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Special Report - As You Like It

Mass customization is touted as the potential savior of airline bottom lines. But will it really pay to make this dream a reality?

Andy Warhol famously remarked that in the future, everybody will be famous for 15 minutes. He understood the modern appetite for standing out from the crowd. Airlines should take heed because embracing individuality may be the route to a profitable future.

Customizing a product to an individual’s taste is finally possible thanks to technological progress. Airlines can now sell a total travel experience tailored to each customer. An economy flight with lounge access or a business ticket with limousine service on arrival—any combination is possible.

Understanding the unique characteristics of each customer’s requirements provides greater flexibility for upselling. If there’s an interest in a business class meal with an economy seat then perhaps a special offer during the booking process will secure the deal?

According to The Amadeus Guide to Ancillary Revenue by IdeaWorks, airline ancillary revenue added up to $22.6 billion in 2010. Providing customer choice would seem to reap handsome dividends.

“If the airline industry is to follow the lead of Amazon and the retail sector we must all work towards the ultimate goal of personalization,” says David Doctor, Director of Airline Distribution at Amadeus. “Airlines that are able to deliver on and anticipate individual customer requirements through whichever channel the customer chooses to use will see bottom line benefits.”

Some airlines don’t need to be told twice. The Amadeus Guide says ancillary revenue for best-in-class carriers averages 19.4% of total income. These include the likes of Ryanair, which now sells pre-approved cabin baggage on its website. Air Asia X reportedly makes about $20 extra from each passenger.

“There is no doubt customer behavior has changed,” says Michael Braun, Spokesperson for Austrian Airlines. “With customization, every passenger can travel the way she likes.” Austrian has developed its ‘redservices’ concept, which allows passengers traveling in any class to book a variety of extra services, including transport, a priority lane at the airport, and lounge access.

But many of the world’s legacy carriers, such as SAS, British Airways, and Egyptair, average a paltry 2.9%—although there are signs of progress. KLM is testing à la carte menus. Even a limited menu based on passenger behavior, transactional history, and specific itinerary could turn onboard meals from a cost center to a revenue-generating one. Major US airlines have been relatively quick on the uptake and now earn about 7% of their revenue from extra services.

Even the success stories though cannot hide the fact that ancillary revenue is still less than 5% of total industry revenue. If every airline jumped to best-in-class status, the Amadeus Guide estimates ancillary revenue would be near $75 billion.

But getting on the personalized service bandwagon isn’t so easy. For all the ease of modern technology and processes, it does represent extra complexity. Airlines have to consider what it really means to fulfill an end-to-end process of selling and delivering these services.

Deploying information-based customization would also require physical infrastructure, for example. A lounge is a finite space so offers to use it must be similarly limited. But data could be gathered on lounge usage. Offers could then be based on a passenger’s expected time of usage and an appropriate fee instead of open-ended usage and a standard fee. This would further deepen the database and suggest if, and when, lounge expansion was necessary. “Whereas traditional infrastructure becomes constraining and less useful over time, information technology infrastructure—especially when it is centered on data collection and analytics—becomes more influential over time,” says Nawal Taneja, Professor Emeritus, Department of Aviation, Ohio State University.

There is a danger that customizing fees according to passenger and point of sale will lose transparency and trust in the airline. But customer loyalty should also be a part of this debate. An airline may discriminate but, with potential benefits and savings on offer, passengers may be willing to accept the trade-off.

In any case, soaring ancillary revenues are witness to the fruitfulness of customization initiatives. And thanks to technological progress, the costs involved are far less than in the days of clunky customer relationship management systems. These didn’t fully exploit unstated needs and behaviors the way modern platforms can. But the path to success remains the same. “The key is to identify which offer to make at what time based on which event,” concludes Taneja.

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