Airline business model transformation begins with customer segmentation

The first reason is that most airlines try to cater to the needs of far too wide an array of customer segments - while satisfying only a small percentage of passengers in each segment.

Second, they have not fully leveraged data to gain insights into passengers' behaviour and their interests.

Third, most airlines do not have systems in place to interact and engage with passengers across the entire travel chain.

So while airlines use an array of channels - the web, mobile technologies, kiosks, ground agents, call centres - to communicate with passengers prior to and after a flight, these channels all but disappear during flights, especially on long-haul routes. How can a passenger engage with the airline once the flight attendant asks them to switch off their mobile devices?

The only way of interfacing with the airline at this stage is through the crew. Yet flight attendants are not equipped with the necessary systems to interact and engage with passengers in ways that are relevant and timely for them.

Airlines are beginning to refine their customer segmentation processes, albeit slowly

US-based carriers Spirit Airlines and Allegiant Air target extremely price sensitive travellers in domestic and regional markets. These passengers are willing to trade off lower fares for less frequent service, in the case of Allegiant Air, or more densely configured aircraft, in the case of Spirit Airlines (178 seats in an A320 vs 150 for a typical legacy airline).

Some full-service network airlines, such as Lufthansa and Cathay Pacific, are targeting higher fare paying passengers travelling in intercontinental markets. Lufthansa has significantly reduced the number of seats in its recently acquired 747-8 "Intercontinental".

While Boeing's largest aircraft can seat 467 passengers in a typical three-class configuration, Lufthansa's aircraft has only 362 seats, including 92 fully lie-flat business class seats as well as eight seats in the spacious first class.

In Cathay's case, the airline is not only improving its premium class products (both business and premium economy), but also aiming for higher frequency and more destinations in intercontinental markets rather than operating very large aircraft.

Singapore Airlines, on the other hand, has decided to meet the needs of different segments through four distinct subsidiaries:

• Singapore mainline for long-haul premium service;
• Silk Air for medium-haul premium service;
• Scoot for long-haul budget service; and
• Tiger (part owned) for budget service in medium-haul markets.

Once a decision is made on which segments to target, the airline can then look at customer needs

Herein lies an even bigger challenge. Initially airlines relied on three standard sources for information: passenger surveys, focus groups and opinion polls. Yet information from such sources was not only limited, but also generally restricted to what customers had done or could supposedly do, as opposed to what they would do. Then came frequent flyer programmes that enabled airlines to gather more transaction-oriented information illustrating the comprehensive travel history of a passenger, including city pairs flown, booking patterns, preferred booking channels, fares paid, seats selected etc.

Although an improvement from focus groups and surveys, data from frequent flyer programmes cannot enable managers to get into the hearts and minds of different passengers and to learn about purchasing behaviour, especially for example understanding the reasoning behind the time-tested practice of tradeoffs (such as brand vs schedule).

Still, some airlines are beginning to expand the reach of their frequent flyer programmes by synthesising data from other internal sources including central reservation systems and passenger management and feedback systems. The key is to shift from developing transactional-based strategies to those based on behaviour.

One way to achieve this is to synthesise the unstructured data available through social media, an incredibly powerful means of understanding ordinary peoples' emotions, lives, concerns, likes and dislikes, and ultimately, purchase patterns. It is a massive improvement on listening to focus groups, which is still a controlled environment even when members are allowed to speak candidly.

Improving the end-to-end travel experience

While airlines are trying to implement new ideas to enhance the passenger experience, they first need to improve the end-to-end travel experience. Virgin America, via its in-flight Gogo Wi-Fi service, is using Twitter to interact and engage with passengers online, which has proven useful in re-accommodating passengers who miss connections. Other airlines have begun to equip their crews with mobile devices, although functionalities so far have focused on operations and cost savings.

The sophisticated deployment of such two-way communication devices in the hands of properly trained and incentivised cabin crews can provide solutions to passengers' problems. It is the availability and strategic deployment of relevant and timely information to relieve passengers' concerns, on a one-on-one basis, that will improve satisfaction and build loyalty, while the sale of a much broader assortment of products and services also raises additional revenues.

The required changes in business models relate not only to the acquisition of new devices and technologies but also to the realignment of processes and organisational structures to mine meaningful and integrated data and design appropriate services. Cabin crews might argue, for example, that new proposed responsibilities relating to in-flight tablets are not covered within pre-negotiated union contracts. They may also claim they neither have the time nor skills to help passengers, for example, make new reservations during times of irregular operations.

These are areas where management must make radical HR-related changes - restructuring departments, redrafting individual roles and responsibilities, providing staff training and implementing incentive schemes, which in turn creates an airline business model that pays more than just lip service to customer-centricity.

Few airlines will admit that they do not place the passenger at the core of all design decisions. But many existing organisational structures, systems and processes are not designed around passengers' needs, which include but are not limited to getting to their destination on time, comfortable economy-class seats on ultra-long-haul flights, transparent fares and timely and relevant information through simple-to-navigate websites. Neither do they address passenger concerns, such as the frustration felt at joining incredibly long queues at airport customer service counters when a flight is delayed or cancelled, or the fear of being stranded at intermediate points or on the tarmac.

Yet being aware of passengers' concerns is only the first challenge; taking action to (a) design systems and processes, and (b) hire, develop and incentivise staff to respond to these concerns is a second challenge.

Can and should an airline 'design like Apple', transforming customers into promoters?

Admittedly, such smart design thinking is a tall order within the airline industry, constrained as it is by government regulations, limited airport facilities and services and union-sanctioned contracts. But that is where visionary leadership and management innovation and conviction come into play. Just like Apple, an airline that manages to implement smart design can develop a breakthrough brand, instead of adopting a conservative "me too" approach. Keep in mind Apple needed to create the iTunes Store to support the sales of iPods.

In designing a new business model, an airline must create integrated synergies across all aspects of airline marketing, operations and communications. Radical changes in design and culture can enable this, most obviously via the thoughtful adoption of social media technology.

Social media is an effective channel for "listening" and responding to customers, exemplified by the experience of KLM. Two years ago, when KLM announced the inauguration date of its service to Miami, a Dutch DJ and filmmaker pointed out that it was a week too late for a DJ festival scheduled to take place in Miami and asked if KLM could begin the service a week earlier.

The carrier responded with a challenge: "Yes, if you can find enough passengers to fill the flight." The DJ identified 150 potential passengers within five hours and the airline changed the inauguration date - despite experiencing the typical constraints faced by other airlines.

This illustrates the power of social media to engage with, listen to and respond to customers. It is also a sign that unless airlines become much more proactive, customers and resourceful technology businesses can and probably will take charge by exploiting the flow and control of information.

Airlines in Transition, Dublin 11/12 April

This article was provided by Prof. Nawal Taneja, a leading
 Business Author and Airline Strategist. He has over 40 years of experience in the airline industry sector, having worked for and advised major airlines and related businesses worldwide. The article also appears in CAPA's Airline Leader, April/May 2013 edition.

Professor Taneja will lead a high level panel on 'Lighting Candles: Innovating to make profits: Big Data, Advanced Analytics, Merchandising/Ancillaries, Social Media' at CAPA's second annual Airlines in Transition conference to be held in Dublin on 11/12 April. The event brings together many CEOs and other leaders from the aviation and IT industry and serves as a platform to discuss strategies that best address the changing customer behaviour and travel industry.