An airline’s most valuable asset?

According to Jeff Robertson, managing director of Delta’s SkyMiles program, “A strong loyalty program is an airline’s most valuable asset.”

I’ve heard that claim made before. But rarely do airlines walk the walk. The long-term decline in the value of frequent flyer miles suggests that airlines’ true feelings about their mileage programs are ambivalent at best.

But Robertson’s remarks were in the context of a discussion regarding two significant positive changes to the program he manages: The newly launched [% 2520732 | | Pay with Miles %] feature, and the upcoming addition of a third award tier. His philosophy also bears on the likely status of SkyMiles in the event Delta merges with another airline.

It’s common knowledge that rewards programs play an important part in airlines’ marketing efforts, providing a mechanism to cost-effectively recognize and reward good customers.

What’s less well known is the extent to which the programs of major carriers are profit centers unto themselves, generating significant revenue from the sale of frequent flyer miles to program partners—the other airlines, hotels, credit cards, and other companies that award customers with miles in a particular program.

Robertson didn’t provide any data on SkyMiles’ revenue contribution to the company. But it’s estimated that American’s AAdvantage program generates more than $1 billion annually from the sale of miles. Based on Delta’s size relative to American’s, it’s likely that Delta’s revenue from the sale of frequent flyer miles is right around $1 billion.

Clearly it is in Delta’s best interest to preserve the goose that’s laying that billion-dollar egg.

Robertson acknowledges that the lure of SkyMiles has been under pressure, jeopardized by an increasing disconnect between the burgeoning supply of miles and the static availability of award seats. “More and more and more miles are being earned.” At Delta, Robertson elaborated, earnings “are up 25 percent in just three years.” But, he admits, the availability of SkySaver awards has remained “flat.” That translates into rising levels of frustration on the part of SkyMiles members trying to redeem their miles—hardly a loyalty driver.

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Pay with Miles addresses the award availability problem head-on, guaranteeing that miles can be used to secure a ticket, and that the miles have a minimum value of 1 cent apiece.

Robertson also elaborated on plans for a revamped award structure, to be rolled out sometime this summer.

The SkySaver awards will remain as is, allowing SkyMiles members to redeem 25,000 miles for a capacity-controlled domestic coach ticket. But the less restricted SkyChoice awards will be split into two tiers.

Using the current SkyChoice domestic award as an example, Robertson explained that in place of the current 50,000-mile award, there would be a 60,000-mile award which guarantees last-seat availability, and a 40,000-mile award which would stop short of last-seat access but offer better availability than the SkySaver award.

According to Delta’s modeling, the revised award pricing will result in more SkyMiles members redeeming fewer miles since there would be a lower-cost alternative to paying double miles when a SkySaver award isn’t available.

What might be the fate of these loyalty program initiatives in the event that Delta merged with another airline?

Robertson argued that it was in the best interests of Delta and its shareholders, as well as its customers, to retain the best features of both programs. And the implication was clear: Pay with Miles and a more flexible award structure will meet that test.