peter r gerstle - mega_event_worldwide_2015_presentation for distribution

Is there any innovation left in Ancillary Revenue?

Discuss!

Peter R Gerstle, Head of Travel

Collinson Group

Mega Event, 4/5th November 2015, San Diego

Innovation in Ancillary Services is dead! •  My hypothesis: There aren’t any true innovations

left in ancillary services, fees & charges •  Innovation itself is very much alive, just in a

different area of ancillary revenue •  There are a few exceptions – e.g. Spirit

continues to explore the limits. But this is not for every airline in every market

•  There will continue to be service innovation at the fringes and debate on how far the un-bundling idea can be pushed: •  Treat fuel as a variable cost in line with spot price of oil •  Consider pricing by total passenger weight – a heated debate


•  I have a track record of ancillary innovation at easyJet

•  Responsible for dinner-party favorites such as checked bag and special equipment charging, excess weight policy, and of course Speedy Boarding

•  Also introduced easyJet Plus, a membership concept that holds much potential for airlines’ future ancillary revenue potential

Authority in Ancillary


Ancillary Revenue – A potted history


Man invents flight…


…improves the concept


…takes on passengers


The Differentiation Introduction


vs.

vs.

•  Differentiation around service classes, with all-inclusive fares •  No optional services or add-ons, no fees & charges

Advent of Low-Cost / Low-Fares


Freddy Laker – Godfather of Low-Cost Aviation

SWA – The Original Business Model

Today: Golden Age of Ancillary


Ancillary Everywhere…


Changes affecting Ancillary Revenue 1.  Consumer tolerance / regulatory framework

1.  Loyalty and Brand Devotion are becoming the bedrock of AR generation capability

2.  Convergence of flag- and low-cost carriers 1.  AR no longer just ‘what LCCs do’ (e.g. BA: upgrade your meal)

3.  Changes in Financial Services sector 1.  Pressures on interchange rate and tighter regulatory environment result in

1.  Diminishing points funding / tipping options 2.  Co-brand arrangements to become far less juicy

2.  Airlines need to have a long-term strategy to counter revenue and customer loyalty risk

4.  Leaner & Meaner FFPs 1.  Shift to revenue-based status qualification 2.  Tightening up of points earn and burn rules 3.  Value erosion of points

5.  Technology – the last frontier of AR service innovation 1.  Glimmer of hope: On-board connectivity opens up a new range of possibilities


The source of true innovation: Selling Ancillaries

“It’s not what you sell, it’s how you sell it”

1. Yield management

2. Fare brands

3.  Impact of NDC

4. Memberships/Subscriptions

5. Extending the engagement


1. Yield Management 2. Fare Brands Yield management: 1.  Rigorous application of economic principles

1.  Extend existing fare yield mgmt. practices to airline ancillaries 2.  Drive and reward early revenue commitment

2.  Rational reflection of value for constrained supply 1.  But: consider consumer irrationality backlash (‘seat next to me’ argument)

3.  Ever considered yield-managing your FFP currency?

Fare Brands (aka: plus qu’ ça change…) 1.  Re-bundling of services

1.  Essentially, a re-introduction of class-based services, but not around cabin alone

2.  Tool for behavioral psychology in selling 1.  Well-proven up-sell strategies 2.  Simplification of sometimes dizzying list of ancillary services


3. NDC (New Distribution Capability standard)

1.  OTAs and airline.com sites have raised the bar 1.  GDS distribution channel left behind in terms of retailing

capability, esp. ancillaries and service differentiation

2.  IATA’s NDC is just the logical consequence 1.  Enriching an important distribution channel 2.  Specifically designed to improve ancillary and service retailing

3.  Airline = Retailers ? 1.  Visible, but gradual improvements in adoption of FMCG retail

skills 2.  Still many optimization opportunities for most airlines globally


4. Memberships / Subscriptions 1.  Free vs. paid?

1.  Question of content and strategy 2.  Learn from other sectors: Hotels; Car rental; Retail

2.  The “Paid-for Loyalty” concept 1.  Lock-in principle anchored in consumer economics, yet few airlines have yet

considered, let alone implemented such a concept 2.  Proven success for those who have…. So? Introduce it to your business!

3.  Memberships & FFPs – coexistence or contradiction? 1.  No single answer for all airlines – requires careful strategic consideration and

program design / rules development 2.  Paid memberships can live inside an earn-based status FFP:

1.  Generates a revenue stream from lower-engagement tiers 2.  Motivates consideration bias in competitive markets 3.  Option: Allow accelerated points earning but not status (cf. Scoot and SIA)

4.  Earn revenue even when not travelling with you 1.  The headroom view: Few passengers only ever travel with one airline only


Subscription examples


I know what I know: My ‘loyal’ customers. Really?


0.0%

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© ICLP 2015 Flight frequency per annum

Sha

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tal c

usto

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Maybe not so loyal after all?


0%

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My flights Compe;tor flts

Flight frequency on routes where my flights operate

Sha

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f flig

hts

Show me the money!

© ICLP 2015

•  ‘Subscriptions’ sweet spot •  Commercially most

attractive share shift space

√(ε+σ)n


(BrEq × km2) + AR2 L(pax) =

The Engagement Equation

NB: Meaningless formula!

I want to highlight how customer engagement and success in ancillary revenue are strongly linked:

“Customer Loyalty = relative Brand Equity * Reach + AR generation capacity divided by earn and redemption

options”

5. Extending the Engagement 1.  Landscape of FFPs is changing

1.  Qualification rules and earning basis 2.  Co-brand relationships 3.  Points value erosion 4.  Balance sheet accounting exposure

2.  Extending the presence beyond own brand 1.  Extending and deepening brand reach 2.  Create engagement points in wider travel and in retail space 3.  Relevant and more context-aware communication

3.  Extending the digital market place 1.  Clicks and Bricks: Extend the successful online model to high street shopping 2.  Seamless customer experience across all channels and modes

4.  Re-definition of partnerships 1.  Funding: turn to merchants / retail partnerships to reduce dependency on

financial services 2.  Communications: Super-brand coalitions / multi-brand engagement


Engaging your customers: So many options…

Points for free flights

a) By spend

a) By distance

a) By zones

Points for cash value Discount program

Use other airline FFP Relinquish brand ownership/control

Transactions for status Recognition program

Social Media loyalty Credits for online engagement

OAL redemptions only Position as redemption carrier

Coalition Join national coalition

Paid membership Added value benefits bundle

Pure CRM Rely on communications

FFP spin-off Arms length business, wholly owned

FFP sell-off Attract investors


Execution requires expertise in Strategy – Finance - Design - Management - Systems

© ICLP 2015


Extending the Engagement: Loyalty Commerce

Offline

Earn Store

Redeem Marketplace

Direct Earn

Pay With Points

Redeem @ POS

Online

CLO @ POS

Offline

Online

Spend Collect

Mobile Payments Loyalty

Wallets

Loca;on Alerts

Converged Search

Key aspects: 1.  Take the online model offline (‘clicks and bricks’). 2.  Extend your brand reach 3.  Extend your point currency utilization 4.  Develop new merchant partnerships and offer funding sources 5.  Emergence of digital wallet & mobile payments drives new models and engagement points

© Collinson Latitude 2015

Complex to set up and run: Loyalty Commerce Workflows

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RewardAll In-‐store Rewards

Payment Card Processor

Transactions Processor

Card Network

Online Offers/Rewards In-‐store Offers/Rewards

PCIDSS Compliant Zone

Members/Offers/Points data store

Transactions data store

HTTPS

Members/In-‐Store Offers data store

Merchants

Offers Management Portal

Offers Admin

Merchant Portals

Payment Cards Data store

Member Offers Portal

Customer

Payment Card Registration -‐ iFrame

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Card Network





HTTPS

HTTPS


Merchants


Offers Admin

Merchant Portals



Customer


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Card Network





HTTPS


Merchants


Offers Admin

Merchant Portals



Customer


HTTPS

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© Collinson Latitude 2015


Conclusion

1.  The leading source of innovation in Ancillary Revenue is how you sell

2.  Drive revenue and engagement through innovative memberships and subscription models

3.  Extend your customer engagement beyond traditional loyalty models

4.  Develop your strategy with a partner with experience in Loyalty and Ancillary Revenue

Find out more! [email protected]

+44 7743 40 16 13


Thank you!


peter r gerstle - mega_event_worldwide_2015_presentation for distribution

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