The Journey To EMDs
Facilitating Ancillary Growth Through Successful EMD Implementation
Ancillary revenue has become the difference between barely surviving or thriving in an increasingly competitive aviation market. Ancillary revenue growth during the last decade has forced airlines to re-evaluate their strategy of this once-forgotten revenue line item and come up with creative new products to increase this growing revenue pipeline. With a renewed focus on ancillary revenue, the need to efficiently distribute, sell, measure and make strategic decisions became acute. For airlines, Electronic Miscellaneous Documents (EMDs) provide the way forward. However, the journey to transition to EMDs requires deliberate, strategic and measured steps to ensure it ends in quantifiable incremental revenue.
In this era of personalized experiences and access to information, airline customers are making choices regarding the products and services for which they are willing to pay. According to the 2013 Yearbook of Ancillary Revenue, ancillaries have more than doubled from US$13.5 billion in 2009 to US$31.5 billion in 2013, and they make up nearly 40 percent of total revenue for some low-cost carriers.
Full-service carriers also saw their share of ancillary revenue per passenger grow with “smart” products and aggressive marketing targeted to capture their customers’ interest.
In response to this growing trend, many airlines have begun leveraging information gleaned from EMDs in real time — both to improve the customer experience and loyalty, as well as boost profitability.
Analyzing this incredible trend, there are at least a couple of primary explanations for the growing ancillary trend:
- Low-cost carriers that offer unbundled pricing and à la carte services make up a quarter of the global capacity. Some of these carriers have been remarkably innovative in developing and introducing enticingly affordable “weekend” and “getaway” deals to the growing middle-class population while recuperating their revenue by strategically pricing their ancillary products and services.
- The once-rigid lines of differentiation between low-cost carriers and network carriers have become blurred, partially due to the expanded international reach of low-cost carriers. This makes it difficult for traditional network carriers to distinguish themselves from their low-cost competitors. In addition, as part of the unbundling movement, many traditional network carriers began charging fees for various popular items, such as baggage, seat selection and meals, that had previously been part of the fare.
Ancillaries Critical To The Industry
In a recent IATA forecast, fuel efficiency, consolidation and robust passenger demand are all key in driving up profits. However, ancillaries are particularly critical. On a per-passenger basis, they are greater than the US$5.94 per passenger profit airlines are expected to earn this year.
The introduction of EMDs facilitated the latter — charging for bags, seats, meals, etc. — by increasing operational efficiencies, because now airlines can sell ancillaries at the same time as the ticket sale and track the ancillary and additional revenue. They have also enabled additional distribution channels for these products and services and fostered technological innovations to provide greater customer experience through incremental product offerings.
Not surprisingly then, most of the world’s leading airlines have invested substantial resources to convert their non-database ancillary documents to EMDs, which can be accessed, purchased and tracked in real time by airline passengers.
The transition to EMDs is an involved process similar to the industry’s migration from paper flight coupons to electronic ticketing using virtual coupon records (VCRs), which had an impact on all major departments within an airline.
In recent years, the consulting team at Sabre Airline Solutions® has worked with several airlines to help develop their ancillary strategies and analyze the impact on their business as they transition to EMDs, ensuring the necessary elements for this transformation are present across the airline. Based on this experience, there are several key aspects of a successful EMDs transition, including:
- Ancillary strategy,
- Organizational structure/aligned incentives,
- Simplify and standardize,
- Avoid false promises.
Several traditional network carriers charge fees for a variety of items such as baggage, seat selection and meals. The unbundling of these ancillary items has made it difficult to differentiate between network carriers and their low-cost rivals.
Airlines realize that brand integrity and passenger experience are critical to customer loyalty. However, many carriers still rush to introduce ancillary products without first carefully studying and thoroughly understanding how these products align with their brand and their impact on each individual’s travel experience.
Often, the race to introduce ancillary products and services is a response to economic and competitive factors. Under such circumstances, an airline may offer an overwhelming number and variety of choices to its passengers, hoping something will catch their attention.
The ease of marketing and selling ancillary products via EMDs has enabled carriers to more quickly launch a product without thinking through the implications of brand alignment with the products offered. For example, if a luxury airline starts selling drinks onboard, it likely diminishes its brand and tarnishes its reputation as a luxury carrier.
In fact, some major carriers involved with the introduction of ancillaries have now come full circle, from bundling ancillary products and services, to unbundling them, and then finally to offering something of a hybrid solution. To be successful, ancillary strategies must be created with the customer’s needs, as well as the carrier’s corporate brand, in mind.
Organizational Structure/Aligned Incentives
Some airlines already have a solid organizational structure in place, encompassing product development, alignment, implementation, and tracking and monitoring functions. These carriers only have to review their current resources to ensure the expansion of ancillary products and services can be supported by current resources (or additional resources can be added to support the growing revenue line).
Generally, these airlines have well-established product offerings with aligned incentives across all groups. They know their passengers and, in turn, their loyal customers understand the carrier’s rules and product policies.
In addition, all airline departments know how to sell these products, and they have standard operating procedures in place to respond during severe operational disruptions.
On the other hand, many carriers simply add the ancillary product implementation as an additional task to one of the departments without clearly establishing processes and procedures to strategize, create, coordinate, implement and track new product offerings. In such cases, carriers do not realize any significant revenue benefits from implementing EMDs.
Developing appropriate organizational structure does not always mean employing additional people. Sometimes it means re-evaluating and redistributing workload more effectively, as well as utilizing human resources more productively and eliminating redundancies within the current organization.
Once the organizational structure has been defined, it is critical for all employees to work toward the same objectives based on the airline’s strategic mission and vision.
In many instances, various departments within an airline have disparate and sometimes conflicting goals. A call-center agent, for example, may be incentivized based almost exclusively on the number of calls he or she handles to minimize costs, pushing an agent to solely focus on the number of calls handled rather than revenue generated by each call.
Meanwhile, the sales organization is given incentives to increase revenue, expecting agents to push more products during their calls to maximize revenue. However, this method extends the length of calls and reduces the total number of calls handled in the same period.
Depending on the reporting structure, the contact center and sales leaders may be working toward opposing goals.
While each department within an airline can have different goals and corresponding key performance indicators (KPIs), alignment across the organization is critical. Additionally, an agent incentive structure should also include some measurement and accountability in reaching these goals.
Additional Distribution Channels
Electronic Miscellaneous Documents provide airlines with additional distribution channels to sell ancillary products and services, such as checked baggage, meals and seat selection, which travelers can select at the same time as the purchase of tickets.
One of the most critical factors in the development and implementation of a successful ancillary strategy via EMDs is communication.
Change can be a difficult, complex process, especially in highly regulated industries such as air transportation. Thus, regular, direct communication regarding impending changes as a carrier moves to EMDs is vital. If employees understand the purpose and benefits of the proposed changes, not only will they collaborate, in many instances they will help drive the changes.
Unfortunately, customer-facing employees are sometimes the last to be informed of procedural or technological changes. However, these employees are the critical link between an airline and its customers. They often have a better understanding of customers’ needs and expectations, as well as their carriers’ operational limits. Early inclusion of frontline employees in the communications process is vital for a successful EMDs implementation.
Moreover, honest, timely and open communication within an organization is necessary to ensure that alignment is maintained and adjustments to the strategy can be made in a timely manner as challenges in the move toward EMDs arise.
Simplify And Standardize
Opening additional distribution channels is another way carriers are trying to boost their ancillary revenue. This requires effective internal communication and agent training around policies, as well as a clear strategy for pricing and selling. Sometimes carriers intentionally establish different product policies based on various channels.
For example, a passenger checking in for a flight within 24 hours of departure time could select a seat for free through an online check-in channel, while another passenger purchasing a ticket within 24 hours of departure through the call center may be forced to pay a seat-selection fee.
While such tactics of differentiated pricing are valid, the actual implementation of those policies should be weighed against potentially reduced operational efficiency for the airline and almost-guaranteed consumer confusion, not to mention angst and dissatisfaction.
Since ancillary products are filed with business rules for the purpose of EMDs ticketing, even the entire exercise of filing product pricing presents an excellent opportunity for airlines to evaluate their existing products and services with policies and procedures for relevancy. They should eliminate ancillary offerings that are no longer relevant to their business and standardize policies and procedures whenever and wherever possible.
Simple and standardized policies are easier to communicate, understand and remember, both by airline employees and customers. Passengers are more likely to fly a carrier they perceive as honest and fair as opposed to one whose policies are confusing and assumed to be unfair.
EMDs have clearly made it easy for airlines to quickly market and sell new ancillary products and services. However, airlines must be cautious not to launch certain ancillaries before thinking through the consequences to their brand. A luxury carrier, for example, will quite possibly tarnish its brand if it starts charging for onboard beverages that had previously been part of the ticket price.
Avoid False Promises
When a carrier introduces an array of ancillary products and services to increase revenue, it must be able to successfully deliver these ancillary offerings. Failing to effectively execute an ancillary strategy may be perceived by unhappy customers as false promises.
For instance, a passenger who has paid for priority baggage delivery will not accept reasons such as a broken conveyor belt, an employee work stoppage or an equipment change. In the best-case scenario, the carrier may only lose revenue from this product by providing a refund to the passenger. However, in the worst-case scenario, the carrier may lose the passenger’s business completely.
Because EMDs are live documents attached to a passenger’s journey, it is intimately tied to an airline’s operation. Particularly during a situation of irregular operations, a carrier must have stable operational procedures and robust business processes in place to successfully handle EMDs and its impact on the guest experience. An inability to handle such situations may result in substantial revenue loss as well as negative media and publicity.
An Airline’s Lifeline
Ancillary revenue has become a lifeline for today’s competitive airlines. Due to the International Air Transport Association’s industry mandate, carriers are rapidly moving toward EMDs, which has eased and significantly reduced the time it takes them to market, sell and monitor ancillary offerings.
However, the migration of airlines to this new ticketing functionality involves more than simply filing prices on a database. Changing the “how” should be followed by a series of internal discussions regarding the “what,” “to whom,” “for how much,” as well as the “where.”
Such discussions provide a unique opportunity for carriers to examine the current strategy as well as tactical practices and procedures to help determine who they are and where they want to be long term within the aviation landscape.