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Are Delta SkyMiles a bubble? The numbers say no.

by on Mon April 22, 2013 • 3 Comments

Delta SkyMilesRespected travel consumer advocate Chris Elliott is out warning today that the next big bubble in our economy is travel loyalty programs, and uses Delta SkyMiles as the case in point of a program about to get much worse.

His point…

Delta has in his view at least 500 billion miles outstanding because it has an outstanding liability of $4.4 billion worth of miles. He believes such a huge number out there thanks to 50,000+ mile credit card bonus offers and the like foreshadows hyperinflation where SkyMiles massively lose their value.

It’s a legitimate concern on the surface, especially after what happened to Hilton this year.

We dug through the numbers in Delta’s annual reports. They don’t dispute the outstanding balance and liability. But they tell a much different story about how that relates to the health of the program.  The numbers are big, but the trends are benign:

Total liability (millions)$4,434$4,549$4,467$4,812
Current year$1,806$1,849$1,690$1,614
Long term$2,628$2,700$2,777$3,198
Miles redeemed (billions)262275264NA
Total awards (millions)111212NA
Avg miles per reward23,81822,91722,000NA
% of miles flown on awards8.0%8.2%8.3%NA
% year over year
Total liability-2.5%1.8%-7.2%NA
Current year-2.3%9.4%4.7%NA
Long term-2.7%-2.8%-13.2%NA
Miles redeemed-4.7%4.2%NANA
Total awards-8.3%0.0%NANA
Avg miles per reward3.9%4.2%NANA
  1. The outstanding balance of miles (in dollars) is pretty constant. If Delta and American Express were running the printing press much faster than they could provide free travel the remaining liability of frequent flyer miles on Delta’s books would start to inflate. It hasn’t. It’s stayed around $4 billion since 2009. Sure, Delta could change the value it ascribes to each mile to make this stay constant (lowering the value even as miles increase), but that belies another fact…
  2. The number of miles redeemed each year is also pretty constant. People are redeeming miles at about the same level each of the last 3 years, about 260 million each year. So they are finding awards that they view as valuable enough to redeem at a similar rate each year. Again, it’s possible they could be at a lower value each year, but not massively so because of another fact…
  3. The current year value of miles expected to be redeemed remains stable. Sure, Delta could be ratcheting down the value it ascribes to miles each year and people could feel more comfortable spending miles each year because they earned more quickly. But the overall value consumers are getting out of the program each year appears to be stable at $1.6 – $1.8 billion. And the average number of miles per award has grown about 4% each year, which may give a sense of the overall inflation, which is modest.
  4. Miles are getting used pretty quickly. Look at that $1.8 billion current year expected mileage liability. That’s 40% of the total liability. Or, in other words, the current stash of miles outstanding could be exhausted in 2.5 years at the current redemption rate. Yes, the ‘long term’ liability includes a bigger breakage factor, so the value per mile there is lower. But people are managing to redeem a substantial portion of the outstanding balance every year.

Yes, we have a vested interest in the miles ecosystem remaining healthy, so you might call our analysis biased.

Does this mean we think you should run out and collect Delta SkyMiles at all costs?

Of course not.

They are among the toughest to extract the exceptional aspirational value for business and first class seats you can find in programs like United MileagePlus or American AAdvantage. But that’s not much new for Delta, it’s been that way for several years and earned them the SkyPesos moniker. Little value from Delta is not new news.

But are SkyMiles like the German Mark in the 1920s? The numbers say no.

The unremarkable  *overall* value today of SkyMiles is probably not going to change a whole lot, unless you’re savvy and exploiting the most extreme values in the program regularly, as you should. What appears to be the case is Delta SkyMiles are losing a modest amount of value – the total number of miles redeemed fell 5% in 2012, while the liability fell about 3% – a touch less, and the average miles per award went up 4%.

So on the margin people may be feeling like they’re getting less value out of the program.

Chris’ advice is sound though – use your miles quickly. If you find a good value to use your miles, by all means take advantage. Your miles aren’t about to become worthless, but changes to award charts are inevitable. Those jackpot rewards are always at risk of getting tightened up to maintain the value of the more run of the mill awards like that roundtrip from New York to Miami.


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3 thoughts on Are Delta SkyMiles a bubble? The numbers say no.

  1. MileCards

    @Mark – Ha – well by his editors at the Post and Nat Geo…and the consumers he helps out of service issues. But among mile gamers not so much…

    @William – Yes the redemption value and the breakage are the missing elements. But the interesting follow up post to this will be to look at the real ‘off balance sheet’ issue – Membership Rewards from Amex. They actually provide a lot of info, including breakage estimates. One interesting thing…their reported liability has gone up in the teens % each year, and expenses faster. At the same time they moved the breakage % fro 9% to 6% over the last 3 years. They also use trailing 12 month redemption patterns to set their cost per point. A big increase in issued points in one year should have a pretty immediate impact on the liability, it’s hard to hide for more than a year or two….people start putting new points to work quickly. And looking at a first glance of the Amex numbers we can see why those transfer bonuses to Delta dried up.

  2. William

    I think your analysis is off because it’s lacking in several key facts that Delta omitts from its 10Ks for competitive reasons and for reasons of not alarming customers who accumulate Skymiles or their other customers (partners who buy miles from them to issue to their customers, like Amex). For instance, how many miles are sold to partners and how many total miles are issued to ticket buyers? Delta doesn’t say, but I would almost assuredly bet that there have been major increases in total miles issued and that they are well above 262 – 275 billion per year.

    This would mean that the balance of unredeemed Skymiles is going up. Why would the associated liability not go up? Because Delta and its accountants are assuming that the value of each mile is going down due to an increase in breakage assumptions (miles that will never be redeemed) combined with an increase in the average miles required per redemption). Not an expert, just a Diamond medallion member and former investment analyst. But I bet I’m right and your conclusion is wrong.


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