Part 1: Ancillaries, past and future: Why airlines should rethink their approach to become more customer-centric.

It's not just about wringing every marginal dollar out of a transaction. Today, customers demand products that solve a problem or a pain point.

Although pandemic restrictions are waning, airlines will continue to be affected for a long time. Aside from operational and crew challenges, pre-pandemic airline strategies have gone through a period of upheaval. Specifically, the pandemic has overturned the one strategy that had driven two positive outcomes: more income and increased customer satisfaction: the strategy of airlines as retailers.

Retailing succeeded when airlines worked out that they slice up individual parts of a flight booking and offer propositions to different customer segments. Retailing became the strategy to drive top-line growth and satisfy customers who wished to pay for the proposition – and ancillary revenue was the platform for retailing.

As airline revenues evaporated and bounced back, the role of ancillaries is now under the microscope again. Where to now for ancillaries as a revenue source?

Is it possible for airlines to recoup this lost income using both creativity as well as strategies that have worked in other industries?

To understand this idea, let’s look at where we came from.

Ancillaries Past and Future: Where have we come from?

In the past, airlines saw themselves as sellers of seats. This created a selling model focused on the seat and its associated pricing. The accepted frame of reference was: ‘I have this product – a seat on a flight, so how do I sell as much of this product as possible through a set of distribution channels, and how do I maximize my margin by revenue management of the seat inventory’?

Historically, airlines considered themselves as “seat sellers.” As a result, a selling strategy centered on the seat and its price was the core proposition*.*

However, the issue with this ‘seat-selling’ strategy was that it encouraged price-driven competition, commoditized the airline's product, and made its proposition identical to its rivals.

Some airlines tried to evolve and keep pace by changing their business model. They embraced the concept of ‘retailing.’ These airlines modelled themselves on classic high-street retailers and their sophisticated merchandising techniques to capture more value in the travel customer journey.

Airline Ancillary Revenue and Margin Analysis

Retailing started with disaggregating the individual components of a flight booking.

The products that airlines owned - air ancillaries - were the highest margin opportunity: seat selection, bag options, meals, and early boarding.

Even when the operational costs for flight-related upsells such as meals and Wi-Fi are factored in, the margin profile is generally in the 80%+ range.

Hotels, car hire and ground transfers, and other non-flight ancillaries have lower margins as they are typically sourced through a third-party supplier.

The seats themselves offered a higher revenue opportunity but ultimately not a lot of margin. Per IATA, the net profit per seat globally in airlines was just $6 – and that was pre-pandemic.

Ancillaries: Past and Future: where can we go?

For airlines, the key to success in a post-coronavirus world will be to unshackle themselves from their purely operational mindset. The old model of pushing options in front of customers through the booking flow won’t suffice.

Can airlines take advantage of this unique opportunity to recalibrate and transform from an operational mindset?

Airlines need a new strategy to do this, and all strategy starts with a proper diagnosis of the challenge.

Professor Richard Rumelt and his book Good Strategy/Bad Strategy, explains how the fundamentals of strategy consist of a diagnosis - identifying the primary problem or challenge before determining the best strategy for managing or solving it.

The strategy created after diagnosis is a coherent set of analyses, concepts, policies and actions that respond to a challenge.

Today, the challenge for airlines is working out the real opportunity: I believe that opportunity is customer-centricity.

Airlines will have to focus on identifying, understanding, and mastering the customer experience - the complete end-to-end journey that customers have with the airline - from the customer's perspective.

In 1997, Jeff Bezos promised Amazon would "focus relentlessly on our customers.” He said, “It's our job every day to make every important aspect of the customer experience a little bit better."

In a 2013 interview, Bezos said, "I would define Amazon by our big ideas, which are customer centricity, putting the customer at the centre of everything we do, invention."

The relentless focus on operations is at the core of today's airline industry’s challenge.

The competitive edge for any airline will come in seeing the world through the customer’s eyes and looking at all the extra information, guidance, and support to help the customer navigate the new world of travel.

As Lufthansa CEO Carsten Spohr said at the height of the pandemic*:  “The pandemic offers our industry a unique opportunity to recalibrate: to question the status quo and, instead of striving for growth at any price, to create value sustainably and responsibly*.”

In Part 2 of our guest series, Colin Lewis outlines the seven steps retailers and other consumer-driven businesses follow to ensure they put the customer at the heart of what they do.

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This article was written by guest author, Colin Lewis. Colin is a marketer with over 25 years experience in airline, travel and technology brands in Europe, Asia and Australia.