How Digital Technology Can Untap New Ancillary Revenue for Airlines

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General Introduction

A decade ago, ancillary revenue accounted for less than 3% of all airline revenues. In recent years, through a combination of technology, competition from Low Cost Carriers (“LCCs”) and a strategic focus on developing new ancillary revenue streams, some airlines now generate as much as 30% of their total revenue from these services.

Some airlines now generate as much as 30% of their total revenue from these services.

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While the growth rate in ancillary revenues was initially driven by LCCs, today all airlines are focused on driving revenue growth from these additional income streams. Full-service carriers are incre A decade agoasingly unbundling their of, ancillary revenue fering i.e. selling a seat only as part basic faraccounted for less than 3% ofe and allowing the pas allof the senger to decide which airline rother services to purevenues. In rchase.ecent years, By choosing wher e they sit, what to eat, thr to boarough a combinad and which entetion ofwhen r tainment options they want, passengers can etechnology,xer competition frcise contr om Low ol over their time and mobility. This Cost Coach is driving the rarriers (“LC apid grCs”) and a straowth in airltegicappr ine revenues and margins and will continue to grfocus on developing new ancillary ow exponentially if airlines and revenue strtechnology pareams,tners can devise mor some airlines nowtheir e service options for passengers.genera In this regarte as much as 30% ofd, big da their ta (specifically passenger data) will prtotal revenue frovide airlines with the neom these services.xt major ancillary revenue stream.

In essence, by leveraging their passenger data, airlines can be transformed from carriers into travel experts, where the flight remains the backbone of a journey, while there is no limit to the additional services that can be co-opted and offered, to make the customer thrilled with his or her travel experience. These can comprise mobility services on the ground, both before and after the flight, in-flight entertainment and hospitality well beyond the food and rest at the airport – i.e. cab rides, restaurants, accommodation, entertainment options, gifts and souvenirs, arts and culture offering and so on. All these options can be brought together under the central stewardship of the airline to keep the passengers happy.

By leveraging their passenger data, airlines can be transformed from carriers into travel experts.

DIGITAL TECHNOLOGY IN THE AIRLINE INDUSTRYWhile the technology of selling in the airline industry has remained static over decades, most other industries have started introducing digital technologies into their respective operations. This shift from a physical (analogue) to a digital market environment has led players in many other industries to change their business models, opening a wealth of new opportunities for themselves.

In fairness, some players in the airline industry are redefining the game by fully adopting the digital model. They have become masters of ancillary revenue, capturing it much more effectively by gradually undergoing a complete digital transformation. Those airlines were able to transform themselves profoundly – from passive, technologically-stressed companies into flexible, dynamic, customer-oriented innovation & IT hubs.

Of course, once released from the bottle, the innovation spirit does not stop at the ticket price structure. Eventually, it leads to questioning every single industry tenet. High-flying innovation comes up with alternative approaches to long-held

arrangements. Providers of flight services can start seeing their air-based work as only a single piece of the broader travel experience puzzle - one where their service could encompass everything from the beginning to the end of the journey.

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This vision drastically changes the traditional business model for airlines. Rather than being just experts in air travel, they are reinventing themselves into full-stack travel providers, that can find or create value far beyond the traditional focus of their business. The inevitable conclusion of all of this is that the airline industry is set not just to change, but to reinvent itself entirely. This will represent a bold switch from constantly tweaking the yield from ancillary revenue – which accounts for approximately 8% of total airlines’ revenue – to entering a wholly new dimension: the travel and hospitality industry, which represents some 8% of global GDP. How’s that for scaling?

This paper discusses a new element of how digital technology can be seamlessly combined with existing IT infrastructure to generate an additional, brand-new advertising revenue stream to complement other ancillary revenue streams.

THE DIGITAL ECONOMY WORKS THROUGH A PLATFORM ECONOMY MODEL

The trajectory of technological development in recent decades has supported individuals in creating their own unique and personalized universes. Features and capabilities have incrementally improved with each new iteration of devices in every field:

Individual mobility (bicycle, motorcycle, car)

Communication-on-the-go (portable phones, feature phones, smartphones

Customized news and information feeds (RSS, news aggregators, social media)

Single-person workstations (typewriters, PCs, laptops)

Pocket-based playlists (cassettes, Walkman, CDs, MP3, iPod)

Entertainment-on-demand (VHS/ Beta, DVDs, HBO, Netflix)

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With each new round of technology, these industries were able to monetize the convenience factor several times over. This is because, in consumption, the actual ancillary quality – the portability of content or

the ability to access it – often becomes the primary driver of use.

Digital technology is everywhere around us and has a major impact on all industries and on virtually all aspects of our business. However, this

impact is different when we discuss operational aspects versus revenue generation aspects.

For decades, airlines have been using PSS platforms to optimize the operational aspects of handling passengers. However, only in recent

years have airlines started to recognize that their core business in the future will be the digital platform business and that the top-level

structure will change. This has an enormous impact on the airline organization as a whole. This is a profound change that can be seen as “transformational”. We are talking about airlines becoming digital technology companies, where handling planes is now becoming a

supporting business (albeit a very important one). Therefore, it is critical for airlines to finalize their respective digital strategies in order to survive

the commoditization of their core market.

This is a profound change that can be seen as “transformational”.

Airlines that will focus on their core business alone will not be able to survive outside of niche markets. The asset and cost-intensive core business has become a commodity and yields little to no profit. However, if airlines can leverage their core business and build a digital platform on top, they have a great opportunity to claim a large piece of the pie in the newly-emerging digital travel ecosystem. In this regard, airlines perhaps have a unique and unfair advantage over all other digital players, but are simply not using this to their benefit at the current time. It is important to note that the digital economy works through a platform economy model. Airlines that do not deeply understand this and will not adopt this business concept and mind-set, are likely to struggle. The reality is that the digital API economy will not make an exception for airlines. Either you are part of the new digital API ecosystem, or you will be fighting for survival in a small niche.

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Differentiation via sharing of data and APIs: After decades of market developments, it turned out that the most efficient model to benefit from digital technology is to position it in a platform that enables a two-sided (or multi-sided) marketplace. This means that you eliminate all non-IT middlemen and start the customer journey with a digital system on top, creating a platform that connects end users to other systems that provide them with important services. It is fundamentally important to understand that this is the prevailing business model that is winning on today’s market. Not being fully integrated into this new ecosystem is a very dangerous strategy. Not understanding the difference in complexity and speed of this new ecosystem is also a danger. There are no friends and enemies in this new ecosystem. Almost every other micro service in the ecosystem will be a so-called “frenemy” – a friend and an enemy. Companies that will be better connected and will have the ability to change business models quickly will win.

For aspiring platform-enabled retailers, micro services are vital. Whatever you are building today needs to follow this architectural pattern, with the clear understanding that you have no idea how micro services will be assembled in the future. However, the more flexibility you have in the architecture, the more successful you will be in implementing fast changes that will inevitably be part of your daily life.

Leveraging transactional systems: The extraction and management of data stored in transactional systems is the core issue of airlines today. Airlines are not usually companies that start from scratch. They are deeply connected to legacy, often rigid systems and it will take years to convert to a new architecture. They need to do it step by step. Here, it is important to look at the big picture and find layers that are critical which are therefore the number one priority, versus other parts that can be changed at a later stage.

SOME POINTS TO CONSIDER IN THE DIGITAL ECONOMY

Advertising is a business focused on maximizing revenue impact, by targeting campaigns to selected audiences. The better we can target specific audiences, the higher the efficiency of the campaign. Specifics are, of course, always linked to the accuracy of databases and the ability to segment them into distinct categories. In this regard, airlines have an inherent advantage with multiple data points collected as part of the natural booking process. By using this data and mapping it to passengers’ unique tastes and desires, airlines are able to provide a very efficient platform for advertisers.

If the almost four billion airline passengers can get what they seem to want the most – like always-on connectivity on aircraft and around airports, allowing them to continue their work and lives without interruption - they are likely to peruse various amenities that the airlines will have in store for them and, if valuable, pay for access to the service. Furthermore, if airlines can play a pivotal part of that connectivity, they will be able to profile their passengers’ personal preferences down to the granular level and quickly respond to any noticeable change in their habits and tastes.

BACKGROUND DRIVERS OF THE ADVERTISING POTENTIAL

Companies that will be better connected and will have the ability to change business models quickly will win.

One thing is very clear, the willingness to share data is showing a noticeable upward trend. When it comes to customer readiness to share their data, almost two thirds of passengers are willing to disclose their data to the airlines. However, airlines need to remember that passengers also expect the corresponding level of personalization of the services in exchange for this data. Above all, the airlines must ensure and demonstrate they are a completely secure vault for this personal information.

In light of the growing concerns of experts and the general public about the privacy and safety of personal data, airlines need to reassure their customers and be able to prove they are safeguarding their privacy. At the same time, the pressure from regulators is increasing. As of spring 2018, the EU requires its members to comply with GDPR (General Data Protection Regulation), bringing sweeping change to how organizations aggregate, keep and protect data. This will inevitably lead to increased vigilance around ancillary offerings. However, with the implementation of adequate technological and organizational layers, these regulations can be implemented both efficiently and professionally.

SHARE OF PASSENGERS WILLING TO SHARE THEIR DATA WITH AIRLINES, PER COUNTRY

Australia Mexico

Japan USA

UK Germany Average

63%62%60%60%58%57%60%

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Within advertising, an airline can opt for the unlocked, digital route, which allows it to continually source, plan, and execute the full advertising loop with limited staff involvement after the advertisement approval stage. This automated, data-driven system allows advertisers to upload advertisements and program their allocation in fine detail, based on filtering customer data age, gender, travel dates and times, destinations, nature of travel and so on. The advertisers can independently set their budget levels, as well as define the preferred passenger profiles they wish to target. The system then serves the ads, tallies and bills them - all in an instant.

This type of platform ties mobility, customer data, and advertisers’ information into a seamless experience for the travellers, starting from their time of booking, through ticketing, check-in, luggage services, car rental, food, lodging, entertainment options at the destination, and on return flights – the whole journey. It is equally seamless for advertisers, as it takes care of their entire business cycle with only a few clicks on their part.

Another advantage of such a system is that it is fully compliant with the regulations concerning data management, advertising and financial and tax requirements.

MAXIMISING ADVERTISING ANCILLARY REVENUES WITH ADNEXA

Meet Adnexa, a solution which makes it possible to monetize 100% of access to travellers, while guaranteeing 100% protection of their privacy.

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Recognizing that there is untapped advertising potential within airlines’ customer databases, Comtrade Digital Services has developed a unique Software-as-a-Service solution - Adnexa. This cloud-based offering ensures high availability, effortless scaling, and hassle-free maintenance. It integrates into an airline’s inventory system and central reservation system to automatically match contextually relevant information.

Adnexa’s algorithm can apply the precise knowledge an airline has about individual travellers, select specific messages for each of them from the pool of ads that advertisers have uploaded to the platform and serve those ads at just the right junctures in each person’s trip, matched by age, language, location and other relevant available parameters.

First, the advertisers populate a database with advertisements. Then they select the preferred passenger groups for each of their ads. In the next step, they determine the budget limit, period, and the number of impressions, based on the planned flight capacity. They can manage the whole process for an unlimited number of campaigns using a simple web-based application.

Once advertisers have won a bid, active campaigns automatically feed the winning adverts to each channel and each individual passenger, every single time, without fail, within the set limits of cost per impression, daily budgets, the total number of impressions or total campaign budget.

Adnexa already offers several payment modalities, along with some other customization options.

Learn more about Adnexa at www.adnexa.io

POWERING DIGITAL TRAVEL

VOYEGO is part of Comtrade Group, a leading IT provider with offices in 16 countries across the globe. The group was established in 1990 and operates through 27 companies with over 2,000 employees. Voyego develops tailor-made software solutions and opens up novel possibilities and business opportunities in the mobility and travel industry.

Our extensive expertise and domain knowledge are the bedrock of this unique combination of content creation, thought leadership and advisory. Our consulting services span Ireland, China, Singapore, Germany, Slovenia and Austria. Using emerging technologies such as AI, Chatbots and Blockchain, the Digital Transformation Lab is paving the way in the industry. Through the digitalization of airlines and ground mobility providers, Voyego is enriching the mobility experience of millions of people across the globe.

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VOYEGOPenthouse, Blackthorn Exchange, Bracken Road, Sandyford Industrial Estate, Dublin 18, D18 P3Y9

www.voyego.com