Airline disruption: It will happen in the next decade – but no-one is preparing for it
Why not? It seems inconceivable that the form of an industry with so many artificial constraints can remain intact much past 70 years, while all around it has changed.
This decade alone has been witness to major disruptions in the travel and transportation industries. Most prominent have been in ride sharing – Uber – and hospitality – airbnb. Telecommunications, media and music industries have also been turned on their heads, banks and payments are in the firing line, retail generally is being rapidly transformed. There is scarcely an industry whose fundamental structure remains intact. Except the airline industry.
In all cases disrespectful upstarts, usually applying relatively simple but sophisticated IT solutions, have taken on legacy operations. The legacy industries attacked typically involve extensive capital investment and are often characterised by significant, unhelpful and highly intrusive, government regulation that restricts competition.
Certainly the legacy airlines have had to deal with a new breed of low cost operations, long and short haul. But almost without exception those legacy operators are still there, fundamentally unchanged. In terms of other industries, this is no more than fiddling around the margins. But time is running out.
The Future, in Brief
The two fundamentals of the airline industry are about to be uprooted – in tandem, as they will feed off each other:
– The regulation of flying. Ownership and control rules (O&C) are being overturned steadily by a combination of “cross border joint ventures”, cross border equity investments, the rising influence of the new markets of China and Asia Pacific. Removal of O&C transforms the bilateral market access system that has lasted 70 years; and
– The selling of tickets. New (non-aviation) retailers, armed with highly specific data and the skills to exploit it, are about to take on the role of selling end to end travel, of which the airline segment is only one part. Meanwhile airlines are confined to (usually) poorly exploited data about only their own customers and to infighting with intermediaries, GDSs, OTAs, metasearch etc.
The result: a vastly different industry where airlines become mere pipelines and retailers the platforms for sales.
Taking the form of The Great Debate, these issues will be the core of discussion at CAPA’s forthcoming Airline Leader Summit at Powerscourt, Dublin, on 11/12-May-2017.
For more information please visit: CAPA Airline Leader Summit, Dublin, 11/12-May-2017 and see the end of this report.
With this level of turbulence all around, does it seem likely that the airline business – governed by 70 year old regulations – will stay intact?
It defies belief that airlines will be immune from this movement. Above any other industry, airlines are captured within an arcane regulatory framework that was designed 70 years ago and whose purpose was to achieve little else than protect against new entry. It is a capital intensive heavily unionised industry, it is dominated by legacy models still focussed on buying and flying expensive metal.
But at its heart the airline offering is just another consumer retail product. As such it is just as susceptible to upheaval as mainstream retailers have been upended by Amazon in many markets.
This report maintains that the airline industry as we know it will be unrecognisable by 2025, as fundamental features are uprooted. The process will be accelerated because of the confluence of disruption in each of the aspects, flying and selling.
First, the advent of companies with the scope to accumulate data about every step of the travel process of hundreds of millions of traveller, together with the ability to interpret and apply it, will overwhelm the airlines’ control of distribution. They will become little more than vehicles for transportation, much as global telecommunications links have become “pipelines” for use by any third party who wishes to access them for a price. That access is readily made through simple (and extremely data rich) “platforms”, like the apps of Airbnb, Uber – and Amazon.
Secondly, the international market access regime, governed for over 70 years by “archaic” ownership and control rules – which have protected incumbents at the same time as preventing rationalisation of the industry – will be swamped by a combination of cross-border airline equity ownership plays and cross-border “joint ventures”
To recapitulate: the airline industry has two essential elements:
- flying aeroplanes; and
- selling tickets.
More technically these are (1) operational and (2) marketing and sales. (Many airlines also involve themselves in various parts of the supply chain – which are often more profitable than the core endeavour.)
There are other important activities, such as lobbying government to limit competition, and exploiting frequent flyer programmes, but flying and selling are the core activities now facing disruption.
The former is unique to airlines and engages massive governmental regulatory intervention, technical and economic. It is also highly unionised, adding to the inertia.
The marketing and sales activity has certain aspects particular to aviation, but generally differs little from any other form of retail – except that most older airlines have tended to be particularly slow at learning the art. As a form of retail, it is also rubbing up against some of the disruptive elements that are affecting that function.
This analysis reviews the nature and degree of disruption in each core area and what potential the future holds.
In the regulatory area, China will be the big disruptor as it expands into its new global role. The wider Asia too, as growth fuels innovation, will tilt the global balance.
Simultaneously, technology advances and the associated rise in consumer empowerment will transform the process of buying and selling tickets.
Both will happen sooner than we expect.
(1) They can’t enter foreign markets by conventional means
Airlines, paradoxically, don’t have global market clout. They are big on brands, but here they’re restricted by nationalist rules that limit them from entering foreign markets. A tiny handful, like Emirates, have been able to rise above the crowd in global branding terms. But Delta, one of the biggest airlines in the world, is relatively unknown outside the US. It’s trying to do something about that by buying into foreign airlines – Virgin Atlantic, Aeromexico for example – but those 70 year old rules prevent them from expanding seriously. That has to be frustrating any long term prospect of financial viability.
As a result of its confinement, even Delta, with the largest market capitalisation of any airline (USD33 billion), is only valued at about the same level as Airbnb, a seven year old app, with no baggage.
Amazon.com, by contrast, has a market cap of USD440 billion, along with a presence in most global markets. And striking fear into those retail markets where Amazon is coming next.
With their natural focus on buying and flying expensive equipment, airlines fit much more comfortably into the role of wholesalers – and of just one part of the travel experience.
So long as they are limited to national boundaries by O&C, they cannot hope to become truly global, or even regional.
However, with their innovative and disrespectful attitudes LCCs in Asia Pacific have skirted the O&C rules by expanding their brands across borders; “joint ventures” where the home brand – like AirAsia – finds a local equity owner who takes a majority share in that country. In this way AirAsia is able to apply its brand as a local airline in numerous market, as well as gaining a range of operational efficiencies.
Other airlines have followed suit: AirAsia’s long haul brand, AirAsia X hubs with AirAsia; Indonesia’s Lion Air; Vietnam’s Vietjet; Singapore Airlines’ (long and short haul) Scoot; Qantas’ (long and short haul) Jetstar. All of these and others have established as home airlines in foreign countries. They stay within the letter of the O&C rules by being “substantially owned” locally. Most governments, willing to see the archaic rules disappear, are little interested in the “control” element, beyond ensuring that the operations are subject to adequate safety supervision.
The Etihad example, of acquiring an array of minority airline interests across the world, was aimed at getting behind the national gateways of the long haul markets they serve; whether or not that particular example flourishes, it has blazed a trail for others to follow. Qatar Airways and its owners are pursuing a similar but different course. HNA out of China is acquiring interests in airlines and associated interests around the world.
And, in the US, Delta has made the boldest/largest strategic cross border equity investments, in Virgin Atlantic and Aeromexico, along with smaller ones. The common theme: gaining access behind key gateways and bolstering international route strength.
These are but building blocks in what will be a remorseless move to rationalisation. One which is gathering momentum…..
2) Mostly, airline managements just don’t get retail yet. They often know the right words, but do they feel it?
Just because airlines have a product/service to sell, that doesn’t mean they’re good retailers. After all they have allowed themselves to get into a position where they mostly offer nothing more than an anonymous commodity.
It’s one thing to recognise that (micro-)tablets are becoming the instrument of choice, but quite another to adapt to the fact and respond effectively.
The cause is not simply online competition, although that has accelerated the swift changes; it is mostly that managers just lost sight of what their existing and potential customers wanted to buy and how.
For a generation of managers who have grown up focused on “push” not “pull”, the system – and their thinking – is often out of tune with the increasingly influential role of (i) personal recommendations and (ii) mobile transparency.
Even where these features might not already have as powerful a pull as in some other retail areas, there is a rapidly growing general expectation by consumers that they are, or should be, in control of the purchasing process. The consumer makes assumptions that air tickets will be no different from buying other products. This alone does not disrupt the system, but it does increase the momentum for change.
This shortcoming is not a problem unique to the airline industry; retailers across the world, often accustomed to leveraging dominant positions in their respective markets, are finding their traditional strength diluted as online sales and word of mouth influence consumer behaviour. And behemoths like Amazon spread ubiquitously.
With their systematically more sophisticated market understanding and analytics, the much larger companies are sweeping all before them.
So global retailers and personalised data collectors are well positioned to attract airlines with the lure of large-scale sales (“part charters”). They can locate, personalise and capture enormous volumes of customers. Selling that into airlines is a simple next step – and for airlines that’s a one way track.
At CAPA’s recent Americas Aviation Summit, Paul Pessutti, SVP and GM, Travel and Transportation, SAP, outlined this potential for airline disruption in the distribution and marketing areas as new entities employ big data to enrich the customer experience:
Some of the key points Mr Pessutti makes:
- “The current distribution channels are going to shift. You’re going to see new players in the market – SAP, google, Facebook, Apple – really get involved in the overall experience of booking and arranging travel. What enables that is the data. And the ability to provide that in a real time way.”
- “Companies that have the data will be the ones who will ultimately be selling travel and capitalising on the market”
- “The airlines need to make a big investment in the customer experience… and part of that is reducing the number of intermediary steps…. But that requires innovation NOW.”ooo
- “I hope there is a role for (airline brands).
- “But what actually might happen If (that innovation) doesn’t take place (the airlines) will simply be a brand sitting over other capabilities. We’ve seen this in retail and other consumer products world.”
But right now it looks as if the companies that have the data are the ones that will ultimately be selling travel. If the airlines are going to remain relevant they will have to innovate….. only the merged entities will survive.
There are so many other “core” activities to deal with: lobbying with government, complex labour relations (pilot unions can seriously constrain an airline’s policy options), network planning, treasury functions and aircraft buying and leasing, IT functionality (insourced or outsourced), coming to grips with fast changing markets disrupted by LCCs, Gulf carriers and new entrants, accommodating and influencing intermediary activities, not to mention externalities like oil prices, volcanoes, terrorism and pandemics.
All the time hemmed in with massive safety and security regulations.
One factor making exploitation of retail so difficult is the powerful and shifting role of intermediaries.
For some years now, airlines have complained loudly about the way GDSs, online travel agents, and metasearch have reduced the buying process to one of commodisation, where the only driver is price. In the airlines’ eyes, this is compounded by the significant charges levied by GDSs on every air segment sold; the airlines are locked into multi-year deals with them and, in turn, GDSs lock in travel agents, making for a near-perfect inertial system.
And the GDSs themselves, often labouring under the weight of old technology and confronted by online competition, are struggling to support their airline clients by providing the ability to display and promote features other than price, as well as to allow them to sell ancillaries online.
But while the airlines and their intermediaries are busily squabbling violently inside their tent, the barbarian hordes are massing outside.
The most significant disruption that has occurred to date in the aviation and travel industry (and retail generally) is the shift in behaviour of consumers. The app-empowered consumer is more knowledgeable today, leveraging greater transparency, wanting direct control and unwilling to accept arcane rules that have governed airline operations for decades. And when they behave as business travellers they demand to be rewarded and treated with some recognition of the value they bring to the airline – something airlines are rarely able to deliver.
In short, consumers have been liberated (and captured) by technology. Small businesses are able to compete in global markets in ways that would not have been possible 15 years ago; B2C consumers are equipped with the information to see into the market – and the tools to get what they want. And if they’re prevented for what they consider unnecessary reasons, they will make their concerns felt loudly through social media outlets. For an industry which has so often relied on opacity to extract greater benefits, transparency can hurt.
Many airlines are now aware of this new consumer power – and they are making all the right noises, talking of the need for personalisation and understanding the customer.
Yet very few airlines are actually doing anything effective to implement the words they are using; they know they need to, but rarely have the instruments to convert words into action.
And here lies a longstanding fundamental problem of the airline industry, one which underpins many of the consumer-airline problems which arise – creating, unrealistic expectations. Overpromising and under-delivering. Whether they be inflight misbehaviour or service shortfalls, or simple “ripoffs” – an expression only too often used where fare complexity traps unwitting consumers – they are endemic.
The new consumer empowerment serves to emphasise the growing disconnect between passenger expectations and reality. Or perhaps it was always there, but where airlines were once able to overpromise, consumers’ ability to complain is now a much more powerful antidote.
The consumer’s ascent to power has coincided with diversification and disruption of the airline product
LCCs, the Gulf carriers, long haul LCCs and new entry generally have illustrated the options which can be possible. Combined with their access to undreamt of levels of handheld technology and social media access, consumers have genuinely achieved a position where they can influence the system. That influence, as noted above, is minimal in the regulatory environment, but is rapidly growing in all sorts of practical areas.
Artificial Intelligence, virtual reality and the use of portable technology have the potential to change travel distribution profoundly over the next 10 years, according to the London School of Economics (LSE) in a 2016 study entitled “Travel distribution: the end of the world as we know it?”.
Based on an industry survey, it suggests that “Gatekeepers, ‘mega meta online travel agencies’, and artificial intelligence may fundamentally disrupt the future of travel distribution”. Data and its use are now beginning to dominate the conversation.
And it’s not just distribution of course; it’s the airline business itself which is in the firing line.
Airlines may struggle to come to grips with the intricacies of big data, but the prospects of large, older airlines achieving serious value are small
It will not be for want of trying – although many senior managements remain reluctant to make the necessary (major) commitments in cost and corporate restructuring necessary to achieve results.
Burdened by a silo-oriented organisational structure and an absence of the right analytical minds and systems, airlines are in an unequal race with third party information aggregators to capture their own market.
As one provider described it recently, “an airline with 500 daily flights can have up to 500,000 discreet data points that potentially need to be monitored by a revenue-management system. But today’s revenue management systems rely on limited technology platforms that were built with a threshold of handling only one-fifth of the volume of complex data that exists today. In addition, advances in data management, processing power, and forecast optimization have become increasingly better, faster, and smarter, creating an even greater need for a new solution.”
Getting the data into a form that is capable of analysis and then developing the opportunity and systems to exploit it are achievements well beyond the likely capabilities of today’s airlines. These need to focus on the user experience, digesting vast amounts of data – then to exploit the data to apply effectively in revenue management.
This is a relatively tiny cross section of its potential market – with no ability to look into consumers who haven’t travelled or booked with them, or along the whole travel chain.
Take the “sharing economy’s” Airbnb for example. It is eight years old. It has recently expanded into corporate travel and into “trips”. Trips are add-ons, or side trips such as a city tour or boat ride (each with high margins).
This sounds minor, but it is important for two reasons; firstly because the company estimates trips will become much larger than its basic business – which itself is now valued at around USD30 billion. That’s a lot of money for and eight year old app.
The forecast is more important in the airline disruption context because Airbnb is able to project this growth on the back of its cutting edge data science technology
The company has accumulated an enormous stockpile of data on its users and is able to convert that to useable information. It is becoming a data analytics company. It has the data, it has the technology and it has the human resource skills needed to leverage the opportunity. It is aiming to provide that holy grail that airlines talk of: door to door service and beyond. As with its accommodation product, Airbnb owns no real estate or infrastructure.
It doesn’t have to carry the risk of buying billions of dollars of heavy metal. It is simply an app; an app with comprehensive coverage and deep insights into who the passenger is and what he/she needs. This is compellingly attractive. In short, it is capturing the customer.
Airbnb is hardly alone. Fellow accommodation online travel agent group Booking.com in Jun-2016 released two “data insight” tools designed to help its nearly one million hotel sites to improve their revenues.
By delivering such a wide range of personalised data, the OTA offers something the individual hotels cannot ever dream of accumulating or applying. These offerings are irresistible in the short term, but they come at a high price. They accelerate the suppliers’ dependence on the data Booking.com’s owner Priceline is valued at USD85 billion. Its data analytics are cutting edge and all-encompassing.
Like Airbnb and Booking.com, Amazon has become a data analytics company, armed with modern technology, human skills and one of the most comprehensive databases in the world. It uses these to sell product, but constantly accumulates an overwhelming database of consumer behaviour. More importantly, it has the capability to apply it.
And Facebook (valued at about USD410 billion), reaching half the world’s consumers (and reshaping democracy!) – we haven’t even got to Uber, valued at nearly USD70 billion or google (nearly USD600 billion market cap) yet…..
These are each massive ventures, mostly children of the 21st century (google is the elder, at 20 years) employing banks of tech geniuses. Aviation is only one of many targets on which they are sharpening their teeth and gaining personalised insights into consumer behaviour.
For an airline, even with a willing management and the ability to fund a few billion dollars’ worth of investment (that narrows the field significantly), it would take at least two years for even the most innovative airline to achieve “personalisation” on a useful scale. Some are trying, with tech labs and the like, but even the best pale into insignificance when faced with the scope and scale of the major analytics aggregators.
So these third party data hegemonists are able to offer a growing array of “solutions” to the providers, all the while strengthening the reliance of their hotel, airline and other clients.
It is not hard to see where this leads. By the end of this decade, control of the distribution process, and of the customer, will be in the hands of the data analytics companies.
That does not mean they will be doing all the heavy lifting. That’s not how they operate – they leave that to others – but they will be pulling the strings. They will be the platforms, while the airlines become the pipelines.
Come along to the CAPA Airline Leader Summit, Dublin, 11/12-May-2017 and hear some of the world’s leading airline CEOs, key government officials and leading industry minds review the challenges and look for solutions. Over 30 airlines are represented.
And above all, participate in the debate. (If you have any comments on the arguments raised above, please forward them to firstname.lastname@example.org.)
The Proposition: This House believes international airline operations will be thoroughly disrupted by 2025
John Byerly will oversee a full scale debate on the demise or otherwise of ownership and control rules, between:
For the Proposition: Rigas Doganis and Barry Humphreys
Against the Proposition: Ulrich Schulte-Strathaus and Albert Muntane Casanova
This will be followed by a full programme over two days, covering the topics raised above, with fascinating discussions and intriguing outcomes.
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