Leveraging Analytics to Improve Ancillary Revenues for Airlines

Abstract

As global competition continues to shrink profit margins, airlines are seeking ways to increase revenue, reduce expenses, and improve traveler experience. They are also deluged with data from multiple channels such as social media, marketing research surveys, customer feedback, and word-of-mouth. While this information explosion can pose challenges, smart airlines are finding ways to leverage it. They are adopting advanced analytics tools and techniques to turn data into knowledge, pushing ancillary revenues to loftier heights, and minimizing liabilities. Airlines are also moving from customer insight to digital foresight, predicting the demands of the traveler and delivering a more tailored offering that spans the traveler’s entire journey.

Driving Revolution in Air Travel

Ancillary revenue is a key part of the airlines business. According to a 2017 report by the Department of Transportation, airlines made a lower percentage of net income from the ticket fares in 2016 and recorded over USD 8 billion in profits from baggage, cancellation, and change fees.

In addition to increasing airline revenues, ancillary services such as entertainment options, in-flight shopping, food sales, and other à la carte features differentiate an airline from other carriers. According to a study by IdeaWorks in 2016, the percentage of airline revenues derived from ancillary fees has increased from 23.9% in 2009 to 43.4% in 2015 for the Spirit Airlines. The study shed light on a new trend among the low-cost carriers to rely more and more on revenues other than the airfare.

The challenge for airlines is to maximize ancillary revenues. Digital engagement and the introduction of new capabilities combined with advanced analytics is the most reliable approach. The tools and techniques they can use here include:

• Enrich the quality of customer data available: Customers should be treated as real customers and not in terms of passenger trips. Third-party data, social media data, and public data can then be combined to increase digital foresight.
• Perform real-time marketing and campaign management: This involves delivering highly personalized messages to individual customers at moments of highest relevance. Such level of personalization needs a data-driven approach where each customer can get the most pertinent and attractive offer possible.
• Identify and plug revenue leakages: Airlines can achieve this through a mix of customer analytics, route profitability, loyalty point usage, and revenue analytics.
• Segment customers effectively: It is assumed that airlines segment their customers by categories of seating: economy class, business class, and first class. But this does not offer much insight into their needs and expectations. Customers can be segmented in a better way such as: frequent leisure travelers (who have ample amount of money to spend and travel for the sake of traveling), regular airline users (leisure/business), urgent travelers (who suddenly travel by air in response to emergency situations), business travelers, and budget-conscious travelers (who make bookings well in advance to use discounts and offers).

With continual work on analytics, airlines can increase their share of ancillary revenue effectively.

From Add-ons to Value-adds: Ancillary Services Are Bestsellers

Customers do not automatically search for additional value-adds for their trip. As Steve Jobs said, "A lot of times, people do not know what they want until you show it to them." Yet, flooding travelers with “extras” or poorly positioning offers will confuse them—leading to dissatisfaction and abandonment of their ticket.

Source: The Rise of Relevance and Customer Intelligence, Boxever (February 2016)

Airlines can achieve success in merchandizing by accurately understanding their customer profile and needs, optimizing their ancillary product and service offerings, and aligning them closely. A blended-channel approach offers the right products and services to the right customer at precisely the right time and in the right manner in order to maximize revenues. Effective execution of this strategy requires a consistent real-time, data-driven, push marketing and sales tactic.

The three key components for maximization of ancillary revenues include

• Customer Attribute Matching: Airlines can predict the chance of a customer buying a particular ancillary product or service. The prediction results are recorded in the form of scores against each customer profile and updated every time the model is run.
• Integrated Internal Customer Demographic Data and Passenger Transaction Data: Merging this data with relevant external data (structured and unstructured) helps develop a holistic customer view. The view highlights the customer’s needs and preferences against ancillary products and services offered by the airlines.
• Real-time Marketing Campaign: The timing and channel of a marketing campaign pushes ancillary products or services. This proves to be a decisive factor in a customer accepting the campaign offering. These factors are decided by analyzing the historic attributes and buying patterns of the customer.

Analytics Framework and Solution Approach

Customer Attribute Matching: Take the case of an airline traveler, a New York resident, who travels regularly to Chicago on business. He has a history of selecting Wi-Fi-only flights and has ranted about the non-availability of reliable and free Wi-Fi in Uber cabs. The traveler’s transaction history also shows that he looks for hotel options at the time of flight booking, but prefers to hire a cab on the spot when he reaches the destination airport.The customer attribute matching system would analyze his profile and conclude that his probability of renting a Wi-Fi-enabled cab service and checking into a free Wi-Fi-enabled hotel is high. The real-time marketing campaign would provide him options for

Paving the Way for Business Outcomes

By leveraging customer behavior analytics and route profitability analysis, airlines can create value and achieve:

Reduce Cost of Servicing Customers: Encouraging travelers to redeem their accrued points on services that are less costly for airlines further improves airline revenues.

How to Get There

Embrace Analytics, Improve Revenues: Airlines have a huge opportunity of utilizing analytics to improve their revenues by plugging revenue leakages while reducing the cost to serve customers and through the sale of ancillary products. The current technology landscape allows them to build an ecosystem that would comprise an adaptable cloud-based platform and a flexible digital operating system—enabling them to take small steps in embracing analytics to achieve business goals and gradually expand the scope and aggressiveness of achieving those goals. Despite significant investment in digitization and data analytics, most airlines are struggling to make headway in harnessing the power of customer and transaction data to drive business outcomes. At Coforge, we follow a structured analytics maturity framework to drive analytics initiatives as part of the system of insights overview. By leveraging data from multiple sources, we help airlines to make strategic decisions and improve their revenue generation capabilities.

Cost management and operational efficiency are no longer enough to profitably transport people and goods. With excess capacity and rising costs in the airline industry, profit margins have significantly dropped. Digital technology has given customers more information and alternatives at faster speed. As multifarious forces combine to create an increasingly competitive market, analytics are vital to make the right ancillary revenue-driving decisions. An airline needs a balanced mix of predictive and prescriptive analytics to drive better growth.

Revenue drivers include pricing, product bundling, sales, inventory optimization, and marketing. With analytics, airlines get the ability to blend the best of human judgment and machine accuracy for continued profitability.