Don’t forget the customer when selling air travel ancillaries

I have been following IATA’s New Distribution Capability (NDC) initiative avidly for over a year, firstly from a professional interest (i.e. how it will work) and secondly from a consumer interest as a keen traveller.

I get that NDC will enable legacy airlines to unbundle their services and prices and make them available and transparent to their customers across all their distribution channels. Specifically make more money (and presumably profits) from ancillary sales by copying the Low Cost Carrier (LCC) model. From a passenger perspective, it’s all about giving me the choice to buy or not buy, or in other words, to pay for what I use and not for what I don’t. Of course unbundling an integrated product and coaxing consumer behaviour towards paying for something that used to be free is never straightforward.

Indeed, the whole business of selling airline tickets is complicated and the arrival of NDC is adding a layer of complexity to accommodate this richer fare structure environment. For both the airline, the third party distribution channels and for passengers – IATA’s attempts to steer airlines towards 21st century retailing – will help them reap rich rewards.

Exploding air travel ancillaries

There is much to say about the new airline distribution landscape that is emerging: what the compelling forces are, the merchandising technology available to support it, the analytics to determine what’s working (and what’s not), future predictions for the industry and indeed anything in between. I’ll be sure to tackle some of those later, but for this article, I want to focus on the ‘buyer’ of airline services (that is you and me) based in part on a recent trip with an LCC whose unbundled service model legacy carriers are scrambling to adopt. Why? Over the past five years, ultra-low-cost carriers like Ryanair and EasyJet in Europe and Spirt in the US have consistently outperformed the legacy carriers in terms of profitability. The data shows that the traditional promise of a nicer experience for an inclusive higher price doesn’t persuade the passengers on short haul flights, not if the LCC version is available.

According to CarTrawler Yearbook of Ancillary Revenue compiled by IdeaWorks, ancillary revenue in 2014 was $49 billion worldwide, a rise of 17.2 percent on 2013. As NDC enables the selling of ancillaries across distribution platforms and more and more legacy airlines recognise its profit potential, this number will continue to rise. However, the trend towards smaller seats and less free amenities is meeting with consumer frustration so airlines need to make sure that their passengers understand and appreciate the value to be derived from being able to choose. Ancillaries need to be turned into personal ‘value’ rather than ‘expensive extras‘. To do this they will need to demonstrate that customer needs, preferences and buying behaviour count for something.

Price Sensitivity

Air travel seems to have fallen into the curious trap of commoditisation. As a means of getting from A to B for business or pleasure, almost more than any other similar purchase travel seems to be bought increasingly on price. Hotels get picked according to their amenities (represented by their stars), and expensive restaurants successfully attract diners with their superior service and food offerings. People make conscious choices for a cheap room or meal or an expensive equivalent depending on the mood and the occasion. Whether travel, lodging or dining they are all experiences delivering memories, but when it comes to air travel, many of us seem to want to cut corners or resent paying the extra. Obviously there are plenty of business travellers and high-net worth individuals who will happily pay for a better experience in the sky, but I think it is fair to say that the rest of us (and even some business travellers these days) shop around for ‘value’.

This may be because we are not convinced that the extra airlines want to charge will actually deliver value. There are just too many variables on the day: weather conditions, plane type (old or new), possible mechanical or operational issues, crew helpfulness (or not), number of babies or children on board, etc. Additionally, when buying the ticket we don’t know how we will feel. If we are running late we might be interested in speedy boarding, or pre-ordering a meal – but adding optional extras close to flying seems hard to do. And if a mistake is made with a name or date during the booking process, any subsequent change becomes a costly ancillary charge. The ancillary fee world that the airlines have created may be presenting additional revenue opportunities for the airlines, but it also needs to be better perceived by the passengers. This is partly because there is often little choice in the ancillaries on offer. If you have long legs you need to buy the extra leg room and if you are travelling for more than a few days you need to pay to check-in your luggage.

So while unbundling services and wider distribution of ancillaries will undoubtedly unlock new revenues for the airlines, passengers need to be made to feel valued. Even now, many airlines fail to sell ancillaries effectively through their own channel, let alone through third parties. And NDC is also designed to offer opportunities to grow customer loyalty through segmentation and personalisation. For example, by rewarding valuable customers with free ‘extras’ such as leg room or premium seating.

Even the Global Distribution Systems (GDSs) are changing their previously intransigent position and are moving to accommodate both LCCs and the sale of ancillary products.

Airlines as Retailers

Full service airlines can increase ancillaries without sacrificing the customer experience by thinking like retailers to enhance their retailing propositions and customer segmentations. In other words not just sell flights from A to B, but travel experiences. Just replicating the more blatant service unbundling that has been the characteristic of the pioneering low cost airlines will not be the best recipe for their brands. The next wave of innovation in ancillary services will come from those airlines which develop new products that support their brand positioning and deliver value to the traveller by meeting their individual needs and preferences. Not all passengers have the same wants and wishes, so getting the merchandising right is about looking closely at the data and understanding customer preferences, history, and current travel context. Armed with such insights airlines have an opportunity to create travel bundles that align with a passenger’s known preferences and context, e.g. business vs. leisure or alone versus family, as well as his purchase history or loyalty status (if known).

Timing can also be important, in terms of knowing the best time during the travel experience to make an offer.

Some concrete examples of enticing ancillaries could be:

• Pre-ordering food and drink offerings from an itemised price list either at time of booking or a few days before departure (perhaps at a discount for early ordering). This would have the advantage of ensuring the airline doesn’t run out of a passenger’s choice and the airline knows more accurately in advance what the choices might be
• Families could be guaranteed seats together at time of booking at a family rate
• Access to on-board Wi-Fi and entertainment services according to personal preferences
• Offering frequent flyer perks to infrequent flyers for a fee

And of course airlines can become even better at selling (and getting commission from) hire cars, accommodation, insurance products, rail and bus tickets, taxi vouchers, attractions and events, etc., through all distribution channels including their mobile apps. All of this is already taking shape in some form somewhere. Using inflight Wi-Fi and bring your own devices is another area where airline marketing executives are keen to find ways of adding consumer choice.

Hunter Keay, a renowned airlines industry guru with Wolfe Research recently contended that consumers actually like airline fees simply because they can be in control of what they are actually consume for their trip.

Consumer Behaviour

Mastering ancillary merchandising will help airlines to differentiate the shopping experience for their customers in the NDC enabled world. By being able to connect directly with consumers at OTAs or metasearch engines via an API (or directly via the carrier web-site) or via the established GDSs airlines will be able to change pricing, amenities, and features depending on known traveller needs and context. While price may still be a dominant consideration, airlines will be able to throw in other “value” items that can steer the decision away from pure price to a value trade-off. When consumers can make real choices, the more they will be able to link the purchasing experience to the flying experience. At a conference, Bob Healey, CarTrawler’s Co-founder used the perfect example of customer buying psychology when he cited researcher Dan Ariely and the Economist example of offering ‘a no brainer’ subscription offer. The challenge for airlines is to develop the ‘no brainer’ offers.