The sky's the limit (European special report)
- Before you continue, you can download the full report using the link at the bottom of this article. This summary provides lots of insight – but it’s better read alongside all of the study’s findings.
The commercial opportunities of connectivity are about to transform European aviation. Here’s everything you need to know about the rise of connected ancillary revenues in the region
If you work in ancillary revenue for an airline, life is about to get very interesting. Enabled by inflight broadband, there’s a massive opportunity set to take off in Europe and around the world – and airlines are in the pilot’s seat. Up until now, the full scope hasn’t been realised, but the release of a new London School of Economics study reveals a market at the tipping point of transformation.
As we know, ancillary revenue is a lifeline for airlines, particularly at a time when seat margins are dwindling. Generated by everything from affiliated car hire and hotel bookings, to baggage fees and inflight retail, this additional income was estimated at $67.4bn globally in 2016 – 9% of total airline revenue, and the figure is set to double by 2020.
But the potential is forecast to be even greater, according to the ground-breaking LSE study – the result of over six months of detailed research and analysis. Thanks to the implementation of next-generation inflight broadband, through new systems like Inmarsat’s game-changing European Aviation Network (EAN), there’s the potential to unlock an $8.2bn market within the European region by 2035.
Inflight connectivity in Europe has lagged behind connectivity in North America for a long time, but this is changing. EAN is a world first – an integrated satellite and complementary ground network that delivers the power of connectivity to European airlines and passengers. A unique, high-tech and cost-effective innovation, EAN will cover all 28 EU states, plus Norway and Switzerland.
So it’s clear that European connectivity is set to take-off, rapidly. Given the relative maturity of the market, over half the region’s connected ancillary growth will be generated within 10 years. But where’s that boost to the bottom line coming from?
Wi-Fi package sales are only half the story
Rather like on board Wi-Fi packages themselves, there are ‘basic’ and ‘premium’ approaches to the opportunity.
The independent LSE study found that by 2035 airlines could experience $15.9bn in incremental revenues by charging passengers for Wi-Fi use. With high levels of take-up expected – as passengers increasingly see inflight Wi-Fi a necessity, rather than a luxury – the LSE reveals that this is only half the story. Smart, future-thinking airlines that build innovations and service enhancements on the back of high quality connectivity could also grab a slice of another $15bn that’s available, bringing the total to $30bn. That’s higher than IATA’s predicted net profits for the entire global airline industry in 2017.
The $30bn in broadband-enabled revenue is part of a wider opportunity that will see the creation of a $130bn connected airline market. It’s a significant figure – and one that’s chunky enough to attract the world-leading content partners and service providers essential to creating the necessary ecosystem to make this value possible.
Connectivity, then, is a change agent that will help transform the airline industry’s revenues.
Robust forecasts for airlines
Authored by Dr Alexander Grous of the LSE’s Department of Media and Communications, the study – Sky High Economics – is comprised of three chapters and it’s the first to comprehensively and independently assess the socio-economic impact of the inflight broadband revolution.
Chapter one, “Quantifying the Commercial Opportunities of Passenger Connectivity for the Global Airline Industry”, draws from a wide range of industry sources across six regions. Spanning North America, Latin America, Asia Pacific, Europe, Africa and the Middle East, these include passenger traffic data and growth forecasts from IATA and other industry sources, passenger trends, and terrestrial connectivity models and behaviours.
“This study builds on the work we’ve been doing in this area over the last couple of years and consolidates the global picture for the value of inflight broadband-enabled revenue,” says Dr Grous. “By bridging the gap between market estimates of ancillary revenue from current traditional sources and incremental revenue from broadband-enabled cabins, this first chapter gives airlines robust forecasts of market potential to inform their business models.”
This first chapter gives the global picture for the value of inflight broadband-enabled revenue, giving airlines robust forecasts of market potential to inform their business models
Preconditions for success
But if Wi-Fi in the sky has been around for a while, why has it taken so long to realise the range of previously untapped ancillary revenue opportunities?
The problem has been that with existing legacy technology often falling short on reliability, speed or coverage, and only 25% of commercial aircraft currently offering inflight connectivity of any kind, airlines haven’t yet capitalised on the true financial potential for the 3.8bn passengers who fly globally each year.
This goes some way to explain why broadband-enabled ancillary revenue in Europe is forecast to be a mere $263m in 2018 – a drop in the ocean compared to existing revenue from ‘traditional’ ancillary sources.
The study highlights that quality of experience is the most requested aspect of mobile broadband
The study identifies six ‘preconditions of success’ which will allow ancillary broadband revenue to meet its potential. The first three of these are to do with technology and quality of service. Almost 80% of consumers experience mobile connectivity issues on the ground, including unreliability, slower-than-advertised speeds and inadequate coverage, and all have a knock-on effect for retention rates. The same is true in the air, where quality of experience is the number one driver. The report points to reliability, coverage of all flight routes and a guaranteed data speed to the aircraft as the essential foundations for the connected-ancillary revolution.
The study emphasises that when inflight broadband meets or exceeds passenger expectations, it can result in greater loyalty, which in turn can deliver a 23% premium over the average customer in profitability and revenue. So, with demand for mobile data increasing dramatically (18-fold in the five years from 2011, and forecast to represent 20% of all internet traffic by 2021) the opportunities to maximise the return on investment through a higher net present-value-per-passenger are evident.
This is where the European Aviation Network can help enormously. The EAN service remains on course for the start of the final phase of launching operations by the end of 2017, following successful results of flight trials over the past months. The launch customer has started equipping production aircraft with EAN hardware and is expected to begin activating aircraft for passenger trials in H1 2018.
It means that high-speed, high-quality inflight broadband will become a reality, allowing airlines to successfully meet passenger expectations and grow revenue.
A retail-focused mind-set
Not that ubiquitous high-quality inflight broadband alone is enough to fully monetise this market.
Historically, the industry has tended to focus on seat-value rather than passenger value, but this is set to change. Airlines that continue to develop a retailer mind-set, delivering the right services and products to a passenger at the right time, will be the ones reaping the biggest rewards.
So it follows that making better use of the exceptional passenger data airlines already possess to create a single, accessible view of those individuals is an important driver too. Even today, only 11% of existing airline schemes offer personalised rewards based on purchase history or location data, despite evidence that the average order value for personalised transactions is 12% higher than those without.
Finally, to ensure the entire ecosystem can operate, airlines need to ensure ‘liquidity’ – sufficiently wide availability of products, content and services to give passengers the confidence to make purchases on board, or even postpone them until boarding. The study found that 85% of passengers can be influenced to make a purchase in a connected cabin if they can be sure the products they want will be available. With almost 5% of tour and 40% of entertainment bookings now made online and 65% of travellers booking hotels with mobile devices for same-day stays, these areas alone present airlines with an opportunity to capture revenue that’s otherwise largely out of reach. As the market develops and passengers become used to the availability of inflight connected services, their behaviours will change. For example, delaying a car hire booking until they are in flight, in order to get the best last-minute deal.
For European airlines, broadband-enabled ancillary revenue is set to rise to $5.50 per passenger
Four primary sources of revenue
By 2035, broadband-enabled ancillary revenue of $30bn amounts to an average of $4 per passenger globally – a 2,005% increase on the $0.23 forecast for 2018. For European airlines, it is higher, breaking down to an extra $5.50 per passenger, making each one 38% more valuable than the global average. This is driven by flight patterns, business model mix, the relative sophistication of European airline services and European passengers’ average likelihood to buy traditional ancillaries inflight. So how will that new revenue be generated? Sky High Economics identifies four main opportunities.
Access fees are already the largest source of broadband-enabled ancillary revenue and are forecast to remain so, but their contribution to the whole is expected to shift over time. So, while paying for inflight broadband is set to constitute 89% of broadband-enabled revenue in 2018, that share is forecast to decrease to 53% by 2035 as other streams mature. Regardless, that’s still a sizeable $15.9bn.
Passengers present a captive market for discounted ‘late inventory'
Inflight shopping is another area ripe for revolution. While revenue forecasts for broadband-enabled e-commerce today are a comparatively modest $26m, this opportunity is estimated to account for $6.8bn by 2035 – 22% of airlines’ total broadband-enabled revenue. Passengers will grow to be increasingly comfortable browsing online catalogues for inflight shopping – catalogues with items impractical to carry on board, and whose sale isn’t limited only to when the tax-free trolley passes down the aisle.
Airline passengers also present a captive market for discounted ‘late inventory’ that’s ripe for greater monetisation mid-flight. These short-dated items, such as car hire, hotel bookings and event tickets, generate zero return if not sold by a specific time and their last-minute nature make deep discounts viable – and targeted, personalised offers could make purchases even more tempting.
Advertising is also forecast to be an increasingly important source of broadband-enabled ancillary revenue. Online advertising is already widely accepted on the ground and terrestrial models can also be applied to monetise online content in the air.
The study identifies three main areas of incremental revenue from broadband-enabled advertising inflight; from pay-per-click and the impression-based approaches typical of online advertising, to the interruption model that encourages audiences to pay a premium for ad-free services, to the broader opportunities of sponsored services.
The study makes conservative estimates for initial growth here, to reflect the technical aspects that need to be in place to accurately assign revenue while travelling. However, a captive audience could offer a higher level of engagement than on the ground, and the forecast is that overall advertising revenue could reach $6.1bn by 2035.
In line with trends for the growth of streaming content services on the ground, revenue from access to premium entertainment content in the sky is forecast to reach $1.4bn by 2035.
The study suggests three primary models to monetise premium content. The first is live entertainment, such as sports events or news. The second involves premium on-demand content not already available via the IFE system – streamed to the aircraft rather than already installed on it, supplementing the existing entertainment offering.
The final model Dr Grous highlights is W-IFEC bundling, where IFC purchase is a precondition to access premium streamed entertainment on BYOD devices. An ideal model for short haul carriers without embedded IFE systems.
We will see innovative deals struck, partnerships formed and business models fundamentally changed
Enormous potential for tomorrow
As Sky High Economics explains, ancillary revenue from inflight broadband-enabled services may be in its early stages today, but, with IATA forecasting that passenger numbers worldwide will double to 7.2bn annually by 2035, there is huge potential for the industry, with new revenue opportunities for all airline business models.
The study predicts full-service carriers will benefit substantially more from broadband-enabled ancillary revenue, across all streams, compared to low cost carriers – earning 63% of the total revenues available in the region in 20 years’ time. The calculations are driven by FSC’s proportionately longer average flight times, giving passengers more hours to fill (and more time to spend money), and the quantity of passengers flown. This is coupled with an analysis of passenger demographics in the region. Nonetheless, the study also recognises that the stronger retail mind-set of the low-cost sector, experienced with à la carte pricing models, may lead to greater adaptability when it comes to implementing broadband-enabled services. Plus, there is potential for this split to change as LCCs enter new routes and the passenger mix diversifies.
In regional terms, European airlines are forecast to realise broadband-enabled ancillary revenue worth $283m in 2018, but this increases to an impressive $4bn by 2028 as the market develops. By 2035, revenue is set to double to a staggering $8.2bn. Asia Pacific leads in the revenue stakes here versus the rest of the world, followed by Europe ($8.2bn), North America ($7.6bn), the Middle East ($1.3bn) and Africa ($0.58bn).
More than just a market for airlines
As airlines forge strong commercial relationships with suppliers of products, content and services to monetise passenger data, and align with new partners, they will unlock sizeable new revenues thanks to inflight connectivity.
In short, it’s a brave new world full of possibilities. In 2035, what will that $8.2bn broadband-enabled market for European airlines look like, and who will be the major players? And what of that wider $130bn global market? Just as few could have envisaged how significantly a taxi app (Uber) or a home rental website (Airbnb) would change the private car hire or hospitality industries, we’re only now getting a sense of what connectivity-led digital transformation could mean for airlines.
“If airlines can provide a reliable broadband connection, it will be the catalyst for rolling out more creative advertising, content and e-commerce packages,” says Dr Grous. “We will see innovative deals struck, partnerships formed and business models fundamentally changed.”
With a revolution for ancillary revenue on the horizon and the requisite inflight broadband technology available today, there’s no time to lose – as Dr Grous states. “Broadband enabled ancillary revenue has the potential to shape a whole new market and it’s something airlines need to be planning for right now.”
This is the bottom line boost that the industry has been waiting for. This is the pivot point for the connectivity revolution.
Read the full study at inmarsataviation.com/skyhigheconomics
About Dr Alexander Grous
Dr Alexander Grous is a lecturer at the Department of Media & Communications and Director of the research function for LSE Enterprise. He’s a specialist in demand-based modelling, communications and transport economics.
Private sector experience includes CXO level roles in mobile communications, high-technology, e-commerce, banking, FMCG and finance. He’s also held strategic roles in directly relevant organisations including Telstra and Lockheed Martin.
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