GRALISTAIR

OMG - go to the UK for 3 days - on my way back to USA. Currently in T3 at MAN (a sucky terminal IMHO BTW) to go MAN-AMS-DTW-IND- and in that time this thread has grown out of all proportion and yet according to NWA/Deltaflygirl - it is all horse manure. 78 pages of horse manure - wow.

sbjnyc

Delta sells LUT fares because they have to. It costs them $1.10 to fly you for every $1.00 you spend on a ticket, so their margins are nonexistant. Just 86% of their total revenues come from flying us around: 3% is from cargo and the rest is from other items such as SCs, bag/change fees and the excess of what they sell miles to Amex et al for in excess of what DL values them. That's 11% of Delta's total revenue. Dishing out cheapo skymiles is what's keeping delta in the black. I assume its because most people use miles poorly, like a drunk playing blackjack.

"SkyMiles program mileage credits can be redeemed for air travel on Delta and participating airlines, for membership in our Delta Sky Clubs® and for other program participant awards. Mileage credits are subject to certain transfer restrictions and travel awards are subject to capacity-controlled seating. In 2011, program members redeemed more than 275 billion miles in the SkyMiles program for 12 million award redemptions. During this period, 8.2% of revenue miles flown on Delta were from award travel."

That's less than 25k per award. Must be PWM since DL values miles at ~half a cent I believe. Delta simply couldn't be profitable if everyone redeemed miles like FTers. And that is almost surely why they want a revenue based redemption model. With a $4.5 billion skymile liability and assuming a half cent valuation, that's 900 billion skymiles floating around. Still, it just seems to me that if DL could sell more LUT fares and redeem fewer award tickets, they would.

On the other hand, here's something else to consider - AMEX isn't going anywhere anytime soon. I don't see DL doing anything to screw around with Amex cardholders, either. The tl;dr version is that AMEX and DL are together for another 3 years at least and AMEX has an option to extend it by a year.

NOTE 6. AMERICAN EXPRESS RELATIONSHIP
General. Our agreements with American Express provide for joint marketing, grant certain benefits to Delta-American Express co-branded credit card holders ("Cardholders") and American Express Membership Rewards Program participants, and allow American Express to market to our customer database. Cardholders earn mileage credits for making purchases on their co-branded cards, may check their first bag for free on every Delta flight and enjoy other benefits while traveling with Delta. Additionally, participants in the American Express Membership Rewards program may exchange their points for mileage credits under the SkyMiles Program. As a result, we sell mileage credits at agreed upon rates to American Express for provision to their customers under the co-brand credit card program and the Membership Rewards program.

Advance Purchase of SkyMiles. In 2008, we entered into a multi-year extension of our American Express agreements and received $1.0 billion from American Express for an advance purchase of SkyMiles (the "prepayment"). The 2008 agreement provided that our obligations with respect to the advance purchase would be satisfied as American Express uses the purchased miles over a specified future period (“SkyMiles Usage Period”), rather than by cash payments from us to American Express. Due to the SkyMiles Usage Period and other restrictions placed upon American Express regarding the timing and use of the SkyMiles, we classified the $1.0 billion we received, the prepayment, as long-term debt.

In 2010, we amended our 2008 American Express agreement. The amendments, among other things, (1) provide that Cardholders may check their first bag for free on every Delta flight through June 2013 ("Baggage Fee Waiver Period"), (2) changed the SkyMiles Usage Period to a three-year period beginning in the December 2011 quarter from a two-year period beginning in December 2010 quarter, and (3) gave American Express the option to extend our agreements with them for one year.

During the SkyMiles Usage Period, which commenced during the December 2011 quarter, American Express will draw down on the prepayment instead of paying cash to Delta for SkyMiles used. As of December 31, 2011, $952 million of the original $1.0 billion debt (or prepayment) remained, including $333 million which is classified in current maturities of long-term debt and capital leases. As SkyMiles are used by American Express, we recognize the two separate revenue components of these SkyMiles consistent with our accounting policy discussed in Note 1. We defer revenue related to the portion of the mileage credits redeemable for future travel and recognize it as passenger revenue when miles are redeemed and services are provided. The value of the marketing component is determined under the residual method and recognized as other revenue as related marketing services are provided.

Annual Sale of SkyMiles. In December 2011, we further amended our American Express agreements and sold American Express $675 million of SkyMiles. Under the December 2011 amendment, we anticipate American Express will make additional purchases of $675 million of SkyMiles in each of 2012, 2013, and 2014. The December 2011 amendment also extends the Baggage Fee Waiver Period. The SkyMiles purchased pursuant to the December 2011 amendment may be used immediately by American Express. The usage of these SkyMiles is not restricted in any way. These annual purchases of SkyMiles will be recorded as deferred revenue within current liabilities. The portion of each purchase of SkyMiles related to mileage credits redeemable for future travel will be classified within frequent flyer deferred revenue and the portion related to the marketing component will be classified within other accrued liabilities.

The December 2011 amendment does not change the number of miles that we expect American Express to purchase from us over the next four years. It only impacts the timing of those purchases. The December 2011 amendment did not make any significant changes to the deliverables (the mileage credits sold and the marketing component). Therefore, it is not a material modification of the American Express agreements under the accounting guidance. A future material modification of the American Express agreements could impact our deferral rate or cause an adjustment to our deferred revenue balance, which could materially impact our future financial results. For additional information, see "Frequent Flyer Program" in Note 1.

bubbashow

2. History (SOS) - I can only hope that they have some memory of the previous iteration where they cramped upgrades and bent MQM towards revenue. Those moves kicked off the SOS fight and DL ended up with a series of painful reversals. Moreover CO tried to move EQM towards revenue factors and despite some work-arounds they still ended up reversing the change. Seems they got a pile of negative feedback from their bus travelers.

Would never happen now. Landscape is so totally different. TO where are ATL flyers going to go? WN?...and a revenue-based program all around.

DLdweeb

So we have one faction that says LUT flyers are a boil on DL's butt, and another that says they are more valuable than elites. I wonder which is true?

Dovster

Let's not forget that while ATL is the biggest airport in the States, most of those flying into or out of it are connecting -- Atlanta is not a big enough city to keep Delta going by itself.

DLdweeb

Listen, DL can and will do what it wants to the SM program. My main issue right now is if they are going to materially change 1) the way miles are earned, 2) the way elite status is achieved, or 3) the way miles can be redeemed, they should do it with plenty of notice so people can react accordingly. To not do so is extremely unfair......

AUDirt

A lot of what you said are ideas that have crossed my mind, too.

But if this move is motivated by DL's desire to lessen their SkyMiles liability, why did they so recently get rid of SkyMiles expiration?

mother-

This is exactly the kind of erroneous logic I'm talking about.

If it costs them $1.10 to fly you for every $1 you spend, then at most it cost them an extra $0.99 to have you on the flights vs it going out with that seat empty. Having you on the flight makes them more money than not having you on the flight.

This is very simple stuff, it just isn't how most competitive markets work.

avidflyer

Individual seat profitability is completely irrelevant. The blended and aggregated profitability is what matters to the flight as a whole. If they can charge one person the entire cost of the flight then they could let everyone else fly for free and just collect bag fees/drink money from them as the "profit".

People continue to apply this "They are losing money on LUT fares" logic and it just shows a lack of understanding for how this works. If you are selling a house the only thing that matters is the total price you get for the house. If you sell the kitchen for $1.1M and each of the other rooms for $1 (and like an airplane, you HAVE to sell the whole thing) that is all that matters. The rest is marketing spin.

mother-

Basically. The only important caveat here is that since they can't get one person to do that, the average fare they can charge is keyed to the demand for the flight. Once the demand allows them to fill the plane at prices above the average total cost the flight becomes profitable...

Dovster

The implied statement in what you posted is that if the demand is low, they charge higher prices per seat. Of course, just the opposite is true. Indeed, the more that an airline is going to lose on a flight, the more apt it is to charge higher prices per seat in order to get back a larger part of its cost.

I think that the basic error you are making is in applying a correct rule of thumb to an incorrect situation. Delta doesn't have to make a profit on a particular flight -- it does have to make it on each route.

Hence, there are fully packed TLV-JFK flights in May in which the least expensive available seat is going for over $4000 and much more open flights in which you can get a seat for closer to $1000.

n301dp

Unfair is the incorrect term. Disingenuous is better, or "flies in the face of Richard's desk speech"

Sez_Who

Happen to agree with you but while it may be "extremely unfair," I have no expectation of fairness from DL. Indeed, I don't even expect courtesy from them. My only expectation is that they will do whatever they do -- whenever they want to do it -- and only then can we decide to accept it, whine about it, or go somewhere else. Until that happens, this is all about....

IF

mother-

Not what I'm saying. They would have to charge a higher price to make a profit but they would be unable to.

To the rest of your post- there are many many odd things about the airline business that cause odd outcomes like focusing on route vs flight profitability.

sbjnyc

Maybe I didn't make myself clear or maybe you didn't get what I said. Delta runs an operating deficit (passenger revenue less cost) becuase almost 1 seat in 5 flies empty (passenger load is 82%). They actually net about 1.6 cents per passenger mile for filled seats, so if they sold every empty seat even as an E fare, they'd make money. But if they did that there'd be no reason to have a skymiles program. So the bottom line is that Delta wants to sell more cash tickets, regardless of the fare bucket. But they can't afford to fill a plane with low fares since their operating cost is about 14cpm per seat, no matter what's in it. I don't know if you can extrapolate this cost to specific routes, though this is to address both your points regarding marginal revenues. They can't fill a plane with award/low cost fares and be profitable, but they can if they fill empty seats with LUT/E fares. They can only do this if they have a reliable source of fliers to fill those seats (ie the weekly road warrior). Delta can't afford to chase them away but that thinking might be route specific (ie someone buying a cheap fare on a popular route isn't as valuable as someone buying a cheap fare on a route that often flies 70% full).

On the other hand, the skymiles program and their partnership with AMEX makes them a ton of cash. A ballpark estimate from the numbers I posted is a skymiles redemption value of 0.9 cpm. If they sell in bulk to AMEX at 2cpm (just guessing), then thats a huge lift to their bottom line.