Airlines as a ‘Complete Retailer’: Could the Pandemic Trigger a Real Transformation?
Everyone who works in aviation is told that it is a "cyclical" business. However, in the years up to 2019, there was an unprecedented long run of profits and general good news for aviation. 4.5bn passengers flew on commercial aircraft flights. Over 100,000 commercial flights happened each day. It was hard to see what event or series of events could bring that current cycle off its historic highs.
Along came the pandemic; everything came to a grinding halt.
Economies have started to open up again, and we are starting to see the size and the shape of the future for the airline industry. Forecasts now point to five years before we return to the level of demand that we had in 2019.
Alexandre de Juniac, IATA's Director General believe that there will be a longer recovery period and more pain for the airline industry: IATA believe that global passenger will not return to pre-COVID-19 levels until 2024, a year later than previously projected.
Predictions that passenger traffic will be depressed until 2024 point to a radically different market. Given this, major airlines are now questioning every aspect of their business. The unpredictability of future passenger demand is based on the question being asked by all people who wish to fly: "is flying safe for me to do?"
- The aviation industry experienced unprecedented profits and growth up to 2019, with billions of passengers flying and over 100,000 daily flights, leading to a historic high in the industry cycle.
- The COVID-19 pandemic brought a sudden halt to aviation operations, leading to a significant downturn in passenger demand and revenue for airlines.
- Forecasts suggest that global passenger traffic may not return to pre-pandemic levels until 2024, indicating a prolonged recovery period for the industry.
- Airlines are now reevaluating their business models and seeking new revenue streams beyond traditional seat sales to adapt to the changing market dynamics.
- The concept of "complete retailing" is emerging as a key strategy for airlines to innovate, personalize offerings, and enhance customer engagement across all distribution channels.
- Investment in technologies like IATA's New Distribution Capability (NDC) is seen as crucial for airlines to drive revenue growth, reduce distribution costs, and offer personalized services to passengers in the post-pandemic era.
Industry Recalibration
Lufthansa CEO, Carsten Spohr spoke to this during the airline's Q2 2020 results: "we are convinced that the entire aviation industry must adapt to a new normal. The pandemic offers our industry a unique opportunity to recalibrate: to question the status quo and, instead of striving for growth at any price, to create value in a sustainable and responsible way."
But what about revenue? One thing that is guaranteed is that new revenue streams are urgently needed for all airlines, as passenger growth is flat or negative for the foreseeable future and fares look to remain static - or go downward. The future for revenue growth for airlines both during the pandemic and beyond the pandemic needs to be based on thinking about what airlines can sell beyond the seat.
From a passenger perspective, in the pre-COVID 19 world, one could argue that passengers appreciated a high-quality engagement, tailored personalised content and offers tailored to their needs - and the ability to buy this from their channel of choice. Will this be this different is this in the post-COVID 19 world?
What about the airlines? In the past, airlines saw themselves as sellers of seats. This created a selling model focused around the seat and its associated pricing. The accepted frame of reference was: 'I have this product - a seat on a flight, so how do I sell as much of this product as possible through a set of distribution channels, and how do I maximise my margin by revenue management of the seat inventory'? The problem with this approach was that this 'seat selling' approach led to price-driven competition, commoditising the airline's offering, and making them indistinguishable from the competition.
For airlines, the key to success in a post coronavirus world will be unshackling themselves from their purely operational mindset. The old push-based model that called customers 'passengers' won't suffice. The competitive edge for an airline will come in seeing the world through the customer's eyes, and looking at all the extra information, guidance, and support to help the customer navigate the new world of travel. If one needed proof, the huge pushback and bad PR from airline customers during the pandemic in trying to understand cancellations, refunds and even just getting on repatriation flights showed the real outcomes of having an operational mindset.
Investment in Rebuilding
The question is, can airlines take advantage of this unique opportunity to recalibrate and transform from an operational mindset? The shutdown during COVID highlighted the gaps in many airlines customer service and disruption issues of cancellations, rebookings, and refunds.
The reality is that many airlines have reduced headcount and slashed resources. Unsurprisingly, airlines are only focussing on investments that can deliver in a very short time horizon.
What are the investments that can deliver results? All investment opportunities start with a proper diagnosis of the challenge. Today, the challenge is recalibration and rebuilding. To face this challenge of rebuilding, airlines need to be in a position to become "complete retailers". Being a complete retailer means having the ability to innovate, create customer offers across all channels and roll these out to market in real-time.
NDC - IATA's New Distribution Capability standard - showed that NDC showed potential revenue increase created through complete retailing through personalisation, dynamic offer creation, better content and availability across all channels.
The NDC Value Proposition
Let us look at the value proposition for NDC in airlines. There are two clear areas-revenue and cost benefits.
Airline-Revenue Benefits:
- control of the offer in all channels
- differentiation through product attributes
- upsell through bundling and fare families
- ancillary upsell
- rich content to inspire and drive conversion
- dynamic pricing and personalisation
- increased reach through new sales channels.
Airline-Cost Benefits:
- lower opportunity cost
- new technology at lower cost compared to legacy systems
- cost savings across ticketing, payment, revenue accounting
- back-office automation
- improves revenue integrity (removes costs of fare auditing)
NDC in action
The NDC goal of reduced distribution costs and increased revenue are particularly pertinent as airlines seek to recover. Case studies from the IATA's NDC Leaderboard show impressive results:
- Distribution cost-savings of more than 80% through bypassing the GDS channel
- New choices for customers that were not always available in the GDS channel
- Consistent product and proposition merchandising display among all digital distribution channels
- New propositions including ancillaries like Wi-Fi, lounge access and dining pre-order through NDC channel partners - as opposed to just on their direct channel.
Increasing bookings and increasing ancillary sales are something that all airlines need right now. NDC drives these by ensuring that all customer propositions can delivered across all channels. OpenJaw NDC partners, ANA and Cathay Pacific are seeing real revenue results, while others carriers are claiming a booking increase of 250% and ancillary sales increase of hundreds of percent.
The current travel environment is very dynamic and changing frequently. As regulations are introduced to restart international travel, health and safety products, such as vaccine certification, can more easily be delivered under the airline's control. Indeed, at the very heart of NDC is the capability to innovate through the addition of new customer propositions - at speed, and across all distribution channels.
Adding new health and safety products across all channels creates the exact sort of benefit that NDC was created for - more and better choices for the passengers, revenue and innovation opportunity for the airlines.
NDC: A Trigger for 'The Complete Retailer' Transformation?
In the middle of a pandemic, new revenue streams are urgently needed for all airlines, as passenger growth plummets and fares remain static - or go downward.
The holy grail for any investment case to drive revenues during the pandemic that delivers a fast return-on-investment, that can deliver in a challenging environment, speed up the rollout of new products across all digital channels and will add revenues continually - instead of just being a one-off. This is the summary of the NDC business case: an investment with specific revenue and cost benefits.
For airlines who have yet to embark on such transformations, where should they start their journey, given the business case for NDC is even more robust because of the pandemic?
The first step, paradoxically, is NOT to 'create an NDC project'. This is an incorrect diagnosis of the challenge. The correct articulation of the challenge - and therefore - the best question to start any transformation is this: 'how can our airline become a complete retailer'?
Here at OpenJaw, our NDC customers start with knowing what does their customer want. From this, they can create a comprehensive portfolio of airline and 3rd party ancillaries and customer offering that are directly relevant its customer.
The best place to start this portfolio view is to breakdown the individual components of a booking. Airlines have total ownership of the flight product and this is the highest margin opportunity for complete retailing. Seat selection, bag options, meals and early boarding are all high margin products: when a passenger books a seat, and pays extra to select that seat, the airline is generating a 100% margin on that seat selection. Even when the operational costs for flight-related upsells such as meals and Wi-Fi are factored in, the margin profile is generally in the 80%+ range.
Margins on non-flight ancillaries are important but are lower: hotels, car hire, ground transfers are an important part of the 'second' wallet and have been part of the airline retailing proposition for years. To be fit for purpose post-pandemic, non-flight ancillaries need to personalised, presented to the traveller in the right channel at the right time to not only improve the conversion, but to also improve the margin opportunity.
For COVID-19 nervous passenger, airlines will need more direct customer engagement at the point of sale to help influence travellers to return to the skies. Airlines can include rich content, such as updates on situations in certain destinations, risks and protection measures being taken by the airline, as well as cleaning and hygiene procedures that are being followed. Again, this is a core value proposition of NDC.
Conclusion
We are at the dawn of a new era in travel - one that was not anticipated. The COVID-19 pandemic will end, but changes in consumer preferences and business models will outlast the immediate crisis. As the economic impacts persist, the crisis gives airlines the opportunity to accelerate their transformation to complete retailing capabilities.
Henry Harteveldt, Principle of Atmosphere Research pointed out that the airline industry is really only at the dawn of 'complete retailing' - and this was before the pandemic. In the current and post-pandemic, airlines need a new plan - a 'recalibration' as the Lufthansa CEO calls. The transformation to being a 'Complete Retailer' should be that plan.