With 2016 underway, airlines have passed the critical booking window of the 2015 holiday season, with some of the highest profits made during that time of the year and airlines hope to continue this trend.
In a recent Q&A with Michael Bentley, he answers four key questions regarding last year’s record airline profits, ancillaries, airline improvements, and the industry’s outlook for 2016.
1) Airlines continue to report record profits. Does that mean they are doing everything right?
Airlines certainly have gotten smarter about pricing in several ways. For example, there’s a much better and smaller price differential between first class and coach, which has allowed airlines to sell more first-class seats rather than give them away through their loyalty programs. They are also offering more seating options, like Economy-Plus on United and Delta’s Economy Comfort, that give flyers a better experience, even if they aren’t willing to spend the money for first.
Additionally, airlines are doing much better with ancillaries, which are increasing their profit margins and driving organic revenue growth. Consumers are now increasingly looking for value-add products and bundle deals when purchasing their airline tickets. These offers incentivize consumers to purchase additional products and services to make travel easier and more enjoyable. These ancillaries result in a better experience for the consumer and increased customer loyalty for the airlines.
2) What are some examples of services that airlines are offering to increase revenue from ancillaries?
United Airlines currently offers a service where customers can pay a small fee at certain airports for “Premier Access.” They then receive dedicated airport check-in lines, exclusive security lanes at select airports, and priority boarding. Basically, they move a lot faster through the airport for a reasonable fee.
Another example, also from United, is giving customers the opportunity to purchase reward miles that can be used toward reaching thresholds for elite status levels. Before this, customers could buy reward miles but it didn’t count toward these levels. Prior to the availability of these products, loyalty members would resort to end-of-year coast-to-coast flights to earn those last few miles needed to achieve status. These ancillary products offer them a much more convenient alternative.
Delta has benefited from offering a variety of ancillaries. In 2013, the airline recorded the second-highest ancillary profits in the industry, which it derived from checked bags fees ($833 million), purchase of SkyMiles ($960 million), and an additional $635 million from purchases of preferred seats, in-flight Wi-Fi, hotels, car rentals, trip insurance, SkyClub passes, the Lift package (which includes priority boarding and a mileage booster), and the Ascent package (which includes priority boarding and Wi-Fi).
3) Are there any other areas where airlines are improving – and generating income as a result?
US-based Airlines are doing a much better job on customer service. While they still lag service offerings aboard Asian carriers, they are updating their fleets, adding entertainment products, and focusing more on the experience in general. This has been a significant shift, especially at Delta Air Lines, which is now tops in customer satisfaction. As a result, they can charge a small premium for that improved customer service experience, and passengers are willing to pay it.
4) What transformational changes do you see taking place in the airline industry in 2016?
Dynamic bundling. I mentioned ancillary bundling earlier, but through dynamic bundling of those ancillaries, instead of offering static bundles that never change, airlines will present only the most relevant packages to each traveler. Each package will be personalized for the customer or the behavioral segment they fall into for each trip. Therefore, the businessman or woman taking an overnight trip will be offered different packages than their family of four taking a weeklong vacation, even when the primary passenger is the same.
Airlines have access to a wealth of rich data. By leveraging this valuable historical data, they will be able to determine which product bundles will result in the highest likelihood of purchase and at a price that results in incremental profit for the airline. They already know that targeting consumers with personally relevant offers l is the most surefire way of securing purchases. Dynamic bundling will only increase their ability to target their passengers with the product combinations they want, thereby driving organic revenue growth and improved customer lifetime value.