Ai Editorial: If tech isn’t inhibiting merchandising, then what ails airlines?

First Published on 16th May, 2017

Ai Editorial: Airlines do acknowledge the potential of ancillary revenue generation but the existing “mindset” isn’t easy to change, writes Ai’s Ritesh Gupta

 

Airlines are reluctantly realizing that what they sell and how they sell has to change.

“The cinema makes more profit on the popcorn than the ticket, the profit for a petrol station comes from its shop selling a wide range of products. Like the petrol industry experienced, the distribution is also slowing down the innovation as that is where the profit sits in the chain,” says Paxport’s CEO Tony Barker. “Culturally the airline industry is very operationally-orientated, the focus is on cost and low risk. The first thought with any new innovation ideas are what if it goes wrong and then they think of all the systems that have to be changed, not possible, carry on as usual.”

Capitalizing on technology

Airlines have to plan and have a strategy to embrace the opportunities technology gives them in terms of actually lowering costs, creating revenue from different areas and how the passenger experience can be more seamless and predictive/ contextual that can also be driven by a spate of devices or by the passenger’s digital platforms/ social media accounts, chatbots or ecosystems like Google, Tencent etc.

This planning needs to done by experienced personnel, not Director of Operations or IT Director. Any commodity-orientated industry finds it difficult to accept, sweets and cigarettes for example can give more profit than petrol. Some people on the board need to come from retailing background to drive the change,  otherwise it will not work, says Barker.

In an era where a digital transaction or marketing attribution is being scrutinized over micro-moments, a travel e-commerce purchase is a complex analysis, encompassing cross-device identification, cross-channel campaigns. Every carrier might not be doing it, but it is actually feasible. As an airline you first have to describe what you want to do in terms of the passenger experience, describe the improvements for the passenger and then forecast the anticipated increment in revenue generation and retention factor.

 

The key here is to crack the intent of passengers, aiding their decision-making at the right time that eventually results in a conversion or helps them in their journey. A couple of examples:  

·          Content via chatbots: A passenger opts to interact with an airline’s chatbot, can this passenger be shown the in-flight meal and allowed to be paid for the same? The chatbot should know the passenger is flying, consumers now expect this. Make it easy and attractive, 3 letter codes for a meal is not so mouth watering!

·          If a passenger has to go into a website to order some extra services and reinput their booking number etc you are immediately at a conversion level 3-4 times lower than if an airline had actively offered the service to the passenger.

·          Personalised video retargeting via Facebook: Say a user is looking at a friend’s holiday video on Facebook, can this user be shown a video related to the previously abandoned cart on airline.com?

Many services are now becoming valued as an experience, flying is not just a seat to transport a human from A to B. Passengers will pay more for an improved experience, it is likely that the cost of the ticket will soon be almost free, this is the price to “capture” a passenger and have the opportunity to sell them other services, this “data” is very valuable, you know what they are doing (business, holiday, visiting family) and you have their attention for a few hours, actually a retailers’ dream, imagine if you had to stay in IKEA for 3 hours! So if your prices are going down and you are not compensating this with other revenue it is not surprising the profit margin is being squeezed.

The arena of merchandising and digital commerce is evolving, so how are airlines responding to it?

Tech not a constraint, “mindset” is  

“The industry (airlines) at large tends to be operationally, process and cost focused, and not so much on their customers (passengers) from a retailing perspective,” says Barker. Rather airlines need to exploit the data, content (not just the fare) and technology they do have available to make the travel more seamless, more predictive and come up with the right offer (at different opportune times), the battle between the reseller, airport or airline to control/ capture the traveller is on and at the moment the airline is not grabbing the same so well, indicated Barker. Airlines should help the indirect selling market sell more of their services not fight against them, for example.

As we dig deeper, it is clear that airlines at large aren’t savvy enough to embrace the requisite organizational change needed to become a retailing organisation. Some airlines are embracing the NDC to give them more control but there is still a long way to go. “It is very difficult to bring in change (in this industry), we have many years of legacy and those legacy systems are very well embedded ,” says Barker. BSP is celebrating its 31st year anniversary for example!

Airlines do acknowledge the potential of ancillary revenue generation but the existing “mindset” isn’t easy to change. Some airlines think loyalty cards and fare upgrades are the main ancillary services. Legacy technology is hard to deal with but if you expect to get a real retailing result using the same system it is like expecting a car with an old engine with a few tweaks to turn into a Formula One racing car.” Even if you have a Formula 1 car then make sure you have a good driver, not the one who drove the old car! You would not use a petrol pump engineer to design the shop?

In fact, a section of the industry asserts its time business processes that are still based on the paper-based workflows are done away with. If there is a full reliance on those legacy systems for back-office processes such as revenue accounting, revenue management, interline ticketing, and pricing, among many other functions, there will be limitations to the capabilities possible through digital transformation. With this weight on your shoulders, eventually the decision-making tends to drift toward – “we are different, e-commerce isn’t for us the way retailers do it, it is costly for us,”. Old tech isn’t ready, but making the most of SOA, microservices, API-led architecture etc. to extract data out of legacy systems, and embrace agility it is there. NDC, for example, is a worthy initiative, it is the key to the warehouse which can be offered to a wider market, then the next steps need to be taken.

Acting like a retailer

Barker recommends that there are several simple, smart merchandising techniques that can result in significantly stepping up the profit per passenger.

He cites the simple example of buying milk from a store where also the shopping trip ends up with a few other “spontaneous purchases” – placing the milk in a strategic place is no coincidence, as the shopper passes by he/she picks up other essentials or goodies. “One would not drive a few extra kilometres to buy those goodies” pointed out Barker. Airlines need to focus on design, content, frictionless checkout etc. to come across as a facilitator of travel essentials. There is no need to “heavy-lifting” like analytics for certain initiatives, may be cohort analysis or access to data related to a holiday is enough to sell ancillaries (opening up of PNR data). Similarly, airlines need to look at intricacies of capitalizing on the traffic or a booker, who can buy more items (during the booking flow, post purchase email or retargeting etc.). We know for example conversions went up by approx. 30% when we launched the post booking communication for some customers.”

Also, Barker categorically says technology isn’t a constraint (cabin crew today can be prepared to interact with passengers based on the purchase history and look beyond addressing one by mere name), airline’s content is being under-utilized for differentiation and data about a passenger can be plugged in (from CRM or a data management platform) to optimize merchandising opportunities. Some big, established traditional carriers are leading the change, some momentum is happening, but there is lot of hesitation from an organizational change perspective (a few skeptics in the camp & hurdles from the legacy providers),” he shared.

 So how to overcome such hurdles pertaining to embracing change and optimizing merchandising?

Barker emphasised on a couple of points –

·          Be clear about the position that the carrier has finalized, identify customer pain points within the framework of operations, and then act on it. If experience optimization can cover the entire journey of passengers, be it for simplifying check-in or enticing them to buy an upgrade, then the same can propel the overall merchandising strategy.

·          A basic example if choice of seating is not creating approx. €5 per passenger there is more work to be done. Quite a few carriers will say “we do choice of seating”, when you ask them the revenue, conversions and what channels passenger can buy this service there is normally a silence!

·          Keep an eye on data flow and predictive, robotic marketing – how recognition of data patterns can make the most of every interaction, touchpoint? Is there already a tendency among today’s generation to switch over to voice search rather than typing keywords? Who is controlling the data flow, and what role the likes of Google are going to play?  For instance, as also explained during Ai’s Ancillary Merchandising Conference in Palma de Mallorca in April, use interactions, especially on mobile, to connect data. Did a passenger respond to a push notification urging them to sign up for a new frequent flyer program or redemption offer? Did they activate a mobile coupon for free lounge access?

·          Bring in outside expertise at least to understand how well the airline is doing and what could the first steps to do to bring them nearer to a retailing experience.

But even as airlines strengthen their initiatives (even the extent of digital transformation), one shouldn’t ignore some of smart ways to garner incremental revenue even today. There is a lot of low hanging fruit.

Barker referred to the “pre-order” service in Scandinavia. “Airlines experience a  ‎€70 average order buying, very often with a 15% conversion. Customers can choose their duty-free in advance. Technology isn’t an issue rather the drive or willingness to do it is the biggest hurdle. Look for right KPIs and return on investment with whatever is being done.  Airlines should look at the 15% conversion rate rather than worrying about .5% fulfillment error!

Technology can also really reduce waste, many airlines accept a 35+% food wastage, with preorder of food not only do you reduce waste but you can offer a more appetizing range of food which will increase the demand and revenue. Fewer passengers will buy food before they get on plane! When you know and see what is being demanded you can respond as well, it does not need to take 18 months to change explained Barker.

Such initiatives aren’t dwelling on personalisation on individual basis. Sophisticated analysis isn’t too far off, and in fact, by starting with the basic analytics (demographics, income etc. of passengers) and banking on the power of APIs or standard language going forward, airlines can make real progress with revenue from other sources which will significantly contribute to the financial performance. Some customers achieve above normal profits today and a lot of that revenue is through the ancillaries that are offered, they just do it better.    

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