White Paper Launch: IFE/Connectivity Market And Ancillary Trends In The Asia Pacific Market

Transcript

Dr Alexander Grous:Hi everybody, good afternoon. Appreciate the very warm welcome and the very nice music. At the LSE, we don't kind of get that, such nice music when we enter a room, so very glad to be here. Yeah, I'm Alexander Grous from the Department of Media and Communications. We've been working in this space with my team for 7 to 10 years now, looking at consumer traveller behaviour. There's a broad spectrum of areas that we cover, but we've been looking at this space in particular, and then we had some sponsorship to do some specific research, 3 chapters to do basically, as we're calling them, and the 3 chapters are quantifying demand for broadband connectivity on board for the airlines and for the industry, And the second chapter, which we're about to launch in the new year, is also looking at the operational efficiencies and how broadband can be adopted for operational efficiencies by the airlines and the supply chain. And then the third one is loyalty. And again, the last 10 years of work that we've done on passengers is culminating in what does loyalty actually mean today, how do you quantify it, And what drivers in a very fast-moving world between LCC, you know, full-service carriers, low cost, what does it actually mean today? You know, does loyalty, is the concept of loyalty even relevant? So what I'd like to do today is just take you through a bit of a whirlwind results from the first report that we did, which is Quantifying Broadband. And we've done that globally. It's the result of 12 months' worth of work. And what we've got is also a regional focus, so I've split out some of the Asia-Pacific results to show you what, what those mean. And as I mentioned on the slide there, this is the first of the 3 reports, so we'll do a fairly, fairly quick tour. Just stepping back for a minute, the most important aspect of this opportunity is it is very significant in size, but very importantly, It's not one of those things that it just sits and happens. Airlines have to be very active partners. And just to put into context, this report that we've done, there's a lot of primary and secondary research we've done over the last 7 years. That's engagement with airlines, potential suppliers we've spoken to, and we know them from the industry, from our digital world. And just for a bit of praising from the, the glory of the LSE, the LSE is ranked again this year as the number 1 global media department from any university. And the reason we take pride in that is we do very applied research work. So we're very plugged into a lot of major brands, major corporates, and companies that are very engaged in digital. So we've brought that in. And the bottom line is this is a very significant multibillion-dollar opportunity by 2035, looking at a 20-year time horizon. Stepping back again at the highest level. And I'll go some of this in detail in a minute. But roughly the opportunity globally splits between 50/50, roughly, between $15 billion we think will come from broadband-enabled connected revenue and the other $15 billion from 3 other categories which I'll come to in a minute. And just to set the scene what this means and the modeling approach that we've taken is The global opportunity, and that's the ecosystem of suppliers and what it means to the airline, we've estimated at about $130 billion over the next, in 20 years' time. What that means is the airline component globally, we've estimated at roughly about the $30 billion, and the other $100 billion comes from the supply chain. And if you think about that, for example, if you go onto a website where you're on Amazon or others who are reselling, what the supply opportunity is, that some of that comes in to supply the airlines, they keep a margin, and the supplier gets something. So that supply ecosystem is very important to quantify because of the suppliers we also speak to and work with. There is a very significant opportunity. So in other words, for every $30 billion you create for the airlines, there's a $100 billion industry out there supplying that partly as a cost of sale, partly as engagement. And just to set the scene for the work that went into this, as I said, it's primary research, secondary research, forecast, IATA data, the stuff that you probably heard a billion times, 7.2 billion subscribers or passengers by 2035. Asia, around half of that. It's the biggest growth market. And also when we did all of this, what we did is we modelled all this and there's about 16,000 lines of code that we bring into the socioeconomic modeling that we're very strong at at the LSE. And by that I mean the results that I'll take you through take account of region by region. What are the demand drivers? You know, for example, Asia, very heterogeneous market compared to some other markets. You've got some spikes of very conspicuous consumption in some markets, high income propensity right next to a large market where you have people that travel, migrant population that comes into other regions to travel, goes back out. Leisure, business travel. It's quite a complicated market, but it's not a very flat market. It's a very varied market, but the opportunities are quite significant. So again, the question that we're asking or that we get asked is, you know, why now? So when we looked at this area, and we've been looking at it for a while, there are 3 factors that really are resulting in a step change This is coming both from the airlines speaking to us and also from our engagement in the industry. And the 3 factors that are actually making this revenue opportunity possible are the first one is that everybody's going digital. Some of the presentations I've been to earlier here and elsewhere this morning had headlines like, you know, Ryanair is looking to be a $2 billion digital player, you know. O'Leary wants to tackle that market. Other airlines are investing heavily. And it's quite interesting. There's a slight contradiction here. Some of the airlines are investing but not necessarily having the right ecosystem yet. So as we just heard from the API discussion, there are still a lot of challenges. But the interesting thing is the groundswell of movement as we track the industry over the last sort of 4 years has been taking a quantum leap every year. So the first one is not only is the world going digital, but the airlines are starting to get it. There's a digital propensity there for people to do things and the airlines are shifting more towards it. And again, the headlines I've seen all over the last 24 hours at sort of these shows are all about that journey. New technology. This would not be possible if the new satellite technology isn't what it is today. So new satellites going up are actually offering connectivity that is truly global, black spots diminished or gone, high data throughput, secure in terms of a data rate. So that in itself and offering high bandwidth is actually making the step change. Otherwise, we'd be talking about a more fringe industry where you're still paying for connectivity, But what you're getting is a very buffered result and black spots everywhere. So the key enabler here is that technology is changing in the sky, and that is what's making the next generation possible. And then passenger demand. Again, one of the things I think we bring very strongly to the table is our understanding. And the loyalty report we'll do in the, probably halfway through next year, is all about the passengers and the work we've done. understanding what drives demand. But again, putting that to one side, connected passengers, that's the reality. You only have to look around the room at how much of your life you run with your phone. People's terrestrial expectations are very strong when you get on board a plane. And by the way, there's room for everybody. There's those that, you know, we've built in freemium models where you're going to give some of it away as data. You're going to get other passengers to pay for some of the higher bandwidth. The point is, if you're smart as an operator, the market we've monetized covers right down to it's free. Actually, truly free, it's not quite truly free if you look at the caveats that some of the carriers impose. But it serves a very strong purpose and there are different parts of the market to monetize. So what we've looked at and we've seen that today, still traditionally, you know, 90%, and it's higher than that, of the traditional broadband revenue is coming from connectivity. America is the market that's still very strong in this. Europe is coming up. Asia is now starting to experiment with onboard connectivity. But the message really about this is that right now the market is still fixated on people getting connected on a plane. That's the overwhelming current mindset before we move to— Connected services. where the market is shifting. So we've looked at 4 areas of opportunity. When we looked at the market 3, 4 years ago, from then till about a year ago, we've narrowed it down. And the 4 areas we've looked at, the first one is connectivity. For all intents and purposes, connectivity will remain bread and butter. And there's something in there for everybody. For airlines, it's low-hanging fruit. You can have a tiered pricing plan. You can implement that tomorrow and start getting revenue. The second area, and this is the area where it's going to also increase in opportunity, is this whole area of e-commerce and destination shopping. Again, what surprised us is some of the airlines we've been speaking to, global players, LCCs, FSCs, very strong at wanting to get the right onboard experience for passengers enabled by broadband, and very importantly, there's a little bit of a groundswell at the moment that's growing, which is suppliers and big brands saying, how can I play in this space? What you're seeing at the moment is almost a bit of a Wild West as people jostle for position. But what we're very confident we're going to see is some of the major brands, clothing retail brands, consumer brands, coming to the party and helping the fulfillment. Because as you all know, the reason why, for example, Europe and the UK is extremely strong in the US in a very digital market is because the fulfillment component is so strong. So we're actually now seeing global players whose bread and butter is fulfillment starting to say to the airlines, listen, we'll come to the party, we'll bring what we can bring, but what are you going to give us in return? So that mindset is starting to change, and what we've looked at with the consumer side is what kind of deals, what kind of packages, what kind of things are consumers looking for, and a spectrum of different goodies, and that's the kind of stuff we've also been factoring in for an opportunity. Premium content entertainment is the other area we've looked at. There's a very strong gap. It's not as big as the others, but it's a strong gap for offering premium content on board. Again, offering passengers a certain amount of shows for free, upgrading to other shows, also things like offering specific content like BSkyB is very good at doing globally, which is you might be flying transatlantic and there's a title fight going on in boxing. You can transmit it. A lot of this will be played out as they develop the rights issues which are being sorted. But again, premium content specific, as we say, it's non-divisible in economics, which means it's a one-off event. You charge passengers exactly like you do in pay-per-view. You're in the middle of the Atlantic and you can watch a title fight. You can watch a football game. That coupled with the ability of airlines to now move into changing their onboard content, digital programming, by coming through, landing, having the broadband to change content onto a leisure route. And on that leisure route then monetising different content. And then targeted advertising. Today you're starting to see this in a, I'd call it fairly basic manner of things like Sponsoring pages, landing pages. The more proactive airlines we've been speaking to are already talking about partnerships with global brands. Things like paid-for advertising. Things like click-through. There's a groundswell of how do you monetise advertising on board, which we also think will be significant. At a global level, what that really means is the global picture that I painted before, the $30-odd billion, is really split between Asia accounting for a third of that revenue, Europe and Russia for about $8 billion of that. So $10 billion for APAC, about $7 billion for North America with Europe just, just around the same figure. And then Latin America $1.9 billion, and then Middle East $1.3 billion, and Africa about half a billion. That journey across those reflects specific demographics, it reflects the different kinds of flying patterns, and it also reflects a mix between low-cost carriers, full-service carriers, long-haul, short-haul routes. The long-haul routes offer greater opportunity to engage with passengers, and there's some skewing between some full-service carriers extracting marginally more revenue, but that's due to duration of flight and engagement. So as I mentioned, in 5 years' time we expect about— sorry, in 10 years' time, about a $5 billion opportunity in Asia, jumping to about $10 billion as we go towards the next 20 years. And that opportunity translates to 333. What this means is today's world of ancillary revenue, for those that know or don't know the number, traditional as we're calling it now, we're even putting inverted commas around it to show that we are moving to a digital mindset. Traditional ancillary revenue, seat upgrades, baggage, all the goodies that go into traditional, is currently about a $68 billion industry. $17 per passenger per annum is the average ancillary revenue from traditional that airlines are getting, average across the globe. What we're forecasting is that in Asia, broadband-based ancillary revenue in 20 years is going to deliver an extra about $3.33 per passenger to the airlines. The global average is slightly higher at 4, and then some countries like Europe and the US are slightly higher than that. The mix is interesting. So at the moment, as I mentioned, for the next few years, 80 to 90% will come from broadband. But as you move towards the 10 and 20-year mark, what we're expecting is it'll actually even out. That broadband-enabled revenue, however that's derived, I mean, the airline's in a very low-margin business. someone is going to be paying for this, whether it's the freemium model, it's monetized and eventually a fare, whether it's in a different package mixed with overt charging. Eventually someone is paying for it. The airlines have already told us they're not inclined to dip in and start subsidizing a per-passenger cost. So we expect a 50/50 split between the revenue from that and the other categories, and roughly almost sort of 45-45 split between e-commerce opportunities, some of the advertising, or brought to you by, or sponsored, and then a smaller sliver of the 10% roughly coming from the premium content. Full-service carriers, low-cost carriers. A lot of work went into this, this part of the work. And really, the full-service carriers we expect to contribute just over half of that total revenue, which is actually quite an impressive result for the low-cost carriers, because the full-service carriers tend to still dominate long-haul routes. Low-cost carriers still have shorter routes. However, the low-cost carriers have a very, very strong monetisation mindset. New entrants, more entrepreneurial entrants, what we found particularly around Asia is this hunger and what you were hearing earlier about airlines wanting to actually monetize those passengers more. So what we're expecting is the opportunities are significant for both types of carriers. The low-cost carriers, as they eventually, some of them develop more long-haul routes, we envisage that they will engage even stronger. And some of the other seminars I've been to this morning were really full of players talking about how they're going to monetize or digitize both on short-haul and long-haul routes. Because passengers, let's face it, every— just to breathe on the aeroplane now you're getting charged for. So I think there's 2 sides to this coin. One is you really piss off the passengers by making them pay for every step. Soon I think you're going to see step counters and then the steps it takes you to get to your seat will be charged for. Maybe that's the new sort of traditional revenue model. But the digital side where you're actually engaging with customers to offer a value to their experience, then you're going to see that, we believe, emerge much stronger, and hence the loyalty component. So trying to bring all this together, some of the factors that will facilitate unlocking this revenue are fairly straightforward, but very difficult in some ways to implement and require changes. Summarizing what I said earlier, High-quality broadband, that's the bottom line. You're not even playing in this space because without that we don't have the business opportunities we're talking about. The complete coverage that I mentioned, you want the ubiquity of the experience for consumers. Also that guaranteed speed to the aircraft. We're finding that 85 to 95%, it depends on the markets where we've been interviewing, more business and high-spend customers are willing to pay for connectivity if you get those factors provided. And then the flip side to that is that this I can't stress enough. The single biggest barrier to actually unlocking this opportunity rests in the airline's mindset. So even the airlines we speak to say, we know we have to change, we're making these steps to change. So unlocking this requires looking at a retail mindset. By that I don't just mean giving a catalogue, I'm talking the full-service ecosystem experience, understanding what it takes to make customers tick. Liquidity of supply, term from the betting industry for those that know P2P online betting. If you're betting against other people, the bigger the people in the pool, the more you win. That example here, what that's saying is you want to engender trust and confidence so when the consumer gets on the plane, he, she knows that there's always a good deal for something that's in their world that they're looking to purchase. So you need that confidence, very important. And then CRM, make sure you use the data on your consumers. Again, one of the areas that's really badly lacking in this space is there's a plethora of data about us that the airlines hold, but monetizing it and acting on it becomes much more difficult. So with the 16 seconds I've got left on the clock, the bottom line is, There's a $130 billion opportunity we've estimated. Airlines, we're calling them the gatekeepers, the facilitators. There's an opportunity there from both the service supplying this industry and from the consumers actually engaging in it. And we believe there's something for everybody. So as the thing says, Sky High Economics, there is a very serious opportunity, but it does require work. It will not just come. So on that basis, 14 seconds over, but thank you very much. I appreciate it. I don't know if we've got time for any questions, otherwise I'll be in the room at the back. The report's available, it's 53 pages, so I'm not gonna bore you with 53 pages. I've tried to cut it right down. You can download it, it's on the LSE's website. But for a whirlwind tour, I hope that made some sense, and thank you very much for your time. I appreciate it. Thank you.

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