Delta Air Lines is selling more upgrades than ever, and a growing number number of those travelers are choosing to pay with their SkyMiles points rather than cash. The carrier is now a half year in to its renewed program selling upgrades for SkyMiles points and more than half a million travelers have chosen the option.
The idea of using points for upgrades is not new in the airline loyalty programs. Delta’s revised approach – treating points more like currency, with dynamic upgrade pricing and nearly universal availability – makes the upgrades more accessible to travelers. And the company is doing a much better job of making sure the travelers are aware of the upgrade option and pricing, further increasing the conversions. It is all part of a plan the carrier has for “continuing to increase the diversity and the ability for people to sit [in the premium cabin],” according to CEO Ed Bastian. “We’re trying to bring more and more ways to get there.”
The ability to create more redemption options is a key factor in improving a reward program and this is just one component of Delta’s progress on that front. The SkyMiles program is attracting new members at a pace double that of three years ago according to President Glen Hauenstein, “and more and more of our members are signing up for the SkyMiles American Express cards. But most importantly, customer satisfaction among our loyalty members is at record levels.”
The credit card sign ups drive loyalty revenue – to the tune of $1.2bn in Q2 – but the customer satisfaction numbers associated with the program are even more impressive for the long term potential. While some have suggested over the years that the loyalty programs are an opportunity for airlines to make up for poor service or performance or other structural problems in the operation, Delta’s numbers suggest a very different motivation for travelers. Participation in the program is augmenting an already positive experience, with more redemptions across a variety of products to keep the consumers engaged and happy. This is not the airline loyalty program of a decade or two ago. The capacity for extending that growth into the future presents great appeal to Delta and American Express.
Premium engagement for loyalty
A half million passengers in the first half of the year represents a half percent of the total travelers the airline carried. It is a relatively small number, but those are travelers choosing to spend additional currency beyond the initial ticket purchase. And they’re part of a growing portion of the customer base that is purchasing premium products from the carrier. Delta reported a 10% increase in premium product revenue – anything other than a Main Cabin or Basic Economy seat – as well as a 3% increase in the paid load factor of those premium cabins.
A higher number of paid tickets for the premium seats could be seen as a negative for the program. After all, Delta advertises complimentary upgrades for its Medallion members as one of the SkyMiles benefits. But the airlines (Delta is not alone with that benefit) have also spent the past few years reducing complimentary upgrades in favor of various paid options. By pushing the dynamic points-paid approach to the fore the carrier is reenabling the idea of loyalty-related upgrades as opposed to only cash-based.
One key to demonstrating the long-term value of the SkyMiles program and these new sales channels will continuing the growth of the redemption. The first month saw 1,000 upgrades daily, growing to 4,000 daily by the end of the first quarter. At a half million over 180 days it seems the numbers may have plateaued somewhat. But it is also still early in the product cycle.
Breaking the commodity cycle
Beyond the loyalty program, Delta hopes that the increase in opportunity to sell premium products helps the carrier to break out of the commodity sales cycle that airlines fell into with the advent of online search technologies. Bastian highlighted not only the potential for attracting more premium customers, but also the ability to keep those customers coming back to the carrier over and over again.
[E]very year, the paid load factors in the premium products get higher and higher and higher, and we continue to drive loyalty into those products and services. So, I think our ability to continue to grow those sectors, I think when you look back and say what was wrong with this industry five or ten years ago as we all thought that it was a race to the bottom and that the only thing that mattered to consumers having all is fare.
What we really figured out when we did a lot of surveys was that for most customers or 60% of the customers, they were choosing on something other than the lowest fare. And then when we dissected that even more that with 60% of customers that’s really 80% of revenue, and we weren’t really geared towards being able to provide value. And that’s the full genesis of this transformation of Delta and its premium products and services; it’s been about providing people what they want to buy.
– Delta CEO Ed Bastian
It remains unclear how large a portion of that up-sell is passengers booking away from Basic Economy versus purchasing actual premium products. But the premium revenue boost – 80% versus the 60% of passengers making the choice – suggests that it is more of the latter than the former, also good news for Delta’s bottom line.
It could prove bad news for the larger GDS platforms if they are slow to adopt the new distribution options from Delta. Bastian noted that only 10-15% of Delta’s ticket sales are handled via OTAs today, half of what it was a decade ago, and the company expects that share shift to continue. “I don’t think we need to put a stake in the ground and say that we won’t sell over those channels. But at the same time, the online agencies are aware that they need to provide a differentiated experience to our customers in order for us to continue to invest in them and have our content on their sites.”
Earnings call transcript excerpts from Seeking Alpha .
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