An industry that used to lead the travel economy became a post-Uber follower; here’s how aviation can take the lead again.
For most of the 20th century, commercial aviation was one of the dominant forces advancing technology. Whether promising greater levels of safety and speed, or "enhancing the sophistication of route-planning and revenue management, the airline industry was at the center of data and digital progress.
During the often-celebrated period between the 1960s and 1970s, flying was billed as romantic, luxurious, and, in a word, exciting. Even as the novelty wore off, airline leaders who straddled the pre- and post-deregulation era were hailed for their dynamic visions. People like American Airlines’ Bob Crandell, Southwest’s Herb Kelleher, United’s Richard Ferris, Eastern’s Frank Borman, were among a cast of C-suite characters who pushed the boundaries of data usage, route planning, passenger service, and marketing creativity.
But, at some point over the last three or so decades, the associations of bold grandeur surrounding aviation started seeming less and less true. For the past two decades, despite a few black eyes along the way, Google, Apple, Facebook, Twitter, Amazon, and Uber have captured the public’s imagination and changed the way products and services are bought, sold, and marketed, impacting every facet of business and culture, including travel. Airlines became just another follower in the new interactive economy.
The Empty Skies
At the dawn of the 2000s, three major events – an unprecedented terrorist attack, a global virus, and fuel price surges – would have a crippling and lasting impact on the aviation industry.
Firstly, the terrorist attacks on September 11, 2001 were such an incalculable tragedy that it still feels uncomfortable to mention it in business context. But the contemporary history of airlines can’t be understood without discussing it.
To truly grasp the dismal state of aviation bookings following the 9/11 attack, consider that before the tragedy, the airline industry had been experiencing “a record high in the number of airline passengers for a given month when 65.4 million travelers took to the air,” according to the Bureau of Transportation Statistics.
After 9/11, the number of flyers dropped precipitously beginning when U.S. flights were grounded for an entire week while all airports were ordered closed by the federal government.
The cost of these closings were initially borne by the airlines. While federal assistance via the Air Transportation Stabilization Board, ultimately alleviated the distress thanks to $10 billion in loans to carriers, it was not enough to prevent bankruptcy filings by United, Delta, US Airways, and Northwest. In the aftermath of nearly the financial turmoil led the U.S. government to approve a series of mergers that disrupted routes around the world.
On top of that, when flight schedules returned, the devastating shock lingered; many people were simply afraid to fly. At the same time, airlines suddenly found themselves coping with numerous new restrictions that further prevented a quick comeback.
In terms of passengers and the number of available airline seats, it would be three years – July 2004, to be exact – until the industry saw higher droves of flyers again.
A Comeback Stalls
A year after passenger demand had begun to climb again, a new international disaster struck in the form of a global health scare, the SARS virus. First reported in Asia in February 2003, the “severe acute respiratory syndrome” (SARS), a viral respiratory illness, infected roughly 8,000 people around the world. And while less than 1,000 people died from SARS, the economic impact was substantial.
Naturally, airline industries in Asia were hit especially hard. Asia-Pacific airlines lost 39 billion in revenue passenger kilometers or around 8 percent of yearly traffic, according to IATA stats. That passenger decline translated to roughly $6 billion in lost revenue. Meanwhile, North American airlines did not come out of the SARS crisis unscathed, as carriers in that region lost 12.8 billion Revenue Passenger Kilometers – about 3.7 percent of total international traffic at an estimated revenue plunge of $1 billion according to IATA’s report on the outbreak.
As if that weren’t enough, 2004 saw fuel prices spike as oil jumped to $40 a barrel. By June 2005, a barrel of oil was $60. Despite fluctuations in the intervening years, fuel prices never saw a return to the historic year of 1998 when there were lows of $18 a barrel. (in Jan. 2019, the price of oil was roughly $51 a barrel). Airlines were challenged to balance the fuel hikes, in turn scaring off travelers with sticker shock at the time of booking.
Yet, that challenge paled in comparison to what was yet to come.
The Great Recession of 2008 and 2009 left no economic sector untouched. Not only did the global financial calamity cut passenger demand again, but it had a direct impact on premium travel. In large part, as banks and investment firms went under, and massive Wall St. layoffs ensued, most premium travel seats disappeared along with those brands and jobs.
And those premium seats never came back. There are no all-premium carriers today. Meanwhile, first class as it’s been known is dying. Amid the financial meltdown of the past decade, airlines had to concentrate more on economy, premium economy, and business class as a direct consequence of the resulting recession.
It’s nearly impossible to grasp fully how the mix of terrorism and health scares and economic disaster wreaked havoc on the airline industry over the last 20 years, but as the first decade of the 21st century came to a close, U.S. airlines reported losing $55 billion in revenue, which led to 160,000 job cuts.
It would take new levels of creative problem solving, strategic analysis, and leadership to rescue the aviation industry from the myriad challenges of the new century.
The New Leaders
The airline chieftains of the 1970s and ‘80s, who steered the industry through the period of deregulation are rightly considered larger-than-life figures. These individuals, mentioned at the top of this piece, crafted ingenious pricing and booking techniques, forged the opening of new routes and destinations, and elevated the experience of travel, such as the introduction of one the greatest innovations in the business of airlines, frequent flyer programs. They made it both affordable for average consumers and profitable for their companies (and, naturally, themselves).
The leaders who emerged in the first decade of the 21st century may not be viewed as the eclectic and eccentric characters of their deregulation era predecessors. But many of the recent and current crop of commercial aviation leaders have demonstrated as much resourcefulness and inventiveness as the innovators they followed.
People like David Neeleman founded low-cost airlines JetBlue, Morris Air, and WestJet before 9/11 and he remains a pioneer two decades later with the much-anticipated launch of Moxy as a “high-tech company that just happens to fly airplanes.”
Then there’s Fred Reid, who is now helping to run Airbnb as global head of transportation. Reid distinguished himself in the 1990s at Delta, as the first CEO of Virgin America, and at Lufthansa, where he was the first U.S. national to be named president of a major airline outside of America.
Though currently retired, Gordon Bethune is someone who has made an indelible mark on the airline business to this day. From his roles as COO, and then CEO, at Continental in the mid-90s, he ultimately played a key role reshaping United Airlines after those two airlines merged.
Technology’s Double-Edged Sword
For these leaders and others, building new approaches with digital technology at the center of all operations continues to be a daily struggle.
It’s worth looking back to see what airlines have been doing for the past decade to see what has led to this moment — a moment that appears to promise a significant leap in the way travelers engage with the travel supplier ecosystem.
For an industry that prided itself on being at the center of life-changing and awe-inspiring technological innovation for much of its history, playing catch up to the ascendance of social media, on-demand eCommerce, streaming media, programmatic ad targeting, mobility, and machine learning has been a tough pill to swallow.
But despite the difficulty in adopting —and adapting to —new media and data collection models, airlines have not been sitting still for the past decade. Perhaps one of the most famous examples of how new technology has been experienced by airline passengers occurred in 2005.
JetBlue was one of the first airlines to upgrade its tech offerings to flyers, installing live satellite broadcasting from DirecTV. In September 2005, JetBlue Flight 292, an Airbus A320-200 carrying 140 passengers and six crew members, experienced had trouble retracting the landing gear shortly after taking off from Burbank, CA en route to New York City. The flight’s captain decided to head to LAX for an emergency landing.
That situation was unusual and dire enough to warrant live TV coverage. Most bizarrely, Flight 292’s passengers were able to watch news reports in real-time.
Ultimately, the flight landed safely. But the experience of having live TV access and the ability to text in the air via in-flight Wi-Fi forever changed the dynamic and experience of flying.
The incident highlighted the double-edged sword that technology has represented for the airline industry. In one sense, the ability to provide an internet connection at 35,000 feet above the ground appears positively miraculous. But that miracle thrill is immediately confronted with an equal (or for many passengers, greater) feeling of frustration when it doesn’t work as well as expected.
Certainly, the average cost of flying has never been more affordable. While the consumer is unlikely to know or even accept it, airlines, plagued by historically thin profit margins, are correct to feel squeezed by the spate of booking channels and the need to sharpen their yield generation and dynamic pricing models.
All of these issues come down to one thing: how consumer demand has been completely transformed by The Fourth Industrial Revolution.
Airlines And The Fourth Industrial Revolution
Every day, we are surrounded with countless examples of what data is capable of within the context of this long developing moment: The Fourth Industrial Revolution. Which industries haven’t embraced these new digital models? Commercial aviation appears to be a glaring example.
Consider the change in how consumers book their travel plans and how the airlines, despite such investments, are still in so many ways stuck in the past.
Take the amount of interaction that an airline will have with consumers directly through their website, or indirectly through other channels that reach that brand’s site. There is so much additional data in signal and real-time operations that happens between an airline and their consumer. All that data could augment the level of accuracy and understanding of the true revenue potential of a flight.
There are roughly 20 billion devices connected to the internet – and that's only growing. The amount of data available to any business is staggering. It’s at the heart of the Fourth Industrial Revolution, which involves the deep connections between physical and digital, machine learning and human intelligence.
Most businesses, from food services to financial to retail to health & wellness, have internalized the dictates of The Fourth Industrial Revolution. It’s clear that digitization allows for the anticipation, as opposed to the quick reaction, of consumer needs and preferences.
The Fourth Industrial Revolution is about recognizing the indispensable ability to provide the kinds of customized and personalized services most consumers have come to expect across all other businesses and channels of communication.
The airlines have had the interactive skill set to respond to a stated customer desire. But the anticipatory muscles remain comparatively weak. Meanwhile, the global upheaval in the travel business is forcing rapid change within commercial aviation practices.
The Demand Paradox
The airline industry currently employs 9 million people directly. And millions more are being hired within and around the industry. Concomitant with the infiltration of digitization within every facet of business and life, there are demographic changes that are fueling the necessity for a massive overhaul in how airlines offer and deliver their value to the travel marketplace.
By 2035, there will be 7.2 billion airline travelers annually – almost twice the 3.8 billion air travelers in 2016, according to the International Air Transport Association (IATA)’s 20-Year Air Passenger Forecast.
Much of the air traffic gains will be driven by China and India, the report notes. And as those markets grow, there will be many new routes to plan and price – and more competition to attract those passengers.
Consumers have many choices even in 2019. The days of a handful of airlines dominating and dictating the standard practices and terms of doing business are over.
Although the Long-Haul, Low-Cost airline model has seen some noteworthy failures in the past several months between 2018 and the first half of 2019 – i.e., WOW Airlines, Primera –we are witnessing a true revolution in travel thanks to pioneers like JetStar, Scoot, Air Asia, and Norwegian to name a few. While survival for individual LCCs is not assured, in many parts of the world, they are continuing to change the interaction with the consumer. At the same time, one of the major challenges LCCs face is as they, too, remain trapped by old technology.
So, the questions facing airlines: What are you going to do to win these new flyers? What are you going to do to ensure you have the best opportunity to capture them?
At the most basic level of competition, an airline wants to prevent its slice of the pie from shrinking any further. Airlines know at every level that they must do more, not only to hold onto market share for air travel, but market share in terms of total discretionary consumer spending as well.
That’s where revamping the approach to airline revenue management is coming into play.
The Revenue Management Reformation
A half century ago, there was only one price, per route, per cabin. At its inception, revenue management dealt with overbooking alone: the practice of selling more seats than physically available to offset for passengers who do not show up. In time, this progressed to managing multiple prices (and across vast networks) - optimizing the yield or average fare paid since there was now more than one, hence the bygone term yield management.
Since those earliest days, the science behind revenue management has taken steps, but not leaps, forward. Multiple price points necessitate the segmentation of demand -- no airline wants to sell a seat for less than a consumer is willing to pay.
First came fare gates: remember the Saturday-night stay requirement? This was to help the airline distinguish between a business traveler (usually travels within the work week) and a leisure traveler (who stays through a weekend).
Next, demand forecasting - mathematical calculations to predict future demand based on history. Then, the optimization approach: how many of those seats should the airline protect for each demand segment? More recently, ancillaries and fare bundling changed the nature of the game. All told, what began with overbooking has become a complex, multi-faceted discipline at the core of airline commercial activity.
The latest discussion revolves around the concept of "dynamic pricing" - specifically, the determination of price tied to a composite of products or services that reflect real-time supply and demand. This concept represents a partial pivot into the world of commercial offer management that has been embraced by so many other industries.
The potential full turn is now rapidly approaching. The airline industry is now at a point when it's ready to address new capabilities and challenges much more dramatically. For example, we can expect to see the industry move beyond the simple segmentation of business vs leisure travelers. Revenue Management systems can now encompass more detailed categories such as a mom with three kids who needs to get away on a long weekend and prefers beach destinations with five-star resorts.
It’s about achieving levels of pricing granularity and personalization never seen before and doing so dynamically. It’s about inferring elements of demand that literally emerge with each passing second and responding within milliseconds. As pricing considerations are redefined to include demographics, the timing of events, weather forecasts, geolocation issues, and others, a new type of Revenue Management opportunity is emerging.