The distinction, which could be done easily among various airline business models, has increasingly become less clear over the past few years. There are several elements that can define an airline business model and these may include profitability, cost drivers, revenue achievement, connectivity, service level, destinations served, distribution/sales, aircraft productivity, labor productivity, and market structure.
The global aviation industry suffered a disastrous 2009-2010, marked by bankruptcies, shrinkage in airline networks and service levels, and overall industry-wide losses of US$9.4 billion. Around mid-2010, Emirates Airline shared that it faced the same challenges as other airlines, although it was fortunate to be operating in the Middle East where there was still positive growth in air travel. Even for 2010, the Middle East region performed exceptionally well. Middle Eastern carriers reported the strongest full year growth at 17.8 percent on the back of a 13.2 percent capacity increase fueled largely by aircraft deliveries to Gulf-based airlines.
Reflecting upon 2010, IATA (International Air Transport Association) mentioned that the world has started to move again. After the biggest demand decline in the history of aviation in 2009, people started to travel and do business again in 2010. Airlines ended the year slightly ahead of early 2008 volumes, but with a pathetic 2.7 percent profit margin. The challenge is to turn the demand for mobility into sustainable profits, stated IATA.
As far as the impact on the approach towards business is concerned, 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.
Competition has led many LCCs to adopt attributes of network operators, including frequent flyer programs and, most particularly, the ability to connect with other airlines’ services. 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.
Assessing the situation, Nura Akbar, eCommerce Manager, Emirates, said both efforts are strategies to sustain growth.
Akbar mentioned that in order to expand its network without constraining resources, LCCs would need to partner with other airlines’ services. And LCCs, too, have shown great success by unbundling a flight service and offering add-ons for additional convenience to customers, e.g., reserved seating, check-in baggage allowance, etc.
Akbar added: “Full-service carriers approaching this “add-on” idea must focus on how it adds a convenience to customers and not take away a privilege that was always offered; for example, Emirates offers pre-flight excess baggage purchase at a discount for customers who need it on top of the generous 30 kg baggage allowance we already offer.”
Filling gaps in distribution
In the US, American Airlines has developed an alternative method of providing airline booking services to travel agents — called AA Direct Connect — that, according to the airline, is based on modern, efficient, flexible, and less-costly technology than the technology that the GDSs use. AA Direct Connect allows American to provide its own flight, fare, and other ticketing information directly to travel agencies and compensate them directly for any bookings they make.
On the other hand, low-cost carriers continue to push for more low-cost distribution models to be able to offer even lower fares to their passengers. Having direct access to those who book their tickets, aids greatly in this endeavor.
The growth of XML messaging technology, more robust computing power, and lower connectivity costs have enabled carriers to have more direct distribution models.
Assessing the situation, Akbar said: “Airlines, just like any other products, aim for optimized distribution channels without cannibalizing one for another. If you could sell your products via many stores, wouldn’t that increase your sales opportunities?”
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 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.
“Ancillary products and services should serve specific customer needs, e.g., additional baggage allowance vs. hefty excess baggage charges at the airport or needing a hotel booking together with air ticket in a single transaction. Today it is often misconstrued as a revenue generating channel because of the variations of products and services, high take-up rate and thus high revenue. Currently, airlines are challenged to be innovative in finding out what ancillary products/services truly serve a customer’s need, e.g., paying extra for a seat with extra legroom because the customer is very tall,” said Akbar.
Ancillary services are also key to helping travel suppliers find ways to better respond to and serve travelers’ needs for additional services or amenities in order to have more enjoyable, productive trips.
On how an airline should go about expanding their ancillary offerings, Akbar said the approach should always be customer-focused, i.e., how can we improve to meet the customers’ needs and the way to find this out is through customer engagement.
“With many airlines focusing on growing their business online, this interaction is now minimalized, but opportunities are created elsewhere; for example, when customers call the call center or come back online to manage their bookings – these are key touchpoints between airlines and customers,” Akbar said.
Travel Distribution Summit Asia 2011
Nura Akbar, eCommerce Manager, Emirates is scheduled to speak at the forthcoming Travel Distribution Summit Asia 2011, to be held in Singapore (May 18-19, 2011).