Hitting Reset on Airline Retailing: Part 2
There is no doubt that today’s generation of mobile-device connected travelers will demand much more from airlines, with higher expectations from the travel industry that are not unlike their other online consumer shopping experiences. Customers have long expected a more personalized, “concierge-like” service from airlines and a more frictionless shopping and booking experience, but often times, legacy technology, siloed organizations, and non-airline direct distribution strategies have made it difficult for airlines to build digital relationships and keep up with customer demands.
If we look outside the world of airlines, we have seen unprecedented changes in other industries, such as telecommunications (iPhone), music (Spotify/iTunes), movies (Netflix), tv (Hulu), and even within - disruptors such as Uber and Airbnb bring new business models and ideas to the travel industry. We’ve all become accustomed to being able to listen to any song, at any time, and without having to take out our credit card. When Spotify recommends a new music artist, playlist or genre, we don’t question it, because we know that their product understands our musical tastes based on previous music that we have played. Could an airline trip recommendation be as smooth and personalized as a Spotify or Netflix recommendation?
One of the attributes that all of these new-generation business models have in common is deep, digital connections that give them an understanding of their customers. They know when a customer is using their products or services, who they are, where they are located, and all of their previous purchases and actions. In addition, these companies make it mandatory to be connected via an account profile to utilize their services and payment is something that is set up once, at the beginning of the relationship, and that takes place behind the scenes for all subsequent purchases. In return, users get more personalized content and a digital experience that is intuitive, seamless and improves over time with the constant learning happening in the background.
The concepts below borrow from the retail successes of companies like Spotify, Uber, and Airbnb, which emphasize an initial “set up” or digital connection to their customers and then hassle-free purchasing and/or use, on-demand and as needed.
Pay as You Go (FLY)
Subscription-based services and automatic payments are found throughout our daily lives, from Apple to Spotify to Netflix to Uber, but they are scarcely found in airline consumer retail offerings. Uber is probably one of the most well-known examples of a travel industry application and service where customer profiles and payment options are preconfigured for seamless ground transportation and post-trip payment.
Several airlines have offered “pay as you go” services in the past, such as Lufthansa and Scandinavian Airlines (SAS), but the features were offered primarily via corporate or business programs only, not through their core retail offerings for consumers.
Similar to unlimited flight passes, subscription-based travel has the opportunity to offer huge benefits to both airlines and travelers. With the use of pre-stored user profiles, preferences, and payment details, customers can skip much of the traditional airline booking process, offering much-needed flexibility and saving time.
Book Now, Pay Later
For airlines who want to deliver to consumers who are looking to take advantage of low fares but want to pay for flights over time, they should consider “book now, pay later” programs. Several offer a form of payment that allows customers to pay for flights over a period of months. Travel companies and agencies offer services along these lines as well. And of course, financial technologies such as Afterpay have proliferated in recent years, allowing consumers to make purchases and spread payment over several months.
This is an interesting retail approach given research shows that customers who pay for purchases using credit often spend more than those who pay with cash and derive more enjoyment out of what they consume because they are decoupled from the stress of how much the travel costs.
Personalized Shopping and Ancillary Optimization
As consumers are treated with more personalized experiences everywhere they shop, their expectations with airlines continue to rise. These expectations make the evolution of ancillary revenue optimization is crucial as airlines transition towards offer management, focusing on maximizing revenue opportunities across customer touchpoints with attractive offers and optimal pricing. Initially pioneered by low-cost carriers, ancillary sales have now become integral to the business strategies of airlines of all sizes. From the early 2000s, with the unbundling of services, to the present day, airlines have significantly advanced in offering a variety of a-la-carte products and services. Today, ancillary sales are a key revenue stream, contributing substantially to airlines' profitability and customer satisfaction.
Furthermore, not only are consumers online, but technology and AI is becoming ubiquitous with the user experience. In the age of AI, every touch point retailers have with customers become opportunities to further build trust to generate tailored promotions and deals, recommend packages or bundles, and automate experiences. Consumers are becoming more and more familiar with the use of AI in the buying process. In fact, a study from EY notes that consumers have a relatively high level of trust in AI: 61% of consumers trust AI-generated tailored promotions and deals, and 53% trust personally customized recommendations.
The future of ancillary revenue optimization and ancillary merchandising lies in understanding the distinction between ancillary offers and flight offers. While flight revenue management focuses on balancing capacity and demand, ancillary management involves optimizing the presentation of additional products like extra bags, seat selection, and Wi-Fi, which are not primarily driven by demand dynamics. Airlines must strategically manage both revenue streams by tailoring offers to meet travelers' needs and preferences, thereby maximizing revenue potential.
AI-powered capabilities are set to revolutionize this space, automating business rule creation and leveraging real-time data to dynamically price, rank, and bundle ancillary products for each passenger segment, enhancing their relevance and conversion rates.
But, this isn’t enough. Looking ahead, ancillary revenue optimization will increasingly merge with overall revenue management strategies. Airlines will consider ancillary spend in pricing decisions, aiming for a unified approach to maximize both flight and ancillary revenues. AI-driven dynamic bundling and personalized upsell offers will transform static branded fares into real-time, customized packages, aligning closely with travelers' needs and airline revenue goals. Embracing innovation and commercial independence, airlines can unlock significant revenue potential and enhance their competitive edge in the evolving landscape of airline retail.
Change in Retailing is Welcome
It is clear that airlines are in a true time of retail innovation, and customers have long desired more personalized services from airlines. This convergence creates an opportunity for airlines to look at new revenue streams and reconsider how they offer their products.