Growing Airlines with Direct Distribution and Demand Forecasting

In this four-part series, we’ll be examining the what, why, how and outcomes of instilling a growth framework into an airline.


The final part of this series continues the discussion of what airlines can achieve with specific growth strategies. This time, we'll discuss how direct distribution and demand forecasting can be used as strategies for growing airlines.

1. Direct Distribution

In Part 3 of this series, we discussed how dynamic pricing is not so easy to implement when it comes to global distribution systems or other third-party channels.

This is one of the motivations for airlines to own their distribution, rather than delegating it to third-party services. Additionally, it allows airlines can better control – and in the process, monetize – data and reduce costs so they can increase per-ticket revenue.

As a matter of fact, some of the most successful airlines are making direct distribution a focal point. Ryanair sells approximately 94% of its tickets through its own channels.

“We have done a pretty good job of protecting our product,” he said. “Other airlines have about 50 percent of their product sales coming from GDS, coming from travel agents, coming from outside their own platform,” said Ryanair CMO Kenny Jacobs.

“But everybody is coming in our front door. That’s a big, big asset. That’s what’s driving 2.5 to 3 million web visits a day.”

One asset of Ryanair that a lot of airlines don’t have the luxury of, is the fact that they didn’t suffer from being strapped to legacy systems. They were able to build their digital systems themselves from the ground up.

This digital-first, hands-on approach is one of its key differentiators against competitors in the ultra-competitive European low-cost market. Ryanair is well-positioned to upsell ancillaries, activate data, experiment with new initiatives and control and develop customer relations.

The Importance of Data

Ryanair are so protective of their data that they don’t even advertise with Google. This leads us to our next point. Data has been dubbed this generation’s black gold. You surely wouldn’t give away oil, so why do so many organizations so freely disperse its data to others? Direct distribution puts you in control of this valuable asset.

 
This is of the utmost importance because, as we previously outlined, outside forces like Facebook and Google are stepping into the space of airlines. Moreover, airlines are also missing out on a new potential revenue stream that could be had by selling their first-party data.

If this is an idea that seems far-fetched to some, once again we can find examples in adjacent industries. One of the best examples comes from the telecommunications industry. This is already a $24 billion business and growing. Mobile carriers such as Verizon, Sprint and Telefonica have partnered with data management companies to collect, segment and sell different portions of data.

One can even make the argument that passenger data from airlines is even more lucrative because it can be verified. Think about it. Before you travel, your passport or other form of identification is checked. Not many other industries can claim this level of data accuracy. We predict this will become a very lucrative industry in the not too distant future.

Money, Money, Money

It’s not just about making money, but also saving money. Most of the earnings from a ticket don’t go to an airline’s pocket. Direct distribution allows an airline to cut out – or at least cut down – costly middlemen.

Source: Statista.com

The chart above depicts the net profit per departing passenger of commercial airlines worldwide since 2005. As you can see airlines, may make a meager estimated $7.70 in 2019. The extra costs come from taxes, oil, and IT expenses among others.

Consider the billions of passengers that fly each year. If airlines can make just a fraction of these costs per passenger, the profit can be huge. By focusing on owned-channels and having less of a reliance on third parties, airlines can realize these increased profits.

2. Demand Forecasting

By owning your distribution and controlling your data, you’ll position yourself well for demand forecasting.

The goal here can be boiled down to the following: By accurately forecasting demand for each flight, class or seat, revenue management can adjust pricing to maximize revenue (think: RASK/M). This comes down to making the right predictions.

Looking at it simplistically, when demand is high and inelastic, higher fares can be deployed with less if any media spend. On the flipside, when demand is low but elastic, lower fares should be deployed with more media spend.

How the Tech Giants Leverage Demand

Outside forces are strong in this realm. Google’s deploying a new travel tool, which uses predictive artificial intelligence to prognosticate the future demands of travelers. It can even predict flight delays and notify travelers faster than actual carriers.

Google has the advantage of having a supreme amount of information on logged-in users. But again, this competition can be a means of inspiration.

By cultivating troves of BOTH revenue and customer/behavioral data (especially that lucrative information from your frequent fliers), you can create a data lake.

From here, you can analyze and create smart recommendations to serve up to your customers. Looking at the desires of travelers and your forecasts, you can create a sweet spot where your demand needs intersect with the wishes of your customers.

You have to look no further than the example we provided under the “Netflix and Recommendations” section from Part 2 of our series.

This tactic is achieved by not gating off all of the responsibility within revenue management, but by also closely involving your marketing department. With proper demand forecasting, you can also maximize the ROI and in some cases even reduce your media spend.

Proper insights show you exactly where your budget is needed and where it isn’t. Instead of wasting money and effort on that flight to Paris that’s forecasted to fly full, you can shift attention towards that underperforming flight to London.

More Tactics for Demand

Airlines can leverage additional tactics. In pricing, inspiration can be found from Uber to incorporate real-time surge pricing during times of high demand.

If airlines can do it in a transparent way, just as Uber does with its multiplier (which is the base fare times the surge price), even better. It can potentially even create demand itself by creating a sense of urgency among would-be fliers and increasing booking volume.

Another useful tactic to help with and better forecast demand is by leveraging third-party event data such as what companies like PredictHQ provide. The image below shows an integration within Yieldr Air.

As revenue managers and marketers check in on their revenue and load factor targets, they can use information provided by PredictHQ to see what might be affecting these metrics.

PredictHQ event data integrated within Yieldr Air.

Even at its most basic level, demand forecasting can become quite a complex subject. It can be even more daunting when forecasting more challenging situations brought on by entering new markets or changing market conditions. The impact of sudden events or new airlines can also shake things up.

We’ll be sure to dive deeper into this topic with future pieces of content, but wanted to tie it into our growth framework as it closely relates to the areas of dynamic pricing, collaboration and direct distribution, which we’ve also outlined.


Summary of Main Points

For now, that wraps up our growth framework for airlines, but I’m sure we’ll add later editions when we take a deeper dive into specific subjects. As this was a lengthy piece of content, let’s conclude with a breakdown of the core points:

  • The market is extremely merciless and competition is strong (even from the outside), but a lot of inspiration and a new blueprint can be drawn from these outside forces.
  • By incorporating a growth mindset, airlines can focus on efficiencies and systemic changes to accelerate long-term success over the short-term wins created by resource reduction and cost-cutting.
  • In today’s digital world, technological investment is no longer a nice to have but a means to survive .
  • This should include the incorporation of a data-first culture, which fosters cross-departmental collaboration and a shared vision across the organization.
  • By championing growth, airlines can excel in four key areas which are crucial to success and survival: personalization and customer experience, direct distribution, dynamic pricing and demand forecasting.
Joseph Vito DeLuca

Joseph Vito DeLuca

Chief Marketing Officer at Yieldr