Travel: Airlines Really Don’t Want to Upgrade People for Free (BusinessWeek)

It’s much better to sell most of the cushy seats up front, if possible, according to the carriers’ math

Airline miles junkies typically have one goal for their large mileage balances: Swilling Champagne in first class while jetting across an ocean for free. Only rookies burn miles on such things as rental cars, theater tickets, and magazine subscriptions.

Delta Air Lines, the world’s second-largest carrier, wants to end that mindset and get people treating their miles as a form of currency. Sure, flyers can use points to make those business and first-class tickets more affordable. But this is the beginning of the end for the era of the free ride.

“We want people to be able to use those miles not to fly for free but to control your experience,” says Glen Hauenstein, Delta’s incoming president and architect of the airline’s revenue plans. To do this, Delta plans to adjust the pricing of seats at the front of the plane so more are sold. While Delta currently sells just 57 percent of its first- and business-class cabins, the company said in December that it will boost the figure to 70 percent by 2018. 

“It’s a zero sum game. There are only so many first-class seats on any given flight,” said Tim Winship, a writer and mileage expert at Smarter Travel, a TripAdvisor publication. “And every seat that gets sold is a seat that is not available for an elite upgrade.”

This evolution is the latest step by Delta to wrest its business model from the boom-and-bust economic cycles that have pummeled airlines for decades. Consistent profits are key, and Delta is turning to the front of the plane for some consistency. Still, Delta risks further alienating members of its SkyMiles frequent flier program, many of whom were displeased after the company switched to a dynamic pricing system, which means there are regular changes in how many points one needs to land an award seat. That followed several devaluations by Delta in what points can net travelers.

Delta’s moves are likely to precede similar steps by rivals American Airlines Group and United Continental Holdings, given that Delta’s aggressive efforts to boost revenues have been the industry’s most innovative and imitated.

Spokesmen for American and United declined to discuss premium-cabin sales.

“Historically, the domestic first-class cabin was a loss-leader,” Delta’s Hauenstein said. Most of the industry’s premium seats went unsold on domestic flights and were assigned at the gate, “and there was no real compensation to the airline.” He said the traditional airline upgrade system amounts to “winning a prize” and leaves many customers displeased.

“We were really making nobody happy except the person who won the lottery at the gate,” Hauenstein said. He said the changes have improved customer satisfaction scores among the top tiers of elite SkyMiles members.

Delta has already experimented with narrowing the gap between the price of first-class and economy tickets. Over time, the aim is for that gap to be just enticing enough to get more travelers to take the plunge to a better cabin. The loyalty program changes give big spenders many more miles than they used to earn—as many as 75,000 per ticket at Delta—while those flying on less-expensive tickets earn fewer miles. That means top-spending customers are likely to see their mileage balances grow faster than they had in the past. 

The roots of this plan lie in the airline industry’s goal of greater segmentation of their traveler base: rewarding “high-value customers” with greater perks and amenities while offering less to those who just want the cheapest tickets. At the three large U.S. network airlines, this has resulted in the emergence of the premium economy cabin: somewhere between economy and business class, with greater legroom, better foods, and complimentary alcoholic drinks.

Delta wants to sell half of its Comfort Plus seats, its version of premium economy, by 2018, a sharp rise from the current 36 percent. That will also mean fewer complimentary upgrades to that section of the plane while presenting a new upgrade option for travelers who won’t make it into first class or business class. While selling more premium seats, Delta says it will also add additional seats to its fleet by 2018—1,700 in first class and 6,500 in Comfort Plus.

To be sure, the complimentary upgrade to the front of the plane isn’t likely to vanish entirely on the Big Three U.S. network carriers. Top spenders, celebrities, and certain others are almost always destined for first class, free of charge.