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Delta flies toward value-based relationships

Peppers & Rogers found that Delta Airlines hopes a relatively small change in its frequent-flier program will lead to big savings.

The airline industry today is in serious turmoil. One by one, major carriers are filing for Chapter 11 status. Travel is down, costs are up and airlines' cost-cutting measures are making daily business headlines. One area where airlines are trying to tilt the profitability scale in their favor is in their rewards programs. Some, such as American and Continental, offer bonus miles for flying in more expensive segments such as First and Business Class. And JetBlue attempts to migrate customers to a less expensive channel by offering double points for online bookings.

 

Another strategy that is growing popular is to align frequent-flyer miles with customer value, and Delta Air Lines is the most recent airline to adopt the technique. Like many others, Delta has had its share of troubles. The firm reported a 2002 loss of $1.3 billion. And, citing the war in Iraq as the primary culprit, March traffic was down 8.1 percent. Then early this month, CEO Leo Mullin announced he would take a 25-percent pay cut.

Fighting back

To better align the benefits and rewards of its loyalty program with customer revenue and value, Delta recently announced changes to its SkyMiles Medallion program. Rather than the traditional frequent-flyer model that adds up the total miles flown, customers now earn elite status based upon Medallion Qualification Miles, which are calculated by multiplying actual miles flown by a factor based upon the ticket's dollar value.

For instance, customers purchasing deeply-discounted coach fares calculate actual miles flown by a factor of .5. So on a 500-mile segment, they would earn 250 Medallion Qualification Miles. By contrast, customers purchasing a First, BusinessElite or Business Class ticket multiply miles flown by a factor of 2. The net result is that higher-paying customers are rewarded differently than lower-paying customers. Tiers within the program -- Silver, Gold and Platinum -- remain unchanged at 25,000, 50,000 and 100,000 Medallion Qualification Miles, respectively. (The changes don't affect the ability to earn SkyMiles.)

The changes are, in part, the result of customer-segmentation research Delta has been conducting for several years, says Rob Borden, SkyMiles program director. Analysis showed that Delta had a high number of Silver Medallion members in particular markets who purchased deeply-discounted fares and traveled on short-haul trips. Their annual revenue generated was lower than many general SkyMiles members.

In addition, many Gold Medallion members who purchased unrestricted fares for long-haul travel got bumped from the best seats and upgrades by lower-ranked customers savvy about "working the system." While modifications to the Medallion program were planned before Sept. 11, 2001, the ensuing economic crisis made the initiative an imperative. "We wanted to make sure we were rewarding our high-revenue customers during this challenging time," says Borden.

The new guidelines went into effect on Jan. 1, 2003, but Delta already moved up more than 100,000 members who qualified for higher status based on their 2002 travel. "We didn't want to lose any time in rewarding the behaviors that made a bottom-line difference to Delta during its most challenging year on record." Borden projects the overall number of Medallion members will remain relatively unchanged, with slightly more members moving up among the elite levels.

Too early for results

It's too early to share more specific results, given the newness of the program as well as current uncertainty in the airline industry and geo-political arena, Borden says. Delta's plan, however, is to use a variety of metrics to continuously evaluate the changes, including revenue, bookings, customer-satisfaction ratings and customer feedback, which comes through the contact center but is shared across the entire Delta enterprise.

The company also expects that some members will increase travel on higher-revenue fares to maintain their status, says Borden, while others may find lower fares to be more important than their SkyMiles status. "Relationships are dynamic and they imply a partnership that is good for both the customer and the airline," he says. "We want to recognize and reward all of our customers according to the partnership they have with us."


To read more articles like this one, visit Peppers and Rogers Group's Web site at www.1to1.com.

 

All materials copyright 2003 Peppers and Rogers Group - 1:1 Marketing.

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