“Air Asia announces 3 million promotional seats across AirAsia’s network with all inclusive fares for domestic routes starting from Rs 699!”
Core product for airlines – The Seat.
For air travelers in India, 2014 has been a good year. Discounts offered by airlines and flash sales by e-commerce travel agencies are now a regular feature. As the competition heats up, a discount by one airline is matched by others. Specialized search portals like Skyscanner further intensify the price wars by helping consumers find the cheapest tickets being offered by airlines and travel agents. Over the last few years the airline industry continued to experience profit erosion on its primary product – the airplane seat. The intense competition made it tough to break through the yield barrier. As a result, the Indian industry has witnessed closure of several airlines in the last few years. Air Deccan, the leader in seat discounting, Kingfisher and recently SpiceJet have suffered heavily. Even the market leaders are not spared . With greater choice, air travel increasingly turns into a commoditized service and time and price emerge as the core value. While most of us like good food and nice entertainment, price is the stronger attractor. In matured markets consumers tend to choose on core values and this intensifies the price wars.
New profit opportunities
Even as consumers are fussy about the ticket price they would be willing to buy convenience during the flight. For the passenger, timely arrival and at a reasonable price is certainly the priority, however, once that is taken care of its back to normal spending on the flight! International carriers realized this early on and offered in-flight shopping which proved to be quite profitable. More such opportunities were captured adding new revenue streams.
Airlines in India already charge extra for itinerary changes, special seats, faster check-ins, baggage handling fees and on-board food. In US and EU, there are many more such opportunities – oversized bags, early boarding, wifi usage, wider seats, streaming movies, pet charges, printed boarding passes – all these earn revenues. Way back in 2006, EasyJet had projected that while passenger revenues per seat will grow just by 3% to 4%, ancillary revenues – as these are called – are expected to grow by 30%. And in 2013, IdeaWorks, a leading consultant on airline revenues, estimated that US airline companies made $23.7 billion in such fees, which is double airline profit forecasts. A smaller share of $18.9 billion came from B2B activities like sale of frequent flier miles to program partners and commissions on cross selling hotel and car rental services to their passengers.
For airlines, such ancillary revenue is generated by product and services that go beyond the core value – moving passengers from A to B. Air travel offers three possible transaction points – while booking a ticket, at the airport and on board. Consumers’ sensitivity to price is different at each point and smart airlines have built profitable offerings. European low-cost carriers undertake co-branding with their partners to offer cross-sell opportunities for their customers. Ryanair markets packages for events such as the Grand Prix and wine-tasting tours. EasyJet markets car rentals for Europcar, ski packages for several resorts and lodging for many hotel chains. In flight advertising opportunities are another source of revenue. Displays and cobranded air sickness bags get in money. Add on retail sales like in –flight insurance and merchandise have been growing too. EasyJet customers can buy airport lounge entry while booking tickets on a per-use basis.
Many other businesses can stand to gain from this example of the airline industry.
Dr. Gurudas Nulkar
He is the Head of Marketing Department at SCMHRD. He also heads the MBA Executive Education Program at SCMHRD.
As a first generation entrepreneur,he founded Prostick Adhesive Tapes in 1994.
An ecologist by choice,he is the Trustee of the Ecological Society, an NGO pursuing ecological education in India for the last 30 years. He is also an active cyclist.
For more articles by Dr.Gurudas Nulkar follow http://gnulkar.wordpress.com/