Interesting question. Below is what Delta says in their annual 10K filing with the SEC.

My thoughts:

1. There's a huge difference b/w the perceived "value" of an award to a pax and the "cost" to Delta of providing the seat.

2. Delta states that the cost of Skymiles to them is substantially reduced b/c they believe that most members will not be able to redeem their miles for a travel award (in part b/c of restrictions they have in place).

3. Delta states that the liability they record is based on an "incremental" cost that they don't define.

4. Delta says the liability is based on estimated r/t awards outstanding, not miles outstanding. As a result, I'm not sure an accurate calcuation of the cost/mile can be made. If one were to make the extreme assumption that all r/t awards could be obtained for 25k miles (not possible of course), Delta's projected cost/mile is 6/100 of a cent. If the average is 40k miles, the cost/mile is only 4/100 of a cent. And so on.


-----------------------------

"We account for our frequent flyer program obligations by recording a liability for the estimated incremental cost of travel awards we expect to be redeemed. The estimated incremental cost associated with a travel award does not include any contribution to overhead or profit. Such incremental cost is based on our system average cost per passenger for fuel, food and other direct passenger costs. We do not record a liability for mileage earned by participants who have not reached the level to become eligible for a free travel award. We believe this is appropriate because the large majority of these participants are not expected to earn a travel award. We do not record a liability for the expected redemption of miles for non-travel awards since the cost of these awards to us is negligible.

We estimated the potential number of round-trip travel awards outstanding under our frequent flyer program to be 14.3 million, 13.7 million and 13.1 million at December 31, 2003, 2002 and 2001, respectively. Of these travel awards, we expected that approximately 10.4 million, 10.0 million and 9.6 million, respectively, would be redeemed. At December 31, 2003, 2002 and 2001, we had recorded a liability for these awards of $229 million, $228 million and $226 million, respectively. The difference between the round-trip awards outstanding and the awards expected to be redeemed is the estimate, based on historical data, of awards which will (1) never be redeemed; or (2) be redeemed for something other than award travel.

Frequent flyer program participants flew 2.8 million, 2.8 million and 2.4 million award round-trips on Delta in 2003, 2002 and 2001, respectively. These round-trips accounted for approximately 9%, 9% and 8% of the total passenger miles flown for 2003, 2002 and 2001, respectively. We believe that the relatively low percentage of passenger miles flown by SkyMiles members traveling on program awards and the restrictions applied to travel awards minimize the displacement of revenue passengers."