® Plus World Elite Mastercard®.
Having a non-fixed mileage currency keeps them aspirational, and adds an element of mystery which will keep people intrigued. If airlines sell everything at fair(er) prices and miles are fixed value, the incentive to be loyal will go way down, regardless of how high revenue or profitable of a customer you are.
There are no surprises here, as Delta isn’t secretive about wanting to move SkyMiles towards a discount currency worth a penny per mile. Personally I view that as dangerous, both in terms of feeling rewarded as a SkyMiles member, and also in terms of Delta’s co-branded credit card business.
Many credit cards are successful largely because you can’t put an exact value on a points currency, so the points feel aspirational. If SkyMiles are going to be worth a penny each, Delta is going to have to do better with their credit card offerings, and should count on losing a lot of (still) loyal customers.