It is hard enough to predict the result of a football match on the day of the game. But try making a prediction several months in advance. As impossible as it sounds, that was the challenge facing several airlines in advance of this summer’s World Cup in Brazil.
Most of the big airlines use a global distribution system, or GDS, to organise ticket booking. The technology has one distinct advantage: travel agents all over the world can instantaneously check the availability of air tickets on any given day, helping the airlines to fill spare capacity.
But GDS technology cannot cope with a fluctuating environment – it is the antithesis of real-time. Which is why, up to 12 months before the start of the World Cup, carriers such as Lufthansa and Iberia were wondering just how many high-value premium seats to sell on the dates that might end up corresponding with quarter-final, semi-final and final fixtures.
For an airline, the ratio of cheap to expensive seats is a critical factor in determining profitability. Yet the respective results of the two teams (Germany reached the final, beating Argentina 1-0, while Spain crashed out early, in the group stage of the competition) illustrate the faintly ludicrous lottery of seat inventory management. Did Lufthansa hold back enough premium seats to capitalise on the German team’s eventual win? Did Iberia ever sell the excess premium seats it thought might be required for the Spanish squad’s involvement in the latter stages of the tournament?
Failure to maximise the sale of premium tickets will ultimately have a huge impact on profitability, particularly during a period of high seasonal demand. Yet airlines are operating in the digital age with technology designed for the 1950s. It is one of the reasons why sustained profitability is so problematic in the airline business.
It costs around $23,000 to fuel a 747 for an hour’s flight. These high operating costs, combined with the increasing commoditisation of tickets, add up to an intensely margin-sensitive business. The balance of economy to premium tickets is therefore critical – getting it right is the difference between making or losing millions.
For the airlines stuck using legacy ticketing technology, the only available route is digital transformation. In other words, they must disrupt their own model before the market disrupts it for them. The largest airlines are already under pressure from the smallest third-party start-ups, whether direct competitors with a tighter control of ticket distribution (airlines that have a direct-only selling model have for some time allowed real-time price adjustment based on how many people are viewing the web page), or travel agents using clever technology to broaden their remit.
The main battleground is ownership of the customer relationship, where the impact will be felt beyond ticket pricing. The more control over the customer relationship that airlines manage to exert, the greater the capacity they have proactively to monitor and plan the many determinants of efficiency – aircraft choice, scheduling, cancellations, route, fuel, food and drink – and therefore profitability.
Good planning starts with a better view of the customer. A better view depends on superior data. But there isn’t an airline today that uses standard data capture tools, such as mobile, to maximum effect.
Imagine a scenario in which every customer visit to an airport is mapped from the minute they download an app to their phone. Information capture can be location based, which means that if customers have yet to check in for a flight taking off imminently, the front desk can make a call on whether to wait (for example if the passenger is loyal and high-value) based on their distance from the airport. If they are stuck in traffic, the airline could not only make the call to leave on time, but also book the late passenger on the next flight, and notify them by text, sending an e-ticket straight to their phone, perhaps also offering them a complimentary massage on arrival at the business lounge. In a commoditised market, this level of service not only helps scheduling, it also builds trust and brand engagement.
The more data that airlines collect, the more dynamic their demand management becomes – and the more efficiencies they can identify. New aircraft generate gigabytes of data on every flight, from the systems health of the aircraft to statistics on location and fuel usage.
It also helps to collect data on which services, entertainment, food, beverage and duty-free items are selected by each individual customer on a particular flight. New products and services can be dynamically generated for passengers before they ever board an aircraft, while loyalty programme perks can be customised to each frequent flyer’s likes based on what they typically select on board the aircraft.
The challenge for airlines is to take control of all this information and use it to solve the specific challenges that they face. Each individual challenge – for example maintenance, yield management, or gate allocation – requires different views and analytics on the same data. This calls for a business information infrastructure that cannot only handle the volume of information but also distil it into the specific information required to address the given business challenge. No single view can hope to address all these challenges, so a business must concentrate on data management and governance rather than enforcing a standard model.
As an example: if the network plan says the aircraft is meant to be landing at gate 47, but the incumbent aircraft at 47 is yet to leave, you need real-time analytics to help you change the gate in order to minimise costly delays. If your customer profile, collected via mobile app, also shows a higher than usual proportion of families and older passengers (both of whom tend to exit aircraft more slowly) you’ll need to allow for an even longer delay into your schedule.
Dynamic pricing is the quickest route to profitability. With the ability to price according to a real-time picture of demand, airlines can price and plan their activity with greater certainty, not only opening the door to bigger profits, but also greater efficiency. And knowing more about the customer not only gives brand engagement a boost, but also contributes to more predictable planning.
United is trialling dynamic pricing through its GDS supplier Sabre. The airline’s biggest rivals, stuck with inflexible legacy technology, cannot afford to stand by and watch. They must seize the opportunity of digitisation before it turns into a threat.
Steve Jones is Capgemini’s director of strategy for big data and analytics