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A Conversation about the Digital Future of the Airline Industry, Episode 1

PROS Travel Podcast, Season 1, Episode 1: A Conversation with Atmosphere Research's Henry Harteveldt

Henry chats with us about the exciting digital future of the airline industry, including machine learning and artificial intelligence. He also discusses the need for shared objectives and successes within airlines.

Henry explains how eCommerce is at the forefront of airline digital transformation. Pricing and revenue management have always been heavily electronic but now, changes are being made in real time, and airlines are using data to tell a story.

You can listen to The View from 30,000 ft. on Apple Podcasts and Spotify. Or listen to the full audio version below.  


In This Episode

[00:40]: Who is leading Airline Digital Transformation?
[02:50]: Organizational Shifts Dictating Transformation
[05:05]: What about Personalization – are the airlines ready?
[07:47]: Can AI be the answer for the industry?
[14:00]: The impact of NDC
[18:21]: Fast forward 10 years – what’s coming?

Full Transcript

Aditi Mehta: Hello and welcome to the PROS travel podcast series, The View From 30,000 Feet. I'm your host Aditi Mehta. In this episode my colleague talks to Henry Harteveldt from Atmosphere Research Group and together they chat about the exciting digital future of the airline industry, including machine learning and artificial intelligence. He also discusses the need for shared objectives and successes within the airline industry. Let's take a listen....

Stanislava Yordanova: Hello, my name is Stanislava Yordanova. I'm part of PROS marketing team and I'm excited to have a leading industry expert with me today.

Henry Harteveldt: Hello, I'm Henry Harteveldt, president and travel industry analyst at Atmosphere Research Group. We're a travel industry market research company.

Stanislava Yordanova: Welcome Henry. It's great to have you. So in your role, you talk to a lot of airline executives and you have many conversations around digital transformation. In your view, how are RM distribution, pricing and e-commerce changing within the airlines? What are the shifts you've seen the airline organizations?

Henry Harteveldt: Well, I would say that of the departments you've listed, e-commerce definitely is at the forefront. They started the digital transformation in many ways and now it is more towards what I would call digital commerce. It's a small but subtle shift. They recognize that it's not just a website but increasingly mobile and other emerging forms of technology that will play a role either in helping a traveler discover the airline or plan and shop for their flights, book their flights, manage their itineraries, their loyalty accounts and more.

Henry Harteveldt: Pricing and revenue management have always been heavily electronic, if you will. We've been doing revenue management on computers for decades, but what's changing now is they are making the changes far more real time. They are trying to use far more predictive analytics. They are using predictive analytics more. You know, sales is also trying to be much more focused and using data as a guideline.

Henry Harteveldt: Data tells a story, we know that, this is an industry that has been built on operational data, business data and more. What we're starting to see within the airlines is a recognition that what we've got may be working, but there are other technologies that may help us work better. Machine learning is a part of that. Artificial intelligence is a part of that and that's where a lot of the conversations I'm having are focusing more. How do they use a AI to improve the commercial aspects of the operation, whether it's sales, marketing, digital commerce, customer service, the passenger experience or other areas?

Stanislava Yordanova: A lot of shifts when it comes to their processes. Do you see any shifts when it comes to the organization and how they interact with each other?

Henry Harteveldt: Yes and no. So technology along with the changing business model, has forced airlines to bust down walls between departments. So departments that used to be fairly isolated from one another, work much more closely together. We've seen shifts in organizations, for example, in some cases digital commerce is part of marketing, in other cases it's part of pricing and revenue management in some cases at standalone.

Henry Harteveldt: But what we're also seeing is there's still a lot of territorial issues. The head of department a may not like the head of department B. You've got the fiefdoms, you've got all the office politics. That hasn't changed. And unfortunately I'm concerned that may not change. What we really need to see with airlines is a recognition that all of these departments really are part of one organization and that is the airline and their job is twofold obviously to help the airline be more successful, but to help the traveler find the value that she or he is seeking.

Henry Harteveldt: Our research shows that loyalty to an airline is plateaued at 21% that's half of where it was 19 years ago when I first started my being an analyst. And that's an alarming stat because obviously an airline would like to have more people be loyal to it. So the role that technology can play to help an airline do almost anything from figuring out destinations to serve, to pricing and revenue management, to digital commerce, to customer engagement. It's all there, but the departments have to come together. There needs to be shared objectives and we've written about this, that the head of department A, for example, one of his or her objectives should be something from another department and vice versa. So that there's shared understanding and shared success.

Stanislava Yordanova: Yeah. At the end of the day, it is about the passenger and passenger expectations are pretty high today because of digital. What do you feel is really the biggest challenge that airlines are seeing today when it comes to personalization and being relevant to the travelers?

Henry Harteveldt: The, the airlines aren't ready to do personalization. They talk a great deal about this, but the ability to act is still very limited. For one thing, the airlines rate the quality of their customer data at 5.7 out of 10 this is in our research. Now that's up from where it had been, but it's still a long way, a long way to go. Second, the airlines struggle with their content management systems.

Henry Harteveldt: I won't name the airline because I don't want to embarrass them, but an airline on which have status, which gives me a free checked bag when I was planning a trip last night, suggested that I pay for a checked bag as part as a bundle with my flight. Even though I was signed in, even though they knew this information. So the airlines still trip over themselves at some of the most fundamental levels and in some of the most fundamental ways. So when we hear about the potential of AI to personalize offers, to personalize bundles, to personalize the journey, we are light years away from that right now.

Stanislava Yordanova: Is it because of the lack of technology or because the data is in silos? What do you think the challenges are?

Henry Harteveldt: The challenges are numerous. I think part of it is the poor quality of data and the lack of the data that they need to be more helpful. I think part of it is the silos. I think part of it is the inability to invest when and where the airline would like, not only in the technology but in the people to make that technology work the way they would like to. And I think part of it is to be very honest, perhaps brutally honest, a lack of imagination and a lack of creativity.

Henry Harteveldt: And then lastly, you know what? The economic conditions in many parts of the world are fairly good and airlines are fairly lazy right now. Business is good. Their load factors are high. For many airlines they're making, if not record profits close to record profits, which is all good, but that's not what pushes innovation. I found ironically in the airline business, it's adversity that leads to some of the best innovation we see.

Stanislava Yordanova: Interesting. You mentioned AI, there is a lot of buzz around it. How do you see it influencing the airline industry? Can you elaborate more on what you mentioned?

Henry Harteveldt: Yeah, absolutely. I would say that there is a fundamental catalyst for the use of AI and it's not just technology itself, it's the IATA New Distribution Capabilities, which is contributing to it as well as airlines own recognition that they need to be better merchants and retailers. But AI is something that more than eight in 10 airlines in our research say we'll give them a competitive advantage in the marketplace.

Henry Harteveldt: More than four in 10 airlines are testing AI projects right now and 10% of the airlines say that they have at least one AI based commercial initiative in production. So the airlines are recognizing this. But they're also very honest when I talk with them. We know this is early days, we know this is something that we don't yet fully understand and in the crawl, walk, run continuum we're still very much in the crawl stage.

Stanislava Yordanova: Is it AI around their offer management and how they deliver offers or is it more on the operational side that you see it happening?

Henry Harteveldt: The data that I cited was about commercial use. So definitely airlines are looking at AI from an operational standpoint, maintenance planning and operations, flight planning, cruise scheduling and more. But on the commercial side where we see AI initiatives focused there on pricing and revenue management, they're on offer management and they're in marketing campaigns. Those tend to be some of the biggest areas as well as within a digital commerce in terms of how they prioritize what they might show you when you do a flight search or for that matter a search for a vacation package.

Stanislava Yordanova: So it would be around bringing more efficiency to the organization but also increasing revenues?

Henry Harteveldt: It's more about increasing revenue and improving conversion rate for shoppers. Efficiency is there, but the airlines aren't yet saying we want to use AI to replace staff. What I have heard is they want to use AI to make their employees efficient. Again, this is especially in revenue management and pricing, but we also see this in some marketing functions. For example, media planning to improve the efficiency of any in-house media buys that they make.

Stanislava Yordanova: Great. So it seems artificial intelligence could actually give people a promotion rather than replace them.

Henry Harteveldt: If it's used in the right way. But when I talk to folks who are pricing analysts, they're scared of AI taking their jobs away, and I think that's legitimate. I mean, maybe not today, but in a few years, AI will be sophisticated enough that it could affect headcount in some airline management groups. The question is, will the airlines use this as an opportunity to reduce headcount or will they simply redeploy people into roles that are frankly more value add and let those employees have more substantial, more interesting decisions to make.

Stanislava Yordanova: Yeah, we're about to see. Interesting times are coming. let's talk a little bit more about Direct. You witness how airlines are making the shift to taking back control of what content they push out there to their travelers. What are the advantages of Direct and where do you see the risks are?

Henry Harteveldt: Sure, so you know the airlines actually are one of the, if not the, industries with the longest tenure selling online. Alaska airlines was the first airline in 1994 to have a transactional website. So we've been doing this for 25 years now and I think airlines understand that by making their direct channels more comprehensive, more user friendly, that it's easier for them to establish at least a relationship with the traveler if not loyalty. And obviously for the traveler, the traveler benefits by having a complete range of products and services available to choose from.

Henry Harteveldt: When you shop through an online travel company. It's not that they won't sell you anything, but they don't always make it as easy as I believe they should to see all options. In addition, the airline benefits obviously from getting the data, from the ability to contact the customer in case of an irregular operation and there are costs savings to the airline. They're not paying some of the fees that they may, whether it's to a GDS company, to a travel agency or someone else.

Stanislava Yordanova: Which could be significant.

Henry Harteveldt: That depending on the airline and its contracts that could be exceed $20 per customer. So, for the scale of airlines today that's not insignificant. What's different though in the conversations that I'm having with airlines is they recognize there is a role for some third party distribution. Corporate travel they recognize is going to remain predominantly third party based.

Henry Harteveldt: There are countries where an airline simply doesn't have the market presence it needs. It's either not flying there directly or it has very minimal presence where a travel agency can be helpful. So the airlines recognize that there's a role for third party. But what impresses me is that airlines are now saying Direct is a catalyst for a relationship rather than Direct is a way to save money.

Stanislava Yordanova: Okay, that's interesting. So with NDC is Direct beyond the .com and the mobile app. Do you see airlines taking more control of how they sell to those third party intermediaries?

Henry Harteveldt: Yes. So airlines have learned from their own direct channels how to become better merchants. There's still, again, a long way to go. They're good at pushing things at us. They're not very good at curating what we believe will be the best things. Now, there are certainly examples out there of airlines that are doing some things better than others, but, the data NDC and one order initiatives are definitely helping airlines take advantage of the opportunities to be better merchants through third party channels.

Henry Harteveldt: And one thing I really like is that it allows the airline to become the publisher of that content and that gives the airline more control over what they sell and it results in a more accurate offer. There's less chance of a fare discrepancy, for example, because the fare that was published perhaps six hours ago is no longer available. And you don't have as many oops moments where the traveler thinks they're going to get a fare at one price. But it becomes substantially higher because of whatever the factors are.

Henry Harteveldt: So I like what NDC is offering and I really wish that they would call it a new retailing capability because I think that really describes what this is much better than just simply distribution.

Stanislava Yordanova: Bottom line. We are hoping that this will definitely lead lookers to become bookers.

Henry Harteveldt: Right, it's already showing that where the airlines are doing this. For example, the airlines that are part of the data NDC leaderboard, they're really committed to this and they are saying that where, they have rolled out NDC through third party channels. They are seeing better business performance and the travel agents that are using it to sell like it as well because they're able to be more helpful to their customer and the customer is finding the value that they want. So it's a triple win for all the airline, the agency and the traveler.

Stanislava Yordanova: And the purpose of retail basically.

Henry Harteveldt: Exactly.

Stanislava Yordanova: Yeah. So, okay to wrap up in 10 years, do you see the way airlines price and sell their services fundamentally change?

Henry Harteveldt: Absolutely. We're already... I should say this, we have begun the shift as an industry in the airline business from one that sells fares and tickets to an industry that sells products and experiences and that is only going to continue. And that's not just a function of unbundling. That is when as airlines get more and better and more actionable customer data, market data and so on. As they are smarter about using that data to create products and experiences, how to price them, how to revenue manage them, what we see now will be almost antiquated compared to where we will be in 10 years because the technology will allow the airlines to be far more creative, far more customer focused, far more market responsive.

Henry Harteveldt: So I'm very optimistic about the future and what it will allow airlines to be. You know, I think even in maybe five years or so, you'll start to see airlines really get much stronger when it comes to retailing. 10 years from now we may not recognize what they are as airlines. They'll really be more travel companies than airlines selling us, not just the services that the airline offers, but much more in terms of third party services and products as well.

Stanislava Yordanova: Looking forward to seeing those changes happen as a passenger.

Henry Harteveldt: Yeah, me too.

Stanislava Yordanova: Yeah. Great. Thank you for sharing your thoughts, Henry. It's great to have you here with us.

Henry Harteveldt: I'm honored to be here. Thank you again.

Stanislava Yordanova: Thanks.

Aditi Mehta: Thank you for listening and a special thanks to Henry heartfelt from atmosphere research group for taking the time to talk with us. This podcast is brought to you by PROS travel and was recorded at our annual user conference in Las Vegas. At PROS, we help airlines on their journey toward offer optimization and digital transformation. For more information, please contact PROS.