Airlines must manage a dynamic environment. Technological changes, regulatory revisions, and market developments all affect decision making and the bottom line on a near-daily basis.
The most crucial shift is the evolution from selling an air ticket to selling a travel experience. In an intensely competitive industry like aviation, it is no longer enough to simply provide a means for the Frankfurt businessperson to visit Seoul or for families to come together for a special occasion.
Overcoming the traditional ticket-seller mindset and generating the optimal offer has become essential in an increasingly digital marketplace.
“Airlines have traditionally been in the enviable position of having a product—the air ticket—that is driven by necessity,” says Alan Dunne, Chief Innovation Officer at Datalex. “As airlines continue their evolution into travel retailers, they have started to expand beyond the traditional ancillary products to sell more and more experience-based products.”
Traditional ancillary products comprise such airport services as lounge access, fast track security, or priority boarding and on-board additions, including extra legroom seats, enhanced meal options, and Wi-Fi. But airlines can now go beyond these parameters. Moreover, this is more than simply being an agent for other parts of the supply chain—hotels and hire cars, for example. It might involve specialist pet care or a home-to-home baggage service or anything else that an airline believes might bring value to the travel experience.
In many cases, legacy processes and supporting systems and technology are holding airlines back
“The nature of these products is different, as they are discretionary,” Dunne continues. “There are many aspects involved in making a compelling offer for a discretionary product and the best retailers leverage multiple sources of data to more accurately estimate market demand and optimize offers to provide a competitive advantage.”
Dunne further points out that many airlines are a long way from making a compelling offer with revenue management and pricing systems that have remained broadly unchanged for decades.
Rather than enhance existing frameworks there is a need to unlearn the historical way of doing things.
“It is about re-inventing the business from a customer-centric mindset,” says Eric Leopold, IATA’s Director Transformation, Financial and Distribution Services. “In many cases, legacy processes and supporting systems and technology are holding airlines back. Traditional airlines have added layers of complexity on paper processes.”
A full-service airline may identify a new revenue stream through partnering with a low-cost carrier, for example, interlining on new routes. “But the legacy processes used by the full-service airline may not be compatible with the processes of the low-cost carrier,” Leopold continues. “Or the airline may wish to offer non-air products or to partner with non-air providers. While it may be possible to do this on their websites, it currently is not possible in legacy distribution systems used in the travel agent channel.”
The question is then about what the industry is doing to counter this impasse. To begin with, there are concepts like Dynamic Offer Creation and Interline on Demand. Dynamic Offer Creation enables airlines to personalize offers based on customers’ preferences while Interline on Demand allows airlines to offer interline journeys between carriers using different booking or ticketing processes.
“These new abilities are addressing the legacy processes that were preventing airlines from taking advantage of new revenue streams,” says Leopold.
Then there is New Distribution Capability (NDC). Its ability to enable rich content offerings through any channel is the beginning of digital retail strategies that will see a rapid shift in revenue and profit source for many airlines.
Air Canada is using NDC to distribute its full suite of products so that the end customer can make transparent and informed decisions. This affords Air Canada with more options to robustly compete for business. The Air Canada NDC Application Programming Interface (API) is free and available to all channels and players. While the level of transactions through an NDC API are modest, Air Canada has ambitions to grow its NDC transactions to 20% of bookings by 2020. Meanwhile, Hainan Airlines is using TravelSky’s direct connect distribution platform to connect to agents and any other channel to distribute its air and ancillary products.
$65bn - According to a recent IdeaWorksCompany and CarTrawler report, airline ancillary revenue reached $65 billion worldwide in 2018. European airlines lead the way with $22.5 billion in specialized offerings with Asian carriers second at $18.8 billion
50% - AirAsia has invested heavily in digital services and acquired a 50% stake in online travel planning platform, Vidi (formerly Touristly)
Arguably the biggest breakthrough will be provided by the IATA ONE Order program. ONE Order builds on NDC by combining the offers chosen by the customer into a single order. In other words, all the data elements contained in the electronic ticket, passenger name record (PNR) and electronic miscellaneous document (EMD) will be merged in ONE Order. The customer will have a single reference number for every element of the journey.
The transition away from e-tickets, PNRs and EMDs toward a single customer order will not happen overnight. Over time, however, the elimination of these legacy processes will remove unnecessary costs while delivering a better customer experience.
By 2021, the ONE Order standard will have been tested by several pioneer airlines. Mass rollout is expected to follow, although full adoption of ONE Order is a multi-year, multi-stage process that will engage many participants in the travel value chain.
These initiatives and many others are the first steps will enable airlines to sell the travel experience rather than a ticket.
Moreover, they are the first steps on the march to becoming a digital airline where traditional paper-based processes have been re-imagined to allow all the elements of the travel experience to be brought together digitally.
AirAsia has invested heavily in digital services and acquired a 50% stake in online travel planning platform, Vidi (formerly Touristly), specifically to expand its ancillary portfolio. When airline founder, Tony Fernandes, announced the carrier’s digital vison he anticipated on average $3 extra per passenger from new ancillary income.
Avianca, meanwhile chose Hernán Rincón, a computer scientist, to lead the airline. Rincón was formerly president of Microsoft Latin America. His announced strategy includes a call for rapid digitization.
“These digital airlines will be ready to compete with digital retailers and other digital players,” suggests Leopold. “Because it is clear that the question is not if the airline industry will be disrupted, but when, and how. Airlines need to get ready for major changes.”
Should airlines be retailers?
The answer is clear, according to Yanik Hoyles, IATA’s Director, Industry Distribution Programs.
“If one believes that the airlines which win are those that listen to the customer, then my conclusion is that airlines need to move to the world of retailing… and do it pretty fast!” he exclaims.
Based on research carried out by IATA and other organizations, there are some key and recurring themes in airline customer feedback.
Customers want to see all the features of a product when they shop, and they want to be able to compare “apples with apples”.
They also want to be connected in real time, receive information on the move and are willing to share personal information if they believe they may get a targeted offer in return.
Most people enjoy highly digitized life experiences. In short, customers expect airlines to be retailers. ONE Order and New Distribution Capability (NDC) are gateways to this development.
The Digital Airline vision
A Digital Airline will have
- modernized systems that utilize off-the-shelf retailing solutions
- simplified digital processes for fulfillment and accounting with orders
- access to a greater number of vendors for airline solutions due to simplified entry into the industry
- easier interlining processes across airline business models and other transport modes
- order-based settlement systems accessible by all involved parties
Jeffrey N. Shane: Rebalancing the value chain
The IATA-CFM agreement will do more than make for a healthier maintenance, repair, and overhaul sector writes Jeffrey N. Shane, IATA’s General Counsel.