Airline Retail Revolution Transforming the Airline Business Model

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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 article, 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 focused 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’.

An Airline must see itself as a retailer
An Airline must see itself as a retailer

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 growth airlines
Focus on increasing a customers’ ‘share of wallet’

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.


The Nuts and Bolts of Airline Retailing

Airlines can think in terms of four categories of retailing opportunities:

1. Products and Services that are part of the airlines suite of offerings

This includes onboard sales of food and beverages, baggage, assigned seats or seat upgrades (including extra legroom seats on exit rows), amenities, priority check-in, sporting equipment, early boarding privileges, in-flight entertainment, onboard entertainment or Wi-Fi. These are often called ‘a la Carte’ products, as they can be selected like a menu by the customer to add to their air travel experience.

2. Product and Services that are external to the airline, but directly related to the travel needs of the customers

Hotel and resort accommodations, car rentals, ground transfers, travel insurance and destination activities: the airline earns a commission based on the sale of these products.

3. Fare Packaging or Bundling

Bundling the fare with one of the ancillary revenue products or services, such as baggage, priority boarding or extra leg room.

4. Dynamic Packaging

The combination of the airline’s flight inventory with hotel accommodation which can then be combined with ground transfers, car hire and destination activities creating one packaged price. These packages are created ‘on the fly’ depending on the origin, destination and dates searched.

Airline retail Dynamic Packaging
Airline Retail Dynamic Packaging

The Challenge of Retailing in an Airline

Becoming a ‘retailer with wings’ means that airlines need to become not just seat sellers, but real merchandisers – good at the art and science of merchandising ancillary products. However, aspiring to be a retailer creates new and complex challenges for all types of airlines. At OpenJaw, we have found from experience that there are four major challenges getting in the way of airlines becoming great retailers:

1. Customer Expectations

The first challenge facing airlines to become a better retailer is that customer expectations are formed outside of the world of airlines. Great brands outside of travel are setting the agenda. Airline customers expect immediacy from airlines because the conventions of retailing are formed outside of the world of travel. Airlines need to embed the conventions of retail shopping and booking to be closer to the incredible experiences of brands such as Starbucks, Amazon, ASOS, eBay, Alibaba, JD.com, Netflix, Facebook, WhatsApp and and WeChat.

2. The Retailing Mindset

It is a challenge for airlines to think 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. Each customer has a unique set of expectations for their interactions with an airline. Customers want better airline retailing experiences that can inspire them as they shop and book their trips – but most of all, they desire to be recognised as people, not Passenger Name Records (PNR). And it is this level of personalisation that is at the heart of the challenge of retailing.

3. Technology Platforms

The third challenge confronting airlines is that access to ancillary products is made difficult due to different technology platforms operated by various providers. Hotel and resort room inventory are on property management systems, and, many different systems, to boot. Golf courses have their own booking systems. The critical challenge for any airline is this: how to integrate retail ancillary products across all channels, so that their customers can book and pay based on real-live confirmed inventory – whether this is hotel rooms, car hire, meals or golf tee times. The ideal, of course, would be a single integrated platform approach that provides a seamless user experience for customers across their entire online journey.

4. Data Silos

Traditionally airlines have held customer data across multiple siloed databases and systems. This creates a real headache using all the transaction data already collected to recommend products or services for future trips. In a retailer, the people responsible for bringing in revenue, such as buyers, have access to a supply of real-time sales data. All the Stock Keeping Units (SKU), have unique codes assigned to each item of merchandise and are tracked to an incredible level of detail. Digital retailers such as Amazon and Netflix have been renowned for their successful recommendation algorithms. These sorts of tools are very rarely available to airlines.

Aviation ancillary product selling

Insights from Best-In-Class Retailing

Thinking like a retailer opens up extensive new revenue opportunities for high margin ancillary product selling for airlines, as it enables consumers to discover and book a diverse range of products, sourced from a multitude of suppliers including hotels, car hire companies, insurance, destination activities, events, transfers etc all under the airline brand.

Airlines should be studying the playbooks of both legacy and pure play retailers to see what they can learn and what talents and technology will be needed to transform business operations. Successful retailing is based on fundamental principles and technology has enabled these to be implemented more effectively and efficiently for maximum advantage.

Here are five key insights that OpenJaw has seen while working with some of the world’s best airline retailers:

1. Product Mix

Product retailing is an industry where the choice of product and the broader product mix is a strategic choice, defined by what the retail brands stands for, and how the retailer wishes to differentiate their online store. The merchandise is placed to promote cross-selling, and the amount of display space is carefully allocated. Regardless of whether a retailer sells bolts or belts, nothing in a store is placed in a particular location by accident.

2. Merchandising

From window display to website, retailers show the breadth of their inventory and explain the value to customers. Retailers make deliberate merchandise and design choices that balances creative elements with commercial considerations, for instance, placing higher margin products at the top of a web page or on aisle ends in-store, all guided by factors such as merchandise mix, sales trends, consumer research and more. They have poured over the analytics on price sensitivity and promotional activity and know how to craft ‘call to action’ messages that will trigger an action on the purchase path.

3. Customer Insight

Great retailers know who their customers are – and also who they are not. A flat pack self-assembly furniture retailer will not waste time courting customers who can afford to buy ready-built furniture. Similarly, an airline who embraces retailing acquires, converts and engages with its customer segments and then aims to develop a stronger relationship with its customers. Integrating data from all sources enables a retailer to develop greater customer insight and personalise customer recommendations.

4. Cross-Sell and Upsell

Retailing can be both complex and paradoxical. Many airlines report that they have to make their merchandising capabilities work hard to capture ancillary sales during the initial seat booking phase. However, as the customer mindset changes when they get closer to their trip, products such as meals, seat upgrades and destination activities may then be viewed as a valid affordable choice. When a customer is booking a flight, the emphasis is on getting the best fare. Ancillaries not related to the fare can be ignored. But, using a comprehensive customer journey touchpoint strategy before, during and after the booking has been made, the same ancillary products are viewed differently, and the cross-sell and upsell can be much easier.

5. Good Retailing is an Art

Henry Harteveldt of Atmosphere Research Group, a consultancy focused on the global travel industry, points out: ‘The concept of retail merchandising balances creative elements with commercial considerations. A good retailer will sell a customer just about anything in its store. As travel sellers intensify their emphasis on selling ancillary products, they are realising that much of what they sell can be considered to be an ancillary product’.


The Seven Steps to Transform your Airline Business Model

How can an airline adapt the principles of retail? Airlines that embark on retail transformation projects with a view to capturing this opportunity have to fundamentally assess how to develop their strategic mindset, much more than deliver a series of technology infrastructure projects. Adopting the mindset of a good retailer, means that you have to create a defined customer experience, personalise your approach, choose the right content by connecting with the right suppliers, differentiate your proposition and develop the capability to control and orchestrate all of this directly.

Let’s get ready to be an airline retailer – here’s how step by step:

1. Get Experience

Customer experience is based upon the sum of all the interactions a person has with an airline – it is becoming the defining differentiator between companies. The consumer now has a set of expectations forged by their contact with the great retailers, and the platform-based disruptor brands, including Uber and AirBnB. These businesses focus on delivering a consistently excellent customer experience (CX), and airlines need to respond by delivering a seamless experience across all devices, platforms and touchpoints.

Airline Retail Customer Experience
Airline Retail Customer Experience

2. Get Converting

Adopting a retailer mind-set means understanding that there is a long window of opportunity to sell relevant products to customers before departure. Research from Yieldr shows that the average booking window is 78 days with a breakdown of 81 days for LCCs and 55 days for scheduled carriers. Within this timeline there will be optimal moments that matter for the customer; these will be the times when they are most receptive to recommendation of certain products. The ‘secret sauce’ is the potential for a real time response to a customer signal with the perfect product based on signals of intent and past purchase history.

3. Get Content

The most crucial element of creating a retail capability is the ability to supply and support a broad range of products. This gives the airline leverage and supports the differentiated proposition. There are multiple supply models: connecting aggregators, connecting directly to hotels, or even individually selected destination attractions. Seamless API technology is now available that enables an airline to become a direct supplier of products and develop exclusive inventory to make more tailored recommendations, and support this across multiple channels.

4. Get Differentiated

Good retailers stock the shelf the way they want to, with their own products or with partner products that are curated in such a way so that they are differentiated from the competitors. Applying your airlines’ unique knowledge of customer preferences, behaviour and purchase history means that you can select the right product supply, for example, a chain of boutique hotels, and create combination retail offers for any flight and travel product. These can be your own products, or part of those products combined and made available.

Big Data in Airline Retail and Conversion
Big Data in Airline Retail and Conversion

5. Get Data

There is no retailing strategy without data. Data-driven insights lead to better customer insight. With airlines able to collect and analyse more and more traveller data (including mobile app and social media behaviour, session history from in-flight connections, travel history and previous purchases), it is essential that this information be captured, stored and shared, to create a single unified traveller view. This will enable personalised search results so that the airline can merchandise the right products at the right time to the right person.

6. Get Control

Integrating all data will enable an airline to develop greater customer insight and personalise customer recommendations. But it is the combination of insight, personalisation and recommendations that provides the ‘magic sauce’ that enables airlines to use their data. Just like a retailer, an airline needs to ensure it has the correct tools at its fingertips that take contextual data and generate tailored offers to match the brand and then funnel these products to the right segment of the customer demographic – across all channels.

7. Get Personal

The objective should be to personalise a customers’ experience and by doing so make things as easy as possible in the online customer journey. Personalisation is about offering the right product at the right time to customers based on their prior history and/or current context. This is particularly important in the world of mobile where customers’ are looking to efficiently transact from the palm of their hand. Airlines already have an advantage in the wealth of customer data they possess and use profiling engines to identify the customer if they can collate it from their different sources of data and integrate it on one platform. Once the booking process is started, even if abandoned, the airline has already gathered incredibly useful data that puts it ahead of other travel vendors and data gathering can continue with customer opt-ins for email updates, app downloads etc

Airline products and personal dynamic packaging
Airline products and personal dynamic packaging

And finally, once an airline starts thinking about identifying and solving customer wants and desires rather than selling seats, then it can realise the opportunity to become a retailer. Airlines need to view the flight seat as just one of many products that can be developed and offered to meet both the practical needs and the more emotional desires of travellers.

By adopting a retail mind-set, airlines are always better positioned to provide a superlative customer experience. This is how to generate incremental revenue, build loyalty and engender the goodwill that translates into lifetime customer value. The right business partner and technology platform will put an airline in control of the product, the experience and the consumer data thereby unlocking the value beyond the selling of a seat.