CEO Blog

Working with revenue-based FFPs

Written by Ravindra Bhagwanani on . Posted in CEO Blog


11 December 2014

On 01 January, Delta will switch its SkyMiles program to a revenue-based program. This will change the way we have to work with such programs – and opens up indeed some new opportunities.

When Delta does that move, it won’t be the first program to do so by far – and United won’t be the second one either when following suit two months later [the time they needed to copy Delta’s idea after the latter made its plans public in early 2014!]. Other airlines have experienced this model already for a while before, from Virgin Australia to Southwest, Germanwings or Vueling to name just a few. But what is new is that a major airline belonging to a global alliance makes such a move – and that might indeed have the potential to change the way these programs work forever.

The principle is easy: For any Delta ticket or any ticket on a partner airline issued on a Delta ticket stock, members earn 5 miles per dollar spent. A tier bonus is added so that Platinum members earn up to 11 miles per dollar. But note that the corresponding elite bonus of 40, 60, 80 and 120% at the four elite levels is actually lower for tiers 2 to 4 than the current bonus of 25, 100, 100 and 125%!

The maths is hence quickly done: If you use high-value tickets, you perform better – or even much better! – than before. For instance, a base member travelling in Business Class from New York to London earns just above 10,000 miles now, but this can easily become 35,000 miles with the new system. On the other hand, mileage credits at cheap fares would rather be reduced. Reductions can be up to 50%. Although we are not familiar with internal simulations, we would, however, expect that Delta ends up giving out more miles in sum under the new system than under the old system.

The challenge Delta faced here is that this principle cannot be applied to partner airlines (unless Delta issues the corresponding tickets) as revenue data would not be shared, even not with its closest allies. This let no other option to Delta than maintaining a mileage-based accrual structure for its partners, based on the service and booking class as before, although it will use the opportunity to align the mileage credits better to the ticket value on all partners. So the times when you earned 100% on all fares on Air France flights – something Air France stopped in its Flying Blue program several years ago – will soon be gone… On the other side, Delta is working on adjusting its partner agreements in the same sense so that 100% accrual at all Delta fares might still be possible for some time with certain partner FFPs, but are about to be phased out as well. Not yet all partners are fully transparent about this at this point, however.

This means that there will be a dual system for calculating mileage credit on partner airlines: Revenue-based on Delta tickets and mileage-based on other tickets. It is difficult to make a general statement about what is a better option for SkyMiles members going forward, but especially on short-haul flights – where the minimum mileage guarantee under the mileage-based accrual will be abolished -, the revenue-based system seems to yield better results.

As an example, a typical mid-week roundtrip Economy trip on Air France from Paris to Berlin with a 1-night stay booked 14 days out would be booked in a medium Economy fare category (booking class H) at 316 EUR. Issued on an Air France ticket, this roundtrip flight qualifies for 540 miles under the mileage-based scheme for a base member. However, issuing the same ticket as a Delta ticket, this accrual could be increased to 1,950 miles.

Of course, these credits should also be compared to what you could earn in other FFPs: In the case of Air France, where you would get a discounted credit for such a ticket in all partner FFPs, this might be less critical, but there are other partner airlines, on which you still get full mileage at discounted fares with the appropriate FFP, what risks changing the picture.

The question remains how to issue such partner airline flights on Delta tickets: There is basically only the option to book through Delta, but this can only happen over the phone. (United’s MileagePlus members will be in a slightly better position here as selected Star partners can be booked online over the United website.) Just make sure that the option remains viable due to the extra costs of 25 USD for an online phone reservation – but this should still be cheaper than the fees of many online or traditional travel agencies.

So the only general conclusion, which can be taken from all this, is that there is no conclusion: Only a case-by-case contemplation virtually for each flight booking yields the best results. 2015 is hence not necessarily a less rewarding year for SkyMiles members – but a busier one with more calculations to be done.

In any case, it will be interesting to watch how Delta will deal with the predictable issues with customers over the new system. Good luck to explain the mileage computation for an Air France ticket from Rome via Paris to Atlanta, where the second leg is operated by Delta, but only certain pro rata of the whole ticket price leg will be taken into account to calculate the mileage credit for the Delta segment… Do all 90 million SkyMiles members need to take training courses in airline pricing?

I am not joining others in bluntly condemning these changes because they make good business sense for Delta and are actually balanced in a sense that not all customers perform worse. So my focus is more about understanding the opportunities in this new reality and to take the right conclusions out of them. When the world is changing, either you stop and complain. Or you adjust and prosper.