Winning the Battle for Customer...

Galor Systems & Software Development Ltd. www.TravelBooster.com

Azrieli Center 1, Round Tower, 37th Floor, Tel Aviv, Israel 67021 Phone: + 972-3-6076300 | Fax: +972-3-6076310 Email: [email protected]

Winning the Battle for Customer Ownership A Travel Tech Consulting Thought Leadership Paper

Commissioned By Travel Booster

Travel Tech Consulting, Inc. 951 Old County Road Belmont California 94402 1 650 345-8510 www.traveltechnology.com

http://www.travelbooster.com/airlines/features�



Table of Contents:

Who Owns the Customer? ............................................................................................................................ 3

Defining Customer Ownership ...................................................................................................................... 5

Holiday Sales - The Key to Customer Insight............................................................................................. 6

Ancillary Sales a Key to Airline Profitability .................................................................................................. 6

The Challenges for Airlines Selling Ancillary Land Services .......................................................................... 7

Is Selling Ancillary Holiday Services Core to an Airline’s Business? .......................................................... 7

Influencing More Direct Sales ................................................................................................................... 7

Is the Investment to Launch Ancillary Holiday Sales Worth It? ................................................................ 8

Implementing an Effective Holiday Solution ............................................................................................ 9

Gaining Customer Insights .......................................................................................................................... 10

How Can Ancillary Holiday Sales Provide a 360o View of the Customer? ............................................... 10

Customer Lifetime Value ........................................................................................................................ 11

Why Airlines Need to Implement Ancillary Holiday Sales Today ............................................................ 11

Summary ..................................................................................................................................................... 12




Who Owns the Customer? Most airlines don’t own their customers. How can this statement be true given the fact the airlines invented loyalty programs? For years airlines have used mileage rewards to entice customers to choose their carrier. The all-familiar phrase uttered by flight attendants daily across the globe, “Thank you for choosing XYZ airline,” is standard, but does airline choice truly represent customer ownership? The answer is no. Passengers can express preference for a carrier and may be driven to stay with that carrier based on rewards, but customer ownership is a more comprehensive term. Customer ownership means having an intimate relationship with passengers, understanding preferences and anticipating needs. Customer ownership means continuous engagement where an airline offers a variety of services throughout the trip lifecycle and lifetime of the customer.

Airlines are in a constant battle not only with other carriers for customer ownership, but with online and offline travel agents. This is reflected in the ongoing struggle to increase direct bookings to a carrier’s website. If an airline chooses not to sell holiday components and leaves that role to the OTAs, this has a direct bearing on the customer's choice of carrier, which is often based on the OTA's interests. With the growth in online booking via web and smartphones, offering holidays elements also improves the airline's relevancy in search engines results which leads to improved conversion rates. By gathering data regarding passengers’ vacation preferences and behavior a more comprehensive knowledge of customer's needs can be gained allowing customized marketing programs and leading to higher customer satisfaction and loyalty .If the online travel agent wins the battle for customer ownership, this means higher distribution costs and lower marginal profits for the airline.

In today’s highly competitive and connected environment, reliance on frequent flyer rewards and data alone limits an airline’s ability to dynamically manage customer relationships. In fact, within the travel value chain, travel distributors often have greater insight into preferences which can lead to greater share of the traveler’s wallet and customer ownership.

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Customer ownership means having an intimate relationship with passengers,

continuous engagement where an airline offers a variety of services throughout the trip lifecycle and lifetime of the customer.




Figure 1: Travel Value Chain

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Defining Customer Ownership For airlines, the main elements of effective customer ownership are: customer loyalty, superior traveler insight and the ability to drive continuous engagement.

Figure 2: Customer Ownership

• Loyalty - The passenger chooses the brand based on rewards and overall brand affinity.

• Customer Insight - Gaining a full understanding of a passenger’s travel preferences and patterns.

• Continuous Engagement - The ability to anticipate customer needs and provide the right services to the right customer at the right location.

Gaining a greater share of the customer’s wallet is only possible with a more complete picture of the passenger’s preferences. For example, a couple traveling to Singapore on the least expensive coach ticket may then stay a week at a five-star hotel. A business traveler traveling economy from Hong Kong to Jakarta may be extending his trip with a luxury tour in Bali. From an airline loyalty perspective, frequent flyer programs would only capture the lower value ticket information from these examples. Airline segments alone can limit the carrier’s understanding of customer value.

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Airlines need to understand the buying potential of their customers and drive customer ownership through an ongoing conversation throughout the trip lifecycle. This insight can lead to increased revenues from cross-sell and upsell opportunities and prevent the loss of a customer to a distributor who may be promoting another carrier.

Holiday Sales - The Key to Customer Insight

Many airlines sell holiday components (hotels, cars) or packages through their website. Often this involves a relationship with an outsourcer that controls all aspects of the holiday purchase, including individual travel elements (e.g. hotels, cars, tours), fulfillment, and support. Implementation of this type of solution often requires a separate booking path launched from the airline site, but disconnected from the normal airline booking flow. Given this fact, why don’t airlines have greater insight into the holiday purchases of their passengers? The answer is control. By outsourcing the holiday content, control is relinquished to the partner. The partner may provide reports on bookings, but integrating that information into a single view of the customer remains a challenge for most airlines. In this traditional outsourced model, the airline often cannot insert holiday offers within the air booking path which presents a barrier to cross-selling related products. By gaining control over ancillary holiday sales, airlines are able to derive insight into passenger preferences, enabling them to sell additional products and services to the customer throughout the customer trip cycle and beyond.

Ancillary Sales a Key to Airline Profitability

Much has been written about the impact of ancillary revenue on airline profitability. According to a recent report issued by IdeaWorks, sponsored by Amadeus, “Airline ancillary revenue soared to $32.5 billion (USD) worldwide in 2011” 0F

i. Most of the discussion around ancillary revenue has been focused on airline-related service fees for baggage or amenities such as early boarding and premier seating. A less discussed area is the revenue received from third-party ancillary services. In the Forrester Research report, sponsored by Amadeus, entitled Cross-Sell Your Way to Profit, the author defines third-party ancillary services as “those operated or delivered by a third-party provider to the travel supplier, for which the supplier earns revenue via the payment of fees or commissions from the third party. 1F

ii The report went on to state:

Figure 3

Source: Forrester Research sponsored by Amadeus: “Cross-Sell Your Way to Profit” January 20112F

iii

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Airlines need to understand the buying potential of their customers and drive customer ownership through an ongoing conversation throughout the trip lifecycle.

By gaining control over ancillary holiday sales, airlines are able to derive insight into passenger preferences, enabling them to sell additional products and services to the customer throughout the customer trip cycle and beyond.




Clearly, there is profit to be made from selling third-party ancillary services; the hidden value is the customer insight gained from the sale, provided there is proper integration into the airline online experience and a unified view of the customer.

The report goes on to describe how airlines are becoming full blown travel retailers. The report also emphasized the strong connection between third-party ancillary services and customer insight: “Successful retailing isn’t the result of presenting random offers to a customer. It’s the result of a carefully thought-through product strategy paired with equally robust technology systems and applications that allow products and services to be sold in a relevant and effective manner.” 3F

iv Deriving relevant information and delivering that to the customer at the right time and place is at the heart of true continuous engagement and customer ownership.

This is not limited to selling holiday content, but actually selling more flights by adopting a robust technology solution for ancillary holiday sales, airlines can design static and dynamic packages which help sell distressed inventory. By understanding comprehensive passenger preferences, airlines can better understand the potential impact of new routes while providing the foundation to market destinations to specific passengers. Relinquishing customer ownership to OTAs not only means a loss of this customer insight, but ultimately empowers the channel to own the customer relationship.

The Challenges for Airlines Selling Ancillary Land Services

Is Selling Ancillary Holiday Services Core to an Airline’s Business?

Despite the clear revenue potential and additional customer insight gained by selling third-party ancillary services, some airlines still question whether selling holiday elements and packages are core to their business. The reality is simple: no matter how much onboard service improves, airline travel will always be viewed as a means of transportation. By offering holiday content, airlines can expand their service and brand, capturing additional revenue and gaining greater insight into passenger preferences and patterns. The answer is clear: in order to gain total insight into passenger behavior and preference, ancillary holiday sales should be core to an airline’s business.

Influencing More Direct Sales

Selling holiday content can also help airlines with their ongoing battle to drive more direct traffic to their websites. The PhoCusWright Global Online Travel Overview Second Edition illustrates the battle between OTA and supplier-direct distribution. In more mature online markets such as Europe and the U.S., the percentage of OTA verses supplier-direct has been consistently split at static level for many years, with OTAs taking about one third of the online market. In the emerging markets

Deriving relevant information and delivering that to the customer at the right time and place is at the heart of true continuous engagement and customer ownership.

Relinquishing customer ownership to OTAs not only means a loss of this customer insight, but ultimately empowers the channel to own the customer relationship. This is not limited to selling holiday content, but actually selling more flights.

In order to gain total insight into passenger behavior and preference, ancillary holiday sales should be core to an airline’s business.

For airlines to continue their dominance in these markets, extending products to include third-party ancillary holiday elements is essential.

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of APAC and Latin America, online adoption is still relatively low. Today, in these markets, online travel is currently dominated by supplier sites but a clear gain by OTAs is predicted by the end of 2012. For airlines to continue their dominance in these markets, extending products to include third-party ancillary holiday elements is essential.

Figure 4

The joint venture of Air Asia and Expedia presents a particular challenge to Asian airlines. Douglas Quinby, Senior Director of Research at PhoCusWright was recently quoted in a TNOOZ article stating: “There is clearly some powerful potential with Asia’s red-hot LCC and the reach and breadth of the world’s largest OTA”. 4 F

v Other Asian airlines must implement effective third-party ancillary holiday sales to compete with this fast growing LCC that has become Expedia’s presence in the region in order to maintain their dominance in direct bookings as online penetration grows in the market.

Is the Investment to Launch Ancillary Holiday Sales Worth It?

According to a recent CNN article, between the years 2000-2010, the 230 global IATA airlines only posted a profit during three years out of the ten year period, losing US$68 billion in total over the remaining seven years. 5F

vi

Airlines have always suffered from thin operating margins, an amazing fact considering the significant margins of the other parts of the value chain. OTAs often earn between 20-30% mark-up on holiday content. Airlines clearly have an economic motivation to make the investment in selling ancillary holiday content. The potential value of launching an integrated and compelling ancillary holiday solution goes beyond incremental revenue as the improved insight into passenger behavior provides the foundation for continuous engagement and true customer ownership, driving better airline profitability and conversion rates. Core profitability comes from selling more airline seats through enhanced passenger insight.

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The potential value of launching an integrated and compelling ancillary holiday solution goes beyond incremental revenue. The improved insight into passenger behavior provides the foundation for continuous engagement and true customer ownership.




Selling holiday content gives the airline the level of customer detail and intimacy that allows the promotion of additional destinations and services that are more targeted based on customer preferences. Conversion rates are improved by better qualified customers and continuous engagement matching passenger needs with the right airline destinations and services.

Implementing an Effective Holiday Solution

It is clear that there is tremendous value in selling ancillary holiday sales, but how these sales are implemented directly impacts the ability of the airline to understand and manage the passenger relationship. The 1990s was the decade of outsourcing. The mantra embraced by many companies was to outsource any service that was not core to their company’s mission. In 2012, we’ve embraced a new business imperative: continuous customer engagement. Outsourcing holiday sales to a third party robs the airline of the ability to continuously engage with the passenger. Travelers do not view a trip through the lens of a flight, but as a total itinerary. Engaging the customer with ancillary holiday content within the airline website provides the foundation for this continuous engagement.

With the growth of mobile technology, offering holiday content is essential as more travelers use smartphones and tablets to stay connected. Smartphones and tablets are quickly becoming a preferred booking platform for travelers worldwide. Hotels and car hire are two of the most popular items being booked on mobile today and thus for airlines to compete in this always connected arena, adding holiday elements is essential. The Forrester/Amadeus report stated:

Figure 5: Impact of Mobile

Source: Forrester Research sponsored by Amadeus: “Cross-Sell Your Way to Profit” January 20116F

vii

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Gaining Customer Insights

How Can Ancillary Holiday Sales Provide a 360o View of the Customer?

By monitoring passengers’ implicit and explicit preferences as they shop and book multiple travel components, an airline can gain greater insight into customer behavior and needs. As travelers explore both air and ancillary content on the airline website, customized offerings can be promoted during the search and booking steps.

Cross-sell and upsell opportunities can become available as part of the extended search and booking process that includes holiday content. Customer insight can be used to develop new routes and services and extend the airline’s brand to all parts of the travel life cycle. Gaining insight also enables airlines to better understand the shopping patterns of their customers. This includes the timing of the purchase (e.g. last minute) and booking patterns for the various elements.

Figure 6: 360o View of the Customer

Customer insight can be used to develop new routes and services and extend the airline’s brand to all parts of the travel life cycle.

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Figure 6 illustrates only a small sample of data that can be derived through effective ancillary holiday sales. It is essential that the airline capture the passenger’s share-of-mind, transforming the airline site into a holiday planning resource. As more information is collected through this process, airlines can offer more relevant content and specials to their passengers. This further reinforces the airline brand and drives greater incremental revenue and customer value. This information can be stored and added to traditional frequent flyer databases to help the airline promote additional goods and services throughout the trip lifecycle. For example, an airline can create a targeted email in conjunction with the introduction of a new route. Customer Lifetime Value

The term “Customer Lifetime Value” (CLV) has been discussed in airline circles for many years, but often not successfully implemented. Customer Lifetime Value means retaining and selling services to the customer throughout all stages of their life and measuring the value of the passenger over a multi-year period. To really execute a strategy that measures true CLV, airline usage cannot be the only source of data. Ancillary holiday sales are an essential foundation to establish true CLV, giving unique insight into customer behavior and preferences. Customer value can be derived in many ways. Gaining insight from one trip (e.g. family traveling to a beach destination that involved a water skiing experience), could trigger the airline to promote a snow skiing vacation to the same family. The lifetime value of a customer means following those preferences as they change over time. For example, promoting a theme park destination as toddlers grow to pre-teens, or offering an “empty nest” couple a luxury vacation after the kids flee the nest, are both examples of using expanded customer insight gained from holiday sales to truly implement a lifetime customer strategy.

Why Airlines Need to Implement Ancillary Holiday Sales Today

Despite regional differences, global travel trends have clearly emerged. One clear trend over the last five years is how all parts of the travel value chain are becoming full travel retailers. This includes not only the airlines and hoteliers, but tour operators, guidebook companies, and even theme parks launching complete holiday solutions.

Implementing an effective holiday strategy is even more crucial in the emerging markets of APAC and Latin America where supplier online dominance still exists. In emerging markets, online penetration is relatively low, with online travel often driven by Low Cost Carriers (LCCs). As the market matures, global and regional OTA brands become stronger. Traditional carriers can benefit from the overall uptick in online penetration, but in order to maintain and grow their online market share, ancillary holiday sales are an important tool. Delaying implementation of an ancillary holiday sales strategy allows the global and regional OTAs an opening to establish their services in the market. For airlines to truly own the customer, implementing an effective ancillary holiday strategy is essential.

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Ancillary holiday sales are an essential foundation to establish true CLV giving unique insight into customer behavior and preferences.




Summary The contribution of holiday sales to an airline’s core business is clear. Leaving holiday elements to others means missed flight sales opportunities and allows the external distribution to influence the choice of carrier driven by their own interests. With the growth of web bookings, smartphones and tablets offering holiday elements improve the airline’s relevancy in search engine results and leads to improved conversion rates. Gaining an understanding of a passenger’s holiday preferences and behavior results in a more comprehensive knowledge of their needs and can allow the carrier to better market routes and services leading to higher customer satisfaction and loyalty.

Customer Ownership is about controlling distribution. When a passenger purchases a package through an OTA and chooses another carrier, this translates into a loss of a customer. Even if the passenger chooses the same airline, the loss of customer ownership means lower marginal profits for the carrier. The term Customer Ownership means more than just gaining passenger loyalty, but includes enhanced customer insight and continuous engagement. To achieve this goal:

• Holiday sales are critical tool to enable airlines to gain additional understanding of passenger preferences and to allow carriers to execute a passenger engagement strategy that encompasses the entire trip cycle.

• The key is to offer the right product, at the right time, to the right customer. In order to successfully implement a comprehensive holiday sales strategy, airlines must maintain control over the holiday purchases enabling cross-sell and upsell opportunities on their website.

• Ancillary holiday sales can provide an important revenue source for the carrier as the margins on holiday content can be significant.

• The customer insight gained from successfully implementing a comprehensive ancillary holiday sales strategy can also help airlines understand the opportunity for new routes and services and promote these services targeting specific customers and segments.

At the end of the day, selling ancillary holiday content on the airline’s website is a critical strategy to enhance profitability, drive more direct business to the website and gain passenger insight critical for the capturing a larger share of the customer’s wallet throughout the entire trip life cycle and lifetime of the passenger.

i IdeaWorks Press Release October 19, 2011 http://www.ideaworkscompany.com/press/2011/PressRelease61ARWorldwideEstimate.pdf ii Forrester Research sponsored by Amadeus. Cross-Sell Your Way to Profit January 2011 http://www.amadeus.com/au/documents/corporate/Cross-Sell%20Your%20Way%20To%20Profit%20_%20ENG_Final.pdf iii Ibid iv Ibid v Schaal, Dennis TNOOZ “Expedia-AirAsia implement online travel joint venture in Asia, but will it be enough?” October 3, 2011 http://www.tnooz.com/2011/10/03/news/expedia-air-asia-implement-online-travel-joint-venture-in-asia-but-will-it-be-enough/ vi Stevens, Andrew CNN Blog “How does the airline industry sustain so many players?” June 6, 2011 http://business.blogs.cnn.com/2011/06/06/how-does-the-airline-industry-sustain-so-many-players/ vii Ibid

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http://www.ideaworkscompany.com/press/2011/PressRelease61ARWorldwideEstimate.pdf�

http://www.amadeus.com/au/documents/corporate/Cross-Sell%20Your%20Way%20To%20Profit%20_%20ENG_Final.pdf�

http://www.amadeus.com/au/documents/corporate/Cross-Sell%20Your%20Way%20To%20Profit%20_%20ENG_Final.pdf�

http://www.tnooz.com/2011/10/03/news/expedia-air-asia-implement-online-travel-joint-venture-in-asia-but-will-it-be-enough/�

http://www.tnooz.com/2011/10/03/news/expedia-air-asia-implement-online-travel-joint-venture-in-asia-but-will-it-be-enough/�

http://business.blogs.cnn.com/2011/06/06/how-does-the-airline-industry-sustain-so-many-players/�

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