Introduction
The growing competition in airline industry has made profit a more fleeting pursuit, particularly during economic crises. To adapt to price hikes, established and startup airlines scale up or down service offerings onboard or on ground. This adjustment could be in restructuring seat offerings, club memberships or onboard or ground amenities. For current purposes, focus is laid on restructuring seat offerings. To "entice" flyers into more mileage spending, major airlines have been engaging customers in a broad range of loyalty programs all aimed at boosting sales of seat offerings in different classes. One most interesting development in seating upgrades is of Delta Airlines. By restructuring her SkyMiles, company's frequent flyer loyalty program, Delta Airlines aims to narrow down price gap between economy and premium classes, including Comfort Plus, First Class and Business (Bachman, 2016). In so doing, Delta Airlines is, in fact, increasing mileages required for an award upgrade but is also making upgrades harder for lower spending flyers who gain fewer mileage points. Put differently, high spending flyers are compensated more by being awarded more perks and amenities, including seating upgrades, compared to lower spending flyers. This upgrade dilemma has broad implications for not only pricing strategies designed for different flyer segmentations but also for how flyers choose how to fly. To better assess current changes in airline loyalty programs, as exemplified by Delta Airlines, a deeper examination of underlying rationales for seating offering upgrades is required. This paper aims, hence, to offer an analysis of loyalty, flying programs in light of recent changes in mileage calculation.
Analysis
Delta's SkyMiles loyalty program represents a marketing strategy adopted by major airlines in recent years in order to boost seating sales and to offset losses incurred by unsold seats in premium classes. If anything, flying loyalty programs are apt to enhance flyer experience and, for that matter, enhance airline's image, particularly for lower-spending flyers whose premium experience is a non-frequent one compared to high-spending flyers. This model of rewarding lower-spending flyers has proven comparatively effective in making lower-spending flyers repeat customers. For high-spending flyers, an award in a premium class is probably an "extra", a complimentary note. The vacant seating in premium classes has remained a major problem for major airlines, particularly U.S. and European ones. If anything, an awarded seat is only a brand enhancement method but is not interpreted into actual boost in sales. Justifiably or not, Delta Airlines has made, as noted, a recent move to narrow down pricing gap between economy-seating and premium-seating areas in order to attract more flyers into buying seats in premium areas. (The new mileage calculator is shown below in Fig. 1.) This strategy appears, however, to reward higher-spending flyers, according to new mileage schemas. The closer examination of underlying rationales uncovers more interesting patterns.
For one, airline industry is one of world's most competitive. Particularly sensitive to fuel hikes, security developments, changing flying habits and, not least, spending patterns across different existing and emerging flyer segments, airlines are under constant pressure to restructure on service offerings in order to remain competitive. The seating upgrade has, in fact, proven successful and effective – until recently. If anything, seating upgrade (in more conventional form before recent changes) is based on a simple rationale: reward lower-spending flyers for more repeats.
(Delta Airlines, n.d.). Fig. 1. Delta Airlines Mileage Comparison Calculator.
This rationale has been able to, admittedly, attract more (low-spending) flyers. However, compared to emerging airlines in GCC – including, most notably, Qatar Airways and Emirates Airlines – and entrepreneurial, luxury carriers in U.S. (e.g. Virgin America) and budget startups in Asia (e.g. Jetstar) , major, global carriers, including Delta Airlines, are becoming under increasing pressure in order to cater for flying needs of both high-spending and low-spending flyers. The common dilemma for seating price hikes is losing low-spending flyers (and hence initiating a negative snowballing effect). Conversely, in adjusting seating prices down (by juggling offered services onboard and/or on ground), airlines risk using more profit in an industry marked by low-profit margins. The dual strategy of offering high quality services at affordable prices, particularly for low-spending flyers, is, accordingly, a strategic necessity for airlines, established and startup in current airline ecosystem.
The step of restructuring SkyMiles program is, accordingly, a necessary evil made by Delta Airlines. To offset potential backlash, Delta Airlines is recommended to advance steadily in her new restructuring schema. This should be implemented by re-appraising current flyer segmentation in light of new developments in changing flying habits, emergence of new flying destinations and, not least, rising competition from emerging airlines in markets beyond conventional ones in which major carriers operate. The strategy Delta Airlines – and, for that matter, similar major U.S. and European carriers – should adopt in restructuring her seating upgrade program is informed, accordingly, by four components: (1) pricing, (2) flyer segmentation, (3) flying habits and (4) competition.
For pricing, Delta Airlines should re-appraise her seating upgrade policy based not only on mileage criterion but also on amenities and perks offered to flyers. Ticket sales remain, admittedly, a major component in airline revenue. However, by better understanding flyer needs (i.e. by more accurate segmentation), Delta Airlines can shift focus from seating sales to comfort. Specifically, by expanding on services offered for flyers (provided more effective segmentation is performed), Delta Airlines can, gradually, rely less on seating sales and more on associated handling and logistic services.
For flyer segmentation, Delta Airlines should perform more accurate flyer segmentation by indentifying or creating new flyer segments. If anything, New Millennials have emerged as a new segment across different industries. Moreover, rising middle classes in emerging economies, particularly in China and India, have further expanded segments flying more frequently. By re-designing service offerings, including seating options, for new flyer segments, Delta Airlines – and major airlines – can expand market share, offset seating sales risks and increase profits. To better identify or create new segments, Delta Airlines should invest more in data analytics platforms and applications well beyond current offerings of flight notifications and online reservation.
For flying habits, Delta Airlines should adapt to changing habits in flying, domestically and/or internationally, as best exhibited by emerging new segments. In response to growing patterns of flying to unconventional destinations (e.g. backcountry and countryside places in developed and developed countries), Delta Airlines can, possibly, add new routes.
For competition, Delta Airlines can develop more strategic partnerships in highly competitive markets, particularly in Asia, and in established markets (currently at risk of market share loss from emerging GCC airlines). In so doing, Delta Airlines can manager pricing competitions in which, entering alone, could pose challenges for profit margins.
Conclusion
The proposed restructuring of Delta's SkyMiles loyalty program reflects a shift in strategic focus from rewarding – for free – lower-spending flyers into more effective utilization of unsold seats in premium classes. This new direction implemented carefully and gradually in order to offset potential brand image loss and market share loss to budget airlines eager to attract dissatisfied lower-paying flyers. Delta Airlines is recommended to focus on four main areas while pacing carefully toward more effective restructuring of her SkyMiles loyalty program: (1) pricing, (2) flyer segmentation, (3) flying habits and (4) competition. By adopting recommendations in each component, Delta Airlines is apt to buffer off, more resiliently, ups and downs in airline industry.
References
Bachman, J. (2016, March 4). Airlines Really Don’t Want to Upgrade People for Free. Bloomberg. Retrieved from http://www.bloomberg.com/
Delta Airlines. (n.d.). Mileage Comparison Calculator [Online image]. Retrieved April 8, 2016 from http://www.delta.com/content/www/en_US/skymiles/2015-skymiles-program.html
