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The Airline Retail Revolution – Part 1

The concept of ‘retailing’ is fuelling a revolution in how travel is purchased. Airlines have modelled themselves on classic high-street retailers and their sophisticated merchandising techniques to add value to the passenger and to improve profitability. But the real challenge is that airlines are still selling with a traditional airline mind-set, and have not embraced the retail model fully.

Through this three part series, let’s look at what drives the ‘retail revolution’, understand why retailing is a customer imperative, examine the challenges and the opportunities, discover insights and best practice from best-in-class airline retailers, and describe the seven steps to become a true airline retailer.

The Retail Revolution – The Transformation of the Airline Business Model

Historically, airlines view themselves as sellers of seats. This created a selling model focussed around the seat and its associated pricing. The accepted frame of reference was: ‘I have this product – a seat on a flight, so how do I sell as much of this product as possible through a set of distribution channels, and how do I maximise my revenue using dynamic pricing of inventory’.

This ‘seat selling’ approach led to price-driven competition, commoditising the airline’s offering, and making them indistinguishable from the competition. Where airline seats are a commoditised product, the opportunity for revenue growth is limited. However, new revenue streams are needed for all airlines, as the rate of passenger growth plateaus and fares remain relatively static. The airline passenger business is projected to generate $511 billion in revenues in 2016, down from $518 billion in 2015, according to IATA. However, global airline ancillary revenues are estimated to have grown by 21% over the last five years, against non-ancillary growth of 9%.

Outside of the airline industry, retailers across the globe have developed sophisticated retailing techniques to better serve their customers. These retailers don’t see themselves as a provider of products, but as a store designed to fulfil customer needs. Retailers guide shoppers through their stores (online and offline) in a way that encourage them to add products and services to their real or virtual shopping carts. The future for airlines needs to be based on thinking about what they can sell beyond the seat.

Today’s airlines look for inspiration outside of the airline industry, and wish to emulate the success of online and offline retailers such as such as Starbucks, Amazon, ASOS, eBay, Alibaba, JD.com and Netflix. While many airlines are now trying to sell new types of offerings to add value to their customers, many are selling these with a traditional airline mind-set. Instead, airlines should behave like retailers. With a retailing model, airlines can flip their thinking about their customer on its head: ‘I have this set of customers, so how do I fulfil as many of their end-to-end needs to capture the maximum share of wallet, but also to maximise the lifetime value of each customer’.

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If an airline sees itself as a retailer, this will allow them to differentiate themselves from the competition. In an age where airline seats are a commoditised product, the competitive edge comes in thinking about merchandising the way a retailer would, in other words, understanding who the airlines customers are and deliver highly-personalised product and content to them, using all the transaction data already collected to recommend products or services for future trips.

Retailing as a Customer Imperative for Airlines

The primary need of an airline customer is organising a trip, not buying a flight, and armed with this understanding, an airline can begin to sell the complete range of products and services relating to a trip.

Simply put, retailing is about providing the right product and service to the traveller, delivered through the right channel, and at the right time, in a way that is visually appealing and easy to understand. The successful airline of the future will depend to a large extent on how quickly it can transform itself into a retailer dedicated to fulfilling all of a customer’s needs.

The airline website is the perfect storefront to sell the full itinerary from the air seat and air ancillaries to hotel booking, car rental, lounge, destination attractions, insurance and airport transfers. The airline retains 100% control of the customer, books all of the revenue and gets higher profit margins. In addition, the airline gets to own all of the customer behavioural and transactional data. Using this data gives the airline a competitive edge by being able to offer a more personalised, tailored experience for the total customer experience.

Revenue Dial

Despite the opportunity, the airline industry continues to struggle with the concept and practice of retailing. To deliver on a retail strategy, airlines must follow the lead of successful retailers by moving beyond thinking of a customer as a transaction and a seat. The goal should be to act like those retailers which have a laser-like focus on increasing their customers’ ‘share of wallet’.

This means airlines have to understand and provide for the end to end needs of the travel customer, from the time they leave their home, and the products they need to get to the airport, through the products that they need to transition smoothly through the airport, and the products that travellers need at their destination, e.g. transfers, hotels and destination activities.

In Part 2, we examine the challenges and the opportunities of retailing, discover best practice from best-in-class airline retailers. So stay tuned…