INSIGHT
The Future of Airline Merchandizing
Since the 1970s, airline distribution has centered on the Global Distribution Systems (GDS).
Airlines loaded fixed fares into the GDS for agents to sell on a per seat or flight basis.
The internet changed all that by giving travelers direct access to suppliers. The emergence of the millennial, ‘always on’ generation created unprecedented demand for travel-related content available digitally, and the depth of traveler data available to mine.
Today, personalized travel experiences booked simply, quickly and seamlessly through multiple digital channels including mobile, are basic consumer expectations. The International Air Transport Association’s (IATA) New Distribution Capability (NDC) has opened up new opportunities and has changed the future of airline merchandizing.
NDC is a communications protocol or XML technology standard that transmits travel data in a new way. It enables airlines to distribute their content to TMCs and other third parties in a single, seamless transaction, either directly to the consumer or via an intermediary. NDC aims to ensure the best available deals and offers are available through both indirect and direct channels. Airlines can differentiate their products from the competition in ways other than ticket price whilst reducing distribution costs.
NDC appeals to airlines because it offers them the opportunity to differentiate their brands; to aggregate or separate product offerings and to create offers for specific customer groups. Collectively, this enables airlines to attract higher yield passengers.
Airlines are investing in their NDC capability because ancillary products such as lounge access, pre-check bags, on-board food and drinks cannot be booked through traditional GDS channels, requiring a separate transaction. However they offer the greatest additional perceived value to the customer at minimal cost to the airline.
Although, by culture, airlines are not digital natives, most are now trying to join up a great digital customer experience with effective merchandizing by deploying agile booking technology, dynamic pricing, merchandizing and marketing automation. Success is based on adopting a retail mind-set and, connecting a consistent customer experience in all offline and online environments.
Injecting digital into airline DNA involves them becoming online retailers with software engineers, analysts and data scientists playing as important a role as revenue management. Some are just getting into machine-learning, robotics and the integration of Artificial Intelligence into their booking systems. Their goal is higher ancillary revenues and a greater connection with the customer, enabling more personalized sales process.
Most airlines have a raft of ancillary products they want to sell; data analytics and personalization are the tools that will help them to identify those customers most likely to purchase them.
Charging models have become more creative too, with carriers charging for services other than the ticket price through frequent flyer miles, bidding for spare seats next to you, on-time guarantees, lounge access and bundling with hotel bookings, holidays and car rental.
Today’s traveler expects an Amazon-like shopping experience and the Online Travel Agents (OTAs) have given it to them. Airlines wanting to persuade consumers to book direct have t not only match the ease, speed and rich of content of the OTA – they have to beat them at their own game.
Customer Buying Behavior is Changing
With more and more consumers checking flight times, airport gates and booking through mobile, the airline value proposition is increasingly about shopping from a small screen.
As a result, airlines are becoming more customer centric organizations, moving away from the ‘pile it high, sell it cheap’ of the wholesaler to the margin-orientated, high service ethics of the retailer. The challenge for airlines is therefore to create ancillary products that truly all value, enabling them to ‘push’ offers consumers actually want, rather than simply ‘pull’ by fulfilling demand reactively.
Although the larger airlines have made the investment in the infrastructure and skills required, e-commerce is rarely a core competency, requiring partners imbued with both to help build and execute e-commerce strategies.
Many Factors can Determine the Choice of Airline
Personal preference, the time of day at which the booking is made, and the device through which the booking is made are two others. This means airlines are having to look beyond traditional business/leisure segments to understand what those segments value. So why are they bothering?
Brand differentiation - airlines can spend millions revamping their product, but those changes are invisible in traditional distribution channels like GDS that work on old ‘green screen’ technology.
The right offer at the right time to the right customer - some airlines are adopting a Price vs Service vs Convenience paradigm to establish the point at which a perfect balance between the three elements has been reached. Value differs between customer segments.
End-game for the Airlines is Attracting High Yield Passengers
Having invested heavily in their premium cabins and experience, airlines have reshaped their distribution and premi-um offers to attract high-yield corporate travelers. The provision of fast-track check-in, boarding, additional bags and other benefits are highly valued by corporates yet cost rela-tively little for airlines to provide.
No wonder the last decade has seen significant growth in airline ancillary sales. The top 10 airlines, ranked by total ancillary revenue, generated $28 billion from ancillaries, compared to $2.1 billion in 2007.
In the same year airlines were estimated to have earned $67.4bn globally from ancillaries – around 9.1%.