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How Can Airlines Act More Like Retailers?

Airlines must develop direct relationships with their customers to reap the rewards of ancillary products - by John Thomas, Managing Director, L.E.K. Consulting

John Thomas, Managing Director, L.E.K. Consulting

Ancillary revenues have become critical to the economics of the airline industry. In 2012, the major US airlines earned an estimated $12.4 billion in ancillaries alone, grown from a negligible base six years ago. Ancillaries are good for both the airlines and consumers. Airlines can offer the cheapest fares and “upsell” with add-ons that generate lucrative returns. For customers, the additional offerings provide greater selection and customization—pay only for what you use.

Airlines, however, have realized that to maximize the revenues from ancillary products, they need to act more like retailers and better merchandise their services. Merchandising in essence means making the right offer to the right person at the right time—personalizing each journey to the needs of each customer for each particular trip.

To do this effectively, the airlines require transparency about individual customers. What services have they purchased in the past? Is their upcoming trip more conducive to the purchase of certain services over others (is it a business trip versus a leisure trip, for example)?

If a customer purchases tickets through an airline’s website, the airline has the ability (even if it does not have past transaction data) to offer services that are customized to the type of travel the customer is booking. If the customer is booking through a third party, however, the airline lacks the transparency required to offer targeted products. 

There are ways that airlines can overcome this problem though:

  • If the customer is a member of the airline’s frequent flier program (FFP), the airline can identify the customer and push personalized offers as soon as the booking is made, or closer to departure through “prepare for travel” emails. Roughly 50% of passengers on a given flight will be part of that airline’s FFP
  • Online check-in provides the second best option as it catches travelers in a relatively stress-free environment (as opposed to during the stressful airport experience). Despite some exceptions, most airlines haven’t tapped into the full potential of this point of sale
  • Airport kiosks provide another opportunity, It is a limited one though because by this stage customers want to get through the whole process as quickly as possible. Nevertheless, this can still be an effective channel for day-of-departure upgrades, FFP-accelerator products and even some airport-related products

It may be too late to sell ancillary offerings on board, although some airlines do sell upgrades. The onboard experience can be a highly effective tool for informing customers of what is on offer, however. Even little things like different head rest covers to differentiate premium economy seats can send important messages to customers about options available on their next journey.

Through ancillary products, airlines have discovered a tremendous source of value. But to fully monetize this innovation, they must find creative ways to develop the type of direct relationships that retailers have with their customers—the key to merchandising effectively.

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