The Evolution of Airline Merchandising

EHL Editorial Team | 18 Jul, 2016

Beginning in the early 1900s, airlines across the globe have fulfilled the job as a service provider that transports people from point A to point B. However, the costs related to accomplishing this task has grown year after year. Currently, the cost of transporting an individual is approximately 24 percent higher than a base fare.

Director General of IATA, Tony Tyler recently noted that airline profit-per-passenger had dipped below $4.00. Although the airline industry is critical to the health of the global economy, the industry is not deriving greater value from its business model.

“There is a mismatch between the value that the industry contributes to the economies and the rewards that generates for those who risk their capital to finance the industry,” he said.

After following cost-reduction strategies for many years, a fundamental shift in the business model has occurred within the industry. Now airlines are actively selling ancillary services and products to enhance their revenue stream. This includes selling pre-reserved seats, baggage check, priority boarding and check-in, lounge access, priority seating, onboard WIFI, in-flight meals, onboard entertainment, third-party promotions, and trip insurance. This is planned to account for $59.2 billion in sales for the airline industry worldwide, which is a 163% percent increase from 2010. In essence, the new business model includes a transformation from service providers to retailers.

This evolution began over 10 years ago when low-cost airlines, which used the Internet as their principal distribution channel, started selling bargain tickets and charging supplementary fees for services like checking luggage. Traditional, full-service airlines followed, in some instances unbundling products and services that had previously been included in standard fares. Some airlines began adding premium services, and soon the retail revolution in the industry had commenced.

Successful retailers develop and implement comprehensive merchandising plans. They closely study customers and make adjustments to product portfolios to focus on the most profitable segments. They make displaying those products an art form all in an attempt to attract shoppers who will buy. It is cyclical in nature, and embracing this cycle of merchandising is now yielding a positive outcome for the airline industry.

The rise of mobile technology and digital communication has added to the wide array of paths to receive personalized offers from retailers. Airlines are adopting this approach and blending in data about individual travelers. By offering personalized options, the airlines give choice to consumers, empowering them to control their individual travel experiences. This improves customer loyalty and prompts additional sales. A model already well established within the Hospitality Industry.

Although this benefits the airline-passenger relationship, the airline industry faces certain challenges to the execution of end-to-end merchandising, including undeveloped industry guidelines, outdated technology, unclear objectives, conflicting or insufficient internal data and a negative consumer perception.

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Currently, the airline industry is taking steps to mitigate the confusion. Industry-standards organizations, such as ATPCO and IATA, are collaborating with several technology solutions providers and airlines to implement standards relating to products and payments for ancillary services.

This includes optional services (OC) fare filing and electronic miscellaneous documents (EMDs) that help with the tracking and fulfillment of related revenues. While these do not represent merchandising, they do represent technology enablers that build a foundation from which the airlines can distribute their ancillary offerings.

The only certainty now is that the marketplace evolves, and airlines must demonstrate flexibility to adjust quickly and decisively in response to marketplace changes. Moreover, they will need solutions to facilitate those changes rapidly. Regardless of the distribution channel, airlines will need to make the right products available to individual consumers in a method that enhances their brand image, fosters market presence, and build customer loyalty.

Today, no matter the type or size of the carrier, a well-designed, correctly implemented end-to-end merchandising plan is crucial for airlines to transition from service provider to retailer. The challenge will be to ensure the strategy addresses escalating competition in an increasingly connected, mobile world.

Thus, what was previously acclaimed as the future in revenue generation for the airline industry is now a fundamental change to the business model. For carriers, merchandising is now a mandatory element to staying competitive.

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