Airline Digital Transformation: Retail Strategy Success Remains Nascent

by 
David Kaplan
Wednesday, October 30, 2019
 • 
7
 min read

Just 8 percent of airlines report more than three years of engagement in digital transformation efforts, says PROS, while Diggin Travel finds that the need to grow ancillary dollars and develop clear dynamic pricing strategies is more intense than ever.

A year after JetBlue founder David Neeleman described his forthcoming Moxy airline as “just a technology company that happens to fly airplanes,” that phrase has become a cliché expected to be uttered by other carriers’ execs at many aviation conferences. In part, that’s a reflection of how urgent the call for digital transformation across the aviation industry actually is.

The need to drive home the point that the business of flying depends on revenues associated with carriers’ core mission is more imperative than ever. The rising numbers of air travelers have brought greater competition along with rising consumer expectations for greater personalized pricing and services.

At the same time, technological change from e-commerce to artificial intelligence and machine learning have simultaneously brought a mix of opportunities and challenges.

Given airlines’ historically low margins, as well as the threat of global economic headwinds, the airlines that are better at selling baggage check-ins, comfortable seats, food, priority boarding, affiliate hotel stays, and branded credit cards, while also managing “frenemy” transactions with online travel agencies, will be the ones that win the day.

The State Of Airline Digital Transformation

The state of airline digital transformation in 2019 gets two deep dives in separate global studies released this month by Diggin Travel, a content platform and airline e-commerce marketing consultancy, and by PROS, which has evolved from a revenue management services company to a broader AI-based airline retailing systems platform.

The main consensus of the two analyses is that this is still the “early days,” but airlines are largely moving past the “realization” point of what digital transformation means and what is needed in terms of making the concept actionable.

The main takeaway from PROS’ State of Airline Digitization: Expectations Meet Reality, which was based on a survey of over 400 airline decision-makers by Hanover Research, is that only 8 percent of carriers have reported more than three years of engagement in digital transformation efforts.

For Diggin Travel, the top priority for airlines involves finding ways to increase ancillary revenue — a high priority in 2017 as well. But as Diggin’s founder Iztok Franko explained in the company’s 2019 Digital Retailing Survey:

“If ancillary is still the top priority, what is different now compared to two years ago? I would say the pressure for airlines to find additional sources of revenue is greater than ever” Franko wrote in the report. “For airlines to stay competitive, they need to master digital retailing. This means knowing your customer better, understanding his or her preferences and offering the right product or service in a way that adds value to the customer.

“In addition to offering a variety of different products (not only a flight), airlines need to be innovative with their products and offers, such as bundling products together and providing dynamic offers and packages. Basically, they need to do what retail has been doing for a long time."

PROS: Priorities Are Similar, But Strategies Diverge

About 58 percent of airline respondents to PROS’ survey say they have initiated completely new departments to organize their digital efforts. Another 65 percent tell PROS they’ve established new roles within commerce, distribution, revenue management, and IT to address digital transformation processes.

As PROS finds, the need to drive technological innovation and passenger experience are top priorities of all airlines, from legacy carriers to emerging low-cost carriers.

Still, both PROS and Diggin Travel note the natural differences in approach to digitization and retailing depending on airline size.

PROS’ survey points out that network carriers are more likely to put their emphasis on operational efficiency, with service- and system- upgrades. In contrast, 58 percent of LCCs are focusing digital transformation efforts on enhanced selling experiences.

“Today’s passengers want to be wowed and airlines understand this, which is why they are undergoing these business-critical digital transformations,” said Aditi Mehta, PROS’ solution strategy director for travel. “In fact, our survey indicates that more than 90 percent of airlines are seeking multiple changes to their tech stacks, including shopping and merchandising capabilities, and digital retail – all to deliver optimized offers to passengers while improving the passenger experience throughout the entire travel journey.”

PROS also reported a high degree of confidence among airline executives about applying digital transformation programs for improving travelers’ web and mobile retailing experiences.

And while that sanguine attitude is also felt in airline execs’ belief that digital transformation investments will lead to a distinct rise in revenues, that certitude becomes a bit more murky depending on carrier size. About 53 percent of network carriers anticipate the revenue impact from digital investments to be more than 10 percent compared, while only 24 percent of LCCs expect a similar outcome.

Diggin Travel: Ancillaries Evolve

The role of ancillaries as a key revenue generator also presents general agreement by all carriers. But Diggin Travel’s report also points out the differences of views and approaches to non-seat related sales by airlines of different sizes.

Specifically, 60 percent of the 45 surveyed airlines reported that increasing ancillary revenue was one of their top three priorities in 2019.
Still, 29 percent of airline decision-makers told Diggin Travel that their ancillary revenue comprised 5 percent or less of their total revenue.

Some of Diggin Travel’s topline findings included:

  • 62 percent said that their ancillary revenue amounts to 10 percent or less of their total sales.
  • Overall, ancillary revenue represents 11 percent of total airline revenue on average for all respondents in our survey.
  • Out of 31 full-service carriers and regional airlines in our survey, 25 percent claimed they generate at least.
  • 10 percent of their total revenue from ancillary. On average, FSC and regional airlines stated they generate 7 percent of total revenue from ancillary.

Beyond Baggage

When airlines talk about ancillaries, they’re generally talking about checked baggage fees. A near-universal 89 percent of airlines told Diggin Travel that baggage fees are one of their top three ancillary products (“seat selection” ranked second with about 80 percent of airlines calling it a core ancillary product, followed by fare bundles/branded fares and upgrades in third place).

“As more and more traditional airlines are unbundling bags and seat selection from basic economy fares, bags and fare bundle upselling is becoming a significant ancillary revenue source for them as well,” Diggin Travel’s Franko writes.

In a sign of how intently airlines are pushing the boundaries on baggage fees, Simple Flying outlines how Lufthansa has created a new fare class dubbed “Economy Light” that comes as a hand luggage fee. In other words, passengers who can carry their luggage and store it under their seat will pay less; those who require an overhead bin will be hit with a separate charge.

Apart from paying extra for seat selection, bundled fares are attractive to airlines because they “work hand in hand with other core air ancillaries (baggage, seat selection, fare flexibility),” Franko notes, as these a la carte products are bundled together with the goal of upselling more than one ancillary product.

“Our survey shows that all 14 LCCs that participated in our survey use some version of the branded fares model,” Franko writes. “More and more traditional airlines are adopting the branded fare model as well. 45 percent of them are using a branded fare model (compared to 24 percent in the 2018 survey).”

Subscribing To New Ancillary Concepts

As an ancillary category, subscription products offered by airlines remain rare. But Diggin Travel’s reports suggest that only means there’s room for growth, particularly by LCCs.

About 20 percent of the airlines in Diggin Travel’s survey said they sell subscription services such as access to special fares. The report is careful to note this is not the same as loyalty programs since rewards are often used as an incentive that can be earned through other purchases as opposed to directly paid to subscribe to.

For example, Australian LCC Jetstar’s “Club Jetstar” subscription package offers special fares and 20 percent off seat selection and baggage fees for $49 AUD annually.

Mexican LCC Volaris provides additional creative illustrations of the subscription model with its V.Club and V.Pass products.

V. Club, which has a million members, is akin to purchasing an annual Costco membership that allows a consumer to shop for discounted products. As Volaris EVP of Airline & Commercial Operations Holger Blankenstein told Kambr Media in August, V.Club is aimed at the infrequent traveler that wants to save money.

“We generate ancillaries with the membership fee, and we inspire the infrequent traveler to travel more,” Blankenstein said. “Instead of one time a year, they'll travel two or three times a year. And you can recover the membership after two trips.

V.Pass is a similar program, but it's geared towards more frequent fliers and business travelers. Blankenstein compares it to a Netflix membership.

“You buy a monthly membership; it's not a yearly membership,” he said. “It's a much lower fee, and it gives you the right to travel once a month.”

The program is still being tested, but Blankenstein claimed that results have been positive. Still, as an LCC, Volaris expects V.Pass to be limited.

Ancillaries By Any Other Name

One of the most intellectually interesting parts of Diggin Travel’s exploration of ancillaries is posing the question: If ancillaries are becoming so essential to airlines’ revenue and notions of digital transformation and new retailing capabilities, should they be called something that isn’t literary defined as “extra” or “supplemental?”

“If airlines want to only be the provider of transport, then by all means stick to the word ‘ancillaries,’” retail analyst Richard Hammond tells Diggin Travel. “If airlines believe that all they’re selling is a ticket from A to B, then ancillaries makes sense. But actually, if you are only selling a ticket to go from A to B, that really narrows your ability to influence whether a customer wants to choose you to solve their particular travel challenge or not.”

As for what the role is for ancillaries within an airline’s revenue management framework, airline analyst and consultant Tom Bacon told Diggin Travel that the complexities of various kinds of fares require singular metrics and applications to price them correctly. Factor in the increasing use of dynamic pricing, and the role of the revenue manager is going to have to change – perhaps it will encompass several distinct disciplines.

“Revenue management is often quite complicated – it's a big job to stay on top of demand forecasts and inventory allocations going forward 360 days. And there is considerable science attached. Ancillary doesn't fit as a simple add-on when it includes various bag fees, a range of seat fees, insurance, priority boarding, etc. It just becomes too hard to try to apply all the same science on a fully integrated ‘total revenue’ basis. Branded fares follow from a ‘gut feel’ value of re-bundling rather than similar science. Nevertheless, branded fares are the easiest application of science to total revenue – what features at what price for what customers. Branded fares are not currently inventory controlled separately, so revenue management decides the relative value.”