Changes Coming to Delta’s SkyMiles Program – Evolution of SkyMiles (EOS) or the End of SkyMiles?

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There has been lot of chatter this past week on both FlyerTalk and Airliners.net about possible changes coming to Delta’s SkyMiles program. Delta that has sizeable social media presence hasn’t uttered a word.

Change is coming and I believe that we will hear about these coming changes sooner rather than later, possibly even this coming week. I don’t normally write about rumors, but in this case there is plenty of solid evidence based i.e. job postings what is the direction of these changes.

I am vested in Delta’s SkyMiles program as I have close to 800K miles sitting on my account. Whenever I have been using miles it has always been easier to use miles on Oneworld or Star Alliance programs. Maybe I should finally go ahead and ticket couple of RTW trips before Delta has another chance to devalue them?

There are going to be two changes. How the future SkyMiles are awarded and at least partially moving to a fare based awards system i.e. the number of miles required for the award ticket will be essentially linked to the price of such a ticket.

There was a post on FlyertTalk by a member LedgeT that looked like a leaked internal Delta memo:

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

1. 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.

In reality it is Impossible to achieve both the increase in revenue and customer loyalty while at the same time “decreasing” liability. The latter basically means higher number of miles required for award redemptions, or making redeeming SkyMiles even more cumbersome than it is today, so that more of them would go unused (breakage).

The deferred revenue that Delta assigns to all unused SkyMiles was $4.5 billion as of December 31st, 2011 same as at the end of 2010 fiscal year (according to filed 10K)’s. Now, they want to bring this liability down by changing the future usage parameters.  In 2010 they brought down the frequent flier liability by $345 million.

Communication is essential as Delta found out when they tried to lower the number Medallion Qualifying Miles (MQM’s) earned on the lowest fares from 100% to 50%. There was a huge public backslash and people donated money to run print ads on publications like USAToday. The website from the era SaveSkymiles is still up.

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)

Revenue Based Mileage Accrual (RBMA) project shifts the basis for awarding miles to a revenue based accrual approach

There are quite a few different approaches that various airlines use for awarding miles based on the revenue. Delta already does this as well by giving redeemable and MQM bonuses for high economy and business/first class fares.

Here are examples from number of US and foreign airlines:

lufthansa-miles-earned

Lufthansa does this by giving a set number of miles for flights within Europe. There is a clear distinction between the lowest economy fares that only earn 125 miles compared to business class fares that earn up to 2000 miles. Worldwide destinations earn from 50% to 300% of the miles flown depending on the fare class.

air-new-zealand-points-earned

Air New Zealand has a more novel approach by using Airpoints. Difficult to compare the miles earned and how much it would actually cost to get a free ticket.  Apparently, you can use Airpoints Dollars as payment towards any fare on Air New Zealand. You need to pay the taxes/fees separately, however. For partner flights they have a separate partner reward chart.

jetblue

JetBlue has a similar approach. They award 3 TrueBlue points per dollar spend and double it for bookings made on their website. There are some threshold bonuses, but about the maximum you can do is 12 TrueBlue points per dollar. You can buy any fare that is shown on JetBlue’s website using TrueBlue points that are worth around 1.4 cents per point when exchanged for a ticket. You can get around 17% rebate in the form of TrueBlue points if you fly JetBlue a lot.

virgin-america-elevate

Virgin America has a pretty straight dollar based approach for earning their Elevate points. You will earn 5 Elevate points per dollar spent. You can spend them on all Virgin America flights by using your points at around 2.14 cents each.  So, if you fly a lot on Virgin America, you can get around 10% rebate in the form of Elevate points.

southwest

Southwest has a tiered system for awarding points. You get 6 to 12 points per dollar depending of the fare purchased. If someone is doing a serious flying on Southwest, they can also earn up to 100% bonus on the points earned. When you redeem, the number of points needed depends of the fare and is from from 60 to 120 points per dollar. Sounds complicated? The best case scenario would be to buy Business Select fares that earn 12 points per dollar and earn the 100% bonus, and then use them for Wanna Get Away fares at 60 points per dollar. You would get 40% rebate on the fare this way. On the other hand, if you are earning at 6 points and need to buy the “business” fare using points, your rebate is only 5%.

ek-skyward-zones

But maybe they are thinking inline what the Emirates has been doing? Emirates doesn’t show any “real” mileage base distances during their booking process, and the miles earned are dependent of the zones and not the actual flight routes i.e. you won’t earn any more miles if you backtrack via Dubai.

Here’s an example how many Skywards miles one would earn flying Los Angeles to Dubai return.

ek-lax-dxb-y

Economy (low)  7000 & Economy (high) 14000

ek-lax-dxb-c

Business (low) 17500 & Business (high) 24500

ek-lax-dxb-f

First (low) 28000 & First (high) 35000

The actual return distance between Los Angeles and Dubai is around 16700 miles. You need to fly business or higher to earn the actual distance flown in Skyward miles.

ek-sin-akl-rt-f

Here’s one actual example about booking a Singapore to Auckland in First class on Emirates. You will be shown during the booking process number of different options and how many miles each of them would earn. After you choose one of the proposed itineraries, you can choose to have a look at the mileage breakdown. This Singapore to Auckland would earn enough tier qualifying miles to earn a Gold status. The actual distance between Singapore and Auckland is 5200 miles.

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

This is staring to get interesting. Legacy US carrier trying to transform from zone based fixed awards to a one based on the price.

Fare Based Award Redemption Model

Using fares to price awards is not a novel concept, although it would be among the legacy network carriers in the United States. Already JetBlue, Virgin America, and Southwest have tied the number of miles/points needed for an award directly to the available fares. Off the examples above Air New Zealand does exactly the same for their own flights, although they have a different fixed Airpoints schedule for partner flights. Also, American Airlines has their dynamic air rewards alongside the usual award chart.

“Launch introduces Fare Based Award Redemption”

The only positive side to this is that they are not using the word replaces.

“Single Shopping Experience for Customer”

Although none of the airlines that I frequently use does this yet, it is very common among the hotels. Starwood, Hilton, and InterContinental Hotels Group all show the price, points price, and price using cash & points (if available).

“New Award Inventory Controls”

This is where Delta has gone completely wrong with their domestic and international award pricing. You have high, medium, and low awards, and all have somehow tied to the underlying inventory controls. But, if all you do is to use SkyMiles as a form of payment then there wouldn’t be need to award inventory control at all. The dynamic feature of fare bucket availability would take care of it.

“Cash + Miles Award Redemption Product”

Delta already partially does this by allowing some members to redeem a set number of SkyMiles for $100 discount certificates. You can then use them for paying any fare.

There is already number of airlines where you can partially pay using points and rest using cash.

“Award Redemption for OA”

This would be truly revolutionary if they would decide to introduce a fare based award pricing for partner airlines as well. Expect to basic international business awards to cost 500K to 1000K miles.

“Modifications to the automated Award Refund, Redeposit, and Reissue and Exchange Process”

Technicalities

Then on the second launch phase in 2013 maybe?

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

“Bid for Price Award Redemption Product”

There are already products available for airlines to handle business/first class upgrade bidding process. Shouldn’t be too difficult to introduce this for regular award flights as well.

“Buy It Now Award Redemption Product”

Not sure if eBay has trademarked Buy It Now and what exactly would it mean on Delta’s case. To sell the number of miles required for award redemption if short?

“Volume Discount Award Redemption Product”

Airlines are already offering targeted discounts for redemptions. Not sure if anyone has done a volume base discount yet.

“Modifications to SkyMiles Branded Mileage Upgrade Products, and Modifications to SkyMiles System-Wide Upgrade Certificates”

Not sure about these.

Conclusion:

I think that it is somewhat inevitable that the US based airlines will eventually give higher multipliers for business and first class fares, and at the same time lower the number of miles earned on the cheapest fares to less than 100% of the flown miles.

Why Delta hasn’t launched a product that would compete with United’s Global Services or American’s Concierge Key? If Delta is truly interested in attracting the high spenders, they need to offer more timely and personal service. There are not set qualifications for either United’s or AA’s invitation only status, but the revenue requirement is in excess of $30K to $50K and is dependent of the market.

Delta has to be really careful in their approach to this issue. Pretending that nothing is happening when a memo has leaked out doesn’t help. They should come out and tell what changes are coming and when. Then the customers could make an informed choice whether to continue patronising Delta or not.

My prediction is that if Delta will move entirely to a fare based award system the rebate that an elite flier will get for dollar spent is going to be 5% to 20% depending of the fares purchased and how the points/miles are used. This will make redeeming for those inspirational international business class awards very difficult.

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