The Future of Inflight Retail - Part 1

This is a multi-part article looking at the travel retail and duty free in general, with a slightly more focused perspective on the inflight channel. 30 airlines have decided to stop selling duty free. This first part delves a little into the macro situation and perhaps how/why we came to be here today.

Today’s news would have taken (a) few in the travel retail industry by surprise: Qatar Airways and Qatar Duty Free are announcing an end to their joint inflight duty free program from 1st June 2019.

Thanks to the Gulf blockade last year, Qatar Airways announced a loss of more than US$69m for 2018, caused primarily by a fall in revenues from 9% lower seat occupancy, a 15% drop in flights and the loss of lucrative short-haul-connecting-to-long-haul traffic. Although they reported a recovery, final numbers have yet to be announced for 2018/19. Not that it really, truly matters when their owners are backed by sovereign wealth funds valued at over US$300bn!

In terms of duty free though, the numbers must have been a lot smaller. Given reported passenger numbers (34m) and typical, average inflight conversion rates (1% or so consistently, if they’re lucky) and multiplied by average basket or transaction values (say $60), revenues were probably closer to $20m. Suddenly not that lucrative after all; remember you’d have to deduct overheads, commissions and COGS and taxes etc. which then prompts a rethink about all the effort probably not worth the nett return of a few million bucks. Qatar isn’t alone.

Just about a week ago, Lojas Francas de Portugal – a joint venture between Dufry (the largest travel retailer in the world by far) and Da Vinci Airports – announced a termination of its inflight retail business on TAP Air Portugal by the end of 2019. The numbers here were actually reported; sales of about $5m in 2018 (puzzlingly described as “huge”). No prizes for guessing what profits must have been like.

And then there’s the brutal history of falling inflight retail dominoes beginning with American Airlines in 2015, followed by Qantas, Delta, United, and a whole host of other airlines; up to around 28 now with Qatar and even KLM (who ironically were the ones to stop ISG’s run of 4 Inflight Retailer of the Year awards in Cannes back in 2015. I’m still somewhat sore about that one!).

How is the TR & DF industry as a whole?

Let's take a look at the performance of Travel Retail and Duty Free (TR & DF) these last couple of years:

2017 saw global travel retail and duty free revenues at just shy of $70bn. Airports contributed 55% of that, while airlines clocked in at about 3.5%. (It’s troubling that we’re in May of 2019 but the data that is publicly available is from 2017…but I digress).  2018 is likely to see overall revenues grow to $76bn and it would be interesting to see if the airline channel share falls, yet again. I suspect it will.

Let’s frame this another way: most passengers who used an airport to fly internationally and decided to shop, strongly preferred to buy at the airport rather than inflight. Comparing TFWA published data over the years and IATA data on passenger numbers (like this one), it becomes alarmingly evident that - at a regional or country level - often travel retail revenue growth lags international passenger growth. And if inflight retail revenue growth is even further behind, it doesn’t take special mathematical prowess to conclude we're looking at sunset more than sunrise.

Note this is just on the revenue side. Revenue numbers are like icebergs – what you see is just the visible bit; some of the most important bits of the story (cost, risks, P&L) are far below the surface, unreported or not publicly available.

So then what's the problem with Inflight Retail?

Talk to anyone involved in inflight duty free operations, and the litany of complaints will sound familiar. On the operational front - a lack of onboard space, stock issues, disinterested crew, the inability to control what happens once doors close. On the commercial front - minimum guarantees, marketing costs (a euphemism for "discounting"), suppliers squeezing margins and not accepting full SOR (sale-or-return), increasing costs of manpower, fraud etc. On the technology front - offline POS (point of sale) systems, lack of business intelligence and analytics, etc.

And last but not the least, we hear the common refrain that now, everyone is researching and buying online; isn't it understandable that inflight retail is declining?

Sure, there may be a bunch of reasons why nearly 30 airlines – some of them amongst the largest and most prestigious in the world – have decided to stop carrying and pushing carts up and down the aisles with non-sales-trained crew valiantly trying to sell to half-sleepy, Avengers-watching, seatbelt-captivated passengers, under what can be most kindly described as “mood lighting” conditions, thereby depriving nearly 1 billion passengers access to (some might actually say “subjected to”, but I digress, again) inflight duty free.

But are all of these the underlying cause of the decline in the value of inflight retail today?

The Symptoms are not the cause

Which retailers in their right minds would voluntarily give up access to what is still, largely a captive consumer market (of 1 billion people), many of whom should be in a happy mood while en-route to or from their holidays?

Perhaps it’s because these aren’t really “retailers”? Perhaps they’re not retailing what customers want, or in the way they want it or when they would like it? Perhaps there’s been a fundamental change in the Customer, who craves a transformational retail experience that is not shrink-wrapped and plucked out of the drawer in an aluminium trolley that hasn’t changed since the 1960s when it was introduced? Or perhaps there’s systemic changes – easier access to goods (online) pre- and post-travel and a growing lack of faith in the duty free value proposition?

Whatever the true reason(s), focusing on the process (the operations, commercials and technology) is akin to taking antihistamines for your allergies. Overcoming the symptoms makes you feel better, for a while, until the next allergy attack happens.

Is inflight retail a lost cause?

Has inflight retail gone the way of bookshops, big-box retailers and as some are predicting, even cinemas? Have enough passengers decided to forego the physical acts of browsing, touching, feeling, trial and review, and finally exchange of cash or card for The Product, and instead, opt to do all of these things digitally? 

A few months ago, an article I wrote contained some answers to this fundamental question. Unlike allergies and antihistamines, inflight retail does actually have a "cure" and a future. I will explore some of these in Part 2 of this series. Watch out for that next week.

An ex-airline and travel retail specialist, I am driven by Customer Excellence. I enable startups and established organisations within the travel domain to connect, grow and scale their business internally and externally, thereby delivering Customer Excellence. This is achieved through the strategic mix of social marketing, modern selling, operations and HR advisory consulting, mentorship and occasionally angel investing.

You can find my content on Linkedin and Twitter by following the hashtag #flyvrai.

Gold Dust

Here's a great video I discovered about retail sales techniques. Feel free to care and share.