airlines

[dropcap size=small]I[/dropcap]f there’s one buzzword most commonly used in the airline industry these days, it’s probably digitalisation.

And little wonder, given that airlines – in South-east Asia especially – face a competitive operating environment with yields under pressure and climbing oil prices. All the while, margins remain wafer thin.

This year, the International Air Transport Association estimates that net profit margin will clock 4.7 per cent for the global industry.

“Digitalisation is a way for (airlines) to find new revenue streams to boost their profits, improve the customer experience through personalisation, and hopefully, retain some sort of customer loyalty,” says Corrine Png, chief executive officer of transport equities research firm Crucial Perspective.

“It’s also for survival. (Airlines which) do not have the benefit of government protection and subsidies have to think about how to improve their profitability.”

It could also be a way to separate the men from the boys in the eyes of investors. “Airlines generally are trading at fairly low valuations because investors view them as cyclical stocks,” she continues. “If (airlines) start to invest and build up new revenue streams, profit margins would increase. Investors may start to value the airlines more like growth stocks. It could be a way to differentiate between the long-term winners and losers of airlines.”

One of the biggest goldmines for the industry is data, analysts say.

“Airlines have data all around them,” points out Richard Brown, principal at consultancy ICF. “They have data from passengers – for example, the routes flown, prices paid and preferences – from suppliers and increasingly, data directly from the aircraft itself, related to reliability and in-flight performance. Yet, having the data is one thing. Knowing what to do with it and how to make more informed business decisions that can produce meaningful savings is harder, but the benefits are worth it.”

Today’s next-generation aircraft also generate far more data than older models. For instance, by gathering data on components and systems, the airlines, maintenance, repair and overhaul (MRO) players, plane makers and engine manufacturers can leverage predictive maintenance to repair or replace components ahead of failure.

Predictive maintenance not only improves safety but also enables airlines to keep planes in the air, earning revenue, instead of being grounded on the tarmac. In addition, an airline or MRO firm could have better visibility relating to spare parts, as opposed to carrying excess inventory which leads to obsolescence and write-offs.

Analysts also identified other potential cost savings from data, such as optimising a plane’s flight path to reduce fuel consumption and predicting flight disruptions due to occurences such as inclement weather. In the case of the latter, airlines can source for alternate flights for passengers likely to miss connecting flights and update them in real time; this, in turn, could reduce compensation costs for airlines.

ICF estimates that airlines could save over US$5 billion a year through fuel cost reductions, predictive maintenance and a reduction in delays. Roughly half of that sum comes from aircraft health monitoring and predictive maintenance.

 

Beyond cost savings to revenue boosters

However, the real money could well be in generating ancillary revenues. While it may be impossible to compete with the technology titans such as Facebook for user data on the ground, the airlines have no equal in the sky, reckons Ms Png. “For the flight duration, the airline can have a monopoly on the collection of passenger data.”

Ultimately, the collection and monetisation of in-flight big data could be worth US$100 billion in additional revenue per year for the global airline industry, a number that will dramatically increase with advances in the Internet of Things (IoT) technology, estimates Ms Png.

For instance, airlines could use data analytics to push products to passengers that are more likely to bite. Malaysia’s AirAsia is already using predictive behavioural modelling to try and boost the uptake of ancillary items such as baggage and pre-booked meals. Some full-service carriers have also started using data analytics to send out targeted offers to selected passengers likely to, say, buy a last-minute upgrade from Premium Economy to Business Class.

“The aim is two-fold,” says Mr Brown. “Maximise revenue and also provide passengers with the opportunity to sample a higher class of service that, next time, they might book.”

But he cautions against overusing this tactic, pointing out that high-yield business class passengers might be less inclined to book the higher fare in the first place if they thought they could snare a cheaper ticket via an upgrade.

Airlines that BT spoke to declined to comment on the exact returns they are seeing from their digital initiatives.

Meanwhile, as the quality of in-flight Wi-Fi continues to improve, airlines could explore other areas to beef up revenues, such as partnering with online search engines to limit a captive audience to a default search platform – for a fee, of course. In the third quarter of last year, Alphabet paid some US$5.5 billion in traffic acquisition costs for its Google search engine, and even a sliver of that pie could go a long way for an airline, Ms Png points out.

In addition, seat manufacturers such as Stelia Aerospace are looking at smart seats equipped with sensors, Ms Png says. In the future, seats could be outfitted with image recognition features, building a database on passenger preferences based on food & beverage orders, entertainment selection and online browsing. Airlines could use this valuable data to send passengers targeted advertisements or coupon codes to their in-flight entertainment systems to enhance in-flight sales; in this way, additional revenue could come from retailers or the airports.

Citing a competitive environment, Stelia Aerospace chief executive Cedric Gautier, declines to reveal too much about the seat of the future, but tells The Business Times: “We’re working in a lot of directions – connectivity, face monitoring, passenger experience, big data and so on.” It all comes down to what airlines want in the end, he adds. Tapping new technologies to improve the overall seat and the comfort of the passenger experience is another area that airlines are keenly focused on.

Then there’s the opportunity to use data to enhance the overall customer experience in a competitive environment. “Airlines are trying to make experiences more tailored for premium passengers in a fiercely competitive market,” says Mr Brown. “The airlines getting it right create loyalty and differentiation.” Welcoming a passenger onboard with their favourite cocktail or magazine, for example, can be one way of sweetening the in-flight experience.

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At the same time, airlines should also be equipping front-line staff with the right information.

“Providing customer-facing (employees) with the data and information to make decisions on the spot can really improve the customer experience, which does translate into increased revenue,” he adds. Some airlines have already recognised this and have rolled out apps for their ground services staff and cabin crew, which should help in this respect.

This is not to say that it will be a cinch for airlines to collect and try to monetise passenger data, especially given the international nature of flights and that data privacy laws may vary from country to country. However, it stands to reason that passengers will get used to it, since so many useful services today – such as Google Search, Facebook, WhatsApp and YouTube – already aim to collect data on their users, Ms Png suggests. Still, there has to be an upside for passengers.

“Airlines will do well to remember the ‘unspoken bargain’ of data monetisation – users accept the monetisation of their data in return for the provision of something valuable,” she says.

She adds: “Airlines will need to make the case that they be judged by the same standards as the Internet giants.

“Of course, it is also crucial that the airlines match the Internet giants in terms of communicating to the public how its passenger data is collected and monetised, getting consent as well as assurances that their passengers’ privacy will always be protected.”

 

First movers

Early adopters of digital transformation in the industry today include Singapore Airlines (SIA), AirAsia, Emirates, Qantas, Cathay Pacific, British Airways, Delta and jetBlue, analysts say. SIA, for example, has set aside “several hundred millions of dollars” to boost its digital capabilities, efforts which come under the broader umbrella of its three-year transformation programme.

“We have been significantly stepping up our investments in the digital side of our business to support our continued growth and to improve our customers’ overall travel experience,” an SIA spokesman says.

“This includes the use of digital technologies to provide more proactive and personalised experiences for our customers.”

Among the various initiatives that have been announced are a revenue management system, which uses algorithms to forecast demand for tickets, and a new digital wallet with virtual Krisflyer miles. The blockchain based wallet will enable users to shop at selected retail stores and will be updated in real time.

Earlier this year, it launched its Digital Innovation Blueprint, under which it will partner with entities such as the Agency for Science, Technology and Research (A*Star), the National University of Singapore, the Civil Aviation Authority of Singapore and the Economic Development Board. With A*Star, for instance, it plans to focus on research in areas such as video and data analytics, virtual and augmented reality, data security and automated technologies to improve maintenance processes.

Aside from industry players, educational institutes and research institutions, the airline also plans to work with startups, incubators, accelerators and tech enterprises. A 3,200 square foot Innovation Lab is being established in-house to enable SIA staff to experiment with new ideas as well as to work with external parties, such as startups.

The blueprint aims to help the group accelerate the adoption of technologies, such as artificial intelligence, IoT, virtual and augmented reality and biometrics to digitise operations and create new opportunities for growth. Through all this, SIA is seeking to become “the leading digital airline in the world,” says the airline’s spokesman.

Full-service carriers aren’t the only ones that are turning their focus to digitalisation. Australia-based low-cost carrier group Jetstar has been rolling out initiatives which make use of areas such as robotics and artificial intelligence. “We’re looking at a whole range of things, both on the customer side, but also on the operational side,” Jetstar chief Gareth Evans tells BT. “This is a core part of our strategy in all facets of the airline because the future is digital.”

 

Cost-saving AI

In February, Jetstar’s virtual assistant “Jess” was made available on Facebook Messenger using AI technology; Jess was first introduced as a chatbot on the Jetstar website back in 2013. Analysts say chatbots deliver the convenience of 24/7 support and minimal waiting time for passengers, while airlines could potentially trim costs in the form of call centres.

“(Jess) dealt with 3,000 customer queries during the Mount Agung volcano (eruption),” Mr Evans says. “Three quarters of those she dealt with immediately, which just improves the customer experience.”

Other cost-saving technology initatives by Jetstar include a system for its ground handlers, which provides the real-time information needed to turn an aircraft around swiftly and efficiently. For instance, the system sends them messages if a plane is off-schedule or if there is a gate change.

Even with all this under way, there are other areas that aren’t being exploited by airlines, even though the technology is available, says Mr Brown. For example, given that it has all the information, airlines could send passengers a message via their smartphone to inform them if their luggage fails to make the flight, saving the passenger the trouble of standing aimlessly by the baggage belt.

Airlines should be taking the lead, he suggests, and remedying the situation even before the passenger is aware that there is an issue.

And in order to get passengers to accept the digital revolution, there has to be something in it for passengers, namely increased efficiency, reduced fares and improved seamless service, highlights Mr Brown. “Increased use of technology should enhance customer service, yet all too often, it is rolled out seemingly without being properly tested and thought through.”

However, embarking on this digital journey is no mean feat for airlines either. It may call for a massive change in mindset for the airline, require retraining of staff and could potentially result in redundancies. It also requires investing in research & development, new technologies and perhaps even more employees for new job functions – which some airlines might not have the financial muscle to pull off. What’s more, betting on the wrong innovations could result in a hefty write-off.

Nonetheless, it is important for airlines to garner first mover advantage before other entities join the fray. “If the tech giants decide to come into this industry and disrupt (it), it’s going to be very challenging for airlines,” says Ms Png, pointing to firms with deep pockets such as Alphabet, which could easily start snapping up stakes in airlines.

Ultimately, failing to hop on the digital bandwagon now could come at a big price for airlines later on.

This story was originally published in The Business Times.