4 concrete steps for ancillary revenue generation

Interview of airline industry expert, Dr. Ricardo Pilon

by

Ritesh Gupta, Airline Information Correspondent

4 concrete steps that can pave way for ancillary revenue generation

Airlines need to optimise the passenger experience path. If this can be achieved, then

airlines would be in a better position to excel in the arena of ancillary revenue

generation.

By Ritesh Gupta,

Airline Information Correspondent

There are times when as a passenger I am willing to pay for certain amenities or

services provided it can be offered when and where it is relevant, not when the airline

thinks it is relevant.

So, for instance, an airline is offering a deal featuring an enhanced meal on a

transatlantic flight, and this can be availed only when a flight is being booked on the

brand website. But what if as a traveller I am open to paying for the same deal before

boarding the flight? I can’t imagine this happening that easily today.

Ricardo V. Pilon, CEO, Millennium Aviation, agrees and says the answer to such

conundrum lies in the sophistication, attention to detail, and efficiency of relevant

services that are bundled around specific trip purposes.

“We have to shift the focal point of commercial aviation from transportation to the

individual’s purpose of the trip,” said Pilon.

Here some critical aspects that airlines need to focus on to combat structural profit

leakage problem:

- Knowing customers better: If airlines find ways to know their customers better, then this will improve the customer experience path as well as revenue

generation. “We need to get the customers’ permission to build multiple profiles

about themselves depending on how they decide to travel and what it is that they

would like during their in-flight as well as on-the-ground experience,” said Pilon. “We need to do that with the customers so that we can start building and

providing offerings around it.”

Once an entity gets equipped with a full picture of what all the possibilities are, it would be fairly evident where the ancillary revenue generation opportunities are

going to be. “We then need to see how we can build that into the in-path flight

booking process. We can generate many ancillary revenues from anything related to

what our personal needs are when we leave home until we come back and after

(sharing our experience in social media). From a shoeshine, to a valet car wash, to groceries delivered at home, to adventure and organized tours, to online and in-flight

shopping (commissions) and duty free, streaming music or films. The opportunities

are endless,” said Pilon. He said there is a need to design the process first and worry

about the (reservation) systems after, otherwise we will find too many obstacles as to why this cannot be done.

- Clear value proposition: An airline needs to balance these two aspects – being

customer centric and the opportunity to monetize the entire customer experience path. “Ultimately there should not be a conflict between the two, but today that is

still the case because we complicated choice and pre-packaged bundles (branded

fares),” said Pilon.

Citing an example, he said: “If I am a top tier member at an airline but slip to a lower level in one year because I start flying more to areas where my home carrier

cannot take me I get penalized. For example, not only could I lose priority access but

also am I now required to pay for seat selection when I happen to find a low fare

with restrictions. The loyalty program considers a period of 12 months as a yardstick for customer value, whereas the rest of the departments may be concerned with my

life-time value.” In a way, the current loyalty programs can create a reverse spiral as

multiple penalties and punitive actions remove the incentive to keep on flying with

that carrier.

Another example of monetization that has a negative value proposition is redemption

travel. Pilon pointed out that some airlines add a significant amount of artificial fees

and surcharges to a redemption ticket that makes them as expensive as just purchasing your ticket (with the difference that you can keep your points for other

purposes).

“I recently had this trying to redeem a ticket from Montreal to London. It would cost

CAD 897 in fees plus 80,000 points (my balance was 210,000 miles) while I was able to purchase a ticket on www.aircanada.ca for CAD 954, taxes included. That did not

make any sense and shows how silo-driven monetization undermines intimacy. In

sum, and given the psychology of pricing, the price points of ancillary (seat selection)

should be in line with the price of the base fare. A seat selection fee of $49 on a $129 fare is off-putting,” explained Pilon. Alternatively, one should simplify revenue

management and optimize ancillary. “Today, we are trying to revenue manage seat

selection and seats separately independent on base fare levels for economy class.

The value proposition is confusing and difficult to understand for customers and it

undermines intimacy, customer experience and loyalty,” said Pilon.

- Charging aptly for a service: Pilon recommends that airlines should avoid all

conflicts that arise from charging for a specific service if that is in conflict with the

overall importance or value proposition for that customer group.

He mentioned that some ancillary revenues today are punitive (bringing carry-on

bags on board), others value added propositions (e.g. upgrade). “You can argue

that seat selection fees become punitive as and when more and more people pay

for this, because people are not paying a fee for the seat location they prefer but for the guarantee that they do not end up in a middle seat. It is a very different

proposition,” said Pilon.

And since it involves people, it is a sensitive area.

“In my view, we will not get it right until we involve regular customers and address both

ancillary service fees/prices in coordination with base fares. The customers look at the

overall outlay of cash and sacrifices to see if it is consistent and reasonable. They do not

do this mental exercise for each item in isolation. For many airlines, this may require a break-down of the traditional airline management structure so that a full commercial

optimization-based process can be designed and implemented,” said Pilon. This will

become more important as we include other ancillary services beyond the flight/ hotel/

insurance/ car rental.

Dig deeper: Airlines are prioritizing their members in the top tiers of the loyalty

program and are looking at ways to integrate the various touchpoints with a customer,

from booking to deplaning and baggage retrieval. Some airlines are also installing

additional software functions that allow airline lounge employees to retrieve more details about key customers when they interact with them (such as history of past issues, lost

luggage, or special status and recognition). As a result and because airlines are looking

into offering more choice, airlines are also reassessing the required functionality in their

core reservation systems.

However, as Pilon said, the initiatives of airlines regarding relevant offerings based on

current or past transactions are not yet integrated with overall marketing and reflects

the silo-based departmental structure behind the scenes.

“As frequent fliers, we get conflicting offerings and they are often still irrelevant because

we are not studied as individuals, only as segments,” said Pilon. “In addition, as long as

the approach of all airline staff towards (frequent) fliers depends on cabin class the customer happens to be sitting in or on what they read of a passenger manifest or their

loyalty card, the overall perception of intimacy will not improve until it is consistent both

offline and online.”

Also going back to what I suggested initially regarding the enhanced meal, Pilon also believes that the timing of offerings does not match the timing expectations of the

customer.

Overall, Pilon does believe that airlines recognize that there is a tremendous wealth of information that can be captured and that suggestive selling will depend on predictive

and prescriptive analytics. “In the latter case, we can think of things the customer may

want before they realize or think about it (adapters, SIM card Wi-Fi access throughout

their trip, cloud-based travel planning and offers of stores on location at any stage for

the duration of the trip),” he said. According to him, the question is not what information

we can read in the data, but which specific question we are looking to find an answer for using analytics.

“Otherwise, we can lose the big picture in big data,” he said.

The airlines are at the cross-roads of identifying new opportunities but will need careful

design of how it will be presented to customers in day-to-day transactions.

Ricardo V. Pilon, CEO, Millennium Aviation, is track chairman for the upcoming Ancillary Merchandising Conference, a part of Airline Information’s Loyalty, Ancillary & Co-Brand

Conferences - Mega Event Asia-Pacific 2014, scheduled to take place in Singapore

(August 20 – 21).

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