Consumer-facing companies across all types of sectors have already begun to harness the power of modern retailing techniques. Tactics such as bundled offers and dynamic pricing can provide a boost to an organization’s revenue and profit. At the same time, they are creating better, more relevant experiences for consumers.
Airlines, however, have yet to capture many of these benefits. For instance, some might fail to bundle the sale of a flight ticket with an offer for airport lounge access or a rental car. Others might struggle to price their offers with precision, in real time. And some might find it a challenge to make all these efforts work across a range of channel partners.
Siloed corporate structures, outdated technology platforms, and a fear that up-front investments won’t pay off quickly are all obstacles to the adoption of these new retail approaches. But the opportunity at stake is substantial. Previous McKinsey research, conducted in collaboration with the International Air Transport Association (IATA), identified $40 billion in potential new value by 2030 across the global airline industry. Refreshed analysis now puts the potential new worth to be derived from implementation of better retailing techniques at $45 billion by 2030 (exhibit). The precise impact for a given airline will depend on its maturity level. But for many, this could translate into an opportunity in excess of 2 to 3 percent of revenue—or 15 percent of EBITDA.
How can airlines get started on their retailing journeys and avoid getting left behind by quicker-moving peers? Which moves will maximize the benefits of a revamped retailing strategy?
This article examines aviation’s retail opportunity by addressing the hurdles that have prevented some airlines from moving forward swiftly and by highlighting bold actions that airlines can take now to catalyze a modern retailing approach.
What does high-performing airline retailing look like?
An up-to-date approach to aviation retailing will incorporate a range of techniques that have long been deployed in other consumer-facing sectors: sophisticated offer design; multiproduct, dynamic pricing and revenue management; omnichannel approaches; next-generation order management and servicing; and updated payment capabilities. These techniques can provide customers with offers that better meet their needs while also helping airlines make the most of their inventories.
Sophisticated offer design
Airlines can generate new offers quickly and flexibly. They can bundle ancillary items—including checked bags, seat upgrades, priority boarding, onboard food discounts, and carbon offsets—with airline tickets into one appealing offer. Offers that involve partners, such as discounts on airport ridesharing, can be accommodated and properly priced.
Multiproduct, dynamic pricing and revenue management
Many airlines have experimented with either dynamic price adjustments or branded fare bundles. But they generally keep one element in this equation stable. Few airlines have been able to balance both pricing and bundles at the same time.
This approach requires a new form of passenger revenue management, flowing from dynamic pricing based on rich, real-time data. It should be free from the constraints of legacy ticket fare categories, allowing for the establishment of new inventory classes. And airlines should apply the approach to the full range of possible offers—including ancillary items, bundles, and offers that involve partners—across all channels. If done right, this approach could fundamentally change the logic of pricing away from “How much is this customer willing to pay?” toward “What’s the best offer to put forth when I’m marketing my last seat?”
Omnichannel approaches
Offers can be distributed in a controlled, streamlined fashion through airline websites, online travel agencies, and corporate travel management companies. Dissemination using the new distribution capability (NDC) format allows for rich and dynamic content, including photos, bundled packages, and real-time changes to offers. The NDC format also enables offers that are tailored to each channel—such as a targeted, bundled offer delivered through a specific online travel agency.
Next-generation order management and servicing
In the future, airlines are likely to be fully ticketless, using no passenger name records or electronic miscellaneous documents. They will integrate everything into a single order management system. IATA’s ONE Order standard, a protocol that aims to simplify order management, could enable the integration. Airlines could work to simplify and streamline servicing and back-end processes while also allowing for more automated and thorough revenue accounting and fraud detection.
Updated payment capabilities
Modern airline retailing attempts to make the customer payment experience as seamless as possible. Accepting a wide range of payment forms (including mixes of loyalty points and cash) and enabling the newest generation of payment types (including buy now, pay later options) reduces checkout abandonment. Customers can also be steered to payment methods that grant the airline lower fees and shorter settlement times. Selection of allowable payment methods might be tailored to the customer’s risk profile. Refunds will be automated, and back-end auditing can be enhanced by AI-enabled fraud detection.
New payment management approaches are fundamental to the future of retailing. They could eventually enable other potential use cases, such as corporate contract management and execution.
How can airlines make high-performing airline retailing take flight?
Many airlines have yet to embark on their retailing journeys. To adopt effective retail approaches, airlines often need to address a few common obstacles: technology, organizational data, and mindsets.
Update technology
Airlines’ existing technology systems have often served them well over a long time frame, but they sometimes lack crucial capabilities that enable modern retailing techniques. This can lead to, for example, static pricing and a limited range of offers. Newer technology platforms can aid in the creation of bundled offers and dynamic pricing. Customer relationship management software can generate a comprehensive and evolving view of the customer. Order management systems based on ONE Order can provide airline employees with a single source of truth. Integration with partners—including through NDC and payment gateways—can be seamless. All these capabilities are brought to their full potential when coupled with a foundational data layer that can connect individual software solutions from different vendors.
Break down organizational silos
Effective retailing becomes difficult when business units aren’t coordinated in their efforts. New technology solutions can only reach their full potential when accompanied by proper ways of working. These retail-inspired business processes will feature cross-functional collaboration (for example, a single order management team that includes a wide range of functions, such as pricing and revenue management, sales, and others), agreed-upon KPIs, and full integration with frontline teams to ensure implementation at the airport and on board the aircraft.
Change mindsets
Airlines might not view themselves, at a fundamental level, as retailers. To become a truly commercial, consumer-facing business, airlines may need a mindset shift. An effective retailing approach might incorporate product-based teams that integrate expertise from multiple commercial domains—including ancillary, loyalty, and digital marketing—and are staffed with cross-functional talent with experience working in different commercial domains. In an industry that has traditionally focused on forecasts and business cases, it might be challenging to adopt a test-and-learn mindset, but it’s crucial to shift toward a more agile approach that facilitates cross-functional collaboration, open sharing of ideas at every stage, and a willingness to start small and iterate quickly.
Preparing for takeoff: How can airlines get started with high-performing retailing?
Many airlines still conceive of their efforts to capture the retailing opportunity as technology or distribution projects. But what’s required is a comprehensive technology and business transformation. While many airlines look to the industry to define pathways, opportunities for value capture will be specific to individual companies.
Airlines can embark on a retailing journey by, over a period of several weeks, performing capability diagnostics, assessing technology strategy, estimating the size of the value at stake, and determining the realistic investment needed based on current maturity. But this first phase of transformation isn’t merely evaluative. It can also deliver approximately 10 to 20 percent of total value by capitalizing on near-term use cases, including integration of additional payment forms and implementation of personalized ancillary upsells (for instance, bag checks and seat upgrades) based on multisourced insights.
This multihorizon approach can allow an airline to realize near-immediate value, provide proof of concept, and help fund the remainder of the transformation using the proceeds of early successes. In later phases, airlines can realize more complex capabilities, including fully dynamic bundling of flights, ancillary items, and third-party products across all channels, with self-service enabled for more than 90 percent of use cases. Moving quickly through these stages can help airlines avoid getting bogged down in planning (and needing to catch up on value that was lost during years spent getting to a decision) before delivering the first dollar of revenue.
By leveraging modern systems and data-driven strategies, airlines have the potential to enhance customer experiences, maximize revenue streams, and achieve significant EBITDA gains. This will require a full business and technology transformation involving technology platforms, ways of working, and organizational mindsets. But tackling this transformation in phases can ensure quick wins that can bolster credibility and support further investment. The future of airline retailing is full of potential, and organizations that act decisively could outpace their competition.
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