Global airlines increasingly pursue the notion of de-commoditising their products in order to create a strategic level of differentiation. But the reality is that the concept of creating new airline customer value propositions remains in its infancy; airlines and other travel companies are still navigating the intricacies of determining how to deliver more differentiated passenger experiences.
Understanding passenger preferences is a huge piece of the puzzle to be solved as travel providers work toward greater product distinction and personalisation. At the same time, passenger preference for the lowest price will always dictate a high level of commoditisation within the travel industry.
The key for travel providers is finding the right balance, and most admit that they are far away from mastering the move from product commoditisation to personalisation. But some signs are emerging that the industry is achieving small moves in that direction.
Standing Out From The Crowd: Air Travel Has Become Commoditised – Or Has It?
Panel Session from CAPA Americas Aviation Summit, Apr-2016
Allegiant has web opportunities and potential capacity innovations in view
Various travel providers believe that opportunities exist in offering a more targeted product to customers. Speaking at the recent CAPA Americas Aviation Summit, Allegiant's SVP of planning and COO, Jude Bricker, stated that there will always be some commoditisation in the airline industry, citing a huge proportion of passengers “that simply want to get from point A to point B in the cheapest possible manner, and I don’t think that is necessarily going to change”.
Mr Bricker sees an opportunity for Allegiant to break away from commoditisation through more direct distribution from the airline to the customer. Mr Bricker said that the customer “as a whole is much more informed than in the past”. One advantage in Allegiant’s strategy is that 93% of its bookings are completed through its own website and the remainder are carried out through the company’s call centre, he said, adding, “That allows us to display the product how we want and extend the engagement period with the customer”.
Another potential innovation of interest to Mr Bricker is integrating capacity decisions with the pricing and marketing side of the business. If there were a more predictive demand profile of customers, airlines could potentially have the ability to load a schedule that featured the highest yielding seats, not those producing the lowest yield, he stated.
“Then, also, what if you add surplus capacity you did not schedule until the demand [had] already materialised”, he said. Those types of changes could result in much more sculpted schedules as opposed to more traditional schedules, which are “repeated every day, regardless, [and] then all you do with surplus demand is discount it in the market,” Mr Bricker explained.
He continued, saying that some of that surplus demand can end up in the hands of intermediaries and then, “you lose control of the customer”.
If those distressed seats come out of the market due to better capacity planning and pricing, “I think that could be real innovation”, Mr Bricker said. It is not “rocket science” to determine that customers prefer to travel in March versus September, he explained. However, it is more complex, for example, to determine that short haul flights from Las Vegas do better after 12pm than after 10am, he said.
Product decommoditisation among airlines remains in its infancy
As airlines contemplate strategies for decommoditising their products, the question is what would be the timeline for significant progress in creating enhanced customer value.
The Sabre manager pricing and revenue management consulting, Terry McClintock, said that the horizon to make those changes could be further away than anticipated. He believes that the advanced airlines in offering fewer commoditised products are those that are creating more sophisticated product bundling. Mr McClintock said that effective bundling occurs at “both ends of the spectrum. It is not just about flat beds and showers”. He remarked that product bundling is not “Uber innovation, but it is airline innovation”.
Mr McClintock's view is that the race is on for airlines to achieve total revenue optimisation from fares, bags, meals and other items. “As airlines adopt that approach in their daily decision making that will help fuel the marketing ideas and facilitate growth in all these more sexy areas [,] as opposed to lowest base price,” he stated.
The concept of micro-targeting by airlines is far off into the future, according to the Travelport VP Americas, air commerce, Chris Engle. But he does see a trend among some of Travelport’s airline partners attempting to apply personalisation to specific passenger segments.
Mr Engle offered the example of airlines having an ability to determine that a passenger is a Chubb corporate traveller based on an implant code. On a mass personalisation scale, said Mr Engle, the airline can load the Chubb corporate travel policy and make targeted offers to those customers. He believes that the next few years could be interesting as airlines work to perfect more specialised customer offers.
Airlines need to practise caution as their de-commoditisation strategies crystallise
Mr Bricker of Allegiant warned that there is a “slippery slope as you talk about customised pricing based on customer segmentation”.
“Imagine you can customise pricing based on a browser, based on a customer’s propensity to transact, you could get down into zip code for affluency”, Mr Bricker said. That does not exist in airline pricing currently, but, “as your data get so efficient in understanding so much about the customer you need to be careful”, he cautioned.
Mr Engle (Travelport) stated that travel suppliers will find a way to differentiate products in a value-added way, or “Google and the OTAs will find us out”.
Product distinction remains paramount in mature markets such as the US
As the three large US global network airlines – American, Delta and United – reach a network scale that allows them to offer passengers blanket coverage, they need to find ways to increase revenues and heighten their brand distinction. Smaller airlines in the US and Canada also face similar challenges in attempting to decommoditise their products, both to engender positive customer sentiment and to bolster their revenues.
The overarching conclusion is that decommoditisation is a complex task. It entails shrewd revenue management techniques; exploiting data to its full advantage; ensuring the necessary IT systems are in place for more targeted offers; and most importantly, understanding different customer segments to create effective value-added proposals for those passengers.
Needless to say, no airline has yet achieved significant success in presenting a decommoditised product to its various customer segments; it will be some time before all the necessary elements coalesce, and airlines succeed at full product segmentation. The next few years should prove critical, since a consolidated and mature US industry requires almost constant vigilance in product distinction in order to retain loyal customers and attract new passengers.