Report Finds Merchandizing Disconnect Between Airlines, Travelers

Driving ancillary revenue through merchandizing is all the rage with airlines the world over these days, and for good reason. Without the incremental revenue generated from selling optional services, many airlines may not have turned the corner and regained profitability. But according to a Frost & Sullivan report commissioned by Amadeus, there's a pretty big gap between airline interest and traveler interest in many merchandizing techniques.

"Additional services now contribute an estimated €10 per passenger globally," according to the report. "Without ancillaries, airlines would be losing money from their core seat product. The shift from providing only a core seat product to providing a variety of travel services has been slow and still has a long way to go." The "patchwork" of familiar extras offered by airlines—baggage allowances and seat upgrades, for example—are a start but a more holistic approach to improve the customer experience is needed "to meet and exceed traveler expectations throughout the duration of the journey and beyond," the report's authors concluded.

They noted that airlines are well-positioned for such an approach, as they enjoy a "huge advantage" over the likes of travel agencies and hospitality firms: Seventy-nine percent of the travelers surveyed for the report indicated they "prefer to buy services from the airline directly."

To calculate levels of interest among airlines and travelers, Frost & Sullivan interviewed executives from 15 airlines and industry experts, examined research and industry data, and conducted a survey of 306 travelers from the United States, United Kingdom, Germany, Brazil and Singapore. Of the total, 41 percent of respondents were business travelers with the rest leisure travelers (findings from the two groups generally varied by no more than a few percentage points), and 50 percent were under 40 years old.

In terms of airline interest in items listed in the report's "offer creation and packaging" section, value-added bundles topped the list, with 98 percent. Traveler interest was about half that, at 50 percent. "The value the traveler gets from a particular bundle must be completely clear," the authors wrote. "Investing in value-added bundles will increase basket size by €14 to €19. While this technique does not offer the highest ROI of all the packaging techniques, it does provide the best balance between revenue generation and customer satisfaction."

For the reverse, an unbundled a la carte approach, airline interest was 95 percent compared with traveler interest of 34 percent.

Meanwhile, the report calculated airline interest in "personalized packs" at 83 percent versus traveler interest of 22 percent. The tailored approach offers a big ROI for airlines—an increase in basket size "of up to €30 to €35, the highest increase of any packaging technique." But to make it work to its potential, airlines must leverage "granular customer relationship management data," social media and location-based data. "There is still much apprehension from consumers around personalized services," according to Frost & Sullivan. Especially in corporate travel, it's far from clear how such personalization would play.

Other big differences were found in the areas of subscriptions and branded fares/fare families. On the former, which can be a service or group of services available for a fee covering a set period of time, airline interest was 62 percent compared to traveler interest of 28 percent. Among business travelers, interest was slightly higher at 30 percent, and the authors suggested that subscriptions would be more valuable to frequent business travelers who by their nature would use such offerings more often than other travelers.

In terms of branded fares and fare families, traveler interest was 15 percent and 11 percent, respectively. Airlines as group also were not overly enthusiastic, with their interest at 25 percent and 40 percent, respectively. "Airlines," the report asserted, "need to remove complexity and be explicit about the value of each bundle."

There were similar disconnects in findings related to customer contact techniques. The item in this area where airline and traveler interest came closest was context-aware email (83 percent for airlines and 76 percent for travelers, including 72 percent among the business traveler subset). "The relevance of email is always being questioned, as newer more fashionable communication tools emerge such as Twitter, Facebook and Snapchat," according to the report. "Today, however, these tools primarily serve communication needs, not yet acting as robust sales channels. Over time, these platforms may develop into more robust sales channels, but traveler preferences will take longer to change. In a foreseeable future, email will remain dominant."

Meanwhile, in terms of push notification, airlines are more interested (95 percent) and travelers are less interested (49 percent). Researchers expect traveler interest to increase as they "become more comfortable with the medium, and apps are able to find a better balance between notification frequency and the point of traveler irritation."

The report concluded that to maximize their revenue and customer engagement, airlines must offer desired services at all points of a journey and effectively use the mobile channel: "If an airline can do this, it becomes more than just a commodity flight provider. It becomes a brand-differentiated service provider, offering positive experiences and adding real value."