Why fly Delta?January 23, 2013: 2:02 PM ET
By adding a requirement to spend a certain amount of money in order to qualify for its frequent flyer levels, Delta is abandoning the very point of the program: Loyalty.
By Cyrus Sanati
FORTUNE -- The shakeup of Delta Air Lines' highly profitable frequent flyer mileage program is a bold move – one that could lead to a volley of disastrous unintended consequences. Requiring a minimum spend to achieve elite status on the airline would alienate Delta's fiercely-loyal lower-margin customers, all while providing no real incremental benefit to the airline's current high rollers. Such a change could eventually lead to decreased load factors, diminished cash flows and the disintegration of Delta's SkyMiles frequent flyer program.
Airlines have tinkered with their frequent flyer programs in the past, increasing and decreasing the number of miles needed to earn some sort of perk, like free tickets or magazine subscriptions. They even created special frequent flyer miles that count toward gaining "status," which, depending on how many you rack up, allow members a range of benefits, such as skipping baggage fees, cutting lines at security, priority boarding, better seats and the Holy Grail -- complimentary upgrades to first class.
But Delta's change, announced last week, adds a whole new element to the mix – spend. Starting in 2014, in order to qualify for status, Delta's frequent flyer members will need to hit a minimum spend threshold in addition to attaining the minimum number of special status miles, which Delta calls Medallion Qualifying Miles or MQMs. The spend amounts, called Medallion Qualifying Dollars or MQDs, works out to 10 cents a mile, meaning that passengers would have to spend $2,500, $5,000, $7,500 and $12,500, per calendar year, to achieve the corresponding Silver, Gold, Platinum and Diamond Medallion elite status on Delta.
To make matters more complicated, those amounts are net of fees and taxes, meaning you will have to spend a lot more out of pocket than you think. For example, a 10-day roundtrip economy ticket from New York to London in February bought in advance on Delta.com currently costs $826, yielding 6,902 MQMs. Today, to achieve Silver status on Delta, one would only need to fly that trip four times in a calendar year to hit the necessary 25,000 MQMs. But under the new system, passengers would also be required to rack up $2,500 in MQDs to hit Silver.
The $826 ticket price makes it appear as if one would only need to make the same four trips to gather the necessary MQDs to qualify. But that is the gross ticket price, which is inclusive of all taxes and fees. The net ticket price, which count toward MQDs is actually a measly $184 (yes, taxes and fees on that that trip work out to $642). That means one would have to fly from New York to London a total of 14 times at a cost of $11,564 to rack up the necessary MQDs to hit Delta's lowest status tier level. To hit Diamond status would mean flying that route 68 times at a cost of $56,168. This makes achieving status so difficult that it could dissuade many people from even trying. Delta's management doesn't see it that way.
"Before we didn't discern between a customer that was a high-yielding customer versus a low-yielding customer," Glen Hauenstein, Delta's EVP of Network Planning & Revenue Management told analysts on Tuesday during the airline's fourth-quarter earnings conference call. "I think as we continue to evolve those programs, we will be continuing to favor the higher-yielding customers over lower-yielding customers."
Delta therefore believes that adding the spend component will throw out people who have flown a lot of miles on the cheap from achieving the same status as someone who flies a lot and who also spends a lot. It's a reasonable assumption and could work to totally free up Delta's clogged status rolls, but at what cost?
Delta (DAL) seems to be forgetting exactly what frequent flyer clubs are all about. They aren't about rewarding people who spend the most money; rather they are about encouraging loyalty. Today, frequent flyer clubs are massive industries, generating billions of dollars for the airlines, which sell miles to banks and credit card companies who then disperse them out like crack to a bunch of frequent flyer addicts. The deeper the capture, the more money the airline can make from selling its miles. This is a volume game, requiring as many members as possible to believe that their miles are worth something – there is really nothing elite about it.
The status mileage system was later designed as a way to keep passengers even more loyal to the airline by offering a heap of goodies that were once reserved for those rich enough to fly first class. The more loyal, i.e. the more one flew, the more special they were treated. These programs eliminated price as the sole criteria for passengers when they went about picking an airline to get them from point A to point B. These captive members were more than happy to pay a small to medium premium to fly their airline of choice, which kept many legacy mainline airlines competitive with lower cost carriers, especially Southwest (LUV) and JetBlue (JBLU), which had little in the way of perks to offer passengers.
Status tiers were created so that leisure travelers could get a taste of the good life. These lower-yielding customers were encouraged to keep flying to reach that lowest tier level. Many would fly just to rack up miles on the cheap, embarking on flights called "mileage runs." Critics of frequent flyer programs saw this as "gaming" the system, but they are missing the point. That plane was taking off with or without that "lower-yielding" passenger. Every seat taken up by a person doing a mileage run or by a leisure traveler aspiring to hit that lowest elite tier filled an empty seat yielding zero dollars.
One only needs to read a few of the hundreds of venomous comments on frequent flyer websites like FlyerTalk.com and BoardingArea.com to see how bad this could be for Delta. One Diamond Medallion member seems to sum up the comments when he wrote:
"CEO Richard Anderson tells us in the new safety video that Delta "has your back." He's correct and he just stuck a very sharp knife square in the middle of it."
Adding a minimum spend component, even one as low as $2,500 net of fees and taxes, will only serve to discourage new people from joining Skymiles. While Delta says that passengers holding a Delta-branded American Express card would be exempt from the spend requirement, that still would leave thousands of people out in the cold, especially younger people and those who don't have high enough credit scores to qualify for the premium credit card. In any case, that exemption might not last long as Delta's mileage sale agreement with Amex is scheduled to end 2016.
Delta would see thousands of revenue generating passengers look to other airlines to achieve elite status or simply forget about status altogether and fly the cheapest travel option. By taking the elite carrot away from the little guys Delta thinks it is rewarding its big spenders, but it only seems to be putting the airline on a path to financial ruin.