pbarnette

I appreciate the attempt to delve into the vaguaries of accounting, but your last statement is not really true. For starters, the incremental cost is impacted by the probability of redemption and the expected redemption price, which can be changed by, for example, changes to your award prices or changing the program to reduce the probability of accounts earning enough miles to complete an award.

What you seem to be proposing is that DL reduces the price at which they could sell a mile, but it isn't clear that the changes actually do that. Indeed, to the extent miles are harder to earn by flying, but are just as easy to earn from 3rd parties, you would think that the 3rd party price paid may actually rise. Of course, the changes may reduce DL's future liabilities and increase future earnings by reducing the share of revenue deferred, but that can be readily accomplished in an Incremental Cost Method just as easily. Indeed, it could be done in exactly the same way.

AA, AS, etal. retain pretty much the same flexibility in reducing future costs of their programs and they retain as much the same flexibility in reducing the current liability. There may be some marginal differences in the optimal changes to maximize your reduction in the current liability based upon which method you use, but I doubt any would lead to significantly different competitive responses, especially when considered against the benefit from reduced earnings in future years.

In short, AA, AS, etal. would see financial benefit from overhauling their award charts and reducing earnings rates regardless of which method they use to value their miles.

javabytes

DL promises more awards at tiers 2 and 4 than ever before.

hazelrah

It has been repeatedly reported that Delta has poor award availability. Here's one article for instance.

http://blogs.wsj.com/middleseat/2013...orst-airlines/.

How do any of the 2015 changes fix poor award availability?

DL2SXM

Hows the saying go? Fool me once, shame on you; fool me twice, shame on me.

Don't know about you, but some fancy new award chart with 5 tiers doesn't cut the mustard for me.

HatAndJacket

Right, so the redemption levels are mostly the same - some lower... but I'll be earning half as many miles when I fly?

I hope this works for many people and you enjoy it... not so sure it works for me. I will enjoy the Gold status I earned for 2014, but will not exert myself to earn it again in 2015...

Okay, other airlines, your move. I may not be the biggest HVC, but the $3000-$4000 I spend each year on flights has got to be worth something, right?

DL2SXM

^

It defenitely doesn't pay to be elite with Delta anymore. They have taken away and stripped elite benefits to the bone.

AdamDunn32

It's a technical fix on the backend with inventory management. They aren't going to share intimate inventory details with customers/competitors.

TripleD

I obviously was not clear enough. Let me try again.

Let's compare the systems:

DRM: Use of the Deferred Revenue Method values the miles at what they will buy. When award passengers travel using mileage credits, it has the effect of not only reducing the airline’s FFP liability, but also allows the airline to recognize revenue approximately commensurate with the amount a fare-paying passenger would have paid (because the initial liability was accrued at the then-fair value of air travel). Reduce the value of the miles and you reduce the FFP liability for all miles, but only reduce revenue by the percentage of miles redeemed.

ICM: The Incremental Cost Method recognizes a liability for the marginal cost of providing air transportation to eligible award passengers (i.e. the cost of taxes, fuel, food, etc. to fly one additional passenger on a seat that otherwise would have been empty—generally a nominal amount). Reduce the value of miles and you reduce a number - but a much smaller number. Fair market value is much higher than marginal cost.

I suggest you may wish to read:

[U]Reinforcing the value of frequent flyer miles: How non-flight rewards drive mileage currency and frequent flyer program value.

KPMG. 2008. New accounting rules for airlines’ frequent flyer program liabilities could significantly affect balance sheets. Retrieved from http://web.archive.org/web/201012272...ases/16521.htm
(KPMG, 2008)

http://www.google.com/url?sa=t&rct=j...62577051,d.eW0

(Hofer, 2008)

TripleD

That is simply not true. See the article I cited.

carolinaRN

Now that they are "charging" extra miles for a domestic BE award ticket vs first, what happens if there is a plane change and you end up with a non-BE product? Can you get the difference back?

As for the five tiers, perhaps they are using the Gillette Company business model: http://www.theonion.com/articles/......-blades,11056/.

wanaflyforless

Yes, agreed.

On average Star has made more award seats available for redemption than Skyteam has so until this changes United miles are still more valuable.

cnc2002

It will be difficult to slash the lowest tier awards further--for some there's only one flight available over a 3 or 6 month period. Clearly, it all depends on how hard it is to get the lower two classes.

privacylawyer

as the miles earned are deflated, the percentage of flights/miles per mileage ticket are increased. 45,000 miles is work far more than it was when you could do two r/ts to sin from nyc. now, it's it's 5, if you're lucky.

mileage tickets are inflated, as earning is deflated.

are others not fighting back because it is hopeless, because the fly at top fares or another reason.

am confused.

cnc2002

Until just about every flight has at least one seat at the lowest level, even if way in advance, it won't be like buying tickets with prices increasing as seats are sold and the flight date comes closer. And they'll likely continue to play games like making only one seat available at a time in J so that you won't know when you select your flight whether your partner can join you on the same plane and in the same class at the same rate, or not.

pbarnette

You do realize that the second article has nothing to do with the first, right?

Regardless, you are assuming that there is a large incentive to generate a one-time goose to the P&L from revaluing miles, while ignoring the much, much, much more important issue that doing so requires decreasing the value of the miles that you can sell (oddly, your second article is entirely about how airlines can continue to sell miles in the presence of reduced availability). DL isn't going to cut off the mileage-selling teet.

At the end of the day, it is just a question of timing for the P&L and no airline is incentivized to make any decision that merely moves money between periods if it means hurting their mileage sales. Over the long-term, there is no impact to revenue or expenses from choosing one method over the other.

Put simply: what is DL's incentive to revalue their miles now - in a period where they don't need the P&L boost? I don't think that they are particularly incentivized by the presence of a liability over which they have so much control. Your theory doesn't really seem to stand up.

What I stated is true. The accrual under an incremental cost method is impacted by the probability of redemption. And, over the long-term, AA and AS and WN and B6 have the same incentives to reduce earnings from flying and raise the mileage required for redemption.