Why Google doesn’t need to sell air fares. It’s all about data. Facebook will be next
Airlines may be global businesses in many ways, as well as exhibiting cutting edge technology in areas like mobile phone check-in at airports and offering user-friendly websites for buying air tickets (along with a host of other "ancillary" items like hotels and car rental). But, when it comes to making use of the enormously rich data that they receive from the world's top 10% slice of spenders, the airlines are positively living in a Neolithic ecology. They are simply unable to extract and match the fabulously valuable information about passengers that they receive by the millions of items every day.
Google, by contrast, is well-able to do so. That's why the company is so interested in getting into the travel business, now reportedly about to spend USD700 million to buy ITA Software, a leading airline travel software company that collects airline schedules and price details.
The airlines are sitting on a mountain of under-utilised data gold
The airlines' shortcomings are largely the result of investing in "silo" type systems designed to run the various key functions that they need for their own purposes. Until recent years they have taken for granted just how valuable personal information has become - especially of the more privileged portion of the world's citizens who can afford to travel.
They typically have a different system for example to run their reservations (which are designed specifically to help speed the process of booking and selling, rather than capturing data for other purposes) and their frequent flyer programmes (how rich are they with information on premium travellers, the world's richest people!).
And Google knows
But just ask Google or Amazon, or Facebook, or odd little Twitter how valuable a pastime it is to capture data on personal spending habits. Twitter users have a profile that includes salary levels averaging around USD80,000. These people are valuable!
Personal data collection has become the future strategy for these socially oriented networks. And they have few problems about up to date technology being able to capture all of the relevant data in ways which can be stored and manipulated.
So it was only a matter of time before one of these big operators moved in on the rich data vein. Google is bigger than any airline in terms of revenue, and vastly bigger in terms of profit.
The search engine's operating income in 4Q2009 was USD2.48 billion, or 37% of revenues. Funnily enough that is almost identical to projected profit for the entire world's legacy airlines in 2010 - and that figure has been recently revised upwards to get that level. And no-one in the airline business would be silly enough even to dream of a 37% return. The airlines' long term average return is less than a tenth of that.
Mining the data…
CEO, Eric Schmidt, said yesterday that Google planned to use the acquisition to "build new flight search tools that focus on end-users." He was quite explicit that the company has no plans to sell airline tickets. Companies like Orbitz and Expedia, who were apparently under-bidders for ITA, along with global distribution system (GDS), Travelport can be expected to challenge the deal with anit-trust regulators, as they potentially stand to lose the most. Orbitz and Expedia rely on data from ITA and similar companies to feed their product.
While building the search tools, which can be guaranteed to be user friendly and attract vast numbers of users, Google will not be making the same mistakes as the airlines. They will be capturing the host of rich information that allows supplementary marketing of other products.
Ancillary revenues? You ain't seen nothing yet
Over the past couple of years, US airlines in particular have profited from their ability to sell additional, "non-ticket" data to their passengers - so called ancillary revenues. Most of this revenue has come from charging for bags to be placed in their holds. This, along with other sources of revenue, will generate as much as an additional USD70 billion for the airlines this year. That is about 12% of global gross.
To illustrate how relatively steam-driven this revenue collection activity is, Southwest, the world's model for low cost airlines, does not even have a booking system that allows it to charge for bags - so it proudly doesn't charge.
But, using a system that is actually established with data mining as a key priority, and melded with their existing massive databases, Google and friends will be able to milk the airlines' passengers (in the nicest possible ways) for a whole lot more than a few billion dollars. If they are not able to swamp that USD70 billion figure in a very short time, they will undoubtedly be disappointed. They won't be doing anything as pedestrian as charging to carry bags, they'll be selling them the bags - along with the rest of their household needs.
The other big data collectors like Facebook and twitter will be close behind Google in this endeavour, watched with awe by the airline GDSs, concerned that their patch will be next.
Meanwhile the airlines, the source of all this wealth, will be scrabbling around trying to earn enough to pay off all the debt they are carrying so they can buy more big shiny flying machines.