Europe's big five airline groups embrace disruption via digital innovation; some more than others


Many of Europe's leading airline groups are acknowledging the importance of establishing dedicated incubator and/or accelerator programmes to innovate in digital technology. On 24-Apr-2017 IAG announced that it had invested in two new technology companies - Esplorio and Vchain Tech. These are the first two investments under its Hangar 51 accelerator programme in partnership with L Marks, an innovation specialist and early stage investor.

IAG's investments followed easyJet's announcement earlier this year that its partnership with the incubator Founders Factory had selected two travel startups for its accelerator programme. The Lufthansa Group established its Innovation Hub in 2014 and started a new partnership with Californian startup investor 'Plug and Play' in 2016. While these three groups chose external partners, Ryanair has its inhouse Labs team, set up in 2014. Air France-KLM is alone among Europe's big five airline groups in not having a distinct and dedicated digital incubator/accelerator programme, but it has recognised digital's strategic importance.

Much of the airlines' rhetoric concerning these developments suggests that they are trying to associate themselves with the forces of disruption, but this will take more than rhetoric. CAPA has argued previously that the airline industry has been slow to prepare for disruption, but some are at least making a start.

See related report: Airline disruption: it will happen in the next decade - but no one is preparing for it

IAG's Hangar 51 accelerator received more than 450 applications

In Oct-2016 the Hangar 51 accelerator programme was announced by IAG and its partner L Marks, which was founded in 2012 to facilitate links between large corporates seeking to innovate more quickly and young companies with disruptive technologies, products and services.

In addition to IAG, L Marks has worked with clients such as John Lewis, EDF Energy and BMW.

The programme, which IAG plans to repeat each year, focuses on four areas:

  • Improving airport processes: making customer journeys through the airport easier.
  • Digitising business processes: developing new tools and processes to speed up and simplify the business.
  • Data driven decisions: finding new ways that data can increase customer satisfaction and create business value.
  • Wildcard: any idea that startups believe can improve customer experience.

Hangar 51 received more than 450 applications by its 6-Nov-2016 deadline. After a first screening, IAG selected 26 startups to pitch in Dec-2016, before further reducing the number of candidate companies to five finalists, who then spent ten weeks working with the group at its Heathrow headquarters.

Glenn Morgan, IAG's head of digital transformation, said: "Our finalists offer IAG a wide range of disruptive opportunities that could create next generation travel experiences and transform the aviation industry".

During this ten week period the finalists were able to trial their products globally and receive mentoring from IAG senior management and external mentors. The process ended with a demo day attended by IAG CEO Willie Walsh on 27-Mar-2017, when the five startups presented their accomplishments during their period of working with IAG.

This then led to the selection of Esplorio and Vchain Tech as the first two investments. IAG has not said how much it has invested, but it is understood not to have taken a majority shareholding in either company.

Esplorio records passengers' travel experiences

Esplorio is an app that automatically records passengers' travel experiences based on their social media updates. It tracks routes and favourite destinations and can generate a travel journal with photo album.

At the demo day Esplorio said that it foresaw so many opportunities while being in Hangar 51 that it decided to do four projects, not just one. These included capturing BA crew members' trips as they toured around London and Lisbon, as well as a marketing campaign to promote travel to the UK. It also integrated rich travel content on ba.com, to help drive engagement and increase sales.

Vchain Tech uses blockchain technology in digital identity

Vchain Tech uses blockchain technology to build so called 'SaaS' in the area of digital identity to help airlines share data safely and securely when passengers take connecting flights. 'SaaS' is an acronym for Software as a Service, which typically refers to software stored in the cloud and accessed through the internet, rather than loaded onto a device.

Vchain provided a proof of concept on passport validation that is now live with a small group of customers. The solution is designed to streamline airport processes and the work is aligned to the IATA One Identity vision.

Both will continue to work with IAG

Both Esplorio and Vchain will continue to work with IAG on further product development. Esplorio will provide support to British Airways Executive Club members.

Vchain's key benefit is easier management of customer data, allowing faster passage through airports. Its prototype realises errors in data provided by customers and facilitates online corrections. It will be tested with IAG products, and Vchain is also collaborating with IAG on biometrics.

In addition to Esplorio and VChain, the other three finalists were Resolver, an online resolution service helping consumers and businesses to raise and resolve issues; Warwick Analytics, data scientists who produce automated predictive analytics software; and Undagrid, a tracking solution for unit load devices and customer baggage.

IAG is seeking entrepreneurs that will transform aviation

Through the Hangar 51 programme, IAG is looking for new entrepreneurs that will transform the aviation industry and revolutionise the customer experience through new technology, products and services. It aims to bring "cutting edge digital start-ups into the heart of our business".

Glenn Morgan, IAG's head of digital transformation, said: "We want them to tell us what we don't know". This should help to give IAG access to technologies and new ideas that it would otherwise not encounter, but the challenge will be to make the appropriate ones a successful part of its own operations.

Stephen Scott, IAG's head of global innovation, said "Some of the failings of accelerator programmes in the past has been this step from prototypes to integration because they haven't done the hard yards with the processes first. We feel we've done that", he said.

Mr Scott said the big benefit of investing in startups was getting innovative ideas quickly to market. "Speed to market in corporates has been more challenging over the years because of the highly regulated market we work in, so to be able to construct innovation rather than just have ideas and get it into the market quickly is really important."

EasyJet has a partnership with incubator Founders Factory

The airline industry has been slow to recognise the opportunities and threats arising from digital developments. However, this is starting to change, and other European airlines have also involved themselves in technology incubation.

In Oct-2016 easyJet announced an investment in Founders Factory, an incubator and accelerator founded by Brent Hoberman and Henry Lane Fox, who were both involved in launching the UK travel and leisure website lastminute.com (with Mr Lane Fox's sister Martha) in the dotcom boom of the late 1990s.

Founders Factory also has investment from corporations in other sectors: L'Oréal (cosmetics), Aviva (fintech), Holtzbrinck (education), Guardian Media Group (media) and CSC Group (artificial intelligence). It aims to develop more than 200 early stage technology companies across its six sectors over the next five years.

In the travel sector, easyJet and Founders Factory plan to support the growth of five early stage technology startups and co-create two new travel businesses every year for five years. The airline's Director of Digital & Marketing, James Millett, represents easyJet on the Founders Factory Board of Directors.

Mr Millett said that the airline's partnership with Founders Factory was "all about putting disruptive thinking right at the heart of our digital activities to continue making things easier for customers at all stages of their journey".

First two easyJet/Founders Factory investments: FLIP and LuckyTrip

On 14-Feb-2017 easyJet and Founders Factory announced the first two travel startups, FLIO and Lucky Trip, for their accelerator programme.

FLIO is a global airport app aimed at frequent travellers and currently working with 900 airports. It provides maps, shopping deals, airport tips and departure information to help passengers navigate the airport.

LuckyTrip enables travellers to set their budget and find a unique holiday in just one tap. It suggests somewhere to go, the cheapest flight, accommodation and things to do.

Both Founders Factory and easyJet are providing operational support and advice to FLIO and LuckyTrip.

EasyJet already had a reputation for technological innovation

EasyJet had already developed a reputation for innovation in the area of digital technology in an airline context. It was one of the first airlines to release a dedicated mobile app (in 2011), which now has more than 17 million downloads.

The app originally offered booking and checkin and has added features such as passport scanning, live flight tracking (in collaboration with Flightradar24), mobile boarding passes and Touch ID.

See related report: How easyJet is driving demand

EasyJet has also developed mobile host technology at airports, has helped to develop volcanic ash detection technology, and worked on drone technology for aircraft maintenance.

The investment programme with Founders Factory pushes easyJet's digital strategy further. The airline's CEO Dame Carolyn McCall has said that the partnership puts "disruptive thinking at the centre of our digital strategy". As with IAG's scheme, it aims to connect the airline with "disruptive entrepreneurs".

For their part, the entrepreneurs selected for the scheme will have the opportunity to accelerate their growth through access to easyJet and its 73 million passengers annually.

Brent Hoberman, Co-Founder and Executive Chairman of Founders Factory, sees the scheme as an opportunity to bring together different strands of travel technology, including data, personalisation, virtual reality, artificial intelligence, ecommerce and fintech.

Ryanair Labs: the internal solution

Ryanair has opted for an inhouse solution, albeit one with its own premises and culture away from the airline's main operation. After conceding a head start to easyJet in digital development, the Irish LCC established its Ryanair Labs team in 2014 as part of its 'Always Getting Better' programme.

This led to a redesigned website, Ryanair's own mobile app, growing membership of its customer relationship management scheme, 'My Ryanair', and increased ancillary revenues.

The success of Ryanair Labs lifted ryanair.com to be the number one airline site in the world and made its mobile app the most used airline app in the UK. In Nov-2016 Ryanair raised the proportion of revenue that it aims to generate from ancillaries from 20% to 30%.

In a sign that Ryanair fully understands the importance of retailing in the future of the airline industry, it has previously stated its aim to become the "Amazon of air travel". The evidence suggests that Ryanair has managed to combine the need for a separate, startup culture in its Labs team that fosters innovation, along with retaining full control and ensuring that the benefits go straight to the core operation.

See related report: Ryanair: digital success raises ancillary target to 30% as it becomes the "Amazon of air travel"

Lufthansa has its Innovation Hub

Although LCCs have typically been more nimble in embracing and leading digital disruption, IAG is not the only legacy airline group to have forged links with technology startups.

Lufthansa's digital innovation programme predates IAG's by a couple of years. In 2014 Lufthansa announced that it planned to invest EUR500 million in "innovations" across the group until 2020, through an 'Innovation Hub' established in Berlin near the "start-up and digital technology scene".

Lufthansa Innovation Hub was established to act as an interface between the Lufthansa Group and global travel startups. It also acts as a laboratory for inhouse technological developments.

In May-2016, Lufthansa announced a new partnership between its Innovation Hub and 'Plug and Play', a leading Silicon Valley accelerator and startup investor. This aims to find innovative business models along the entire travel chain that have the potential "to significantly improve tomorrow's travel".

Plug and Play's Travel & Hospitality Programme involves a twelve week mentoring programme supporting 20 to 30 selected startups. The programme brings in other corporate partners alongside Lufthansa, including Carlson Wagonlit Travel, Panasonic Avionics and Michelin Travel & Lifestyle.

Lufthansa's Open API allows flight bookings on third party websites

One interesting development coming from Lufthansa Innovation Hub is the use of Lufthansa Open API (application programming interface), which makes data available to developers, for direct ticket sales. This allows the integration of Lufthansa flight offers into third party sales channels.

For example, an online customer for a concert or other event who requires travel could be offered a relevant flight on Lufthansa, Eurowings or Austrian Airlines. Third parties can link their event calendars to Lufthansa Group airline schedules.

Other projects emerging from the Innovation Hub include AirlineCheckins, an app and website that bundles together the checkins of more than 100 global airlines into a single platform; and Linea, which aims to compensate for when something goes wrong.

Air France-KLM is lagging the other leading European airline groups in its digital innovation strategy

Air France-KLM is alone among Europe's five largest airline groups in not having a distinct and dedicated digital innovation incubator/accelerator programme. Of course, it has people in IT and a specialist Digital team.

The Group's Chief Investment Officer has said that digital technologies are at the heart of its growth strategy, but its Digital team comes under the Group's Marketing, Digital and Communication division.

In Nov-2016, the announcement of Air France-KLM's 'Trust Together' strategic initiative recognised the importance of technological innovation when it said that the group wanted to differentiate itself via investment in digital tools. However, Trust Together did not include anything about a dedicated digital laboratory.

Rather, almost as an addon, it mentioned that its planned new long haul lower cost airline, under the project name Boost, would also play this role. That airline is yet to launch operations, while Europe's four other large airline groups are already pressing ahead with what look like their more concerted approaches to digital strategy.

LCCs were the first to seize digital opportunities

The development of the internet was one of the main catalysts for the development of the LCC model in the mid 1990s. The first digital business to consumer retail platform, the internet provided the opportunity to sell direct to the customer, not only reducing costs, but also giving the potential to develop a more immediate relationship with the customer.

In Europe, low cost airlines such as easyJet and Ryanair were far more responsive than incumbent legacy airlines to the opportunities offered by the internet, and used their first mover advantage to devastating effect (although this was not the only factor in their success).

Legacy airlines responded initially by setting up their own LCCs, but this first wave of legacy owned low fares airlines did not last (think of BA's Go and KLM's Buzz, for example).

Digital innovation must become central to core operations

One of the lessons for legacy airlines was that cost efficiency, operational efficiency and a simpler product needed to become central to their core operations. The same is true of digital innovation and its importance to retaining control over the customer relationship.

Those airlines that are seeking external startups as a source of technological innovation are widening their access to disruptive business models and technologies. They do not have all the skills internally, so must look outside. However, in order to progress sufficiently to meet the challenges they face, they must also internalise the necessary skills.

This requires balancing the focus on external sources with developing an internal culture that can very rapidly adopt the resultant innovations - not an easy balance to strike.

A CAPA report of 20-Apr-2017 cautioned that airlines were not preparing sufficiently for disruption, and were in danger of losing control of this relationship.

The report said: "New (non-aviation) retailers, armed with highly specific data and the skills to exploit it, are about to take on the role of selling end to end travel, of which the airline segment is only one part. Meanwhile airlines are confined to (usually) poorly exploited data about (only) their own customers, and to infighting with intermediaries: GDS companies, OTAs, metasearch, and others".

See related report: Airline disruption: it will happen in the next decade - but no one is preparing for it

This is particularly troubling for legacy airlines, while Europe's leading LCCs continue to have a lead in terms of digital developments and their use in reaching the customer. IAG and Lufthansa Group are showing that they are serious about trying to close the gap.

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