Understanding the evolution of airline business models and associated changes in distribution
Competition has led many Limited Liability Companies (LCCs) to adopt attributes of network operators, including frequent flyer programs and, most particularly, the ability to connect with other airlin
Competition has led many Limited Liability Companies (LCCs) to adopt attributes of network operators, including frequent flyer programs and, most particularly, the ability to connect with other airlines’ services.
Recently, the Centre for Pacific Aviation (CAPA) highlighted that many full service carriers, on the other hand, looked to the LCCs for clues on how to enhance income, finally in many cases adopting their ancillary revenue systems and making themselves look more like their low-cost opponents.
Airlines have been focusing on removing non-essential costs, and overall maximizing profitability by developing a portfolio of routes with consistently high passenger load factors and carefully managing capacity.
And in order to meet their objectives, they have re-focused on their core offering.
“Each airline has to be clear about its value proposition,” said Candice Iyog, VP – marketing and distribution, Cebu Pacific Air (CEB). Iyog says one has to be clear about: what is it that you are promising guests?
In Cebu Pacific’s case, the airline promises three things:
1. We get you from point A to point B in the soonest possible time,
2. We offer the lowest fares, and
3. We do it with a smile and with our brand of fun!
“You have to know what category you compete in, and stay focused in consistently offering products and services aligned with your airline brand,” said Iyog, who is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2011, to be held in Singapore (May 18-19, 2011).
Impact on distribution
The airline product, as highlighted by American Airlines, has evolved into a collection fares and optional services that can be mixed and matched according to the needs of individual customer segments. The airline has highlighted that the Internet, which first revolutionized the way that customers interact with both travel agencies and airlines, is now facilitating closer interaction between travel agencies and airlines for the benefit of the customer. These two factors – merchandising and XML-based direct connects – present an opportunity for airlines to sell more of what customers demand and reduce distribution costs, for travel agencies to offer richer and more personalized offerings, for corporate travel managers to better report and control the spend of their travelers, and for all customers to have greater visibility, choice, and control of their travel experience.
The growth of XML messaging technology, more robust computing power, and lower connectivity costs have enabled carriers to have more direct distribution models.
“You do what you need to do to bridge the distribution gaps and XML messaging is one of them. As a low-cost carrier, we continue to push for more low-cost distribution models to be able to offer even lower fares to our passengers. Having direct access to those who book our tickets aids greatly in this endeavor,” Iyog told EyeforTravel’s Ritesh Gupta.
The whole flight planning and booking experience is also undergoing a change. Travel intermediaries are also highlighting several aspects of the overall airline experience.
For instance, earlier this year, TripAdvisor Flights introduced eight airline rating categories, covering various aspects of the flight experience that can be rated by travellers on a scale of one to five:
• Baggage Handling – Do bags make it through smoothly or get lost in the shuffle?
• Check-in Experience.
• In-Flight Amenities – Can travelers expect seatback entertainment and in-flight Wi-Fi or hours of checking their watch?
• In-Flight Service – Is flight staff friendly and attentive or rude and neglectful?
• Punctuality – Are flights often on time or routinely delayed?
• Reasonableness of Fees – Does the airline make fees clear and reasonable, or do they add a significant hidden cost to the price of a ticket?
• Seat Comfort – Can travelers expect a comfy ride, or will they need to schedule an appointment with their chiropractor?
• Value – Is the total flight cost a good value, or will it empty a traveler’s wallet?
Merchandising and ancillary revenue
Ancillary revenue is surely a proposition, which airlines seemingly can’t do without especially when companies are constantly working on covering all of customers’ travel needs and keep them loyal by packaging additional content. At the same time, any discussion of ancillary revenue should also include a realization of the how the core revenue is being sold.
Merchandising and ancillary revenue are helping airlines in improving their bottom line results. Baggage fees, travel insurance, and vacation packaging are rated among the highest revenue generators.
US carriers have pioneered the way of ancillary revenue, airlines in Europe are starting with this now, and Asian carriers are showing keen interest in this new business model. Consumers paid more than US$9.2 billion in fees to US airlines in 2010 for checked baggage and other services.
There is a huge revenue opportunity for Asian airlines in cultivating ancillaries as part of their overall business strategy. Airlines across Asia have been stepping up their efforts to capture new revenue growth through ancillary revenue.
More and more airlines across the region are now involved in merchandising strategies such as branded fares or ancillary products and services. Recently, Abacus highlighted that ancillary revenue earnings by Asia-Pacific legacy carriers currently represent up to 12 percent of total revenue. For budget carriers, they make up 15 to 25 percent of total revenue.
From an airline’s perspective, Iyog said, “We’re happy with how our ancillaries’ performances are trending for CEB. We’ve pretty much put in place the right ancillary products for our passengers, from Fun Tours packages and Hotels Plus, to seat selection, [a] sports equipment option, and travel insurance. Lately, our focus is on driving conversions. People know their options are there, so they should avail of it, too.”
Robert Bailey, Abacus International President and CEO, said, “Although Asia Pacific carriers in general have been more cautious to the ancillary business model, it is an area of revenue that simply cannot be ignored. Both budget airlines and network carriers alike want a piece of this pie – it’s simply a matter of when and how.”
Airlines will also need to spend time to be prepared, as the International Air Transport Association (IATA) has set a deadline of 2012 for airlines to comply with electronic miscellaneous document (EMD) standards, which would be used to track the sale of ancillary services. The EMD would serve as an e-coupon attached to a specific trip for ancillary purchases like checked baggage, inflight Wi-Fi, and lounge access. EMDs would be used on ancillary purchases made directly through an airline and via travel agencies.
Travel suppliers also need to work on ways to make the most of third-party services to become better retailers, build brand differentiation, and deliver the types of services that travelers are demanding. Third-party ancillary services are those operated or delivered by a third-party provider to the travel supplier, for which the supplier earns revenue via the payment of fees or commissions from the third party.
There is growing recognition that third-party ancillary services will become important revenue contributors to travel suppliers, provided they offer a relevant product mix and make these services available throughout a journey and across channels. Third-party ancillary services offer the potential for travel suppliers to extend the length and breadth of traveler interactions before, during, and after a trip.
In its study released this year, Amadeus underlined that third-party ancillary services provide travel suppliers with an underexplored revenue-generating opportunity, expected to increase by 30 percent by 2015 compared to 2010.
Cebu Pacific has a support team in charge of providing consistent high-quality travel products, said Iyog.
“We co-brand some of our travel products, such as travel insurance and car rental services, but the rest are arranged within CEB,” said Iyog. “We continuously research and study how to find the right ancillaries to complement existing travel products. We also focus on streamlining processes and driving conversions. This can be as simple as progressing from Duty Free offerings onboard to accepting credit card payments for said transactions. You have to keep up with your passengers’ needs and sustain your brand’s quality.”
Candice Iyog, VP – marketing and distribution, Cebu Pacific Air scheduled to speak at the forthcoming Travel Distribution Summit Asia 2011, to be held in Singapore (May 18-19, 2011).
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