Consider as you read these words the smartphone in your hand. Or at least the one nearby. Do you know how it works?
Like all technology, smartphones are full of fiendishly-named hardware like DRAM, SIM, GPU, GPIO and UART which I know nothing about. To be honest, I don’t care either. Do you?
Chances are that no matter how much you know about the inner workings of your smartphone, what interests you the most is what it can do for you. For most people, the apps which help us work, rest and play are what is interesting and inspiring about the smartphone.
The most desirable of these apps, the killer apps, are what make the smartphone economy tick. Quite which apps qualify as “killer” is hard to define. They are the apps that nobody can do without. I would bet that WhatsApp is up there. Uber will be too. Presumably the App Store itself.
I have quite a few travel apps – British Airways, Virgin Atlantic, LNER my local rail company, Accor, Hilton and Hotels.com. I also have the BA Rewards loyalty app, which allows their sister company IAG loyalty to make hay with British consumer spend. Then I have the online banking apps which turn your subscriptions to this blog into letting the good times roll. Thank you!
A smartphone is a platform on which all of these money spinning machines operate. And airlines have their own platforms too, the Global Distribution System and it’s New Distribution Capability (NDC) communication standard operating on top.
NDC is supposed to revolutionise travel. It has cost tens of billions of Dollars but, so-far, has achieved almost nothing.
The reason is simple. Airlines diligently attend the working groups that define standards, determine protocols and cover what they need to do to align with other carriers and their agents.
They march up the so-called NDC Leaderboard as they do further systems integration. Unfortunately becoming more and more technically proficient in NDC has reached the stage of diminishing returns – much airline activity in the field now has little value.
Airlines have built their NDC platform, their smartphone if you like, and it is probably very good. But it is useless until they populate it with apps. What might these be? Read on…
Killer app 1: the travel marketplace
Airline Internet booking engines are based on a legacy ‘from > to’ logic which does not reflect how people actually buy travel. They are great if you know where and when you want to go, but not so good if you just want ideas.
Airlines have created ‘find the best fares’ pages and pages of information about their destinations to get around this problem. It is easy to book flights with hotels, cars, insurance and other travel products. But a true travel marketplace seems a long way away.
Great retailing requires an experience marketplace with attractive window displays as well as well-stocked shelves. Fortunately this is exactly what NDC is designed to create. Three things are needed:
1. Lots of inspirational experiences which customers can mix and match – think everything from meeting rooms to bungee jumps over the Grand Canyon
2. Social proof, like hotel chains do when they put Trip Advisor reviews on each property’s section of their site
3. Flexibility to combine the large with the small and the expensive with the cheap – just because people are flying economy does not mean they need a cheap hotel and for the golfer a desirable and expensive tee time plus a new driver might be more important than a great meal.
Airline travel marketplaces will need to make it easy for small local suppliers to put up their own content. Just like how SMEs use Amazon.
For more Airline Revenue Economics content on digital airline retailing experiences, read this article. There are, however some pitfalls which airlines need to address to get things right – read our articles here and here to find out more.
Killer app 2: the upstream offer
When you or I think about buying a plane ticket, we go to an airline website or travel agent and search for trips. Airlines make us offers – they tell us the amount of money they would accept for a seat. We either accept or we do not. If we do not, the airline does not know why.
Maybe they are too expensive. Could they consider a counter-offer? Unfortunately there is no mechanism for ordinary consumers to make counter-offers to airlines today. There should be.
Boffins in revenue management, the part of an airline which decides how many seats to offer at each fare, will often tell you that there is no need for a counter-offer market. They reckon that their whizzy algorithms have already got everything worked out to optimise revenue on each flight.
In fact the situation is rather murky. Large institutional buyers paying for hundreds or thousands of seats a year strike volume discount deals with carriers. Some of these are front-end – a discount on the regular fare. Others are back-end – a rebate at year’s end.
Whether front- or back-end, the effect is the same. Airlines do not always collect as revenue their published price. Revenue management adjusts accordingly by exclusively making higher fares available at some times in the booking cycle when the vast majority of bookers are discount holders.
As a result some prices are eye-watering. Fly from London to New York tomorrow and back the day after in Club World (BA’s business class) and the fare can be up to £9,654 ($12,228). Nobody will be paying that out of their own post-tax income.
A few mid-sized businesses might buy one or two at a price like that from time to time (remember that you and I buy tickets out of post-tax income, businesses buy tickets out of pre-tax revenue so business willingness to pay is roughly twice a consumer’s). But most buyers will have a discount of some sort, say 33%, so in the end BA expects to get £6,468 and the minimum acceptable price (the bid price) will be something like £6,400.
If you made an offer to BA for £7,000 for the seats, all the principles of revenue management would tell them to accept it because it is greater than what they expect to get for the seat under current arrangements. Even though the price is lower than published.
The published price is meaningless if only a tiny number of people buying that fare actually pay the price in the end. The airline would win by increasing it’s market share and passengers would win too by taking their first-preference carrier more often.
But it is not possible today thanks to three challenges:
1. BA’s ticketing systems cannot automatically issue a ticket at the £7k offered when the price is £9k+, even if revenue management might like them to do so
2. BA’s revenue management system cannot automatically reconcile an offer for £7k by a free individual traveller against the bid price and decide to make a seat available for that price
3. BA’s revenue accounting system cannot automatically determine that the £7k offered was accepted by BA and therefore that the ticket was paid for in full.
If a startup can solve those three challenges, they have a product. Blockchain ticketing may be the answer. This is not pie in the sky - Argentinian airline Flybondi is using the technology today. For more Airline Revenue Economics content on blockchain ticketing, read this article.
Killer app 3: the tradeable ticket
Air travel markets are competitive – everybody makes money in the airline business except the airlines. But they are also inefficient. People do not find it easy to buy what they want, compare products and prices, or even get the correct price (see above).
Three frictions stop the market for air travel being efficient – demand failure, mismatched expectations and poor pricing. Since most tickets are non-refundable, some passengers find it too risky to buy until only a few seats are left and fares are unaffordable. So airlines suffer reduced demand.
Mismatched expectations occur when people get to the airport and wish they had bought something different, a window seat or a lovely biz-class flat bed for example. Unfortunately then it is too late and they are all gone. The passengers have a disappointing flight and vow never to fly that airline again. Even though the airline delivered exactly what was paid for.
The problem of poor pricing is not just about the bid price being lower than the published price in the face of a volume discount (see above). Airlines price with imperfect information and a lot of fear. Many of us will have encountered the “matching analysts” who simply copy what the airline they are afraid of the most is doing.
Tradeable tickets, also using blockchain technology, can solve these problems. They reduce the risk of buying travel as consumers know there will be a chance to dispose of them later and still get a great fare. That solves demand failure.
Consumers should also be able to trade certain features of their travel with each other. Somebody offered a small sum of money to trade their window seat might take it. Both passengers are happy. That solves mismatched expectations.
And all the data generated by trading will help airlines price more effectively in the future. New insights will permit evaluation of willingness to pay like never before.
To read more Airline Revenue Economics content on tradeable tickets, read this article and this article.
Killer app 4: the air travel futures market
Way back in the 1800s and before, farmers did not know how much money they would earn when they took their crops to market. They had to plant months ahead, and if on market day it turned out there was a glut they would make a loss and fall on hard times.
Futures markets like the Chicago Board of Trade were established to help farmers know in advance what they needed to plant. Farmers could sell their wheat, corn or hogs bellies in advance, knowing before planting that their efforts would be worthwhile.
It is the same for airlines too. Today they ‘plant’ (schedule) flights a year ahead based on what happened in previous years. They are at risk of a supply glut. Instead, imagine if airlines could sell everything in advance in a futures market.
Critical to success would be the way that capacity is packaged. Selling seats may not be the right way to proceed. It may be more effective to sell available seat miles instead. Startups investigating the space will need to investigate.
Airbus’s Skytra platform was set up to achieve this just before COVID. An ops research specialist called John Lancaster who worked with me at Qatar Airways had a go at the same thing just before 9/11. While the idea does not seem to have worked for now, it seems to me to be more a victim of unfortunate timing than poor underlying economics. The opportunity is still there.
Killer app 5: the tour guide accreditation pack (buzzword: sustainability!)
A typical safari vehicle in Kenya carries up to nine passengers. They have all bought plane tickets, cameras, hotels and the services of a tour guide to be there. The vehicle might be carrying the results of somewhere between $10,000 and $50,000 of travel products.
None of this would be possible without the guide. He knows where the animals will be and how to get close without disturbing them. But typically he is only earning $100 to $300, a tiny fraction of the total spend. This is unfair.
Part of the problem is that barriers to entry are low and tourists find it hard to know who are the good guides and who are shoddy in advance. Professional tour guide associations in Kenya have been lobbying to have the role of guides enshrined in the constitution. But a market-based solution would be better.
Increasing payments to high quality but small travel service providers would help airlines achieve some of their sustainability objectives.
Hotels are already able to monetise the existing travel infrastructure through great service and review platforms, provided they have a stunning location. The Victoria Falls River Lodge is able to regularly achieve $1,500 a night and other nearby hotels achieve $500 in a $50 a night market.
Airline travel marketplaces should incorporate review and accreditation mechanics for tour guides and other small travel service providers like them to share the wealth and allow great service providers to boost their prices. These will not necessarily be consumer driven, Trip Advisor-style. In Kenya an official accreditor is likely to appear.
A small increase in total-trip price could double or better a guide’s earnings and be reinvested into local communities. It would genuinely meet the needs of present travellers and boost the chances of future travellers meeting their needs. The very definition of sustainable travel.
For more Airline Revenue Economics content on sustainability, see this article.
oliver AT ransonpricing DOT com