Under the old rewards program paradigm, regular flyers learned that if they remained loyal to one airline and flew enough miles, they would earn what many road warriors say is business travel’s top perk— free first class upgrades.
But for all but the most big-spending corporate customers, that benefit has mostly disappeared. Now, on many airlines, and on popular routes, if business travelers want first class seats, they must buy them.
It turns out, at least according to Delta Air Lines, they’re actually forking over the cash. And with many barred by their employers from using corporate money for business class, first class or even premium economy seats, business travelers often pay out of pocket, Delta President Glen Hauenstein told investors Thursday.
Up-selling customers who once might have sat up front for free is becoming big business for the airline. Speaking on Delta’s fourth quarter earnings call, Hauenstein said the carrier made it easier for travelers to buy upgrades after purchase in mid-2017, and earned an extra nearly $100 million in the first six months it offered the program.
Two Receipts Can Help Road Warriors
If a passenger buys an upgrade on Delta’s website after buying a ticket, the system can generate two receipts — the first for the ticket, which the customer can submit for reimbursement, and the second for the upgrade. By this summer, Hauenstein said, customers will be able to buy post-purchase upgrades not only with cash, but also with miles. That functionality should go live just after Delta introduces premium economy on Europe routes.
Most airlines permit customers to buy up to first class and premium economy after buying a ticket. But except for United Airlines, which has been aggressive on its website and mobile app with up-sells, carriers often require customers to call to make changes, and relatively few customers even know it’s possible. For the average customer, making a purchase on the Web or through an app is easier, and for Delta, that’s driving sales.
“If you think about how that opens the aperture to control your travel experience for people who want to buy those premium products and services, we think that’s going to be key to our ability to drive revenues moving forward,” Hauenstein told investors.
Delta is increasing its up-sell functionality at an opportune time. The airline is replacing older domestic aircraft like the MD88 with modern Airbus A321s with more premium seats, and it would prefer not to give them away for free. This year, Hauenstein said, Delta’s fleet will have 5 percent more premium seats than before.
Today’s up-sell functionality works fine, he said, but in the future, Delta might want to personalize offers to customers. “As we continue to work on our digital evolution, we could see expanding that so that we can actually market to you,” Hauenstein said.
For Delta, Hauenstein said, the goal is to avoid “driving to the bottom” by selling an airline seat as a “commodity.” Instead, it wants to attract “people who are discerning who want to buy premiums and products and services.”
At the Skift Global Forum in New York in September, Delta CEO Ed Bastian said the airline sells about half of its domestic first class seats, up from roughly 15 percent a few years ago. On routes where business travelers want free upgrades most — such as New York to Los Angeles — the paid load factor likely is much higher.
At the forum, Bastian said Delta must try to sell the seats, rather than give them away.
“Any business where you give the majority of your best product away for free doesn’t work,” he said.
Delta’s premium positioning, which began just after it merged with Northwest Airlines a decade ago, continues to pay dividends, with Hauenstein saying the carrier commands a domestic revenue premium of 117 percent over the U.S. airline average.
On Thursday, Delta reported fourth quarter adjusted pre-tax income of $1 billion, after accounting for a December power outage at its Atlanta hub and the effects from Winter Storm Benji. Delta said fallout from the two unexpected problems cost $60 million.
For full-year 2017, Delta earned adjusted pre-tax income of $5.5 billion, $621 million less than in 2016.
While Delta’s business is strong, the airline’s fuel costs are rising. In the fourth quarter, Delta said it paid $349 million more for fuel that during the same period last year, and it expects fuel prices to rise further. For the first quarter, Delta estimates it will pay a net cost between $2.05 and $2.10 for jet fuel, up from $1.93 in the fourth quarter.
Higher fuel costs worry some analysts, but Delta CEO Bastian said he is not concerned, and he doesn’t see fuel prices skyrocketing this year, as they did in 2008.
“As an industry, we have demonstrated our ability to cover higher fuel prices,” he said. “Don’t forget we were profitable with fuel well over $100 a barrel. And I think over the medium term if the new level is at $70, the industry will adjust reasonably quickly.”
With fuel prices unlikely to spike, Delta has reason to be bullish. On the call, Bastian said “demand is the healthiest we’ve seen in years,” with strength not only in the United States, where business has been highly profitable for several years, but also abroad.
In every geographical area, including Latin America, where business has lagged amid economic woes in Argentina and Brazil, Delta reported a revenue uptick in the fourth quarter, year-over-year.
“When you read all the headlines about this synchronized global economic expansion that’s kind of what we’re seeing manifesting itself,” Hauenstein said.