In American’s most recent earnings call, CEO Doug Parker lamented his airline’s ability to do what Delta does. More specifically he said:
…[Delta is] doing a better job than we can today of making sure this sell-up activity is available to the customers. They have products that are there where people buy, and they’re available in channels that we don’t have it available in yet. So we view that as upside.
Anyone can sell a ticket, and really, anybody can slap on a bag fee. What’s really hard, however, is finding a way to upsell people and have them still like you for it. Delta’s has been leading the charge in this area to the point that other airlines have become jealous.
Some of these upsell opportunities are very visible, like paid upgrades. Delta is now selling about 60 percent of its domestic First Class seats in one form or another. That’s up from 13 percent just a few years ago. Naturally, not everyone loves this. Elites, for example, don’t like that their chances of upgrading for free have dwindled, but they also aren’t abandoning the airline. Instead, they’re probably just paying to upgrade themselves if the price is right. That makes Delta happy.
Upgrades are big money, and the benefit Delta receives by making it easier for people to actually purchase an upgrade has been huge. Since Delta launched the ability to pay for upgrades after ticketing on any seat last year, revenue has exploded. Year-over-year, Delta saw a 19 percent increase in premium revenues on only a 3 percent increase in seats.
But as Delta CEO Ed Bastian said on that airline’s last earnings call, they aren’t done.
That’s what we’re excited about in the future is the ability to control your travel and upgrade however you want to with whatever currency you want to use. So you want to – if your company buys you a coach ticket and you want to sit in the Premium Select cabin, we’ll have an offer for you that would be 17,000 miles for you or it’s a $170 in cash. So those kinds of offers are really where we’re trying to go with all of that in making it simpler to buy or easier to buy and allowing you to buy it however you’d like to pay for it.
Just last week, Delta took that next step by launching upgrades available at any time using miles. The ability to do this on the app will come early next year. On the website, it looks something like this:
But wait, does this even make sense? If Delta is getting a lot of revenue by selling these upgrades, then why would it want to let people use miles for them? It’s because to Delta, miles are money too.
President Glen Hauenstein had this to say on that same earnings call:
So the answer is that clearly it comes through different line items, but the revenue is real whether or not you pay with cash or whether or not you pay with mileage. And that’s one of the things that we’re really excited about is being able to let you do that on your app on the way to the airport. And it doesn’t matter to us how it comes through the P&L because it’s real revenue either way and what we need to do is continue to have your affinity grow there.
Delta makes hundreds of millions of dollars off its mileage program. All those points you earn from your SkyMiles Amex? Delta gets paid. Did you transfer points from Amex to Delta? Delta gets paid. Outside of miles that Delta awards for flying itself, Delta gets paid. The key is just setting the right conversion rate so that Delta becomes indifferent to whether someone uses miles or money.
In that sense, Delta is no different than, say, Capital One. As we’ve all heard Jennifer Garner tell us, you can redeem your points on any airline with no blackout dates. One point is worth one penny of paid airfare. Delta has a formula where miles = cash, and at that conversion rate, Delta is happy either way. In the upgrade offer I posted above, it looks like each point is being valued at 1.075 cents.
For a traveler who prefers to redeem miles the old way, this is frustrating. In a traditional program, mileage redemptions are scarce, but they’re a good value when available. But year after year, the airlines have devalued those points. Now, they’ve been devalued enough where Delta can consider them an additional currency to be used for far more things. The high-value redemption rates will keep disappearing, but there will far more opportunities to redeem miles at a lower valuation going forward. Many travelers are likely to view that step positively.
With the ability to redeem in new ways, Delta has been able to restore some value to its program, but mostly it’s just found a way to extract more miles from people to pay for ancillary services. And remember, for Delta, miles are money in the bank.