What does the airline retail revolution mean for leaders? Transformation is needed—and opportunity awaits.
An airline retail revolution is underway. To retail their products differently, carriers are transitioning from revenue management to offer management. This journey entails an organization-wide transformation, though, and airlines are finding that they have to build new teams and capabilities, reconfigure their processes, and adapt their employees’ roles, responsibilities, and ways of working.
Making this transition constitutes a big leap for carriers, but it can boost top-line growth and significantly improve customer engagement and satisfaction. Those who move the fastest and most effectively will lead the industry.
To better understand airlines’ progress, we recently interviewed and surveyed senior and C-level leaders across full-service and low-cost carriers around the globe. The leaders included chief commercial officers, as well as heads of offer management, revenue management, ancillary products, distribution, and inventory teams. Collectively, we spoke with more than 40 leaders from over 25 airlines. These carriers account for more than 40% of global revenue passenger kilometers and over $340 billion in revenue.
Our conversations yielded critical insights into the steps airlines are taking, the challenges they face, and what it will take to overcome them. There’s a lot to consider, but one priority is crystal clear: CEOs should be ready to mobilize their organizations immediately and be ready to lead through the retailing transition.
Industry watchers often assume that the companies transitioning to offer management know where they are headed. But many leaders say managers and employees do not have a full understanding of what they are trying to accomplish and how to get there. One likened the effort to bringing a big group together to solve a large puzzle. Further complicating matters is the fact that no airline has made enough progress to serve as an example for others to follow.
Nevertheless, leaders across the industry remain ambitious about the airline retail revolution. The general consensus is that the required organization-wide transformation will be worth the effort, even if it takes time. Among the leaders we spoke with, nearly 90% expect the transformation to take three years, at least. About half expect their distribution-cost savings to be at least 25%, and some even believe that by changing their overall approach to retailing, they can eliminate distribution fees entirely. A majority believe that their passenger revenues will grow by more than 3%, and the most hopeful anticipate that they will exceed 5%. BCG’s analysis suggests that will be the case.
While most airlines around the world are trying to improve their retailing capabilities, some are moving faster than others. Our research suggests that airlines are either acting quickly to be among the first movers or adopting a wait-and-see approach. Those in the latter category are hoping for a firmer proof of concept before committing significant resources. They believe that the whole industry must move in the same direction before any real value can be extracted. Even the most advanced airlines can’t get very far by themselves, the argument goes, because of their dependence on interlining, legacy pricing processes, codeshare agreements, and third-party partners and providers with limited retailing abilities.
Early movers—which have dedicated teams and investments to jump-start the journey—are already seeing positive results. Most have come in the form of distribution-cost savings, which have been as much as 50% for some airlines. Additionally, a few carriers have already felt a greater impact in terms of revenue uplift, which generally takes more time to realize. They have seen passenger revenue per available seat kilometer (PRASK) increase by 1% or more.
By and large, early movers (most of which are based in Europe or the Middle East) have focused their initial efforts on improving their technical capabilities. Some are relying on external vendors; others have acquired custom-made systems or developed technology in house. Regardless, having access to enhanced technical capabilities has allowed them to do the following:
- Transform product distribution. First movers are adopting the International Air Transport Association’s New Distribution Capability and shifting traffic to direct channels. This standard is making it easier to collect customer data; ultimately, it can help distribute richer products. These airlines are also implementing new commercial models with distribution partners to potentially reduce booking fees and offer a wider variety of bundles and personalized offers. Some have already entered into new agreements and seen their distribution fees drop to nearly zero.
- Enhance pricing models. Early movers are offering dynamic bundles—instead of standalone fares and ancillary options—and continuous pricing. This improvement is enabling them to shift away from fares tied to reservation booking designator systems—a change that allows carriers to more precisely price according to customers’ willingness to pay for a specific product.
- Leverage data and technology. First movers are learning more about what matters most to customers. For example, one leader who we interviewed confirmed early in the pandemic that flexibility and insurance, not bargain prices, were what mattered most to customers.
Still, even among industry leaders, these efforts have been uneven. A carrier that dedicated funding and resources to getting comfortable collecting customer data will start offering new retail bundles in the next three to six months. However, other airlines are still trying to figure out how to upgrade and consolidate legacy systems. One carrier had to modify more than 200 systems to implement its new cabin product, according to an executive. Another executive’s “eyes were opened” to the retail constraints imposed by old systems.
Technical capabilities are critical, and we expect most players to continue making progress on this front. Nevertheless, our experience suggests that leaders should be mindful of the 10-20-70 rule of thumb: to achieve success, focus 10% of the company’s attention on algorithms and data science, 20% on technology, and 70% on people, processes, and organization considerations.
Reshaping the Organization
Making the most of an organization-wide transformation will require a carrier to become a bionic organization—one that combines the best of its human expertise with the latest technology. To reach this end state, an airline’s leaders will have to address many questions regarding capabilities and the structure of the organization given its starting point and unique context. For example: Who should sponsor the transformation? Which new functions and role types will be required? Who owns these new capabilities, channels, and data? Where should they sit within the broader organization—and how do they work together? What new processes are needed to support them?
The carriers that have already made progress have shared that they are determining where teams should sit on the basis of their company’s context, and it’s clear that no one-size-fits-all approach exists for codifying these capabilities in the organization chart. But these leaders generally agree on which capabilities are needed for the future of retail. In addition, they are beginning to organize their teams around commercial and technical capabilities, and they are adopting new ways of working. The following isn’t an exhaustive list; rather, it includes some of the key competencies that airline executives are focused on today.
By Gabriele Ferri, Alberto Guerrini, Marcelo Cirelli, Yanik Hoyles, Olivier Hours, and Sebastien Touraine
Courtesy BCG. Full article available here