Ai Editorial: Is ancillary revenue an apt barometer for excelling in digital retailing?

25^th October, 2019

Ai Editorial: Share of ancillary revenue shouldn’t be the only criteria of how good an airline is when it comes to digital retailing, according to Iztok Franko, founder, Diggintravel

There are ample indications that airlines, be it for full-service carriers or LCCs, are not averse to transforming internally, for instance, opting for two tracks (one for running the organization as usual and one for innovation) and even setting up dedicated units to capitalize on the dynamism of the technology ecosystem.

Such initiatives have resulted in a culture of constant learning and adjustment as there is collaboration among cross-functional teams and development teams are focusing on iterating faster than ever.

Counting on digital assets to sell all trip essentials, vacation packages etc. and even running a data platform with focus on only selling products that they haven’t sold earlier (for instance, a hotel brand selling an experience in a destination even if the traveller isn’t staying with them), travel suppliers have come a long way in today’s digital economy.

As highlighted by the findings of the recently conducted Diggintravel’s 2019 Airline Digital Retailing Survey, when it comes to digital retailing, having a great business model and great product strategy is not enough.

Some of the key findings from the survey, featuring 45 airline digital professionals, include:

• Airlines are indeed introducing new roles for real digital retailing.
• Some airlines already understand that a systematic conversion optimization process is the core of digital retailing.
• In addition to focusing on measuring and advanced analytics, airlines need to have a flexible martec stack that will empower digital retailing experts.
• The vast majority (84% in this survey) say that their digital platforms are either not flexible or that it takes time and effort to implement new products and processes. Digital platforms should be designed in a way that empowers ecommerce and marketing professionals to execute campaigns and activities quickly, with minimal IT intervention.
• By many, artificial intelligence is seen as the step that will take digital retailing to the highest level – and there are clear cases for applying AI, from identifying customer behavior patterns in data to dynamic pricing to calculating propensity for ancillary revenue product purchases to personalization.
• Only 2% said they use data to create truly personalized offers, while 48% claimed they mostly have the same offers for all.
• The level of organization usually reflects the airline’s business model and its digital retailing maturity. This is why there is no “one-size-fits-all” approach when it comes to the best organization. For airlines that are at the beginning of their digital retailing journey, centralized organization is probably a better model. However, for more mature and larger organizations, centralized organization could mean slower growth. Having many independent and agile teams can enable faster product development, optimization and experimentation.

Ai’s Ritesh Gupta interacted with Iztok Franko, founder, Diggintravel about the survey and its findings:

Ai: In your latest research, you have observed that the pressure on airlines to find additional sources of revenue is greater than ever. Can you share some of the trends that are emerging? 

Iztok Franko: We all see the yearly reports about how ancillary revenue is increasing and how more and more airlines want to generate more revenue from it. In our 2019 research, 60% of the 45 surveyed airlines said increasing ancillary revenue is one of their top 3 priorities. Less than 20% of airlines claimed that increasing ancillary revenue is not among their priorities in 2019. These percentages are almost identical to the research Diggintravel did in 2018. So, this is really nothing new or a novelty.

However, what we see as a new trend is that more and more airlines openly talking about becoming digital platforms, digital retailers. This combined with more investment into digital teams, platforms is something that we look into deeper when we do airline digital retailing research.

Ai: Airlines have been trying to innovate and expand digital offerings by focusing on opening digital labs, via their corporate investment/ VC units etc. How are these initiatives helping in becoming a digital company that sells all kinds of travel products? 

Iztok Franko: Airlines realized that they are not digital companies, like OTAs, or companies like Skyscanner, Airbnb, Uber who sell only digital products. Digital is not in a “traditional” airline DNA. High level of regulation, avoiding risk is something that airline industry was built on and in most cases rightfully so. However, consequences of this are large, hierarchical organisations that move and decided slowly and have yearly (seasonal) planning cycles.

On the other hand digital companies move fast, are built on experimentation and agility. To catch up airlines mostly innovate from outside (for example through start-ups, hackathons…), however we see the ones who are serious about long-term digital transformation investing in their own digital units. Like digital labs (example Ryanair), or Eurowings Digital which is a separate digital company under Eurowings. Eurowings stated the difference in how digital companies think and work compared to airlines as the main reason of why they created as separate digital company.

Ai: What according to you is the role of a Chief Digital Officer (CDO) in an airline, and how can CDOs play their part in airlines becoming digital retailers? 

Iztok Franko: Personally, I’m a very hands on person who does digital marketing, ecommerce in everyday life, with a hands-on approach. So, my view on CDOs is sometimes a bit critical. Airline digital narrative is very tech vendor driven, where airline tech vendors tell airlines they need to do very advanced digital stuff like artificial intelligence, 1-1 personalisation, etc. Consequently, airlines go for this silver bullet concepts, big bang digital projects or platforms that will solve their issues. In reality, we need to master digital basics first, a step-by-step approach were we build our digital skills and competences, instead of buying the best or the most shiny tool. With our Digital Retailing Framework we try to help airlines systematically asses their digital maturity in different areas and then provide them guidelines on how to advance step-by-step.

Ai: If you were to assess the goal of a group like Lufthansa vs. the likes of Ryanair and AirAsia in becoming digital retailers, what differences would you like to highlight? 

Iztok Franko: The biggest difference is the business model and complexity. Airlines like Lufthansa have complex IT, distribution landscape and digital (ecommerce) was never their only sales channel. This reflects in people, backgrounds, organisation…Although Lufthansa is doing some very good things. On the other hand, for LCCs ecommerce was only the sales channel, their organisation is more flat and they can move faster.

Ai: You mentioned that ancillary revenue generation isn’t an apt barometer for excelling in the arena of digital retailing. Can you explain the same via an example on how airline should gear up for digital retailing? 

Iztok Franko: What I meant is that share of ancillary revenue shouldn’t be the only criteria of how good an airline is when it comes to digital retailing. During my projects with airlines I’ve seen LCCs that generate high share of ancillary because of their business model (very unbundled model), however they still have big gaps and opportunities when it comes to digital retailing. For example how they use their data to create more relevant offers, communication, UX…Or how adept are they at digital analytics, conversion optimization, using marketing automation platforms.

On the other hand, I’ve also seen more traditional airlines doing some very innovative digital stuff when it comes to digital retailing. So, by comparing only ancillary shares one cannot get real picture of how good airlines are when it comes to digital retailing. This is why we evaluated airlines in 5 different areas when we did our research.

Ai: As per the study, only 7 airlines (15.6% and only 1 FSC) were classified as “Leaders”. Can you explain how these carriers are going about finalizing people with the right skillset, then nurturing creative, cultural and processual freedom to prosper? 

Iztok Franko: These airlines, the ones we identified as Leaders really recognise the importance of digital retailing. They have built their digital capabilities, like analytics, user research, they invest in UX development and build great digital experience on all digital touch points, have systematic experimentation programs, etc. They use data to be more relevant to their users, instead of one-size-fits-all approach. Again, it’s not one thing that makes them Leaders, rather systematic long-term investment in building their digital capabilities.

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