Ho Hoong Mau, Abacus International’s Division Head of Airline Distribution talks to Travel Daily about the rise of ancillary revenue, mobile applications and social media in the aviation industry.
1) How is the aviation industry embracing ancillary revenue?
Currently low cost carriers are clearly leading the charge in terms of unbundling services and charging ancillary fees. The network carriers, on the other hand, appear to be observing the trend, trying to figure out what is the best model for them. Last year in the US, ancillary revenues from checked bags totalled US$3.4 billion, but this is largely because they acted together in unison & this in turn sets the industry benchmark. Even then, Southwest airlines decided that they could find a unique market positioning to differentiate themselves from the other US full service airlines by not charging for checked bags – this position became anchored in a very successful “Bags Fly Free” campaign.
In Asia, carriers seem to be observing each other, waiting for their rivals to make the first move. Bundled fares are still the predominant mode for full service carriers in Asia, and these carriers are concerned about how charging for ancillary services will be received by their premium passengers. How would a long-standing frequent flyer react, for example, if suddenly everyone was able to pay for access to the airline’s lounge? They worry that they will take a reputation hit and dilute their premium brand position.
Low-cost carriers will continue to be the main driver for the adoption of ancillary revenue; they want to keep headline fares low to attract eyeballs to their websites and this means unbundling services as far as they can go. But full-service carriers have started charging for some smaller things; for example Singapore Airlines is now enabling passengers to pay extra for economy class seats with extra leg room. These airlines have project groups looking at potential ancillary revenue streams, but from what I can see the pace is still rather slow.
2) What are the main factors that will drive the ancillary revenue segment?
As far as I can see there are three main catalysts that could drive the future development of ancillary revenue streams. Firstly, the implementation of eMD (electronic miscellaneous documents) by IATA, will enable both airlines and agents to sell these ancillary services efficiently without paper documents. Secondly, there may soon be a tipping point when several major full service airlines start driving specific ancillary service items in unison. Like in the USA, this will then force all other regional players to do likewise and hence, potentially setting an industry benchmark. The third catalyst is the rise of the LCCS. Currently budget airlines account for approximately 20% of the airline capacity in Asia, and as this share rises, their activities could become the industry benchmark.
3) What new ancillary revenue streams do you think will become popular with airlines in future?
Currently the ‘low-hanging fruit’ are seat selection and in-flight advertising, such as placements in in-flight magazines. But we’re seeing a growing trend towards more widespread on board advertising, such as ads in the backs of seat tray tables, and the potential for this area is huge. ANA recently started issuing iPads to their cabin crew, so how long until airlines offer iPads to passengers? These iPads can contain adverts too, and as airlines offer more products to customers, everything can be branded. Other elements being considered include offering express check-in services or lounge access for economy class customers etc. For example, in Bangkok airport, SIA offers fast track immigration process for business class passengers. Will there come a time when SIA charges a fee and allow economy class passengers to have fast track immigration too? What is the potential brand dilution on their business class product? These are calculations which full service carriers have to make very carefully based on their own market positioning, their customer profile and their strategic intent going forward.
4) What are the main trends affecting the development of mobile technology in the aviation industry?
The trend towards mobile is clear; in India mobile subscribers outnumber home internet subscribers eight-to-one, and the figure is almost that high in Indonesia. The key underlying trend is that more consumers are now assessing the web through a mobile phone. These phones do not even have to be Smartphones, in fact, there are more people browsing the web through simple feature phones. The trend is very clear that we are reaching an inflexion point when there are more people browsing the web through mobile than through broadband connection with PCs. The proliferation of low-cost phones with basic browsing capability also supports this trend. Put the two together, we know that mobile is a channel that no one can ignore.
With the airlines, there are three stages of development airlines need to tackle in order to take full advantage of mobile technology. The first stage is making websites mobile-ready. Following that, airlines need to develop apps that allow direct interaction through mobile through efficient workflows. This sounds simple, but they need to know which platform suits which market. For example in India the iPhone isn’t that popular, because 3G in the country isn’t so good, so companies need to develop apps for 2G phones. In Singapore, iPhone is the top selling smartphone but not far away in Indonesia, the top selling smartphone is Blackberry. The third stage, which can only be tackled effectively if the first two stages have been completed, is mobile marketing. Currently companies aren’t spending much on mobile marketing, because they are unsure of the ROI but this will grow.
4) How are airlines using social media to drive revenue?
Right now airlines are still learning how to interact with their customers through social media. It’s mainly used a loyalty and customer-engagement tool, but airlines still need to learn how to use this effectively. Some airlines like Lufthansa have launched simple campaigns that leveraged location based services of social media platforms like Facebook, Tweeter, Foursquare etc – for example, asking consumers to check-in at specific spots to win prizes etc.
It is important for airlines to understand that social media can be a very effective customer service tool too. In the European ash cloud situation for example, airlines like Lufthansa and KLM used Facebook and Twitter very well, providing updates to stranded passengers when their Call Centres were jammed with calls. Some even went further and asked passengers how they travelled home and retweeted their tales in order to encourage alternate route planning. This was very well-received by passengers.
There is growing realization that they need to engage their customers through social media and that’s why SIA recently began to officially interact with their customers through Facebook.
However, airlines also have to realize that like all things, there is no one size fits all approach. In China, for example, Facebook and Tweeter is completely absent and the way to reach Chinese consumers is through the micro-blog sites like sina.com etc. The number of users at Chinese microblog sites are already similar in size to the tweeter global user base. They need to understand what segments of the market they are targeting and what platforms are best suited to reach them. With the launch of google plus social media platform, we might see some more changes in how consumers chose their preferred social media modes.
5) What, in your opinion, will be the future trends affecting the airline industry?
Obviously China and India will continue to drive global travel growth, but smaller Asian markets will also take off. In Indochina Vietnam Airlines and Thai Airways has huge growth plans. In Central Asia, Air Astana is planning to become the major carrier for Central Asia region. Indonesia of course has huge potential, and its large domestic market insulates it, to a certain extent, from global economic problems. Indonesian airlines like Garuda will grow huge domestically, before taking on the international markets in a big way.
Mobile technology will obviously be a huge growth driver, and it will be exciting to see the industry’s future developments. We all know the problem with mobile technology: the screens are too small. But imagine if companies could develop a flexible tablet, which can folded to fit in a pocket and then unfolded to display a large screen? This would revolutionise mobile sector.
Finally social media will develop in scale and usage; the game changer for social media is when companies figure out how to move consumers from engagement to transaction. Airlines need to learn how to build transactions via social media sites.
The future is very exciting and a lot of the cutting edge change could happen in Asia.