Airlines Business - Glimmer of Hope

Ailing Airlines Business Model – Is Pandemic only to blame?

During the scourge of pandemic, the fragile business model of Airlines has undergone unprecedented stress as more than 160 airlines have gone belly up since 2019. In 2023 alone and more than a dozen Airlines have already filed for bankruptcy so far. These numbers don’t include some of the larger Airlines and Flag carriers who have received generous support from their respective governments. The question arises is the pandemic only reason for the current state of Airlines?

The answer to this question is No. While the pandemic has certainly exacerbated an already fragile business model, it is not the only factor at play here. The airline industry was facing challenges before COVID-19 and will continue to do so in its post-pandemic future. Airlines have always been highly competitive with razor thin margins that make profitability difficult even during normal times, let alone during a global health crisis where demand for air travel has plummeted dramatically.

To support the argument, look at Flybe, which at one point dominated the U.K. domestic flight market – its first collapse [March 5, 2020] was, really, before the pandemic. It was rescued last year by Thyme Opco, a company linked to the U.S. hedge fund Cyrus Capital and had only restarted in April 2022 collapsed again within six months i.e. Jan 2023. This happened despite the high demand in Europe and U.K. as there were no COVID related restrictions.

Similarly, Go First, the no-frills carrier in India flew 109.02 lakh domestic passengers and the market share stood at 8.8 per cent in 2022 became the latest victim of bankruptcy.?Go First while filling the application said “it has been forced to take the decision due to "serial failure" of Pratt & Whitney engines resulting in the grounding of 50 per cent of the fleet and is no longer able to continue to meet its financial obligations.” To keep the airline afloat, promoters have infused funds worth 389 M USD without any gains. Therefore, the reason for failure cannot be considered Pandemic only.

The airline industry has always been a difficult one with high-cost factors such as leased aircrafts, unpredictable fuel costs, landing charges, no fly zones restrictions etc; all adding up making it hard to generate profitable business models, pandemic acted as a catalyst.

Warren Buffett's ten years back has said that “the airline industry has all the ingredients required for bad business”. Yet it is fulfilling basic requirement of mankind, which is to Travel, Travel faster and better.A multiprong approach would be needed to make Airlines’ business model more sustainable as the cost parameters are above and beyond the control of business owners and will continue to persist.

Airline Retailing - A glimmer of hope?

Since the adoption of the Internet at the end of the 90’s, most industries quickly transformed and benefited substantially from e-commerce, but Airlines due to limitation of legacy technology couldn’t take full advantage. It’s modernization was limited to “screen scraping” the legacy systems and digitizing paper-based processes rather than creating more effective processes using contemporary technology. Even today it is still largely operating with concepts and flows that date back many decades, resulting in rigid product offerings and high cost of selling.

In the current legacy workflow operated by Global Distribution Systems (GDS e.g. Amadeus, Sabre, Travelport etc.) for making a reservation, airlines provide availability per booking class and per flight. This means that airlines operate in a “blind” environment where they cannot estimate demand in real time, beyond total volumes (full polling only partially addresses this). Airlines also do not “know the customer,” including the context in which the request is being made and is thus unable to tailor the response based on the customer’s specific needs. Availability requests are generally not stored (unlike web searches), and as a result this information gets lost.

Several years ago, IATA (A nodal agency who regulate Airlines globally) with the support of the industry, embarked on a journey towards the modernization of airline’s product distribution, by developing new standards, workflows, architectures, business cases, implementation paths, etc. through their New Distribution Capabilities (NDC). The objective was to provide airlines with a framework so that they can transform themselves towards true “Retailing”.

Retailing is one of the biggest industry disruptions in recent years as it allows airlines to sell new products in new ways, directly to consumers; perhaps; imperative for Airlines business subsistence.

As per IATA publications, airlines and others in the current sales and distribution system must implement three critical new concepts:

·??????New Distribution Capability (NDC), technology that allows for airlines to include a great deal more content (such as legroom, seat pitch, ancillary offers, and other essential attributes) in their offering to travel agencies and consumers.

·??????ONE Order streamlines the current system of dozens of orders and confirmations for each part of the offering into a single order-management system.

·??????Dynamic offers—builds on these technologies to offer customers flexibility in what they want, and similar latitude to airlines in what they charge for these options.

As per experts “The objective driving airline retailing is to bring back control to the airlines. It is also an opportunity to know the customer better and offer a better service exploiting technologies like Artificial Intelligence and Machine Learning.”

Another key driver is customer expectations of an enriched, seamless, familiar user experience, today similar interfaces, services and experience while shopping for Air travel (e.g., Amazon, Apple, etc.) where they receive “an Offer”, and they place “an Order”. They also expect a similar user experience between leisure and corporate interfaces.

Offer and Order!!

As per IATA” This is not about re-engineering or making changes to the Passenger Service System (PSS), but about transitioning over time to a new environment. It is about how to move from a current legacy channel and process-centric driven architecture to one that is omnichannel and customer centric, relying on centralized capabilities - Offer and Order Management capabilities and data.”?

The Offer Management system creates an offer, which includes the price the airline offers to the customer along with ancillaries ( any other service which customer can buy during the journey, e.g. Lounge access), bundles with partner offerings e.g. Hotels and Car rentals. It provides a unique source of content to all sales channels encompassing Travel Management Companies (TMCs), Online Travel Agencies (OTA’s), or metasearch operating as well as to direct sales e.g. Airlines.com their call center and physical sales offices.?

The Order Management fulfils the accepted offer, includes payment, tracks delivery status, and is the single source of truth for the customer order data. To reach the end-state the airline will have to develop its own Retailing platform from which all its sales channels will be managed (direct and indirect), via a single source of truth. The figure appended represents the reference architecture diagram provided by IATA.

Where is the Money?

IATA and McKinsey have jointly researched the promising potential for retailing. As per their research “The industry might realize up to $40 billion in new value annually by 2030 (equivalent to 4 percent of current industry revenues). Put another way, modern retailing might be worth up to $7 per passenger.” This report further says “retailing can produce value for airlines in five ways: development of new offers (the largest source of value, at an estimated $22 billion), enhanced revenue management, an optimized distribution mix, better targeting of and engagement with consumers, and optimized payment and fulfillment”.?

This should be welcome news to an industry that is not able to provide double digit growth first time in more than the last two decades.

The reports say “Modern technology does not come cheap; the industry will likely need to spend between $3 billion and $15 billion over the next ten years. Nor is that all: airlines will also need to consider carefully their needs and their strategy.”

Already, several of the world’s largest airlines have embraced retailing, and have started to develop systems and standards that can light the way for the rest of the industry. These early adopters are already selling a healthy percentage of their tickets through new retailing approaches and NDC channels.

Being part of this industry for over the last two decades and currently being part of teams that are engaged in implementing NDC channels and retailing for key industry players, I can sense that this disruption is happening.?

Just imagine few years down the line you after a hectic 10-day trip to USA, you were scheduled to travel back home at New Delhi, India from Phoenix, Arizona, USA via PHX-OHR-DEL. On the day of travel, i.e. on a Friday morning at the time of hotel check out you receive a message from Airlines that your flight (PHX-OHR) is cancelled due to bad weather (IROPS) at Chicago, O'hare.?

In the new world, instead of going to Airport and standing in long ques at Airline counter and convincing them about the importance of your connecting an international flight, Airlines will be able to provide three or more alternate offers on your mobile phone there and then -

1. Offer 1 - Take the same flight next day and check into another hotel near Airport at PHX. Consequences; overall delay of 24hrs. with no certainty that the situation will improve in Chicago and you have nothing to do in Phoenix.?

2. Offer 2 - Take a “red eye” flight to Atlanta and a connecting international flight next day (1300 hrs) to New Delhi. Consequences; overall delay of 18 hrs., tedious red eye flight prior to catching an international flight, search a hotel or avail an Airport lounge to spend next eight hrs.?

3. Offer 3 - Catch next available outbound flight from PHX (flying at almost the same time) to Las Vegas (your preferences suggested by AI engine) with free Airport pick up and hotel stay on “the strip” and take an morning ( 0900 hrs) flight to New Delhi ( Via LHR ) in lieu of some loyalty points or perhaps few more hundred dollars. Consequences; overall delay of 18 hrs. and entertaining evening at a negligible cost.

With click of a button you will be able to accept one of the “Offer” and place an “Order” like you purchase a book on Amazon. Airlines in this process not only save some cost but also may earn more.

The possibilities are enormous, the technology and frameworks are available, it is now up to the key players how soon they can adopt to ensure sustainability to Airlines business model.

Data Sources - IATA Publications, CNN Travel, BBC Travel and other news articles on Internet.