how to increase revenue in airline industry

Airlines can enhance their flexibility through measures such as increasing the deployment of so-called preighters, or passenger airplanes that are used to transport cargo. The operational departments (such as airports and in-flight service) often have little or no opportunity to influence the concept or design. As airlines seek to improve the onboard passenger experience, so too must they identify new ways to increase revenues. Domestic RPKs will be much better, driven by buoyant economic growth (revised up to 5.2% (from 4.9%), accumulated savings of consumers, pent-up demand and the lack of travel restrictions within borders. For example, today most carriers price point-to-point nonstop flights at a premium. While demand has increased, so have profits for major airlines, predicted to sit around $33.8B in 2018. Not only did its stronger position pre-COVID-19 enable it to navigate the crisis thus far without taking on government loans of the scale relative to other airlines, it also made it possible for it to restructure to emerge with an even more competitive cost base. 1 - Seatback self-service report to the senior commercial executive, either directly or through the teams for pricing, revenue management, sales, or distribution. During that time, he has overseen the continuous improvement of the PROS revenue management products. The PROS Platform for Travel and our IATA ARM-certified solutions for price optimization are opening up a world of airline distribution, enabling rich customer engagements and dynamic offers. Industry 4.0 also known as the fourth industrial . For example, airlines can respond to the quicker recovery of domestic and short-haul flights by investing in direct sales and owning the customer relationship. April 2021 update crisis levels. This includes upsell with seats, bags, onboard sales in addition to the travel experience. DTTL and each of its member firms are legally separate and independent entities. Ubers pricing algorithm includes many of the typical factors that go into revenue management but also unique ones like distance and demand for a ride at a given time. Innovative Revenue Generation: Low-cost airlines can get quite creative in order to generate extra revenue. Total Offer Optimization and Customer Lifetime Value. Leading from the front line: How airlines can boost ancillary revenues. Comments are closed. This article examines how a systematic data collec-tion process and supporting variance analysis will facilitate decision-making and help make an airline more competitive. Airlines can use frequent flyer miles in an a-la-carte options approach to reduce those costs that are under their control without annoying customers. The sharp fall in revenue led to high cash burn due to fixed and semi fixed costs. A father of five kids is likely to be more conscious and aware of the price of a plane ticket because he has to buy so many of them. )1 is generated from a-la-carte products and services. United Airlines is a clear industry leader that has bounced back strongly from the COVID downturn and is posting near record revenue numbers. Privately Owned Vehicle (POV) Mileage Reimbursement Rates. This disjointed approach makes it difficult to tailor pricing to specific demand segments. Butthe effectiveness of these practices is limited because, as behavioral economics researchtells us, people typically prefer to avoid losses over acquiring equivalent gains, and, when customers have to pay for something that used to be free, they interpret this as a personal loss. The next step forward: Efforts to help frontline employees collect these fees and charges more effectively. Head, Dynamic Offers, International Air Transport Association, Head, Distribution Strategy, International Air Transport Association, Associate Director, Data Science BCG GAMMA. Have you flown off course with your approach to revenue management? ULCCs, in particular, have grown since 2013 and now account for 9.5% of domestic RPMs. Theyll have to keep their teams focused, build a resilient culture so that employees are reassured that their efforts will pay off, andwhen they hit bumps in the roadhelp them resist the urge to go back to the old ways that always worked.. Execution is even more neglected. Airlines may look at freighter conversions, especially as their passenger fleets reduce in number. Exhibit 2 shows how to apply this approach in the check-in environment. Aircraft are a significant expense for an airline, making up 10 to 15 percent of a carriers cost base. Airlines seeking to harness these impulses should recognize that change programs reinforced by targets and by monetary and nonmonetary incentives are significantly more successful because they help to align the personal interests of frontline employees with a companys goals for ancillary sales and collections.3Voices on transformation: Insights from business leaders on creating lasting change, 2010; How to beat the transformation odds, April 2015. In fact, theyd rarely do on long-haul. Airlines need to grow cargo in an agile way that allows for quick adjustments; pursuing such a play should be seen as part of a wider theme of establishing a more flexible production setup. But the forecast is not without bright spots. Some business sectors chronically lose money but are adored by customers ride-hailing services, to take one example. In 2022, airline net losses are expected to be $6.9 billion (an improvement on the $9.7 billion loss for 2022 in IATA's June outlook). Patrick T. Fallon/BloombergGetty Images When a customer checks into a flight with United Airlines (UAL), there is typically an array of potential add-on offers to navigate through: flight. The sector is expected to be smaller for years to come; we project traffic wont return to 2019 levels before 2024. Earn badges to share on LinkedIn and your resume. Some low-cost carriers use the space on the overhead bins to place carefully targeted ads in order to generate revenue. These moves typically arent effective. However, other than charging more for certain seats or VIP packages, pricing remains stagnant. has been saved, Have you flown off course with your approach to revenue management? This will be especially challenging for global network carriers, given their reliance on international trafficwhich is expected to recover very slowlyas well as their expensive hub infrastructure, which will not be fully utilized during the long recovery. The switch from revenue management to offer management wont occur overnightfar from it, in factso it will be critical for organizations to build early momentum that can sustain the transformation over the long term. Waste is thus being eliminated in a win-win way. It allows airlines to generate and sell contextualized offersproducts that are customized and priced in real timeand combine ticket fares with ancillary products such as in-flight meals and priority boarding. Artificial Intelligence, October 13, 2021 They must expand their revenue focus, rethinking how they distribute tickets and sell ancillary products (such as airport accommodations and in-flight services). To increase ancillary sales significantly, companies must take a more holistic approach. Carriers that embrace offer management can achieve those goalsbut transformation is needed. Lets go back to the empty premium economy cabin. Our work shows that four levers are essential: fostering understanding and commitment, providing appropriate tools and support, aligning processes and structures, and enhancing talent and skills. Savvy airlines are taking notice: consumers are more likely to fly with providers that offer tailored, competitively priced bundles that meet their specific needs. Even though many airlines find themselves in financial straits, we recommend investing more in IT and digitalization, not less. 1 IdeaWorksCompany / CarTrawler 20182 Criteo panel Can AI build brand loyalty?, PhocusWright Europe 2019. Airlines in all regions are expected to record negative operating income in 2020. As commercial flights gradually return, belly supply will increase, although not to pre-COVID-19 levels for at least a few years, as the industry is expected stay smaller than before the pandemic for several years. The impact of the COVID-19 pandemic is far from over. This large gap between nonstop pricing and connect pricing may need to narrow. Compounding these liquidity issues, airlines face another critical challenge: the need to restore capacity quickly and flexibly to meet demand, while aggressively downsizing overhead in an effort to survive if demand recovers more slowly and unevenly than forecast. Please see www.pwc.com/structure for further details. And I thought: Why didnt they offer those empty seats to passengers in economy for some additional comfort in the next 10+ hours?! For instance, inventory teams can expand their focus beyond RBD-based demand forecasting to account for more of what customers might be interested in buying. No matter their starting point, BCG can help. What happens, though, is that bookings slow down and sometimes even stop. Heres 5! Alexander Nikonov, Director of Aviation Commerce at Aerodynamics, considers what 2020, and COVID-19, has taught us about the aviation industry and, crucially, how we can learn from it in a post-pandemic world. Legacy Distribution Ecosystem. ABM Resources Test Stream for Your {demandbase.industry} Industry, travel industry needs to adopt a modern commerce approach to revenue management, Airline Revenue Management Strategies for Other Industries, The amount of time remaining to sell the seat or room. Offer optimization cuts through the challenges airlines face and delivers fast, accurate results. Are Airlines Escaping from the GDS Or Simply Falling Under Googles Control? Agility will be the name of the game throughout the transformation. Instead of seeing this as a necessary restriction to access much-needed funds, airlines can treat it as an opportunity to shape how the sector evolves with a key stakeholder. Ancillary revenues are rising, and airlines increasingly depend on them. A: Airlines attempt to get the most revenue per flight. PROS Outperform gathers airline leaders for the latest travel AI innovations across revenue management, distribution, marketing, and e-Commerce. A move to offer management on the part of the airline industry as a whole could represent a bigger leap than the shift from leg-based to origin-and-destination-based revenue management or from standard fares to fare families and branded fares. Unlike the 2008 global financial crisis, which was purely economic and weakened spending power, COVID-19 has changed consumer behaviorand the airline sectorirrevocably. Cant they do it now?. As airlines struggle to turn profits, they look for ways to boost revenues, from new fees to new sales tactics. For the airlines, miles are very low cost, with estimates ranging from less than $0.001 up to $0.01 per mile. Technology, Media, and Telecommunications, Why Airlines Network Planning Must Be Bionic. You would be wrong. The shape of the post-COVID-19 airline sector is becoming clearer and holds lessons for airlines today. Looking ahead, carriers will continue to fight for survival, while investorsmore cautious today since airlines have loaded up on debt to stay afloat amid the COVID-19 crisisare being more selective when making their aviation investments. has been removed, An Article Titled Have you flown off course with your approach to revenue management? Using the $22.50+ gain and some reasonable estimates of the number of business-class passengers who would take advantage of the option leads to annual savings (excluding the cost of adding this option) of millions of dollars. A high load factor indicates that. Its inventory that an airline should be able to offer at any time hours before departure, when you are willing to fly back home in a more comfortable seat; at bag drop when your customer willingness to pay is higher; or on the monitor in the aircraft just before take-off? To launch the transformation, they should first appoint a dedicated leader to oversee a new collaborative, cross-functional organization model that will bring together siloed teams. Entertainment pricing could drastically benefit from implementing revenue and yield management strategies. Were seeing a reemergence of, or increase in, the level of state ownership and influence. Please see, Telecommunications, Media & Entertainment, Corporate Responsibility & Sustainability. Please enable JavaScript to view the site. They shouldnt be. By means of comparison, the retail industry spends around 6 percent on average, and financial services 10 percent. While larger cities have more local traffic to weather this downward spiral, reduced traffic may undermine weaker hubs. These costs will need to be recouped. A McKinsey Live event on 'Returning to corporate travel: How do we get it right?'. Furthermore, when demand for air travel returns, it will likely outpace supply initially. Use machine learning to identify and capture these insights and automate the learning. First, a smaller contribution from business traffic could necessitate a different pricing logic. The price sensitive can either choose to stay where they are longer in hopes that the rates go down, find some other way to get to their destination which could take longer or be less safe or just pay the price, enjoy the convenience and get home. Airlines use a sliding scale involving price, inventory, marketing and various sales channels to determine profitable plane ticket prices based on a flurry of factors like willingness to buy, competition, and destination. This article is the first in a series, coauthored by BCG and the International Air Transport Association, on the airline . Each member firm is a separate legal entity. This makes small seats, which often allow the airline to install more seats per airplane, more profitable. It is the first profit since 2019 when industry net profits were $26.4 billion (3.1% net profit margin). While connecting passenger traffic and reliance on international traffic are indicative measures, other factors also define hub competitiveness and airline network decisions. The first and most obvious source of new revenue for airlines is expansion. To that end, they must be ready to embrace new ways of working, make the right investments, and reshape their organizations accordingly. Singapore Airlines Ltd. Chief Executive Officer Goh Choon Phong was paid S$6.7 million ($5 million) last financial year, an 86% increase that puts him among the best-paid leaders in the industry. Given the pandemics ravages on the industry, these developments couldnt come at a better time. Ultimately, however, it will likely be necessary to reduce the number of hubs in the US network to help restore and accelerate profitability in a market with fewer passengers. To make the most of the systems personalization capabilities, they must invest in the right technological infrastructure and the relevant e-commerce technologies (such as customer relationship management systems) for collecting and managing massive amounts of customer data. Holistic pricing engines that can process customer data and generate customized offers in real time on both tickets and ancillary products are not common. For these reasons, NDC has the potential to serve as a powerful backbone for offer management on all distribution channels. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholdersempowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact. In the context of expected economic downturn that CAPA projected during their Airline Leader Summit 2019 in Dublin, making money and keeping margins is vital. Navigating the multitude of solutions and players in the marketplace can be daunting, as is identifying the key building blocks that could work for a given airline. On the contrary, the executive assistant booking a last minute flight across country is more likely to pay more and also choose a more expensive seat in business or first class. As such, were seeing some airlines pull ahead. This report discusses the four pillars of an airlines commercial strategy: Pillar 1: Does your organization have an explicit commercial strategy that can be translated into clear and meaningful actions for pricing and revenue management? Many airlines have also implemented corporate safeguards to increase, even sometimes guarantee, their chances of keeping flights full. This serves them well in the search for competitive advantage and higher yields. GSA has adjusted all POV mileage reimbursement rates effective January 1, 2023. Business-class tickets typically offer passengers the option to use lounges, and when access is free, passengers are likely to do so if visiting is even just marginally more desirable than not. Airlines are often held up as the epitome of best practice in pricing and revenue management. Combining the volume of rideshare transactions and a fairly sophisticated revenue management model, these companies capitalize on each customer and continue to grow. These could include committing to reductions in greenhouse-gas emissions in return for more labor flexibility; increasing the cash-on-hand requirements to make airlines more resilient against future shocks; more balanced value sharing between airlines and other sectors such as airports; or changes in the ownership caps to allow greater inflows of foreign capital, reducing the reliance on state capital further down the road. Some hotel chains have implemented a similar strategy, offering rewards points for guests who choose not to have their rooms cleaned. The impact on value creation will vary by geography, by player category, and by each airline's existing capabilities, but academic studies indicate that improvements of up to 7% are possible. North America is expected to turn to profitability in 2022. Dynamic pricing allows airlines to price seats and ancillaries dynamically based on travelers willingness to pay, increasing the likelihood of purchase. Eliminating the abuse yet not the use of costly services is a vehicle to tackle dwindling profits. But technology is only an enabler of a broader strategy. Tailoring bundles to individual customers or microsegments is simply not practical for the average airline selling through indirect channels. The cabin crews that sell duty-free products most successfully generate a multiple of an average crews revenues. Emirates and PROS are collaborating on a revenue management training program to attract and retain the best RM talent in the industry. Of course, the potential for individual airlines remains to be seen, but those that make the transition will undoubtedly see results in immediate revenues and in long-term customer relationships. This article is the first in a series, coauthored by BCG and the International Air Transport Association, on the airline industrys transition from revenue management to offer managementa new approach to retailing products and improving the customer experience. Non-hub airlines like Low Cost Carriers (LCCs) and Ultra Low Cost Carriers (ULCCs) led growth both during the previous downturn recovery (2008-2013) and expansion (2013-2019) periods. Airlines can work with regulators to set standards across a gamut of issues. (See Exhibit 2.) In this article, all mentions of a survey refer to this one. Carriers that embrace offer management can achieve those goalsbut transformation is needed. Enhancing Customer Experience and Growing Revenue with Artificial Intelligence. Seize ancillary revenue opportunities. Tailored, Dynamic Bundling. All rights reserved. "The A380 is an aircraft for flag carriers with a few very dense routes and a certain cost and revenue profile," he says, "But for secondary markets, we never thought it would have much . In previous crises, leisure trips or visits to friends and relatives tended to rebound first, as was the case in the United Kingdom following 9/11 and the global financial crisis (Exhibit 1). Related Expertise: Often times, concert venues and movie theatres struggle with the same issues as airlines and hotels: a limited number of tickets to sell, a timeline of when the tickets have to be sold by and the need to sell a minimum number of tickets to return a profit. Striking the right balance will be challenging, but airlines do have options. However, the biggest win was going through the whole process and the results with the team. Airlines are currently focused on reducing cash burn by 50% by Q3, and investors will expect airlines to rebuild their balance sheets by paying off this 45% increase in debt as rapidly as possible. First, it identifies services that have a sizeable variable cost component and that competitors offer for free for example, the use of third-party airline lounges or late check-in windows. As lease rates and OEM pricing fluctuate with supply and demand levels, inking deals during a crisis could allow carriers to enjoy a cost advantage for years to come. And even much of todays most flexible merchandizing software is built on rule-based engines and can only be used on direct channels. Jun 28, 2023 11:36 AM EDT. These hubs face added pressure as airlines rationalize their networks to survive in a lower-demand environment that will skew more heavily domestic in the next two years. So, bottom line passengers do not end up always buying the cheapest fare. Good question. Boston Consulting Group is an Equal Opportunity Employer. The story isnt much better when it comes to customer experience: Airlines are among the five most hated industries in the United States and have been in the bottom 20% of companies ranked by the ACSI (American Customer Satisfaction Index) since it was introduced more than 20 years ago. Retailers lower the prices in order to get more people into the store with the hopes that if customers dont make it in time for the one product they really want, maybe theyll buy a similar product of lesser quality but at the same price point of the desired sale item. A Narrow Revenue Focus. If use of privately owned automobile is authorized or if no Government-furnished automobile is available. This has to do with why so many movie showings are empty or only have a handful of viewers. This is relatively low compared with other sectors. To stay logged in, change your functional cookie settings. Ancillary revenue in the airline industry reached a historic high last year, accounting for approximately 15% of total airline revenue.. The industry needs a new approach to growing revenues and meeting customer needs. But this pool of profit-generating passengers has shrunk because of the pandemic. 1. The potential impact of helping companies to improve on this measure is considerable. And debt levels are still rising (Exhibit 2). High fixed costs combined with unpredictable demand levels outside an airlines control increase the need for airlines to be able to scale down supply nimbly. New approaches to increasing revenue, optimising costs and improving the passenger experience. T&L industry leaders have digitized their market strategies and enabled selling and distribution directly to customers, which frees up sales teams to focus on more strategic work. Travelers who value time over pricemostly business travelersbook these nonstop flights. These programs are valuable both from a balance sheet perspective because they can be used as collateral for loan programsand from an income statement perspective since frequent flyer miles can be used in an a-la-carte options approach to reduce costs under airlines control without annoying customers. It will take time for airlines to restore capacity, and bottlenecks such as delays in bringing aircraft back to service and crew retraining could lead to a supplydemand gap, resulting in higher short-term prices. Airlines, on the other hand, use complex algorithms to constantly analyze the market and determine what prices customers are willing to pay. Waves of change: acknowledging progress, confronting setbacks. No passengers are worse off, and those who exercise the option are better off since they chose to do so. Becoming better can necessitate investment. By following these 5 steps. Learn about the ways airlines revenue managers around the world are implementing artificial intelligence applications to drive value. Most of the profits earned on a long-haul flight are generated by a small group of high-yielding passengers, often traveling for business. The benefits of a-la-carte options are higher in the airline industry than in others because of the asymmetry in customer value and supplier cost: the value of an airline mile is much higher to the customer than its marginal cost to the airline.
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