Forward-thinking airlines have moved beyond imagining their aircraft as costly assets generating a return and steadily depreciated. They now imagine them as revenue generating platforms.
Standard seat sale and ancillary revenue from baggage and duty free have always been prime revenue generators. More recently ancillaries, including food & drink (see article), advance seat selection and upgrade promos (see article), and the introduction of advanced fare families (see article), have added a healthy extra chunk of income.
Airlines have been learning how to offer these sorts of services for over a decade. Your favourite airline revenue economist spoke on the topic “unlocking your inner retailer” at the Passenger Experience Conference in Hamburg way back in 2013.
Since then it has been a long journey for airlines but the market has matured. Carriers are now quite good at figuring out how to unbundle their products and services. Systems providers offer workable tools to make such retailing happen in practice.
The NDC communications standard is poised ready to help operators offer a wide range of travel-related packages, although few if any airlines have really unlocked it’s capabilities yet.
So what comes next?
My friends at on-board wi-fi provider Airfi recently invited me the The Hague to chat at their conference about anything IFEC related. I chose to speak about how to model the revenue contribution of an in-flight entertainment and communications (IFEC) system.
Using an aircraft’s on-board assets to generate revenue is the next stage in airline retailing.
Consider a passenger going through a large airport, Dubai say. They have three hours at the airport, which sounds a long time but gets eaten up surprisingly quickly.
First of all is check-in and bag drop, which might be anywhere between 2 and 20 minutes or more. Then there is security, another 20 minutes. Next they walk around to find somewhere to sit or if eligible to visit the lounge, another 20 minutes. Time to relax, chat, play or surf, another 20 minutes. The gate closes 20 minutes before travel and it might take 20 minutes to walk there.
That’s two hours gone already. At most the passenger has one hour to spend in the shops. On the plane however they are what troupers call a captive audience for two, four, eight hours or even longer. They have a lot of time to shop.
Let’s start with some basic principles
Long-term readers of Airline Revenue Economics may recall the eight principles of seat map optimisation behind the LOOP (LOPA optimisation) algorithms (see article). These are:
1. Start with maximum density and only deviate when doing so has a strong revenue case
2. Remove low value seats in a lower cabin and replace them with high value seats in a higher cabin until the higher cabin’s demand at worthwhile fares is exhausted
3. If you can fit extra seats by placing galleys and cabins in unconventional positions, do so
4. If it costs nothing to enhance the product, do so
5. Be prepared to use higher cabins as “virtual capacity” and upgrade where necessary
6. People booking a lower cabin can be inspired by marketing to book a higher one - but only if you have a higher one
7. Consider flexible cabin solutions where these are available
8. Galleys are revenue generating spaces, not cost centres
For airlines considering an IFEC system there are five similar principles:
1. Start will no IFEC and only install a platform if it will generate profit
The type of IFEC system installed can have a big impact on profit.
On the one hand, wired-in IFEC is extremely expensive with high up-front capex, significant content licensing costs and hefty maintenance penalties.
On the other hand, the market clearly demands entertainment on longhaul flights. Often a good IFEC experience can offset tight economy class seats – passengers will not tell their friends how small the seats were but they will say there were a thousand movies to choose from. All of which leads to higher demand and revenue, so airlines without IFEC will lose money.
Wireless IFEC comes in two flavours. Suppliers like Airfi offer a box with a wifi signal through which passengers can stream content. This may be entertainment, shopping (earning the airline a chunk of commission), insight into things to do at a destination (including the ability to book tables, buy tickets etc…, from which the airline can also earn commission) and ideas about other destinations to visit with the airline (leading to more ticket sales).
Satellite Internet suppliers like Viasat claim to offer a “true broadband” experience on planes, with the ability to access almost any web service available at home. Arguably the Airfi approach is more lucrative for airlines as it is a walled garden, directly controlling what passengers can and cannot access, and the ability to monetise it.
With a Viasat-type satellite link it is not clear how the airline monetises content. In principle web companies might pay airlines for passengers to buy their products and services onboard planes. But good luck to any airline trying to negotiate such a deal with big incumbents like Amazon and Google.
It remains to be seen whether or not “true broadband” on aircraft will be demanded by the market. If it is, there may not be many perks for airlines beyond losing market share and seat sales if they do not have the full experience.
Your favourite Airline Revenue Economist reckons that airlines can monetise the “true broadband” experience by building truly excellent travel services marketplaces (see this article and this article).
2. If enhancing the passenger experience costs nothing, do it
3. Any services that can be delivered profitably should always be offered
4. Aircraft & galleys should now be seen as revenue generating platforms, not cost centres
London-based British Airways apparently made a silly mistake. They wanted to sell food and drink in their Euro Traveller (shorthaul tourist) cabin. But they did not load many trolleys because somebody with a cost budget decided that their costs were too high, forgetting the revenue and profit potential going to somebody else’s budget.
Don’t be like British Airways. Airlines should make sure that what sells is always loaded and avoid silly debates over who holds what budget in the interest of total profitability.
5. Airlines are now lifestyle companies
In 2018-19 orange EU mega-carrier easyJet ran their “generation easyJet” campaign. The idea was that flying away to a wonderful new city was just something you do on a normal weekend.
Look at any online dating profile and a desire to “travel” is a common theme. Generation easyJet aimed to put in peoples’ minds the idea that easyJet was helping them meet their lifestyle objectives.
The relevance for IFEC comes from using entertainment and retailing content to compliment a passenger’s existing lifestyle. Get this right and the revenue will flow naturally, no sales tricks required.
Conducting a valuation study
So how do you value an IFEC system in practice? As with everything in aviation, the best place to start is with a schedule.
Apart from one or two aeroplane lovers, nobody would fly an airline that did not get them where they needed to be, no matter how great the entertainment content or how plush the first class seats (see article). So the schedule is the core airline product around which everything else including IFEC should be based.
Schedules are complex beasts. In July 2023, British Airways has 1,358 longhaul flights per week with 71,067 seats just in Club World (biz-class, see article). Their competitor Virgin Atlantic has 506 longhaul flights per week and 17,014 Upper Class (biz-class) seats. Across all cabins there are many more seats, and that is just one week of service.
Here is a chart showing short-range ops ex-Sydney (SYD) for Aussie carrier Qantas.
Consider the late morning flight to Christchurch in New Zealand (CHC). The scheduled block hours are 3:05, plenty of time to deliver services you might think.
Our simplest valuation method divides a flight into five minute slots. At each time we imagine whether or not passengers are able to buy services through IFEC and whether or not cabin crew are able to deliver them.
Sometimes the passengers are not able to use IFEC, like when the Captain is making an announcement or during the safety demo. Sometimes the crew are not available to deliver services, for example because they are seated for taxi, take-off or landing, or because they are preparing the cabin for any of those.
The table below shows that on the 185 minute flight to Christchurch only 170 minutes is available for passengers to buy services. A surprisingly short 75 minutes is available for crew to deliver services.
The next stage is to think about the type of passengers using the IFEC system and what sort of usage profiles they might have. I normally use nine basic archetypes (see article):
1. Long sleepers zonked out
2. Busy workers going clackety-clack on their laptops
3. Device lovers glued to their phones
4. Popcorn fiends who fill the flight with movies
5. Restless souls who cannot settle down and flit from one activity to another
6. Parents looking after their kids
7. Young children not asleep
8. Youths on tour
9. The groggy and the sick
The table below shows how an airline might divvy them up. For the avoidance of doubt, this is just an example showing how these things can work and is not based on real Qantas data.
The next table attempts to assign value to each sort of user based on what they typically buy. The post-flight services column is empty here but could be significant (see article).
According to Airfi about 30% of passengers buy something, A simple calculation shows:
30% of passengers paying paying €6.50
174 seats
85% seat factor
€288 on this demo flight
Suppose the aircraft performs four flights per day 350 days of the year at €288 per flight. That’s an IFEC system valuation of around €404k per aircraft per year.
There are opportunities to take this analysis much further. For example by defining further passenger archetypes, modelling passenger propensity to purchase and average transaction value in more detail or by considering more carefully the influence of departure and arrival time. Let me know if any of that is of interest and we can have a chat.
oliver AT ransonpricing DOT com