The New Generation Of Ancillaries

Transcript

John Thomas:Thanks, Peter. So you're probably saying, forget the company name. I'll just give you a little bit of background. I was lucky enough from about 2004 to 2014 basically consulting to the US airline industry. And as I like to say, we went from the most unprofitable to the most profitable airline industry in the world. And yeah, people talk about transformation of the airlines, blah, blah, blah, blah, blah. It all came down to ancillaries. Ancillaries basically have become sort of the bedrock of the US airline industry. So as Peter said, I'm actually very passionate about it. And interestingly enough, It was a very fortunate slip talking about passenger experience because I actually think that the heart of ancillaries is all about passenger experience, even though I do have the nickname as the bag man. I did actually was the one who introduced bag fees for full-service carriers in the US. So ancillary revenues, they really do power the financials of the airline industry. Our friends at IDWorks come at about $82 billion in 2017. I've always had a few issues with the IDWorks numbers because the IDWorks numbers include third-party frequent flyer revenues. You strip about $25 billion out for that, so you're looking at about $57 billion for ancillary revenues, about 10% of the global revenue of about $770 billion for the industry. So, I like to— certainly in the US, often more than the profits of the US industry is made up on the $20 billion or so of ancillary revenues that they get. So $57 billion, you may say, wow, that's an incredible number. We must have sort of done all of that and there's not much more to happen. However, I do believe there's a lot more in order to grow the category. There's a lot of opportunity upside in the category. I agree. And the way I think about it is you've sort of— you've got the travel wallet, and there's 2 ways of actually sort of getting more money. The first thing is I can grow my share of the wallet, or I can grow the wallet itself. So what I mean by greater share of the travelling public's wallet, you can get better value. If you provide better value than other operators or other people trying to get to that wallet, you can get a greater share of the wallet. Leverage key strength in distribution. We've talked a lot today about distribution technology. My thinking about distribution is more how do the airlines actually operate as a distributor of product— of travel products. Leverage new technologies and my favourite being the brand halo. Airlines, I think, underestimate the relationship they have with their customers. When you go out and buy a product, there's an inherent— inherent in that is that you trust the supplier. Well, as I like to say, if someone's going to sit in a pressurised vessel at 37,000 feet going at 500 miles an hour, there's a lot of trust there. And I think that airlines don't recognise the amount of trust that their customers have in that brand. And that— and I would suggest that that trust is transferable to how they sell other products than just their own product. And then the other one in terms of growing the size of the travelling wallet, you can go out and just develop new products. And I know that the topic for today was the sort of the next wave of ancillaries. So those 2 opportunities there. But if we step back, the global travel industry is estimated at $2.3 trillion, and the airline industry is clearly sort of a major contributor there, but it only captures about 30— 32% of that overall market. And as we all know, the airline industry is obviously core to the overall travel industry. Importantly, it is the most often— most often it is the first touchpoint in the travel industry value chain. I mean, with all due respect to the hoteliers, very rarely do people go and check hotel availability before they check seat availability. By and large, sort of all the research says people check airline availability and then they book the rest of their travel. The problem is the airline industry historically has done a lousy job in taking advantage of the fact that they're the first point of contact. And the other thing too is that, and I don't know whether this is politically correct in this day and age, but we actually do touch all of our customers directly in product fulfilment. There's a lot of companies out there that sell to people that never really have a direct interaction with them. They have— in order for them to buy our products, they have to come and travel with us. So how do we as an industry leverage this unique position in the overall valued travel chain? So what I would suggest in terms of the next wave of ancillary is to stop thinking like airlines that only sell your own product and more like retailers that make money both on selling their own products and in retail language that would be your home brands as well as all other products in the market. Imagine, I mean, one of the best retailers in the world is Marks Spencer, and they have great home brands. But they don't just sell their own home brands, they go out and sell lots of other brands. So why do we as an industry say that we're only going to sell our own products and really sort of play down everything else? Because guess what? Yeah. If you go back to the whole retail mindset of the fact that you actually have trust with customers, you don't want to abuse that trust. But if you— you can take advantage of that trust by actually selling them a whole raft of other things. And as I say, we as an industry actually only capture 32% of the value chain. Why could we not? We're never going to capture the whole value chain. And our good friends at IATA, I know under Giovanni, did a big study that said you know, WOW is us as the industry because you've got this value chain that generates all this value, but the airline industry is always negative value and all the other parts of the components that have positive value. But how do we actually not just capture the 32% but capture 40%? And that 40— and the difference between 32% and 40% isn't about going out and buying hotel chains and rental car chains and all that, but it's actually the value of us being the distributor of all of those other products out there. So, but it needs to start at the top. What Peter mentioned in my previous introduction was that I had the delight recently to be running Virgin Australia Airlines. And in terms of coming up with a new strategy for Virgin Australia where we knew that we had an amazing brand, We came up with this strategy and it was very deliberate in terms of the strategy that we promulgated throughout the organisation. It was to provide the world's most rewarding travel experiences. And, you know, the world was about the fact that we were already operating at the world's level in terms of best business class and all of that. But we were very particular about rewarding. That was around the fact of we need to make propositions to our customers that were rewarding to the customers. And if they were rewarding to the customers, they would be financially rewarding to us as an entity. And it was more about just selling seats on aircraft. It was about the travel experience. People loved— people love the frontline staff at Virgin Australia because it's a great experience. But it shouldn't just be limited to actually selling people a seat from Sydney to Melbourne. Virgin Australia has a great asset called Virgin Australia Holidays. Mm-hm. And it's minuscule in terms of the size of the overall airline. So again, it was— we started on a journey of actually selling more than just seats. It was about travel experiences. And guess what? If you actually recognise that someone is travelling from Sydney to Ayers Rock more for the fact that there is an experience doing that and you actually cater to that need, Guess what? They'll be happier customers and they'll be more loyal customers because they're saying, guess what? My airline provider is making sure that I've turned that seat on the aircraft into a whole travel experience. But it obviously needs to be part of the face of the airline. And my friends from Allegiant, I was so disappointed. I went to your website this morning and I used to hold Allegiant up as the the best airline website. Because if you used to go to the Allegiant website, it was a travel website. It was all about— it was about the travel experiences. And some— obviously you've done some changes to your website. But I took this screenshot from the EasyJet one where again, rather than with a lot of airline websites, and I think this is pretty consistent through the industry, rental cars, hotels, tours, all of that are always relegated either to the left side the right side or below the actual— to the bottom of the screen. But this in the EasyJet one was again, you know, here it was an offer of £100 off a holiday package. But again it's the fact of actually selling more than just an airline seat but selling it aggressively to customers. And it was interesting, one of the earlier conversations this afternoon about the fact that we know more about our customers. Well, the Michael O'Leary film clip, he knows a lot about his customers, but he only knows about his customers on selling— he did actually say the 15%, I think the 15% off the taxi. But there's so much more that we as an industry should know about our customers. And if we do, we can actually promote to them much more effectively. But as I said before, it all starts with building trust because the retailer is all about trust. I mean, you look in the— you look at sort of the Australian retail market, sort of Myers versus David Jones. To a certain extent, yeah, there's brand, but at the end of the day, it gets down to trust. It's the fact that I can go to a retailer and I trust them to give me the right offering. But part of that trust comes through providing quality value for money. And I'll use an example of buy-on-board. So all LCCs, you know, this was sort of a great opportunity for ancillaries, for LCCs. Let's do a buy-on-board. But the problem with a lot of the buy-on-board products is we've gone for sort of the cheapest, you know, so that we can actually set the price point. So we sort of start off with an perception of the price point and then work out the margin that we've got to make and then by derivation work out how much can we afford to spend on that food, which may not necessarily be a quality product. So question, would your customers rather eat your buy-on-board product in a stress-free zone? Stress-free zone being I've got over the stress of getting through the airport, getting to the gate, getting my bags into the overhead locker, we've taken off, 30 minutes into the flight I've finally relaxed. Work that we— I used to do years ago about how the customer thinks. So 30 minutes after takeoff the customer is relaxed and they're open to opportunities. Buy on board stress-free zone versus them queuing, rushing to consume. Poor Peter yesterday at Sydney Airport, I caught him shovelling in a quick meal before we got on our flight. Next slide. However, what's the quality of your buy-on-board food product versus what the customer can get at the airport? And obviously the airports over the last couple of years have done an amazing job in terms of improving the quality of food. But guess what? That's the reality. You're being compared— your buy-on-board food isn't being compared to other airlines. It's being compared to what can I buy at the airport? And guess what? If you provide a substandard product because you have this view about how much they will spend, and you basically will lose the trust of the customer. And if you've lost the trust of the customer, forget about how much money you've lost on not selling buy-on-board. It'll actually affect you all the way through all of the other things you try and sell them on board the aircraft because basically you've broken the trust. I can use this example because the airline no longer exists, but I did some work for AirTran about a year before they were acquired by Southwest. And I can still remember coming up with an idea on a buy-on-board product, a food buy-on-board for AirTran. And I've forgotten what it was. I've forgotten what the food was, but basically the price point was $20. And I can still remember going to the chief commercial officer and said, look, we've done all this research, $20. and that'll be a great buy-on-board product for you to have. And he just went ballistic. He said, you don't know our customers. $20, our customers couldn't afford $20. You know, went into this tirade about the fact that $20 was not the right price point. He had in his mind $5 for the price point. Well, fortunately, when we did the research of all the customers, we asked them an important question. We said, How much do you actually spend today on buying food at the airport? And they spent on average $25 per person at the airport and they still had to buy their soda and we gave them a free soda. So again, there's a perception because I'm a low-cost carrier I can only afford to charge people $15 for food. It's amazing that people— if people The one thing that came out of all of the ancillary revenue work in the US is that people actually don't mind paying for stuff, but they want to get good value for money. So that's the critical important thing. So as I say, I just used the buy-on-board example as part of this overall retail mindset. Is that— does poor quality onboard cheap food lessen the value of your brand? Because your brand is actually one of the most important assets that you have to actually sell ancillary revenues. And again, just as in retail land anywhere around the world, most retailers have loss leaders. So I know when you sort of do your economic models, you might say, well, in order to do this buy-on-board, we should be getting this type of margin. Well, guess what? It may actually make sense to actually do buy-on-board food at a much lower margin than your other ancillary revenues. Because if you do that and can have a quality product, then you will have— then you'll gain the trust of customers. The other one is new technology. And again, this sort of requires this change in mindset. So new technology should be seen as an enabler to open the travel wallet for your customers. But most airlines treat it as a profit centre. Option A is how most people do Wi-Fi today. Having done a lot of work in Wi-Fi over the years, trying to sell an internet-only product of paying for access, the economics are pretty marginal. However, and it still amazes me that very few airlines actually get this, that the other option is to sell internet connectivity at higher rates for the price-insensitive segment because there are people who will buy the connectivity irrespective of the cost of it. But provide rich commercial offers from your strategic partners to pass— to passengers. That gives better engagement of the customers. It gives you stronger overall value proposition because your customers see, wow, again, the airline is giving me something of value here. It gives you greater loyalty and it leverages the strength as a key distribution channel. And I've got to tell you, time and time again when I've looked at the economics of that, The economics are far more compelling for option B than it is for option A. And again, it's the fact that we've got people captive. Now, you don't want to abuse the fact that you've got them captive, but it's idle time. And in retail land, the best way of selling to people is impulse buy. And guess what? People with idle time on board an aircraft who are captive are most receptive to impulse sales. Right. sales. And it cements your position as a provider of not just simply a good value seat, selling but capturing more value of selling the entire good value travel experience. I mean, I am flying from, say, Ayers Rock to Brisbane or whatever, and 2 hours out, up pops this offer that says, if you haven't got your accommodation in Brisbane, Here's an offer on a hotel. It's 20% off if you buy it on board the aircraft. And as we know, more and more with these millennials now aren't booking their travel— aren't booking their accommodation until they actually get to the destination. So why aren't we as an industry capturing this value? So given airlines should provide the right platform for optimal retailing, some of the actions that we can do to to get greater share of wallet can actually fulfil the second objective which I gave, which was to grow the travelling public's wallet. So take for example, taking the stress out of eating on a trip increases the overall market for F&B-related travel. I mean, if you make eating on board the aircraft a better experience, guess what? Overall food and beverage between airports and airlines goes up. Using on board Wi-Fi to do impulse sales duty-free should increase the overall market for duty-free by making the whole purchase process easier. AirAsia adding 24-hour business-style airport lounges increases the market for business lounges. And then finally, offering a seats product, you know, preferred seating or my favourite premium economy product, grows an overall revenue— an airline's overall revenue base. This is found money. This actually increases the market. in terms of some of these products. So in summary, there's still a lot of growth in the market, but I would contend that it's not about going out and finding the next best sort of ancillary revenue product. It's actually taking what we have today and just doing a much better job in how we actually sell that to the customers. And again, Damian's presentation about about the distribution and retailing. I mean, it's all there. So in terms of where I'd be putting my money as an LCC, it's much more about getting— much more about trying to increase the share of wallet than just going out and finding new products. Thank you. Thank you, John.

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