Organic growth is very limited in mature air travel markets. In fact, most U.S. airlines faced unit revenue declines in 2016 as capacity outstripped demand in many markets. The largest U.S. airlines have embraced “capacity discipline” to keep unit revenue in check – increasing capacity in 2017 at 1-2% and shrinking in sectors experiencing limited demand growth.
Acquisitions are of course, another vehicle for airline growth. The U.S. market has seen tremendous M&A activity over the past decade. In fact, it is now commonly believed that anti-trust officials would block further acquisitions by any of the four carriers that now represent 80% of domestic capacity (American Airlines, United Airlines, Delta Airlines, and Southwest Airlines).
Another vehicle for U.S. airline growth is virtual, an arena that airlines have pursued for many years. Because much international growth is limited by various regulatory policies, airlines have exploited codeshares, joint ventures, alliances, and other virtual relationships that extend each partners’ reach into new markets without airplanes or employees. This vehicle also is largely tapped out after decades of deals.
Rather than more passengers – virtual or not – the next revenue growth opportunity for airlines is revenue per passenger. Airlines recognize this and are generally interested in new service-oriented ancillary revenue streams, including premium seats and priority boarding. But airlines still do not focus enough on third-party ancillary, perhaps the last huge growth opportunity for many airlines in mature air travel markets like the U.S.
In the U.S., only Allegiant Air has explicitly positioned itself as a full-service travel merchandiser. Allegiant likes to say that it is not an airline but a travel company that can help arrange a complete trip – air, hotel, events. Similarly, in Europe, Ryanair has said it wants to be the “amazon of travel,” and late last year launched a new vacation packaging service. They also announced they want to move into selling tickets for sports events and concerts. Such travel merchandising by airlines, however, is still in its infancy.
The U.S. travel sector estimates that airfares represent only 20-25% of the total cost of a trip – an indication that there is a large opportunity for airlines to grow revenue through commissions on third-party activity. Since many travelers begin their travel planning with the airline search, airlines have the potential to “own” the customer and facilitate other elements of a customer’s trip. And as airlines explore greater personalization in their ancillary offerings, they can extend that expertise to third-party services.
To take greater advantage of this opportunity means more than merely adding a button on the airline website for hotel or car rental, something most airlines now offer. There are three keys to more fully exploiting third party arrangements as a complete travel merchandiser:
1. Flexible and Compatible IT Platforms/Processes
Ryanair’s “amazon of travel” implies linkages to a variety of travel-related suppliers. Links to all of the various travel options often becomes a highly complicated task for airlines. Airlines that strive for increased third-party revenue need to develop a platform and a systematic process for linking to various, diverse sites and services. The links need to allow the services to be displayed and booked on the airline site and both payments and /commissions to be automatically processed. A number of new technology firms are much better positioned for this, forming broad “data coops,” that effectively network dozens of related firm-specific data and APIs. Rather than treat each new offering as a special case, the successful travel merchandiser will need a highly scalable process.
2. Personalization – Understanding the Customer
Customers seek value-add; therefore, travelers are more likely to utilize sites that offer a degree of personalization in the offers. Arguably, the leaders in third-party revenue today are ironically the low fare, vacation airlines. Ryanair in Europe and Allegiant in the U.S. effectively merchandise third-party services to vacationers, adding significantly to the low airline fares these price-sensitive passengers pay. Legacy airlines, on the other hand, target a broader set of customers and in turn need to tap into an equally broad set of third-party opportunities. Such legacy airlines will then need to highlight for individual travelers that set of services that correspond to their needs.
3. Follow Through – Owning the Journey
Finally, the travel merchandiser cannot just hand off its customers to new partners. Rather than ending its relationship with the customer after a flight, for example, it needs to insure that customer expectations are met throughout the journey and to invite feedback on all of the elements of the trip.
With other options for revenue growth more limited in mature airline markets, airlines need to focus on revenue per passenger. Third-party services, with airlines repositioned as more fulsome travel merchandisers, offer an especially underutilized opportunity to grow revenue per passenger. To do so, however, requires a systematic way to link third-parties to an airline’s site, a matching of services with the individual needs of customers, and “ownership” of the entire journey.