Zero Fare Airlines

Building market places may be more successful for airlines than selling seats

The quickest way to become a millionaire is to start an airline when you already have billions in the bank. This old joke does the rounds regularly, but it reflects three fundamental truths that cause airlines to be chronically loss making.

Airline seats are so similar to each other that consumers simply do not see the difference and buy on price, leading to intense competition. They are common in undergraduate text books as a real-world example of what economists call perfect substitutes.

Second, many passengers resent every penny they pay and airlines often report poor value for money scores in their market research. And finally, airlines fail to capture a fair share of the value of the travel experience that they enable. Many people love to travel and find it an enriching experience, but the air travel is normally something to be endured before the enjoyment starts.

However recent technology encouraged and marketed by travel trade body IATA may make it possible for airlines to move away from a world where they sell seats and find profit from enabling travel experiences instead.

Market placers

Travel market places were one of the first e-commerce success stories, and pioneers like Expedia and lastminute.com which were part of the dot-com bubble are still with us today. Like any market they attract consumers by offering a wide range of products and services in a way that helps people compare price and quality before they decide to make a purchase.

But surprisingly little innovation has been seen in travel market places for the last 20 years. This is because they are built on top of legacy platforms called Global Distribution Systems (GDS), which themselves emerged from technology developed in the 1960s. They are old, clunky and expensive so innovation has been limited.

Product shakers

In 2012 IATA launched a programme to establish a communications standard called New Distribution Capability (NDC). The idea was that airlines could bundle products and services like hotels and rental cars with their flights and consumers buying through online or high street travel agents could have access to the same deals.

The technology promises to change the way airlines maximise their revenue by allowing airlines to optimise both the price and makeup of the bundle of services that they offer to consumers and not just the price of a seat. To date, much of the work in this field has been with travel products and services that are traditionally sold through GDS, such as hotels and rental cars.

Airlines who follow this approach will enjoy three advantages:

(i) Consumers will buy products and services that they actually want from the airline (remember that flight are necessities of travel, not a benefit) – buyers associating the airline with value-for-money may be more likely to use that airline in the future, reducing spoil costs (see article)

(ii) The airline will compete on a full travel package and can differentiate on product and service rather than price, which may encourage some passengers to pay more and reduce price sensitivity, reducing spill costs (see article)

(iii) Suppliers of travel products and services can pay the airline commission, and a commission of 10% on an entire holiday or business trip may be more than enough to pay for the plane ticket – the airline need not charge a fare.

Content makers

In the world of the airline-driven travel market place, content will be king. In principle what the airlines can offer through NDC is limited only by their imagination. Restaurant meals, meeting rooms, tickets to events and attractions can all be packaged by airlines and sold with flights. My recommendation to all airlines right now is to examine how they can become their own travel market place, a one-stop shop for anything that a travel consumer might want to buy.

Airlines are well placed to become gateway to travel because their services are essential and their brands are strong, but there may not be room in the world for every airline to follow the trend. AirAsia is taking action – their new travel “super app” appears to be just such a travel market place.

The most profitable airlines in the future may be those who only operate a limited range of flights themselves but can become the new Amazon or Alibaba of travel. Is your airline ready? Write to me and tell me – oliver AT ransonpricing.com.