Musing about the real value of SkyMiles to Delta. Can the current plan continue to work?

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Respected travel writer Brian Sumers last month had the chance to chat with Delta’s CFO Paul Jacobsen. His piece is an interesting read and it explains why Delta has been so bold in gutting the value of SkyMiles for the past many years (and just keeps doing so). Also in the piece my fellow BoardingArea blogger, Gary does an amazing job at pointing out much of the fallacy of the CFO’s boasting.

But today I want to key in on what is between the lines when it comes to the discussion of the value of SkyMiles. Notice this part of Brian’s post:

“We can get into different options for our customers where from a revenue perspective we truly are indifferent, whether someone spends a dollar or a mile,” he said. “We know what the cost is, and we know what the whole pool looks like versus somebody who gets the same amount of miles when they pay 10 percent of the ticket cost that somebody else did,”Paul Jacobsen Delta CFO via Skift — Brian Sumers (BOLD MINE)

I know having talked to insiders at Delta before they went to SkyMiles 2015 they had fixed numbers of what a SkyMile would be to you and me spending them on tickets and were ready to go with that when the program change rolled out. But, at the last minute, they got cold feet and stuck with the award charts (until they hid them from public view, that is).

Again, take a look at the bold bits above. Not only is it clear to Delta what each SkyMile costs them going out i.e. paid to fliers when they spend on tickets (and that they get more miles when they “overspend” on tickets) but also the cost when folks like AMEX buys them by the BILLIONS in both quantity and dollars (both talked about in the annual $DAL stock info). Also, the really interesting bit about Delta not caring if a passenger pays for whatever with “dollars or a mile”.

That is just astonishing to me. Let’s look at the math.

This says to me that the mix of folks simply paying LEVEL 3, 4 or 5 award (horrid value for their SkyMiles) or even worse, using them in places like the SkyMiles Marketplace paying for gift cards or hotels or car rentals is all offsetting the few of us who wisely only spend our Delta points at LEVEL 1 or “Flash Sale” awards (or using booking PROs like ADAM to extract real value).

Much like credit cards, those of us who never EVER pay a penny of credit card interest and score literally millions of frequent flyer miles a year both getting new card bonus deals but also taking advantage of all the other ways to amass points are subsidized by those who are foolish and carry a card balance paying upwards of 24% interest. This is one of the reasons why card companies don’t mind pouring out huge new card bonus offers because they know some will still end up making them money and when you look at the total “pool” mix it all works out. It must the same for Delta and why the CFO shared the above.

For me this all just solidifies what I have known for years. SkyMiles is valuable to Delta and that conversely means it is NOT valuable to you and me. That is – unless – we really work hard to extract value out of the program. I only collect SkyMiles when I can get them either free or almost free (like the current LTO for example). Personally I only spend on my Delta AMEX cards when I can earn bonus MQMs but after that not a penny more. I can spend on other cards, like the new AMEX BLUE PLUS card, and earn a MUCH higher return that I could, if I wanted to, send over to Delta 1:1 when I need them. This is value – this is smart.

Lastly it will be interesting to see just how long this lasts as spend based rewards and lack of transparency in the program does not build loyalty. Also, the one thing that is constant in the frequent flyer world is change. I think at some point the general public will wake up to what I already know regarding SkyMiles – that is, they are nice for free but if Delta wants to drive folks to again save them they need to fix the broken SkyMiles program.

Who knows – maybe truly going to a full fixed value point program (at last) would be the way to do that. More on that idea another day! – René

 

 

 

4 comments

  1. I think Delta is playing to (at least) two audiences. The first group is folks like you and me who only spend those SkyMiles for Level 1 seats. If that possibility were gone, I think we would both be gone – and both Delta and Amex would be hurting. The other group they are playing to is the group that doesn’t really know how to play the game or don’t care that they are aren’t getting maximum value for their points. All they know is they have been collecting points forever and they want to get something – anything in return – so they will overpay. They will buy that drink in the SkyClub and be happy they got something free – or pay 50,000 points for a domestic coach ticket and be happy again that they scored something free. They don’t follow the blogs or pay close attention to know how much more they could have gotten. And Delta isn’t going to tell them (therefore, no charts). Delta will gladly take their money at the higher price. Delta needs BOTH groups to keep maximizing the money it receives from Amex for the points game. If either group leaves, profit from the points game (Amex/credit card points/flying points) will take a nose dive. So Delta has to keep both types of players playing and happy. At least I hope so.

  2. I really think more people than you think spend their skymiles at horrible rates. I just had a co-worker…who I’ve explained the value of miles to about 1000 times, just spend 63k Amex points to buy a $315 paint sprayer. The same sprayer I was able to find online for $275. I think people are so tired of trying to use their points for the flights they want, and being shut out, that they when they find something they want/need and can use points they just do it.

    I think we hear of redemptions like this and think they aren’t that common…mostly because how can people not do the 3rd grade math to see what terrible redemption rates they are getting. But I think they are far more common than we think. If that’s the case, I think Delta will make a hard push to move target redemption rates to <$0.01 per skypeso.

  3. In theory shouldn’t the value of Skymiles to delta equal the value of Skymiles to the customer? If Skymiles aren’t valuable to customers, why are they valuable to delta?

    What is the value of a dollar in a bank if the bank has sole control over what the dollar can buy (i.e. devalue without notice) and can even terminate the account altogether without notice to the accountholder and for any or no reason? I don’t know the precise answer to that, but I don’t think many would keep dollars in that bank when there are safer options. That is one of the reasons for the earn-and-burn strategy and the appeal of cash-back cards.

  4. Outside of the hobby, I don’t think I know anyone who uses SM (or any award currency) efficiently. As others have suggested, most people see loyalty earnings as “free,” where they have a balance that covers whatever they want (flight, hotel room, TV, blender, etc.). And most Millennials I know don’t care about these programs at all, often seeing them as a scam. They’ll just travel as they like without joining or earning anything.

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