In this four-part series, we’ll be examining the what, why, how and outcomes of instilling a growth framework into an airline.
- Part 1: The What & Why of the Airline Growth Framework
- Part 2: How to Implement Growth in Airlines
- Part 3: Accelerating Growth with Personalization, CX & Dynamic Pricing
- Part 4: Growing Airlines with Direct Distribution & Demand Forecasting
We’ve looked at why airlines should shift to a growth mindset and how that shift can occur. Now it’s time to get to the heart of our framework and break down exactly what an airline can achieve. In this piece, we’ll discuss the oft-mentioned topics of personalization, customer experience and dynamic pricing.
1. Personalization and Customer Experience
McKinsey estimates that airlines could reap a 5-10% improvement in total revenue by leveraging advanced technology and analytics. They stress that this opportunity must be seized now, before the moment is lost:
“If they wait along with all the other airlines for RM systems providers to innovate on their behalf, they will lose their chance at a competitive edge.”
“In an era when optimization of distinct processes and departments has met its ceiling, this opportunity is too big to pass up.”
To be more precise, the competitive edge to be had is an ability to create predictive and prescriptive revenue-optimization models. This goes beyond just filling empty seats and shifting the demand of bespoke flights. Airlines need to start looking beyond the initial ticket sale to truly optimize total revenue.
By incorporating the right analytics and tech stack, airlines can put a greater focus on personalization, allowing for more precise pricing and upselling opportunities. By having the right customer insights – not only attributes but also passenger-level data – a more complete customer view can come into focus.
A Forbes article looked at customer-centric companies from South America and referenced Colombian national carrier Avianca. The writer states, “Avianca uses data to put customers at the center of everything it does. The company collects data on each flight and every customer interaction to create customer profiles that include their travel history and preferences.”
The article goes on to say that when a customer contacts Avianca or checks in, employees give personalized services and recommend products the customer would like. Top customers can also easily be identified and rewarded for their loyalty.
This becomes a powerful strategy, especially when it comes to ancillaries and optimizing revenue on the entire trip/customer lifetime value, rather than just the ticket sale.
Let’s use a hypothetical example. Frequent business traveler Geraldo makes a weekly round-trip flight from Bogota to Medellin. It’s a short flight, so he doesn’t mind flying economy. You even make sure his preferred window seat is available.
However, your revenue data shows that there is often an open business class window seat on his typical evening return flight from Medellin. Knowing he’s traveling for business on a stipend, you offer him a special price on the open seat, which he takes.
In the end, you delight your loyal customer with a desired upgrade, increase his recurring flight booking revenue and open up his economy class seat, which is easier to sell.
Personalization seems to be that just out of reach ambition for not just airlines, but many brands. However, as we stressed in Part Two of our series, it’s important to lay a strong foundation by establishing a strong data culture. From there, the experience needs to be a focal point.
The Customer Experience
As flying becomes increasingly commoditized as a means to just get from Point A, a key differentiator will be improving the experience. After all, consumers (especially relating to travel) are not so much buying a product as they are an experience.
Delta CEO Ed Bastian recently discussed how Delta is innovating the travel experience, stating:
“[Delta's] goal is to make travel something customers don't have to endure, but a magical experience.”
Bastian said data is helping Delta to build relationships with its nearly 200 million annual customers by giving the airline's 80,000 employees more meaningful information at their fingertips about any customer.
Some specific ways Delta is elevating the customer experience is using RFID bag tracking technology, launching the first biometric terminal in the U.S. and automatic check-ins. But a more relevant example is how Delta is using the power of machine learning to serve up customer insights to employees, so they can engage more meaningfully with customers.
The airline is giving flight attendants a prioritized list of customers to recognize on each domestic flight. This is based on details like frequent flier status, achieved milestones, recent flight interruptions and standing as a business traveler.
This enables flight attendants to quickly identify the customer and personalize the engagement. This is the type of data activation coupled with personalization that creates the kind of experiences that can make an airline stand out.
2. Dynamic Pricing
When talking about personalization, we’d be remiss not to also include dynamic pricing. So let’s dive into our next topic. Kristian Weymar of Lufthansa Innovation Lab sums it up best:
“A magic word on airline-strategy agendas is 'hyper-personalization' – the ultimate promise to offer each passenger an individual price for an individual service based on historical data points.”
“The resulting tightrope act between profit maximization, individualization and loyalty optimization may be a long time coming, but it is definitely approaching.”
Primarily, we are seeing the most deployed pricing strategy used by revenue managers being price cutting, in large part due to the rise of low-cost carriers.
We’re already seeing some airlines make progress with dynamic pricing, but there is still a great opportunity at hand. According to PROS, some airlines are implementing dynamic pricing on some search queries within their own channels, leveraging behavioral data to manage revenue.
Other examples of price experimentation can be found with bundles and subscription models. Airlines such as Swiss and KLM have rolled out flight bundles, where travelers can purchase flights for specific routes in bulk and in advance, then make flexible bookings later.
The Volaris Way
Mexican low-cost carrier Volaris has rolled out a more traditional subscription model. Executive Vice President Holger Blankenstein discussed the new revenue channel with Yieldr.
“You know there's quite a few subscription models across different verticals and sectors and industries out there; you have Spotify and Netflix and so on.”
“And so we thought, 'Why not?' You know, why not go out and see whether that's a model that works for the airline business and for customers?”
Blankenstein went on to explain how V.pass allows a traveler to build their own subscription and tailor it to their needs, as well as what it will look like in the future. This can range from international or domestic flights from a certain hub, or flying with or without luggage.
“The idea is really to let the customers decide how the subscription looks like. For now, what we have done for the initial phase to get the product out is offer domestic flights both one way and round trip. And then you select a few options and there's also an option to add other products like luggage. With that you pay a monthly amount and that monthly amount entitles you to one flight a month. The only thing you have to pay on top of that is taxes.”
These initial pricing measures seem to just be scratching the service compared to what can be achieved in the future.
The Road Ahead
While there is great promise, the road ahead is not without some stumbling blocks.
According to work published by ATPCO, moving into a world of dynamic price offerings has proven technologically difficult for the airline sector. This is mainly because of inflexible global distribution systems that date as far back as the 1970s. Within that distribution system are 26 fare classes. Prices and other parameters can be assigned to each class.
At present, carriers are able to update prices in each fare class four times per day on domestic flights and hourly on international flights, according to Tom Gregorson, Vice President of Products and Solutions for ATPCO. But it's unclear when dynamic pricing will become a possibility through a GDS or other third-party sales channels.
“In a purer version of dynamic pricing, however, airlines wouldn't file fares at all,” writes Robert Silk of Travel Weekly. “Instead, a fare offer would be generated from scratch, in real time, based on who the shopper is, the nature of the inquiry and existing demand and availability for a given flight.”
According to PROS, they have 11 clients using their software to carry out real-time dynamic offers within direct sales channels.
“Our customers have definitely seen increased conversion rates of up to 50%, and it has enabled airlines to achieve incremental revenue in the 7% to 10% range,” said John McBride, director of product management for PROS. “Dynamic pricing clearly speaks to the opportunity for airlines to service a wider range of customers with a broader set of fares.”
Airlines can achieve a lot when they invest in personalization and dynamic pricing. That’s not the only way they can reach solid results, though. Stay tuned for Part 4, where we’ll discuss how airlines should incorporate direct distribution and demand forecasting as growth strategies.