It's well known that management consultants help airlines analyze fleet purchases, potential mergers, and joint ventures with other airlines.
But what's less appreciated is how consultancies have prompted and sped up airline experiments in merchandising.
Exhibit A is L.E.K. Consulting, a London-based global consulting firm.
Today, L.E.K., whose initials correspond to the names of its first three founders, is on speed-dial with the C-suites of many major airlines.
That's because the firm has made Zelig-like appearances at many pivotal moments when airlines were confused about how to make profits.
Examples include privitization of national airlines (it helped the Australian government with the Qantas Airways sale in 1992) and frequent flier mileage program restructuring (it helped Delta Air Lines move from a distance-based mile accrual system to revenue-based accrual system).
So it may not be surprising that Fred Reid, the founder of sister airline Virgin America, and former president of Delta and Lufthansa, became one of its advisors in spring 2013.
To learn about L.E.K.'s views on merchandising -- the next big revolution it's been fomenting -- Tnooz caught up with John Thomas, who spoke yesterday at the 2015 CAPA Americas Aviation Summit in the US.
Tech-driven merchandising
Thomas says L.E.K. was present at the creation of this US airlines' ancillary revenue model. In the second-half of the 2000s, Air Canada led the industry with pioneering efforts.
Then in February 2008, United became the first major carrier to introduce the breakthrough checked bag fee.
The backstory: In 2007, when oil prices went through the roof, the US carriers were in deep trouble. L.E.K. had been advising the airlines on how to improve the base product, but, through economic necessity, checked bag fees were born.
A lot of people would say the embrace of ancillaries "saved" the US airlines. In 2012 the major U.S. carriers booked $12.4 billion from ancillary revenue, up from nearly nothing six years earlier.
Even today, many airlines elsewhere in the world have yet to update their technology and marketing strategies to copy the miracle and fully leverage its potential for profit.
Merchandising as a golden ticket
Thomas says L.E.K. has lately found itself helping several airlines with merchandising as a way to de-commodify their product and thereby increase pricing power.
By "merchandising," he means everything from selling ancillaries, like checked baggage fees, to creating dynamic packages, such as Air New Zealand's buy-two-seats-get-three-seats Skycouch.
Thomas, head of global aviation at L.E.K. and based in Boston, says there is still a lot of potential for product enhancements for economy-class among full-service carriers.
He says there are a lot of non-U.S. premium carriers that are starting to dabble in ancillaries in ways that enhance the experience rather than just unbundle services. He says:
"One of the best examples is Virgin Atlantic. A core part of its premium experience is the airport arrival.
If I buy an Upper Class ticket from London to New York, I get picked up in a limo, I get taken to the Wing which is a dedicated facility at Terminal 3 at Heathrow.
I get expedited security screening, and I get access to a posh lounge called the Clubhouse.
Why not offer that experience to economy passengers in some segmented way?
There are travelers who, either through corporate travel policy or by virtue of the fact that the fare differential between economy and business class is so great, are never going to buy a full business class ticket but would like to enhance the airport experience.
About two years ago, with our help, Virgin Atlantic introduced the Guest List, which is available for Economy and Premium Economy passengers, they can buy into the experience.
The interesting thing is that it enhances the overall brand. My corporate travel policy may let me fly on Upper Class, but I wouldn't do it for leisure.
Being able to buy these additional services for personal travel that I've previously bought via my company's account for business travel makes me more loyal when I'm booking my next business class ticket."
Technology needs to catch up
One of the large problems that airlines face is that they want to have a single view of the customer but their technological systems are functionally siloed.
Their systems often don't let them take full advantage of the data they collect and don't let them deliver consistent messages to customers.
An airline’s frequent flyer program may have different data and messaging than its e-commerce operation (for ancillary revenue), its onboard operation (through customer satisfaction surveys), and so on.
Unifying multiple points of interaction with travelers is increasingly a top goal of airlines. Technology vendors need to better tailor their solutions if they want to meet tomorrow's demand. Says Thomas:
"Historically the airline industry has done a poor job of monetizing the whole travel value chain.
EasyJet is one airline that is offering a more wholistic travel shopping package. Its website is much more a travel site, not necessarily an airline one.
At the moment, the airlines only capture the behavioral aspects of the airlines.
We think they could do a better job of capturing data sets of how their customers make travel purchases across the spectrum and cross-market hotels and rental cars accordingly."
Thomas says the functional siloing also affects how data is analyzed.
"We find in a lot of airlines is that the operational group looks at data differently than the finance group and the commercial group may take a different perspective as well.
A unified perspective can be helpful."
Looking for the next flatbed
Data and customer surveys can be essential to progress in finding pockets of profit.
Roll back to 1999, when British Airways was focused on how to keep competitive market share on premium traffic.
L.E.K. was asked to test if adding a flat-bed seat to first-class would be good business sense. It brought 11 versions of the seats to airports, surveying 2,000 passengers. It did a conjoint analysis on the results to grasp the trade-offs.
It then built an economics model on the revenue and cost implications for each type of seat on different routes and aircraft types.
The Eureka moment was when the consultants realized what British Airways needed to do was to also create a new class of service, premium economy. That assured an overall bottom-line gain to adding flat-bed seats.
L.E.K. optimized plans for all seat configurations throughout the network.
How can airlines discover the next innovation that's as profitable as flat-bed seats have been? Well, they could accelerate market testing of promising ideas if they did a better job of collecting and analyzing the data they collect through multiple touch points.
In-flight entertainment: A new frontier
Thomas says one of the biggest opportunities for airlines now is in-flight entertainment (IFE) and on-board-connectivity systems.
"The airlines have millions of so-called captive eyeballs.... Every consumer electronics company in the world would die to get access to those customers.
It's really unfortunate how on-board connectivity has evolved in the industry. It's come down, basically, to a pay-to-play, flat fee model, such as $15 per segment to get on the Internet. That's a huge under-utilized asset for the airlines."
What's ahead?
The underlying strategy behind L.E.K.'s engagements with customers could be applied to, and used by, travel technology companies in other contexts.
While L.E.K. says it approaches each problem without preconceptions, it does have some beliefs.
One relevant belief is that, instead of focusing on your core competency, a company should consider an "edge strategy”, looking for profit on the edge of a core business through the sale of ancillary goods and services.
Behind that edge strategy is a more fundamental concept, which is that there is always a small slice of products, customers, ways of competing, or parts of the value chain that contributes a disproportionate share of the profit.
The small slice can be grown for far less capital than the average requirement in one's field.
For both airlines and their technology vendors, that's a worthwhile lesson in what "thinking strategically" means.
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