Delta makes a radical change to its frequent-flier program

(CNN) -- Delta Air Lines (DAL) is making a radical change in its frequent-flier program designed to win more business from its biggest-spending customers, including corporate travelers. These "elite" fliers account for just 2% of Delta's customers but generate over 20% of the revenues, numbers typical of the industry.

Delta's gambit, announced at midnight, marks an historic shift: It's the first of the so-called network carriers—large, hub-oriented airlines with international service—in the U.S. to base frequent-flier rewards on the fares its customers pay instead of the miles they travel.

The announcement will affect all classes of travelers. The move from distance to dollars represents a huge benefit to the elites in the form of lots of free tickets. The non-elites who relish flying long-haul on cheap fares, in many cases, will suffer. Delta's major rivals, American (AAL) and United (UAL), will be watching closely to see if Delta lures more big-payers, or if the move mostly irks folks who occupy the back of the plane. If it's the former––a likely outcome––expect its competitors to be strongly tempted to follow Delta's example.

Delta isn't the first airline to de-couple reward dollars spent vs. miles flown. The pioneer was Virgin America, which offered a similar program about eight years ago, followed by JetBlue (JBLU). And Southwest (LUV) made the switch 18 months ago. But for these low-cost carriers, frequent-flier rewards don't carry the same allure—or opportunity to shift lucrative tranches of business—as for the major carriers. So Delta's frequent-flier change is likely to have a much bigger impact.

Here's how the new program will work. Today, Delta fliers fall into four major "elite" categories depending on how many miles a year they fly, and what they spend. A customer in the lowest rung, Silver Medallion, must fly at least 25,000 miles a year and spend a minimum of $2500; reaching Diamond status requires covering 125,000 miles and purchasing $12,500 in tickets.

Those categories, and the ones in between––Gold and Platinum––will remain in place. The new program goes into effect on Jan. 1, 2015, and all flights after that date, even if the tickets are purchased this year, will qualify. The customers in each category will receive a rising level of rewards for every dollar spent, depending on their elite status. If you sign up for Delta SkyMiles, but don't fly or spend enough to rate as elite, you'll receive five times the dollars you spend in miles. That's right, the rewards will still be expressed in miles. "It's the currency accustomed to for many years," says Jeff Robertson, vice president for SkyMiles. But the number of miles you receive will be based entirely on what you pay, not how far you fly.

For that customer who flies twice a year from New York to Los Angeles on a $650 fare, reserved months in advance, it's a downer. Today, he or she would book 5,000 miles. Under the new program, the credit is just 3,250 miles, or the $650 fare multiplied by five.

By contrast, the top elites will reap a big windfall. Say you're a Delta Platinum member, and on Monday your mercurial boss suddenly orders, "Get to that conference in London on Thursday." So you book a flight from JFK to Heathrow in business class for $5,000. Today, you'd get a credit of over 20,000 miles, the round-trip distance across the Atlantic (plus a bonus for being a Platinum member). In the new SkyMiles regime, you'd receive nine times your fare in miles. That's 45,000 miles, more than double what you'd receive today on Delta or any other U.S. major.

The main objective, Robertson explains, is to coax customers who fly most of the time on Delta to go even further on the airline. So if a flight from Newark on United is more convenient, they'll take one that leaves two hours later on Delta to get those fat mileage rewards. Garnering more of that—say, 20% of the business they now give to United or American—could substantially raise profits.

In recent years, Delta has developed a reputation for going first, and making it work––notably by orchestrating the first big merger among the majors with its purchase of Northwest. Delta's out front again on this one. The old question may apply: If it's such a great idea, why didn't another major do it years ago?

Maybe Delta has the right answer: Serving its best customers better makes good business sense.


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