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AIRLINE BUSINESS: Ten years ago, now, and ten years from now

Airline Leader

BASED on the content of my last column, The Airline Retailing Revolution: Best and Next Practices, some readers asked if I could put that in the broader context of the expected changes in the airline business in the next ten years. One way to do that is to take a quick look at where the airline industry was ten years ago, where it is now, and then project where it might be ten years from now. I will restrict my comments to some areas that I consider to be tipping points.

Summary
  • Low-cost carriers have increased their capacity share from 20% to 30% in the past ten years and are projected to reach 50% in the next ten years.
  • Major restructuring and consolidation have occurred in the US airline industry, with further consolidation expected globally.
  • IATA has made significant progress in transforming airline distribution processes through initiatives like New Distribution Capability (NDC).
  • Middle East-based superconnectors have experienced substantial growth, with new China-based superconnectors emerging.
  • Ancillary revenue has grown from $10 billion to an expected $100 billion, with a shift towards offering price-service options and guarantees.
  • Digital marketing and direct distribution strategies are becoming more prevalent, with airlines adapting to changing consumer behaviors and targeting specific customer segments.

Ten years ago ----

1. Low cost carriers worldwide had a capacity share of just under 20%.

2. Major restructuring within the US airline industry had just started with the announcement that Delta and Northwest planned to merge.

3. IATA had successfully completed its game-changing electronic ticketing programme.

4. The three Middle East-based superconnectors were growing fast. Just as one indicator, Dubai International Airport was handling just under 40 million passengers per year, representing itself in the categories of such airports as Amsterdam, Bangkok, Hong Kong, Houston and Singapore.

5. Ancillary revenue of the airline industry was probably in the range of USD10 billion, with most of it in the hands of low cost airlines, such as Allegiant in the US and Ryanair in Europe. Ancillary revenue as a percentage of total revenue was about 5% at the industry level, with a wide variation among carriers.

6. Most airlines, with the exception of some low cost carriers, sold their tickets mostly through the indirect channels.

7. Mobile search, let alone booking activity, was minimal given that the Apple iPhone had only come out a year earlier, in 2007.

8. Social media was just emerging. If one were to look into the percentage of people who used some type of social media, what would the number be? 10%? Consider, for example, Twitter (launched in 2006), one of the three major channels, the other two being Facebook and LinkedIn. Based on the information available in the media, there were less than 10 million Twitter users per month and the messages transmitted text only.

9. Digital marketing activities within the airline industry were minimal. Airlines were still promoting their services through the regular media channels - print and TV, for example. Content was there, but it was delivered within the contexts of "push" marketing, with messages going out to all customers.

10. The Uber concept did not exist in 2008. The business was founded in 2009 and the service and the mobile app were launched in 2011 in San Francisco. Although the concept of Airbnb was developed around 2008, operations did not begin until 2011.

11. WAYMO, a self-driving car business, and a subsidiary of Google's parent company, had not yet been formed. It was formed a year later, in 2009.

12. In 2008, there was no discussion of the development of a small hybrid electric aircraft to operate in regional markets or the development of a small commercial supersonic aircraft. Both, Zunum Aero and Boom Supersonic, were formed in 2014.

Now, ten years later ----

1. Low cost carriers worldwide have a capacity share of about 30%.

2. The airline industry in the US has gone through a major restructuring process with the mergers between United and Continental (2010) and between American and USAir (2015).

3. IATA has already made enormous progress in moving forward its New Distribution Capability initiative that is enabling airlines to totally change their distribution processes.

4. The three Middle East-based superconnectors have achieved enormous growth. Just as one indicator, the Dubai International Airport, which handled just under 40 million passengers in 2008, handled just under 90 million passenger in 2017, overtaking London, Heathrow and Los Angeles, and becoming the world's busiest airport in terms of international passengers making connections.

5. Ancillary revenue is expected to approach USD100 billion with major carriers now participating in the stream. It represents about 10% of total revenue at the industry level, with substantial variation at the carrier level.

6. Leading carriers in the US and in Europe are pushing ahead with their strategies to distribute their products directly to consumers, facilitated in part by IATA's NDC initiative.

7. Web search activity is more on mobile devices than on desktop computers. However, the higher level of activity on mobile devices relates only to search. Majority of consumers still book through their desktops.

8. Social media has become a major force. What would now be the number of people who use social media? 80%? Again, according to information available online, there are more than 300 million Twitter users per month. The size of the message has increased (from 140 to 280 characters). It is now possible to attach images and videos to messages. The number of social channels has increased, now to include the likes of Instagram, SnapChat, YouTube and WhatsApp.

9. Digital marketing is now the buzzword with initiatives to adapt to changing consumer behaviours, as consumers are increasingly shopping online. Airlines are now beginning to consider delivering content within the framework of "pull" marketing and aimed at targeted customers. Content is also moving away from text and more toward images and videos.

10. In 2018, it is reported that the

market capitalisation of Uber exceeded USD70 billion. The number of countries where Uber has service appears to be approaching 100. After transforming the taxi sector with its ride-sharing service, Uber announced in 2017 that it planned to experiment with flying taxis in Dubai and Dallas, with service beginning in 2020. Airbnb is totally transforming the hospitality sector and the airline sector is beginning to feel some pressure too.

11. The self-driving car is almost here. In the middle of 2018, there was discussion of Google starting a paid ride-sharing system using the self-driving car.

12. Zunum Aero, backed by Boeing Horizon X and JetBlue Technology Ventures, is planning to fly its prototype aircraft by 2020 with the aircraft in commercial service in 2022. Boom Technology is planning to introduce in 2023 its 55-seater supersonic aircraft, capable of flying at a speed of Mach 2.2 with a range of 4,500 nautical miles.

Ten years from now ---- a scenario

1. Low cost carriers worldwide could have a capacity share approaching 50%, especially from their expansion in international markets. Think about IndiGo Airlines, based in India. Its fleet, about 170 aircraft now, expands to over 500. It could most likely be serving numerous international markets, including destinations in Europe and all over Asia. JetBlue, Ryanair or easyJet could be offering trans-Atlantic services. AirAsia, Singapore's Scoot and Qantas' Jetstar could be offering trans-Pacific services.

2. The airline industry worldwide would have gone through another restructuring with further consolidation, both in Europe and the US.

3. IATA has initiated numerous ways to simplify the airline business. Two game-changing examples are the success of its ONE Order and one ID initiatives. The ONE Order relates to the concept of a single Customer Order record that replaces the multiple and rigid booking, ticketing and payment methods. The one ID initiative makes the process more efficient for passengers and more effective for governments.

4. Not only have the superconnectors continued to grow during the last ten years, but new China-based superconnectors have emerged to take advantage of the changing air-traffic patterns around the world.

5. Although ancillary revenue had continued to increase at a reasonable pace, the big change relates to the types of price-service options provided. For example, for a fee, say X% of the fare, a traveller is provided a guaranteed arrival within Y hours of the scheduled time.

6. A significant portion of the air travel business would still be handled by third party distributors but there would be new breeds of travel marketers who handle the total mobility needs of different categories of customers. They will use specifically designed platforms that are solution centric and experience centric.

7. Web search activity would now be almost completely on personalised mobile devices and through AI-enabled digital assistants. WiFi will be literally everywhere. It will be very fast and very reliable. 5-G networks will become available around the world. Bookings will now be made through mobile phones as the process would have become much easier, relating, for example, to price comparisons, provision of information and the check-out process. There will also be greater security relating to websites.

8. Social media now will have new channels and each one, using new technologies, would develop new ways of learning about its audience and ways of monetising that audience. The new channels will have mastered the use of some technologies (specifically AI, machine learning, augmented reality and virtual reality) to show specifically curated content in each social ad for each individual.

9. Digital marketing, a buzzword in 2018, will be enabling travel service providers to really adapt to changing consumer behaviours. The new travel marketers will now be making access to relevant content easy, fast and in real time. Consumers will be able to interact with the content and engage with content providers on a one-to-one basis to customise the experience in the end-to-end journey. In other words, digital marketing now adapts to the digital lives of individuals.

10. Mobility-as-a-Service will have gone from an idea to new forms of service. Urban transportation, for example, will be available via Uber flying taxis.

11. Driverless cars would have totally changed transportation in short haul markets, reducing, for example, the number of short haul flights connecting to other short haul flights with connections at major hubs, helping to reduce congestion at major hubs. Furthermore, hybrid electric airplanes would be offering nonstop services in thin markets with ranges up to 700 miles.

12. 50 seater supersonic airplanes would be flying across the Atlantic and the Pacific. They would have started to divert a noticeable amount of the premium traffic from the conventional fleet of full service airlines.

According to this perspective and the scenario, whereas changes in the last ten years might have been evolutionary, changes in the next ten years will be revolutionary, facilitated by the phenomenal growth of low cost carriers and the commercialisation of exponential technologies, including the introductions of new forms of ground and air transportation. These technologies will enable airlines and travel service marketers, the new distributors, to create significantly new value propositions for existing and new customers. It is important to keep in mind that it is the combination of the commercialisation of technologies and the emergence of new travel marketers, the new distributors.

One question: If ten years from now, low cost carriers are providing 50% of the capacity, and new forms of ground and air transportation have taken away a large part of the business in short haul markets, and supersonic transport has begun to divert a noticeable part of the premium passenger traffic, what is the outlook for large full service airlines that existed ten years ago? Here is one scenario: While the low cost carriers would have achieved a capacity share approaching 50%, the successful ones would have merged into or evolved into full service carriers. The full service carriers will, of course, be still be around but there will be fewer of them. On the other hand, while they would be fewer in number, they would be larger in size! That implies more consolidation. However, the remaining full service carriers would be more innovative in creating and delivering value, for example, through platforms to rebuild their customer bases by providing personalised solutions to meet travellers' total mobility needs.