Making up the shortfall on European short-haul
How connectivity could be a pivot to profit for European short-haul operators
The ever-quotable investor Warren Buffett said, in March 2017, that “airlines had a bad 20th century.” His point was that, for all their prominence as companies, they are not great investments. As we know, the airline industry has enormous overheads and high capital costs; it relies on complex infrastructure and systems and its profit margins are often wafer thin. However, Buffet’s wider point was that, while the industry’s first century has been bad, its second century could be better.
Here, it’s worth reminding ourselves of the unenviable position the industry finds itself in. This is well-illustrated by recent research from Spacehopper, a UK parking firm which found that the cost of week’s car parking at an airport can often be three times the price of the flight. Flying has become so devalued that it is possible to spend more on an airport meal than the journey.
This issue affects short-haul flights more than any others and is particularly acute in Europe. When the skies were deregulated in the ‘90s, dozens of low-cost carriers popped up. They competed on one thing only: price. The result was a race to bottom and it affected everyone, even the established airlines which had previously offered a very different product.
It’s worth reminding ourselves, though, that the LCCs who came in to try and eat the lunch of legacy carriers, introducing new models for the industry, brought many benefits in their wake too. Customers who simply wanted a safe, punctual, comfortable journey at the best-value fare found themselves better served, making travel more accessible. And while this provided a clear benefit to the world’s tourism industry, it also helped to cut costs for business travellers – as the airline industry found that what could begin as a tourist route may be quickly adopted by businesspeople.
A stagnated market
The airline consolidation that was the result of this market shift is still playing out in the Euro-budget sector, with IAG chief – and merger guru – Willie Walsh telling Aviation Business last year that “there are lots of airlines that look interesting at the moment.”
EasyJet CEO Carolyn McCall, also expects to see more consolidation, plus increasing alliances and partnerships between LCCs and legacy carriers, with the former ‘feeding’ the latter passengers to their hubs for onwards long-haul connections.
However, with the rules of the game being set by the cheapest of the budget airlines, the higher tier of the industry needs to find a way to counter a price-dominated market. Writing recently in the Harvard Business Review, Juan Pablo Vazquez Sampere, a professor at EADA Business School in Barcelona, remarked, “Instead of having a few companies stagnate because they don’t move upmarket, the entire industry has ended up in stagnation…. Mere company survival is considered success.”
This is where brand differentiation, through the medium of inflight connectivity, comes in. It provides real possibilities for positive change by creating a more valuable proposition that customers will pay for. It offers not just the obvious way to make money – by charging customers for inflight Wi-Fi – but a whole host of potential revenue streams besides. Here it’s worth remembering that, if you can make an extra €1.20 per customer (average short-haul connectivity benefit), you have boosted your margins considerably. You may have even made that seat profitable.
One of the effects of mass adoption of the smartphone is that people now expect to be connected at all times – and are unhappy when they are not. This applies in the air as it does elsewhere. A recent Inmarsat survey showed that 83% of passengers would take the provision of inflight Wi-Fi into account when choosing an airline.
So, one model is to include connectivity, charge more for tickets and make it a selling point. However, as we know airline passengers are price sensitive, especially on short-haul, so it may make more sense to charge for usage. Lufthansa, for example, plans to offer a variety of packages for different use-cases which vary from €3 to €12. There are also “freemium” models whereby the first 30 minutes is free – or ad-supported data is free and ad-free data costs. Another key model for short-haul will be multi-flight passes – which are increasingly popular in the US – targeting business ‘commuters’ who regularly fly with the same airline and who work while on board.
Beyond the duty free trolley
However, this is only the start. Airlines can sell new services that rely on or are supported by IFC, such as e-commerce, live sports events, advertising and sponsorship – and they will be able to offer advertisers an incredibly targeted market.
They can offer duty free shopping – at the moment, airports take over 90% of this. They can let customers buy for their destination – for example, theatre tickets for the city they’re visiting, or groceries that will be delivered shortly after they arrive home.
These new passenger service innovations are good for the airline and good for the passenger, helping to both justify premium ticket pricing – thanks to an enhanced and personalised experience for fliers – while providing tangible brand differentiation for the airline.
The increase in BYOD (bring your own device) also means that short-haul airlines will be able to offer W-IFE – a locally streamed IFE service to passengers’ devices – and charge for the service. The strategy here is that passengers will need to log on to the inflight portal to access Wi-Fi, but once there they will see the W-IFE offering and be more likely to buy.
Connectivity also enables the speedier and more efficient sharing of real-time data about the inflight performance of the aircraft. This can help reduce aircraft downtimes and improve maintenance schedules, as well as saving fuel. Indeed, as Dan Smith, manager of systems engineering and principle avionics engineer for Hawaiian Airlines, said recently of the connected aircraft: “You can save a lot of fuel with good communication."
One of the many emerging benefits this operational data brings is enabling smoother descents. This is particularly relevant to short-haul operators as short-haul burns more fuel, proportionate to distance travelled, because of the percentage of the flight that’s taken up with take-off and landing.
Arguably the most important aspect for the commoditised short-haul market, though – where everyone’s product offerings have become broadly similar – is how IFC can help to revive that market. When airline A and airline B have little difference in price, schedule quality and passenger comfort levels, for example, then IFC offers product differentiation, which then drives brand differentiation. For those airlines who are struggling to justify the higher prices that their operational structure demands, IFC offers an attractive value proposition.
Finally, keep in mind the bellwether that is the flight search engine. According to a report by Roland Berger consultants, availability of inflight Wi-Fi has become one of the top three selection criteria for passengers, alongside the traditional factors of price and schedule. So while it’s a differentiation factor today, it will be a hygiene factor very soon. And airlines that fail to meet passengers’ digital expectations risk seeing them switch to rival carriers.
The next revolution in short-haul is underway, driven by IFC, offering new sources of revenue and brand benefits for airlines. For those who get it right with IFC, the shortfall on European short-haul could soon be a thing of the past.