Required Reading for Frequent Flyers
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Revenue-Based FFPs
[Aug 2014 Issue]
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What the move to revenue by major frequent flyer programs really means for members


The recent announcements by Delta and United with a move toward a revenue-based frequent flyer program have frequent flyers everywhere reacting to the news. For some, they see the change as devastating. For others, there was barely a sigh. Regardless of where you fall on the spectrum, one thing most can agree on is that the mileage-based frequent flyer program in the U.S. is disappearing.

REACTION FROM FLYERS
We recently conducted a survey of frequent flyers, asking, "What is your gut reaction to a revenue-based frequent flyer program compared to a mileage-based program?" A good majority at 74 percent of those responding chose the response, "Revenue-based makes me feel a bit ill - I don't like it at all." The next most popular response was far below the percentage of the #1 response at 15 percent: "I won't know how I feel until I live with revenue-based for a while."

The survey asked those responding to comment on their answers. One flyer said that his normal mileage per trip will be cut in half; therefore, "it makes flying UAL much less desirable for me." Another says his mileage will be cut 50 to 75 percent, but says that the move is good for the airlines, "... to align their program with their true objective - revenue maximization." While another says, "Pretty much the last straw. I'm sick of the airlines' greediness. I already drive rather than fly much more over the last five years."

Another traveler looks at the changes in a practical way, "It's unbelievable that it's taken this long for the airlines to figure this out. For Elites (if you can get there) it will make being an Elite actually mean something. Corporate travel managers won't like it - an incentive to purchase higher priced fares. For those of us who flew a lot of international flights in coach, the party is over, but it was great while it lasted."

Who Cares?
"Revenue-based frequent flyer miles: who cares?" said Frugal Travel Guy, just days after United made the announcement to a revenue-based earning system for United MileagePlus starting March 1, 2015.

He said, "There are far more lucrative ways to earn frequent flyer miles, or the dollars needed to buy tickets, than flying on airplanes." Frugal Travel Guy is a frequent flyer member who goes out of his way to find ways to earn miles in every possible way, including many the airlines perhaps did not intentionally create as a way to earn miles. He says, "... I can go to the drugstore and grocery store and Wally World and earn the cash to buy tickets if I so choose to on any airline I want."

"Instead of whining about what we have lost by the airlines going to revenue-based earnings, look at the tricks and techniques in place right now that far exceed in value the losses we have sustained in the recent airline changes and devaluations." Especially, he says, it pays to use credit cards to your advantage. "They are the basis of winning the game, plain and simple." You can read more about what Rick, Frugal Travel Guy, has to say here: http://www.insideflyer.com/link/?11563

So, for the Frugal Travel Guy and many who consider themselves Travel Hackers, the new system might not make that much difference to them because they do not use flights as their main mode to earn miles.

The Right Travelers
Gary Leff of View from Wing says one way to look at this move by United and Delta to a revenue-based earning system is, "as a move away from frequent flyer programs as having anything to do with rewarding flying." He says the two programs are, "getting out of the airline business, even if they don?t admit it."

Leff says that the idea that a revenue-based frequent flyer program rewards preferred travelers is not correct. "They aren't 'rewarding the right travelers' at all. They are giving more points for high fares than for low fares. But that doesn't mean they are getting any more business, or making any more money. Expensive tickets aren't always more profitable tickets, and customers buying those tickets may do so independently of receiving miles at all (making the awarding of miles a marketing expense with zero upside)."

He explains that to understand revenue-based mileage earning in the Delta and United programs is to understand that miles are no longer about flying. "An airline not looking to use its frequent flyer program to put butts into airline seats will want a revenue-based program that cuts down on mileage awarded for flying."

Leff notes that Delta and United are not cutting down on the amount members earn through credit card spend, or earning through other partners, so that makes third-party partner transactions relatively more valuable than flying when earning miles.

"The same $25,000 in credit card spend earns 25,000 miles (or more with category bonuses) than before. But it will take two or three times as much spending on tickets to earn the same amount of miles." You can read more about what Leff has to say here: http://www.insideflyer.com/link/?11564

Bottom line? Although Frugal Travel Guy and View from the Wing are coming at this from different perspectives, they both agree that with revenue-based programs, credit card spend is important. And for Delta flyers, U.S. and select international Delta SkyMiles credit card holders will continue to earn up to two additional miles per dollar on Delta purchases with the card after the new earning system is in place.

Who Loses?
The program members who will be the biggest losers in the new revenue-based FFP environment are those who have primarily been earning their miles through discount flights. And according to a recent J.D. Power Airline Loyalty/Rewards Program Satisfaction Report, 85 percent of those responding to the survey said that they earn the majority of their points through flights, and we would guess most of those flyers get the best deal they can on the cost of the flight. So, that's a lot of people.

Another example of how revenue-based earning might have a negative impact on the average frequent flyer comes from flight research website Hopper.com that states that United MileagePlus members will earn on average 11 percent fewer miles flying on the most popular routes while Delta's changes will result in SkyMiles members earning 22 percent fewer miles per flight on the most popular routes. (To read the full report, visit http://www.insideflyer.com/link/?11605 )

"Lucky" of One Mile at a Time says, "For the vast majority of people, this is a negative change." For non-elite members, he explains, the "break even point" on miles is 20 cents per mile. So, looking at 5,000-mile roundtrip itinerary, in the past, you would have earned 5,000 miles. Under the new revenue-based system, you would have to spend $1,000 on that ticket to earn the same 5,000 miles. (To help put Lucky's assessment in perspective, a flight from SFO to JFK is 5,160 miles, and from LAX to JFK it's 4,940 miles.)

The other "big losers" are the gamers who have been milking every weakness of mileage-based frequent flyer programs for years. These people will not disappear. They will simply find new ways to game the system.

Another group likely to lose includes corporate travel departments. They will likely see their business travelers chasing more expensive tickets in order to get more miles. No doubt there are conversations taking place throughout America about how to deal with this scenario.

Every member will lose if you like your frequent flyer programs to be as simple as possible because these new systems add complexity to the FFPs. For example, as Lucky at One Mile at a Time points out, "One challenge with a system based on revenue is just how complex it is. For example, if you book a ticket on United ticket stock (even on partner airlines) you'll earn miles based on revenue, while if you book a ticket on non-United ticket stock for travel on partner airlines, you'll still earn miles based on miles flown."

Lucky says he discovered that United will continue to offer miles based on distance flown at a reduced rate for consolidator tickets. Specialty tickets, including, but not limited to consolidator/bulk, group, tour and other tickets where the fare paid is not disclosed on the ticket, will earn award miles based on a percentage of distance flown and purchased fare class as follows:

Fare Classes United /United Express FlightsMileage Percentage
J, C, D, Z, P, F, A 150%
Y, B, M 100%
E, U, H, Q, V, W 75%
S, T, L, K, G, N 50%


InsideFlyer recently interviewed the heads of SAS EuroBonus and American AAdvantage, and when asked if they could wave a magic wand to change anything about frequent flyer programs in general, both mentioned that they would wish for the programs to not be as complex - with these changes, the programs are going in the wrong direction.

Who Wins
The main reason behind these changes is for the airlines to win. But they are not the only ones who might benefit. If you are a business traveler and your company regularly allows business and first class travel, you will be doing very well under the new system. If you travel from an airport where you generally have to spend more (not from the coast where flights tend to be relatively cheaper), you might do well in the new system, or if you fly shorter flights often that are generally relatively more expensive, you might do well.

The study by Hopper.com says the new United MileagePlus system favors low-mile, high-cost flights with nine out of the top 10 routes with the largest increase in mileage returns being under 85 miles. A flight like Newark to Providence, which could earn 2,000 miles under the new system compared to 320 under the old system is an example - or Palm Springs to Las Vegas and Denver to Grand Junction with increases of over 300 percent.

The Numbers
To help you determine what you will actually earn under the new system at United MileagePlus, the program features a calculator at mileageplusupdates.com. You input the amount spent on a flight and your membership status to see how many miles you'll earn. Non-elite members will earn five miles per dollar; Silver will earn seven, Gold will earn eight, Platinum will earn nine and 1K will earn 11 (these are the same numbers for the Delta SkyMiles program at the same elite status levels).

We searched for a United Airlines roundtrip flight from New York JFK to Houston IAH. The cost was $605 in economy and $1,042 in business. The chart below shows the amount of miles a member will earn based on the class purchased and membership level.

MemberSilverGoldPlatinum
1K
Coach 3,025 4,2354,8405,4456,655
Business5,2107,2948,3369,37811,462

The roundtrip distance between JFK and IAH for the flight was 4,254 miles (with connections). So, in this instance everyone is a winner in the new system except for non-elite members and Silver members who basically get about the same amount of miles.

In the chart below, we look at the amount of miles members earn in the current mileage-based system for a coach flight, including status flight bonuses, compared to the revenue-based system.

MemberSilverGoldPlatinum
1K
Current 4,254 5,317 6,3817,444 8,508
New3,0254,2354,8405,4456,655

We took the same dates as our first search, but flew from JFK to LAX. The cost was $556 in coach and $2,008 in business. The total miles earned in a mileage-based program would be 4,950 miles for a roundtrip flight. In this scenario, the non-elite member gets a rather whopping blow compared to the old mileage-based system, from 4,950 miles to 2,780 miles, a difference of 2,170 miles. You would have to be a Platinum member to earn more miles under the new system, and at that, it's only 54 more miles.

MemberSilverGoldPlatinum
1K
Coach 2,780 3,8924,4485,0046,116
Business10,04014,50616,06418,07222,088

And below, a chart comparing what United MileagePlus members currently get compared to what they will get with a coach flight on United Airlines under the new system.

MemberSilverGoldPlatinum
1K
Current 2,780 6,1877,4258,662 9,900
New4,9505,3176,3817,4448,508

You could make comparisons like this all day and get different outcomes, but this supports the theory that if you live on the coast and have been enjoying discount flights, your membership will take on a very different look when these program changes go into effect.

United MileagePlus reminds members when accessing the mileage calculator, "The mileage calculator is for estimating purposes only. Actual mileage posting will be determined by the actual ticket price, purchased ticket routing, fare class, Premier status, residency and ticket issue date. For tickets purchased in a currency other than U.S. dollars, we will convert the purchase to U.S. dollars and then calculate the number of miles you will earn." So there are quite a few factors that can change the amount of miles you'll actually earn. It's a "dynamic" world we are living in, for better or worse.

The Cap
Both programs have a maximum amount of miles that a frequent flyer will earn on a single itinerary. And as one flyer stated, ?The thing that cracks me up most with "rewarding our best customers" is that those rewards are capped. If you're truly trying to do that, why on God's green earth would you cap the amount of miles you can earn on an expensive ticket?"

Why do Delta and United place a cap on single trip earnings? Both programs max out miles for a single ticket to 75,000 miles. If you are a top elite member, this means that any ticket above $6,818 or so will not give you any additional award miles. If you're a non-elite member, you would have to spend $15,000 on one ticket to max out.

75,000 Award Miles Cap Per Ticket
MemberSilverGoldPlatinum
1K
Max. Cost Per Ticket $15,000 $10,714$9,375$8,333 $6,818


We asked United why they imposed the 75,000-mile cap and Karen May, Public Relations Manager replied, "In our current program, members almost always earn less than 75,000 miles per ticket."
Lucky of One Mile at a Time said, "I think the answer for why Delta and United placed a cap on the amount of award miles members can earn on a ticket - as well as the whole revenue-based question in general - is because they can. I think they don't see any marginal return on their end for awarding over 75,000 miles for a single ticket."

Gary Leff of View from the Wing points out that high-revenue passengers can buy one-way tickets instead of roundtrips to circumvent the cap.

Miles Still Matter
With both new programs, Delta and United members will earn elite based on the current criteria. United MileagePlus members will still earn status based on the mileage flown (starting at 25,000 miles for Silver membership), along with the Premier Qualifying Dollar amount that was introduced Jan. 1, 2014, and announced not long after Delta made a similar change to its program. Premier Qualifying Dollars are necessary to earn elite status for members residing in the U.S. only. This was Delta and United's first foray into a revenue-based frequent flyer program.

Another way that miles still matter is when MileagePlus members fly partner airlines (this does not include co-share partner flights starting with United "016" ticket numbers). For partner airline flights, you will earn miles just as before. You will still need to check that the partner flight will earn miles, but this is potentially a way to earn more miles than flying United.

Flights marketed and ticketed by Delta's partner airlines will earn mileage based on a percentage of distance flown and fare class paid. More details will be announced later this year.

If you read social media, you would get the sense that very many members of these programs intend to spend their miles as soon as possible. Our survey asked: "Regarding your current mileage balances in Delta SkyMiles and/or United MileagePlus, are you: 1) Spending miles as fast as I can; 2) Still saving up miles for my next award as usual." The answer might be a bit surprising because a majority, at 57 percent, say they are saving up their miles as usual.

Spending Miles
One of the biggest questions members of these programs have is how these changes will have an effect on their award redemption. Many are saying that they see this move by the airlines as the airlines' way to decrease the amount of award flights they give away every year. And members report that they believe they will be earning fewer miles, which will make it harder to get enough miles to redeem for an award flight. Seventy-four percent of those in our survey said they believe it will be more difficult to redeem for award flights with the new system.

One flyer responded regarding earning awards with the new system, "It will be much harder to accrue the miles. They need to lower the redemption levels like JetBlue or Southwest." Neither program has made moves toward making flight awards more affordable. United recently upped the cost to redeem miles on partner airline flights but promises new ways to spend miles in the future (no set date has been announced) including using miles to purchase Economy Plus seats on a single flight or Economy Plus or checked-baggage subscriptions.

Delta and United both stopped short of introducing a completely revenue-based frequent flyer program. Other revenue-based programs, like Southwest Rapid Rewards and Virgin America Elevate, are revenue-based when earning and revenue-based when spending their points - the amount of points needed for an award is directly and dynamically related to the actual cost of the flight.

The Way Forward
In this brave new revenue-based FFP world, how should members approach their memberships? Where will the value lie? We asked three experts and you can read their answers in the accompanying piece to this story, "Brave New Revenue-Based World - Tips from the Experts."

Our recent survey included questions about how members believe they will earn most of their miles when the changes come into effect. Both United MileagePlus members and Delta SkyMiles members said they will earn most of their miles through credit card spending: 22 percent of Delta members agreed that credit card spend was the way forward and 36 percent of United members agreed with credit card spend. More United members said they will earn miles through partner airlines than Delta members said they plan to earn miles through partner airlines.

One flyer commented regarding flying Delta, "I won't fly Delta out of hatred for their starting this whole move." Another commented a terse, "Switching to Southwest," which is a rather interesting response when you consider that Southwest Rapid Rewards is a revenue-based program. More than one person said that overall, these changes make them rethink the idea of loyalty and will now just find the cheapest flight they can.

Copycat?
"Monkey see, monkey do," says Milepoint member eponymous coward regarding the post UA Insider, the official voice of MileagePlus on Milepoint, wrote explaining the changes to MileagePlus coming March 1, 2015. And he's not the only one who noticed that the revenue-based moves almost exactly match those of Delta.

InsideFlyer Editor, Randy Petersen, pointed out in his Opening Remarks last month, however - even though the program changes look a lot alike - it's a bit shortsighted to think that United decided make changes based solely on seeing what Delta has announced. No, this move by United has been in the works for a long time. What is apparent however, is that United sees Delta as an airline worth emulating.

Unfortunately for United, the airline is coming up short compared to Delta in service and products and this is one aspect that is irking frequent flyers. At least with Delta, they feel they are somewhat getting their money's worth.

Responding to UA Insider on Milepoint, member Black Cloud says, "Changing the frequent flyer program will result in exactly zero change in purchasing behavior (from me). You're going to continue to lose an increasing amount of my business until you can demonstrate some degree of operational reliability and you show some degree of customer service. I'm not asking for 747s to operate DEN - ORD in an all first class configuration with caviar and lobsters stuffed with tacos. I'm asking you to deliver on the product you're selling me. And when you don't - I expect your front line employees to have the tools and the ability to make it right."

Gary Leff had this to say about copycat behavior and the opportunity presented by the new American Airlines: "The US Airways-American Airlines merger presents a window of opportunity for flyers - focused on integrating two airlines - we shouldn't expect them to follow United and Delta for a year and a half, during which time they'll evaluate the effects of their competitors' changes. Defect to American now, enjoy a better program in the interim, all while showing the world's largest airline that it can do better by going its own way rather than following Delta down this path."

Final Word
If you mostly earn miles through shopping and credit card spend, these changes will not affect your participation in these programs much at all. The changes are focused on earning miles when taking flights.

Our survey included questions regarding if those responding had been surprised by Delta and United's announcements toward a more revenue-based program. For both Delta and United, flyers responded that they were not surprised: 40 percent of Delta SkyMiles members were not surprised while 50 percent of United MileagePlus members were not surprised. And when asked if they feel that American AAdvantage will follow, a resounding 80 percent said yes. Comments about the adoption of a revenue-based FFP model by American included, "It's inevitable", "I hope not. I'm thinking of switching to AA if they don't change", and "The majors always copy each other and it is much better for the business. It should have been that way from the beginning. We will get used to it."

"We will get used to it" indeed. Whenever there are changes to frequent flyer programs, we always come back to the thought that these programs were born out of the imagination of a marketing department. Those involved had no idea at the time that what they were creating would someday be more valuable than the airline itself. They certainly did not think through the idea of a mile flown vs. a point based on the revenue of the flight. There were road warriors in the early 1980s just as there are road warriors now. New members of frequent flyer programs just signing up will only know the programs as they are now. The rest of us will adjust and find the value where we can. Whether or not these changes will prove to be the right decision for the airlines is yet to be seen, but because of the complexity of making the change, we don't see Delta or United reversing their decision.

Our question to United about how their members have reacted to the changes received the following answer from United's Karen May, "Reaction has been mixed, with some members saying they'll have opportunities to earn more miles under the new structure."

We agree with this statement about the changes from Lucky at One Mile at a Time: "This isn't "doom and gloom," and is more another evolution of our hobby, in my opinion. At the end of the day, this game is about maximizing current opportunities and staying one step ahead!"


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