Recently, Delta Air Lines (NYSE:DAL) announced that from the next year it will award miles to passengers not based on the miles they travel but based on the amount they spend on tickets.  This move from Delta comes after Southwest (NYSE:LUV) and JetBlue (NASDAQ:JBLU) changed their frequent flier programs on similar lines in the recent past. We figure this change in Delta’s SkyMiles program will help it better reward its business class fliers, prompting them to remain loyal to it. In turn, a high share of business class travelers in the carrier’s overall passenger traffic will help lift its yield and margins.
We currently have a stock price estimate of $35.95 for Delta, marginally ahead of its current market price.
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This Move Will Reinforce Loyalty From Delta’s Business Class Fliers
Up till now Delta awarded redeemable miles to fliers based on the number of miles they flew with it. Beginning January 1, 2015, the carrier will award miles to passengers based on the amount they spend on their ticket purchases. Therefore, business class fliers who pay much higher fares compared to economy class fliers will be awarded more miles. Under the new program, fliers depending on their elite status will earn between 5 and 13 miles for each dollar spent on ticket purchases. We figure this change in Delta’s frequent flier program will help it retain its existing premium class fliers, as it prepares for greater competition from both United (NYSE:UAL) and a resurgent American.
Business class passengers constitute the bread and butter for network carriers such as Delta, as they face intense competition from low-cost carriers such as Southwest for budget travelers. Higher revenues from business class passengers in turn push up yields and margins at network carriers allowing them to compete with low-cost carriers. Currently, in the domestic US market, Delta earns one of the highest passenger yields (amount collected from passengers per seat for a mile of flight) among all airlines. This change in its frequent flier program will help it retain its leading position in passenger yield.
On the flip side, budget travelers who scout for low fares will likely see fewer free miles coming their way. However, from the airline’s perspective, this step is valid as it rewards customers who contribute greater revenue. Looking ahead, we figure it is highly likely that United and American will also shift to a similar mileage award structure, but till then Delta will gain from this move.Notes:
- Delta introduces 2015 SkyMiles program with new mileage earning structure and more redemption options, February 26 2014, www.delta.com [↩]