16 June 2014

Fast tracking merchandising revenue

Jim Davidson, President and CEO, Farelogix and John Thomas, Managing Director and Partner, L.E.K. Consulting examine airline merchandising

It’s hard to find an airline CEO not aware of—and not seeking to leverage—the transformative nature of airline merchandising. After decades of razor thin margins, 2013 witnessed an industry profit of nearly $12.9 billion, largely thanks to ancillary revenues in excess of $42 billion.

In 2014, it is expected that the average revenue per passenger boarded from optional purchases such as priority boarding, preferred seats, Wi-Fi, and more will exceed $7.5 per passenger. With highly lucrative margins of roughly three times that of the typical ticket sale, the business case for airlines of all shapes and sizes to expedite their merchandising strategies has never been clearer.

Ancillaries are not only a boon to airline economics but also an opportunity to enhance the customer experience and airline brand loyalty. Meeting the customer’s demand for greater choice, convenience, and value is the new competitive playing field. The key to meeting this demand is intelligent use of data—from customer demographics and trip purpose, to buying history, real-time trip conditions, and even revenue-managed inventory—to create the most relevant offer, and then deliver it no matter where the traveler happens to be shopping or browsing, even in-flight. Intelligent merchandising is, put simply, engaging with your customer, and acknowledging their specific needs.

Historically, the introduction of ancillaries has been stymied by technology as airlines and their passenger service system (PSS) providers struggled to get airline systems to do something they were never envisioned to do. Few airlines could consider matching Delta’s recent $130 million investment in merchandising IT. Indeed, for many years, airlines limited their merchandising, or held off completely, while waiting for the right technology options to become available (and hoping their competitors did the same). Such a mindset must be consigned to the past.

New Merchandising Capability
The introduction of PSS-agnostic sales and merchandising technologies, in parallel with industry-wide standards initiatives such as IATA’s New Distribution Capability, creates game-changing opportunities for airlines seeking to compete for dollars, loyalty, and brand differentiation in a competitive marketplace.

This new world merchandising is characterized by flexibility, speed-to-market, and cost-efficient IT solutions that can deliver on consumer demands for relevant, personalized, ‘any time, any channel’ engagement.

With modernized merchandising, the airline invests in its own merchandising engine that is centralized by the airline and accessed by all key airline constituents, including marketing, e-commerce, revenue management, and loyalty. This provides a unified system for cross-channel customer engagement and distribution of ancillary products/offers across all outlets via accepted data standards.

As the airline assumes direct control over the creation and standards that govern its ancillary product and service offers, external dependencies and delays are eliminated from the innovation cycle, thus delivering faster speed to market for new product introductions and offer optimization.

In one case study, a major US airline was able to reduce the implementation time for new product offers from the typical 24 months to a matter of months or, in some cases, weeks. Changes to existing offers—modifying the price of seats, or the contents of a service bundle—are now easily accomplished by airline personnel within minutes, without lengthy change requests or costly Statements of Work. This not only drives cost and time savings but, more importantly, enables the airline to quickly introduce, learn from, and refine its product and brand strategy.

Depending on the airline and region, as much as 80% of business is transacted via the travel agency/global distribution system (GDS) channel. By adopting an airline-controlled merchandising solution with a standardized web services API (NDC approach), airlines can expeditiously deliver ancillaries and rich marketing content to this channel using a single XML API. Not only does this multiply the possibilities for ancillary revenue, but also enables significant operational cost savings through elimination of one-off connections to each GDS or outlet.

As early adopter examples, consider Travelport’s integrations to Air Canada, WestJet, and American Airlines using a standardized XML API.

The evolution of merchandising
As compelling as today’s ancillary revenue numbers may be, the industry is actually in the nascent stage of airline merchandising and personalization. Moving forward, the airline capacity to engage with its travelers and innovate accordingly will grow exponentially.

As merchandising evolves, offers become more dynamic and personalized, even leveraging the power of yield management. One major US carrier optimizes priority boarding availability based on the day of the week and time of day to better satisfy high-value corporate clients. This is all seamless to the traveler regardless of channel.

Service bundles are also a growing area of sophistication with the introduction of consumer-driven bundled content such as “pick 3 services out of 5 services for $X.”

The availability of new alternatives for merchandising technology is also driving changes in the area of procurement. With the advent of new solutions for cloud-based, Merchandising-as-a-Service alternatives, often absent of long-term contractual commitments, some airlines are abandoning the traditional, 18-24 month RFP processes in favor of new, faster, and more creative ways to procure technologies for merchandising and distribution.

If you’re seeking to capture the huge value from airline merchandising, the last thing you can afford is a two-year RFP. Clients are encouraged to jump-start that process, in particular if they can try out some of the newer solutions in a matter of months. Pick a channel, pick a pilot or proof of concept, and see what happens! Have a bake-off to test out which solution works for you. We predict you’ll be finished and have a decision before your RFP is even drafted.

The new breed of financial winners in the global airline industry have successfully transformed their economics through ancillary revenue. This financial transformation is open to all airlines irrespective of their own unique value proposition. With technology no longer the limiting factor and the ability to fast-track a solution easier than ever, the only limitation is having the right strategy and the courage to get started.