Keeping pace with a changing airline industry

The airline industry is in the midst of a fundamental commercial transformation. Influenced by rapidly evolving technology and high consumer expectations, airlines in 2015 more closely resemble on-line retailers than they do the industry itself in, say, 1995.

While one may argue that the previous statement displays a bit of poetic license, it is indisputable that the rapidly evolving buying behaviour and technological savviness of consumers both individually and collectively have triggered an irreversible airline merchandising revolution.

For most of its history, the passenger airline industry has been guided by a “demand-pull” business model. Although carriers advertised heavily in an attempt to win passengers and gain market share, the same model persisted: consumers demanded tickets for transportation, and the airlines obliged. All that the airline really needed to know about the passenger was the information ultimately contained in their PNR. In fact, as far as the airlines were concerned, the passenger came into existence when the PNR was created, and departed when the last leg of the reservation was flown. That model worked as long as transportation was the only product that the airlines sold. As we know, that is no longer the case.

The catalogue of products and services offered by airlines today would be quite unfamiliar to an industry insider of twenty, or even ten years ago. In-flight services (bag check, preferred seating, etc.), travel-related services (e.g., hotel rooms, concierge services), and retail/promotional tie-ins are now offered directly to customers either in conjunction with a ticket for travel or independently. Further, it is important that the consumers of airline services now be referred to as customers, and not simply as passengers. As opposed to the transient nature of passengers described earlier, customers are always available to engage in direct contact with the airline, and to receive offers for the broad array of airline-provided products and services. Just as the airline insider of twenty years ago would not recognise the full range of offerings of today’s industry, so, too are most of today’s customers equally unaware of the full scope of inventory that an airline offers for sale. Out of necessity, therefore, the industry has at least partially adopted a “supply-push” merchandising model.

Of course, implementing a core change like a business model shift is no small matter; in this case, a transportation-focused industry is becoming a general retailer while retaining its traditional business responsibilities. By changing the business, the addressable market of prospective customers also changes. An airline cannot reasonably expect a customer in this shifting environment to be fully aware of the enhanced product and service offerings and independently generate the necessary demand - the airline must push the supply. However, almost like snowflakes, no two customers are alike in their purchasing preferences and behaviours, so promotional communications sent to the customers must be targeted in a way that maximises the likelihood of revenue generation. To do so, carriers must solve the problem of segmenting the market so that product solicitations are perceived as providing a service and not as a nuisance. Utilising advanced demographic analytics is a significant part of the solution.

Although the approaches take many forms, most of the relevant analytics discussed today address both historical data clustering and near real-time capitalisation on opportunities. The retail industry has been successfully practising demographic analytics for quite some time, and the effectiveness of their methods has increased significantly with the advent of big data analytics, social network activity, and mobile/digital technology. Airlines have a great deal to learn and adopt from the retail industry in this regard.

Beginning with historical data, the airline attempts to discern the purchasing behaviour of market segments by defining identities or personas. These personas are built using commercial and demographic information found in numerous data sources, including airline passenger records, loyalty systems, credit card activity, survey results, social media activity, etc. By incorporating various analytical clustering algorithms, patterns can be derived which relate buying behaviour to complex multivariate characteristics of the overall market. Based on the accuracy and availability of relevant data, a large number of personas can be defined. The more personas available, the better the end result will be - we seek, but may not attain, the elusive “segment of one.” As we learn more about our individual customers, we can assign each to a persona based on their individual characteristics and attributes, and have a reasonable expectation that their purchasing preferences and patterns will match that of the assigned group. Once assigned, solicitations can be targeted to increase the likelihood of revenue conversion.

To capitalise on near term opportunities, an airline can mine significant value from social network tools. Regardless of their segment assignments, many customers actively engage in social network chats through which their current preferences can be revealed. By relating these revelations to other known data, tie-ins can be made to create additional revenue opportunities.

For example, if a customer has a recent trail of social network comments about a specific favourites in cuisine and also has a booking, the airline can offer destination dining options through pre-arranged restaurant deals that, if accepted, would yield additional ancillary revenue. Such “sense and respond” activities can serve a much broader niche than dining accommodation, and further serve to refine the pre-defined personas.

Of course, this brief paper merely scratches the surface of revenue generating motivation, possibilities, and techniques. Questions related to actual analytical methods, unstructured data handling, omni-channel connectivity, etc. (i.e., the hard stuff), are left unasked and hence unanswered. However, it is clear that a rich revenue stream exists for airlines who take advantage of the opportunities.

Mark Tedone, General Manager and Head of Global Airline Practice, Mindtree

Image source: Shutterstock/chbaum