This is a continuation on a series about the future of travel — feel free to browse the previous articles on Wi-Fi, Premium Travel, Routes and Automation or jump in below!
Air Travel Will Become Increasingly Differentiated
I firmly believe we’re still in the Model T Era of air travel. You can have any seat you want, as long as it’s coach, business or first (“Now our newest product! Premium Economy!”). Carriers compete on price and frequency, but a few have found ways to differentiate themselves (on service — Singapore, stylishness — Virgin Atlantic, punctuality — Delta, route network — Finnair) and are starting to realize that they can charge a fare premium for doing so (according to a normalized analysis I did of their 10ks last year).
Other carriers are competing by taking the Wal-Mart approach and gobbling up smaller competitors, where economies of scale will provide the cheapest airfare.
But many carriers, including some in the first group are being strategic in how they differentiate, providing drastically different experiences at different prices to people who paid roughly the same for an economy or business class ticket.
Ancillaries Are Higher Margin Than Tickets
What’s the motivation of this “unbundling” of air travel? Well, by taking apart everything that originally came included with a ticket, carriers are cutting out waste generated by giving services to people who don’t need them. Providing dining services on the ground means less to cater in the air. Allowing elites to select their benefits a la carte allows passengers to derive higher value from their status than bestowing benefits that they see no value in.
More importantly, “ancillaries” — a catch-all term to describe all product offerings that aren’t airline tickets, are typically higher margin than selling the seats themselves — Google Flights and OTA have essentially created market-based pricing for seats between city pairs as carriers often match each other within hours.
Most businesses, when looking for growth, seek out ways to improve margin over revenue, and ancillaries are proving a great boon to airlines who offer them.
Airlines Design End-To-End Experiences for 14 Hours
So we’re starting to see the rise of partnerships with well-known brands and experiences. Delta has Westin Heavenly Bed, United partners with Sax Fifth Avenue. Jetblue amenity kits are made by Birchbox and IFE is sponsored by DirecTV. Alaska serves Sun Liquors, SAS has Hastens Bedding and Mikkeller beer, Finnair partners with design brand Merimekko, Korean with Absolut — but this is probably just the beginning.
Airlines are waking up to the fact that they have to design complete end-to-end experiences for thousands of people daily, often up to 14 or 16 hours on ultra-longhaul flights. This presents a great marketing opportunity, where the airline can rely on companies that have built powerful brands on the ground, rather than providing “standard issue” food, beverages, IFE and amenities. Perhaps provide Starbucks coffee for free, but Clover (or Blue Bottle or Stumptown Coffee) made with bottled water for $4 – I’m willing to bet a SWU that people (at least ardent coffee drinkers) will buy this.
Carriers have often been sensitive to providing a consistent experience across their entire fleet — and this is where foreign carriers, having 1 or 2 hubs and higher percentage of long-haul departures have excelled, leveraging key aspects of their country’s “brand” as differentiators. Korean and Asiana always have bibimbap onboard and ANA offers a kaiseki menu in first.
But this can be taken many steps further beyond the one-off partnership or reliance on local cuisine and tastes. Carriers are starting to look to regional flare (especially in the US) and even entire branded experiences. Instead of a “blank and blank” for $10, sell me a Woodford Reserve Manhattan or Bombay Sapphire Martini for $15 — Offer an XBOX or NFL-branded experience to make middle seats more attractive — Instead of status tiers, provide incremental benefits a la carte as I hit 10,000 flown mile or $1000 spend bonuses (maybe I value a free bag more than priority boarding or lounge access, let me select the order so you lock me in with the benefits I value sooner)
But What About Costs and Distribution?
Sure, the naysayers out there are all about creating the most efficient experience possible. Aircraft weight is serious business and adding new products might get in the way of that. Furthermore, historically, carriers that wanted to offer a consistent experience (or drive unit procurement costs down) have only interacted with brands that can provide the volume for every passenger on every flight. Believe me, there are only a handful of wineries and distilleries that can provide enough inventory for EVERY flight on American, Delta or United.
Yes, there may be slightly higher costs to stocking a few bottles of vermouth, or a few packs of ground premium coffee, but by giving brands more access to a captive marketing experience is likely to be highly profitable for the carriers, especially if they partner with smaller premium brands that operate on higher margins, and offer a wider rotational variation of products on flights (maybe split by hub or region). They may even find partners that pay for most of the distribution costs, just to have access to passengers in a non-obtrusive way — a low pressure way to sample a product without being pressured to do so.
Conclusion – This Is Just The Beginning
After all, passengers are getting more comfortable with novelty and choice as we fly out of the Model T Era. I’ll gladly take 1,000 movies on demand (by Netflix) over the same Simpsons episode that only changes fleet-wide every two weeks. Perhaps I want to buy fast Amazon Wi-Fi on one flight (over free or cheaper Gogo) and Veuve Cliquot champagne service on another (over $7 Lamarca Prosecco), and check a bag with pricey souvenirs with delivery protection by Fedex (over the free one I get as a silver) on a third.
By ramping up ancillaries and branded experiences, carriers can integrate air travel into a life that’s more similar to one on the ground — and likely make more money in the process.
What do you think? Will branded experiences be better or worse for passengers? Do you like bundled or unbundled experiences? Comment below!