Photo by Suhyeon Choi
The airline industry traverses a boom and bust cycle like no other on earth. When fuel prices are low, and the economy is booming, profits soar. When the pace of business tightens and fuel prices spike, massive operating losses can pile up quickly. In response to these cycles, airline leadership has adopted measures to hedge fuel prices, provide flexibility in their fleets, and generate new means to cover revenue shortfalls.
The most significant change in the industry that has affected the flying public took shape after the economic downturn of 2007-2008. As the airlines – and most everyone else – recovered from that ugly time-period, reservation and yield management systems were optimized with a new goal in mind: reduce the amount of “iron” in the fleet to adjust supply, and strive to fill every departing flight to the max. Along with this “load balancing”, came a subtle shift in philosophy from maximizing revenue per seat to revenue per passenger.
The airlines discovered something called “Ancillary Revenue”, which Jay Sorensen, President IdeaWorks Company LLC and an industry maven on this topic, documents thoroughly each year in his Top 10 Airline Ancillary Revenue Rankings report.
The IdeaWorks report defines Ancillary revenue as “revenue beyond the sale of tickets that is generated by direct sales to passengers, or indirectly as a part of the travel experience”.
The primary sources of ancillary revenue include frequent flyer programs, a la carte components of product or fare bundles, and advertising. In layman’s terms, Ancillary revenue is created by the unbundling of the flight experience.
Remember when you just paid a fare to go from city A to B? That simple experience has changed forever. Have you noticed that the ticket purchase experience now offers you different flavors of economy fares (basic and enhanced) and that you are offered upgraded seating within each category for a price, internet bundles, mileage accelerators, flight insurance, and other goodies?
Depending on the class of airline you fly, you might also have the choice to pay for the opportunity to select a specific seat in advance of your flight, the right to board early, the privilege of checking a bag, even carrying a bag on board. Once on board, you have more choices. On a “global” or “legacy” airline (think American, Delta, United) you might be offered food and upgraded entertainment opportunities. On an Ultra-low-cost carrier (Spirit, Frontier, Ryanair), you might have to pay for water, earbuds and more. As one flight attendant jested on a recent Spirit flight “we’d charge you for the air that you breath if they let us”.
The impact of Ancillary Revenues in airline profitability is enormous. In 2007 the top ten airlines (ranked by total ancillary revenue), was $2.1 billion. By 2016, the figure had skyrocketed to more than $28 billion. Some industry observers say that consumers embrace the choices delivered by this approach. In line with consumer bias towards choice and control, the opportunity to customize their travel experience is appealing to some segments of the traveling public. To others, the impact of the unbundling of the flight experience has steadily diluted the quality of that experience.
My questions are simple but fundamental:
- Has the unbundling of the travel experience gone too far? Has the modern jet aircraft been reduced to a giant vending machine with twin turbines mounted on either side?
- Has the proficiency of airline yield management systems resulted in chocked full cabins that leave minimal room for accommodations to valued Frequent Flyer Members or to resolve service problems?
- Will the combination of these experiences make the idea of a “loyal airline customer” merely a nostalgic notion? Could it be that Frequent Flyer Programs will be firmly mired in the mercenary loyalty quadrant of the multi-dimensional loyalty model discussed in the Wise Marketer | Maritz 2017 Loyalty Landscape?
Here are a few industry metrics and thoughts to consider as you ponder your response to these questions:
- Passenger load factors, a core metric tracked by the industry, have risen significantly over the past decade. In 2005, airlines had an average load factor of 75.2%. In 2018 that figure has soared to 84% among US domestic airlines.
- In my recent experience, actual load factors on popular routes are much higher. “We have a completely full flight today” is a standard refrain from cabin crews heard as you board an aircraft today. Taking two popular aircraft as examples, a 737-800 or Airbus A320 accommodate approximately 160 passengers in a two-cabin configuration. If even 10 seats are empty, the load factor is 93.7%. I am confident that most of the flights I’ve been on in the past 2 years have had 10 or less available seats when the doors were closed.
- According to the Airline Economic Analysis 2016-2017, published by Oliver Wyman, the airlines had enjoyed 13 consecutive quarters of profitability through mid-2017, but just in the past month, American and Southwest both missed Q2 revenue estimates. If another trough in the cycle is looming, what further measures will the airlines take to shore up profits?
Taken as a whole, has the industry lost focus on the customer in search of stabilizing profitability over the longer term?
While the airlines might float the argument that the array of choices presented through the unbundling of the flight experience is meant to delight the customer, it seems clear that the principal motivations of many policies serve the needs of the airlines, not the traveler.
The answers to these questions are not easily found and there are many viewpoints to consider. Joining in a conversation with industry leaders, practitioners across the airline industry and operators of FFP’s, is the most compelling way to uncover solutions to these tough challenges.
If you want to be part of this discussion and contribute to industry-wide solutions, I encourage you to attend the FT Awards Europe and Africa & The Loyalty Summit to be held jointly in London, UK on September 20, 2018.
The Wise Marketer is a Gold Sponsor of this great event and Aaron Dauphinee and I will be presenting thoughts and facilitating discussion at various points during the day. You can see the entire speaker group here.
We’ll have more thoughts on the key topics of interest in airline customer loyalty in the days leading up to this event. Follow along with us, send us your comments, and join us in London on September 20.
Bill Hanifin is CEO of The Wise Marketer and is a Certified Loyalty Marketing Professional (CLMP).