Fifteen years ago Delta Air Lines filled 92% of its first class domestic seats, but only 6% of passengers were actually paying for the product. Today that number is 75%, a massive shift.
Speaking at the airline’s recent investor day event President Glen Hauenstein called the domestic F product the “biggest loss leader” at the company. “We gave them away based on a based on a frequent flyer system that was based on miles, not dollar spend, he explained, “and so the incentive was to spend as least as possible, fly as long as possible, and get as upgraded as often as possible.” (Welcome to FlyerTalk, Glen! – ed.)
Loss leaders are not necessarily bad. Sometimes it is good to have a product that induces customers to spend more overall. But the premium cabin has evolved into the most profitable segment for Delta. It turns out there was no need to have those seats as a loss leader; simply charging a more reasonable price solved the problem. Hauenstein continued, “What we found is that the customers wanted to buy those products; we had just made them unavailable as an industry. We were charging 13 times more than the average coach seat at the time of booking. So we brought that separation way down. We’ve made them much more affordable. And guess what? When you make something affordable, people want to buy it, and they saw value in it.”
Selling the seats is good for the bottom line. But it also means a significant change in the way loyalty plays out vis a vis the SkyMiles Medallion program.
Lowering the price for the premium seats induces a different type of loyalty. Hauenstein cited a stat of 85% of those premium passengers wanting to travel in that same cabin or above on their next trip. It seems the product is still driving loyalty, but so is the wallet. And when the price is right passengers will simply pay for the on-board experience they want.
But they don’t all start there. Hauenstein sees the SkyMiles program – and its significant revenue from American Express – as a long-term play, even as some components of “loyalty” appear more transactional then ever:
People don’t start in the front; they start in the back. Having best-in-class services in the main cabin, having price points that are accessible in the main cabin [is important], because that’s where you draw people in. And then as you as you look at who they are, and as you see who has the greatest opportunity here to become high lifetime value customers, using that information along the way to encourage them with the right offers at the right time, to get them to do what you want them to do. To get them to download the app. To get them to join SkyMiles. To get them to buy the credit cards. And then use that as your leverage to continue to enhance their journey by bringing on more and more partners and more and more ways to use those miles in the future.
Key to the success of this approach is getting customers into Delta’s data analytics platform, also known as the loyalty program. The carrier tied its complimentary on-board Wi-Fi service to SkyMiles accounts and saw a spike in enrollments. That translated to a rise in credit card signups, just like the carrier hoped it would. Indeed, Delta suggests the incremental signups are enough to offset the OpEx of the IFC offering.
But the carrier also included a chart showing that new signups in the program have slowed in the past year or so.
Even allowing for the lack of a Y-axis, the line suggests the number of new users is growing slower than in the past 7 years. And if that growth slows, will there be enough new members signing up for credit cards to push Delta from its current $7 billion annual AmEx contribution to the $10 billion target?
Earlier this year the carrier reiterated its confidence in the program, claiming about 30% of active SkyMiles members carrying co-branded American Express card, with new acquisitions skewing younger. Perhaps most important, however, the (relatively) recent rejigging of the benefits and costs seems to have not caused a collapse of the program, as Delta says “the overall portfolio portfolio continues to shift to a more premium mix.” People are paying more for the benefits of the card and shifting up the curve to the more premium – and more expensive – cards.
Hauenstein remains confident, despite this apparent slowing of program membership growth, “We’ve made a lot of progress, and a lot of people would say, ‘Oh, well, probably less ahead of you than is behind you.’ And I think the opposite. I think there’s more ahead of us than what’s behind us.”
That could come in the form of an even more premium co-branded card. Hauenstein hinted as a “more aspirational” option than the Reserve that the company is working with AmEx on developing. Or other tweaks to the loyalty program and how that spills over to the travel experience.
But one thing is for sure: Frequent upgrades are not a key feature of the loyalty program the airline wants to see delivered and have not been for years. If you want to sit up front, expect to pay for that pleasure.
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What puzzles me is why Delta thinks anyone who’s not a hub captive would bother chasing status if free upgrades are over. Why spend your money with Delta if the main benefit in exchange for that spending with Delta is gone? Surely not because of Skymiles, and many other benefits can be gotten by having a credit card and flying Delta a whole lot less. Delta’s loathing of engaged loyalty members is why I left them but I suspect other people will do the same as elite status becomes increasingly meaningless.
Upgrades haven’t been a consistent thing in years, but people still chase status. This is not particularly new. Which is not to say that I know why all those people are doing it. But it very much is not for the upgrades.
And that’s the same at American and United, too.
Fair enough. I will say that American upgrades me close to 2/3 of the time on domestic flights as an Executive Platinum but I also tend to fly at less popular times for business travelers.