Why Customer-Centric Airlines Will Lead The Industry
Today, there is a bit of a disconnect between airlines and their customers. Airlines don’t always appear to have a clear view of what customers want and when they want it. However, a unique customer-experience strategy can help bridge that gap, as well as grow revenue, reduce costs and create a bond with customers.
During the last 100 years of commercial aviation, the industry has changed significantly. Unfortunately, that change has resulted in some disconnect between airlines and their customers. The airline customer experience has become known for its lack of knowledge and understanding regarding customer needs and willingness to pay for what they want.
Despite investments, strategic planning and good intentions, the airline industry consistently struggles to meet customers’ expectations of the sales and service experience. Competitive pressures, evolving business models and volatile market conditions have dictated when and where a carrier must make trade-off decisions to maintain both operational execution and profitability. As such, innovative customer-experience initiatives often drop down on the priority list.
Sabre Airline Solutions® has explored the deterioration of the customer experience, the disconnect between airlines and their customers, and the real opportunity that exists to reverse that trend. To differentiate, gain market share, optimize profitability and create long-term loyalty, a carrier must properly invest in and execute its unique customer-experience strategy. Investment in strategy execution and organizational readiness through talent and technology has proven economically lucrative in many industries, and the airline industry is no different.
Because many other service-providing industries have made the first investments in the customer experience, customers are now more informed about what’s possible and, therefore, have only recently come to expect more from their airline experience.
Executing a unique, customer-centric strategy is an impossible task if a customer’s experiences, preferences and behaviors are not known at an individual level by the airline. Without the requisite data and a subsequent complete view of the customer, a personalization initiative is merely an automation of internal guesswork. Not only do a carrier’s disparate data silos (passenger name record, electronic ticketing, check-in, shopping analytics, purchase behavior, social media influence, baggage, in-flight, customer relationship management, loyalty, etc.) contain a history of customer touchpoints and a 360-degree view of activity, new customer data is flowing in all the time.
Customer Satisfaction With The Air Travel Experience
A recent survey conducted by The Economist Intelligence Unit unveiled that more than 80 percent of airline executives believe that customer satisfaction has increased, while more than 65 percent of customers feel the air travel experience has stayed the same or decreased.
Without data-driven personalization, customers are left feeling like the airline doesn’t know, or care to know, who they are and if they are important. Carriers today are unable to access and aggregate data, make insights and take action within the context of an individual’s travel journey, using their current technology. It is costly, and some say logistically impossible, to sync these data systems in real time into a single view of the customer.
Sabre Airline Solutions has explored the complexities and challenges of the airline-data problem, and it offers possible solutions. Though the “silver bullet” remains elusive, industry leaders can agree on one thing: the carriers that can harness and act on their customer data will truly understand their customers and consistently outperform their competitors in a virtuous cycle of personalization, profit-margin growth and long-term customer loyalty.
The Airline/Customer Disconnect
A company’s market share and earnings, in most industries, is directly correlated with the quality of the overall customer experience. While research shows that the airline industry follows a similar metric for success, many carriers have been unable to cultivate the organizational prioritization and subsequent time and capital investment necessary to execute a comprehensive customer-experience initiative.
Historically, industry profit margins have been so thin that non-core initiatives became very challenging to implement. Industry influences such as deregulation and increasing global competition have pressured airlines to shift their product to an unbundled, à la carte offering. Instead, strategic focus has been on load factor to offset pricing power, operational efficiency, RASM (revenue per annual seat mile), fuel burn, staff reduction and other cost-cutting measures that have slowly deteriorated the once-prominent focus on the customer.
According to one study, the airline industry ranks in the bottom 4 percent in customer satisfaction. The top industries in customer satisfaction include e-retailers, automobile manufacturers and smartphone manufacturers. The industries that customers are least satisfied with include mortgage lenders, Internet service providers and ... airlines. The trouble is, many airline executives are disconnected from their customers’ expectations.
The Economist Intelligence Unit and Sabre Airline Solutions recently released a special report analyzing the results of a comprehensive airline industry survey on the topic of customer experience. According to the survey, 81 percent of airline executives believe that customer satisfaction with the air travel experience has somewhat or significantly increased. However, 66 percent of customers believe it has stayed the same or decreased.
Airlines do not have full control over certain negative experiences such as disruptions to airport operations and service. They can, however, move a step beyond the basic customer-service and customer-interaction tactics into a next-generation model of a data-driven customer experience that focuses on personalizing an airline’s offerings to a specific individual.
Would You Recommend This Airline?
Promoters Versus Detractors
Net Promoter Score divides consumers into three different categories — promoters, detractors and passives. Who fits into these categories is determined by the response to a simple question: “Would you recommend this airline?” Promoters clearly give a strong “yes,” while detractors respond with a firm “no” and passives are on the fence.
Airline Revenue Opportunity
Customer-experience investment is no longer a theoretical aspiration created by marketers and consultants, but rather the single most lucrative and measureable growth investment opportunity in the airline industry today. Airline leaders are beginning to sit up and take notice of the success that other industries have enjoyed in this area.
In recent years, multiple studies have revealed significant, measureable value with customer-experience investment in the airline industry. A recent study by 3IBM states that with an investment of US$34 million in a customer-experience project, a large carrier will be fully paid back within 16 months. After the first five years, the approximate total benefit would be US$582 million. This is a truly staggering figure considering the many other types of investments the airline industry has tried in failed attempts for innovation, differentiation and customer loyalty.
A number of metrics and frameworks can be used to benchmark a carrier’s gains in the customer experience. Year-over-year revenue growth is a great place to start, but customer-experience metrics can be taken a step further. Measuring aggregate customer sentiment and its subsequent effect on the profitability of an airline is more of a science than ever before.
For example, Net Promoter Score® (NPS) has been proven in many major industries to be the most accurate and trusted metric globally. Research conducted by top global consulting firms rank each major industry in terms of a customer’s sentiment toward a product or service experience and its subsequent correlation to revenue growth year over year. NPS is calculated by surveying a given customer base and asking one simple question: “Would you recommend this airline”?
The NPS survey segments customers into three categories — promoters, passives and detractors. Promoters are those who respond with a score of 9 or 10 to the recommendation question, and are considered loyal enthusiasts. Studies have found that promoters tend to talk to more people, but conversion rates are relatively low. This is especially true when it comes to prospective customers who are shopping for a flight. Those searching for a flight tend to be less likely to convert based on an airline brand recommendation from a friend, as opposed to a recommendation for another type of consumer service, such as a bank or coffee shop.
Revenue Growth And NPS For US Airlines
Outpacing The Competition
On average, companies with the highest Net Promoter Scores achieve revenue growth two-and-a-half times that of the competition. During the last 10 years, airlines with a growing NPS have achieved subsequent topline growth of 5 percent to 15 percent.
In contrast, detractors are those who respond with a score of 0 to 6 and are generally dissatisfied. They typically talk to less people, but conversion rates are higher because the group tends to seek out willing listeners or those who are more likely to act upon the information. In other words, those who are connected socially trust negative information significantly more than positive, which can be dangerous for a service-providing industry.
Why is NPS the most accurate metric for the airline industry? The majority of the 33 industries studied, unsurprisingly, showed significant correlation of revenue growth to NPS growth, with most at 0.70 or higher and 1 being a perfect correlation. The airline industry has one of the highest at an impressive 0.89.
Historically, companies that hold the highest NPS average revenue growth two-and-a-half times that of the competition. Airlines with a growing NPS have seen subsequent top-line growth of 5 percent to 15 percent during the last 10 years, outpacing the competition.
Reducing Airline Costs
A customer-experience investment isn’t undertaken exclusively to grow revenue; it also reduces costs and creates greater organizational efficiency. Referral economics is the framework used by NPS to measure the value of promoters. Airlines can use this framework to reduce costs by growing the percentage of promoters and reducing the number of detractors in their respective customer bases. Though the classic scenario of a customer referring a friend to become a customer of an airline is less prominent than in other industries, it is still highly lucrative for an airline to have a high percentage of promoters in its customer base.
Promoters are great customers to have for a few reasons. They have higher average annual spend and retention rates. Across service-providing industries, a 2 percent increase in customer retention has the same effect as decreasing costs by 10 percent. Promoters also tend to complain less and show less sensitivity to price changes, leading to longer-term loyalty and further reducing customer acquisition costs. A study by Bain & Company estimates that it costs six to seven times more to acquire a new customer than retain an existing one. This is significant for an industry that focuses heavily on acquisition and conversion. Also, new customers gained as a result of a promoter’s efforts are more likely to become a promoter themselves, and the virtuous cycle starts all over again.
Mid-Sized International Carrier
From Detractor To Passive
A mid-sized international airline could improve total customer worth by US$227 per customer merely by changing a detractor to a passive through an improved customer experience. If the airline carried more than 30 million passengers in a year and converted just 2 percent of its detractor customers to passives, it would realize a US$31.8 million increase in total customer worth.
Just as promoters are less likely to complain to the airline about issues, detractors exhibit the opposite behavior. Complaints directed at airlines on social media are at an all-time high, forcing labor-cost increases that are being felt by carriers of all sizes and business models. Call-center and airport staff are, therefore, less productive when dealing with a customer base that has a high percentage of detractors.
As previously stated, the airline industry’s NPS-to-revenue correlation is nearly perfect. As such, any point shifts in an individual customer’s NPS or an airline’s aggregate NPS have significant revenue and cost implications.
A recent study by the Sabre Airline Solutions consulting practice shows that a mid-sized international carrier could improve total customer worth by US$227 per customer simply by shifting a detractor to a passive through an improved customer experience. Passives are customers that respond to the recommendation question with a score of 7 or 8, but are not necessarily enthusiastic about the product. If the airline carried more than 30 million passengers in a year and converted just 2 percent of its detractor customers to passives, it would realize a US$31.8 million increase in total customer worth.
A carrier with a low NPS has a customer base that is not loyal to its brand. At all levels of value, this leaves customers with a low brand-switching threshold, again, leading to higher acquisition costs. A customer could be one bad experience away from choosing a competitor and not returning. Improving NPS has real margin implications for airlines and, over time, this cross-industry success metric will become even more significant for airlines as customer-experience investments become the single most important airline differentiation opportunity globally.
Customer Experience Pendulum
In recent years, many airlines have shifted their business models from a high-value, fully bundled product offering to a stripped-down, fully unbundled product offering, leaving customers frustrated and less loyal. As a result of this negative trend and the impacts it has on airlines, 97 percent of airline executives plan to invest in technology to personalize the experience for their customers in the next three years to help swing the pendulum back toward the right direction.
Investing in and measuring the customer experience are key foundational steps to transforming an airline’s bottom line. Personalization is the mechanism by which best-in-class service providers drive an elite customer experience and promote customer loyalty. Delivering a personalized experience to an air traveler throughout his or her journey is a tricky endeavor. A fine line exists between making personalized offers and overwhelming the customer with advertisements and notifications.
A balance must also be struck between strategically growing ancillary revenue and providing value-added services, such as service recovery and other reactionary-type activities. The customer experience is, therefore, the sum of all experiences and not just ancillary offers. This includes value-add perks, such as complimentary services or gifts during a service recovery, value information about a destination, and other proactive, personalized offerings. This is unlike the opinion of airline customers today: offers being viewed as a penalty for specifying their preferences to airlines. That is an important distinction that market-leading carriers must understand.
Best-in-class service-providing industries offer highly personalized, timely and contextual customer experiences. When a customer scans a loyalty card at a coffee shop, uses his mobile banking app or calls his entertainment provider, the respective service providers immediately know the customer’s name, his value to the company and his preferences for the consumption of the particular products. Product offers and proactive and reactive service can then be tailored specifically to that individual. This is the level of personalization that the modern consumer, and high-value traveler, expects.
For airlines, this creates a negative return on expectation, as is highlighted by The Economist Intelligence Unit. Customers have begun to prefer and expect these personalized experiences, and airlines have not kept up with the trend. They have instead allowed the pendulum to swing from a high-value, fully bundled product offering to a stripped-down, fully unbundled product offering, seemingly overnight. Customers have reacted with more frustration and less loyalty.
Personalization, however, is what customers expect, and this increases their loyalty. Industry leaders are beginning to take notice of these recent negative trends and adjust their strategies. In fact, 97 percent of airline executives will invest in technology during the next three years to personalize the experience for the customer; and for good reason, because 92 percent of those airlines plan to monetize that investment with subsequent ancillary revenues.
Technology now exists to support these ambitious, strategic initiatives. These new initiatives offer ways to create and monetize value for the customer, increasing loyalty and expanding the airline’s touch and influence throughout the traveler’s journey.
An airline’s full-journey dialogue with the customer will only become more important as smartphone penetration increases and airports progress toward a no-touch environment. With the smartphone mobile channel, airlines now have a greater ability to create contextual dialogue with customers, thereby significantly influencing the revenue potential throughout the full journey.
The Data-Driven Customer Experience
Throughout each step of the customer journey, there is an exchange of data between the traveler and the airline. The reservations system’s view of each interaction phase, powered by the data input by the traveler, acts in near real time to facilitate con¬textual, multi-channel dialogue to execute sales and service through the full journey.
Personalization And The Airline Data Problem
Carriers that are able to provide a fully personalized experience to their customers throughout each phase of the travel journey will have successfully created a differentiated offering in a generic marketplace. Facilitating a personalized dialogue with the traveler within the context of the journey requires seamlessly integrated technology that operates in near real time. Mobile is a convenient and effective avenue that can be used to facilitate that personalized dialogue.
“Third-party mobile apps are not optimal due to internal airline systems still speaking a different language,” said David Cush, president and chief executive officer of Virgin America.
However, a bigger challenge than system integration across the extent of the journey is enabling the carrier to actually see the full journey. A 360-degree view of the customer creates a greater degree of intelligence that allows airlines to offer a unique, personalized experience based on a customer’s past behaviors, interactions and stated preferences. These preferences and behaviors can then be used to predict, and ultimately influence, the customer’s future buying behavior.
The aggregation, analysis and real-time actioning of customer data is needed to create this personalization.
“The challenge is making that data come alive, so we get a better picture of the individual customer,” said Jeff Foland, United Airlines’ senior vice president of marketing, strategy and technology.
Roughly, a terabyte of customer data is floating around at any given time within a large carrier’s systems. The velocity, variety and volume are growing as airlines’ scale and consumer technology continues to expand and evolve. Structured data has been increasing at a significant, but predictable, rate ever since reservations and check-in systems came online decades ago. Conversely, unstructured data, including campaign responses, customer relationship management information, agent interactions, shopping analytics, buying behavior patterns and, of course, social media data, has grown exponentially in recent years. Even with this significant growth, the costs of storing and processing data in the industry has dropped. A lower-cost barrier effectively gives the go ahead for airline leaders to begin aggregating and actioning their customer data.
With at least 20 disparate data sources within most airlines and some larger carriers housing 50 sources or more, a single, comprehensive view of the customer is a highly complex and expensive undertaking for an in-house project. Most airlines and regions of the world lack the abundance of talent and skill sets necessary to build a single system that compiles all customer data points.
Relatedly, a customer-experience program architected with disparate technology solutions requires costly integration for setup and regular recalibration over time to stay in sync. The ideal solution to this complex business challenge is a seamless customer data environment that is fully integrated with all systems involved in shopping, reservations, check-in and the many other steps of the customer journey. Seamless technology in a central data hub within an airline’s reservations system could aggregate these data-creating systems into a comprehensive view of the customer that can be used to execute business rules, making airline system integration a problem of the past.
Opportunities For Differentiation And Loyalty
Traditional loyalty programs have proven to be, at minimum, insufficient for creating customer loyalty to an airline brand. In reality, customers are more loyal to the loyalty program itself, rather than the airline. As soon as a more beneficial “spend-to-points” ratio or “fly 15 segments, get one free” program comes along, most customers will consider switching. Unlike a weak loyalty to a particular airline’s unique ancillary product catalog or a temporary loyalty to a price advantage, serving the customer with “right dialogue, right time” personalization creates true, long-term customer loyalty.
Today, high-value customers are not truly loyal to any one carrier; they are frustrated and confused by their airline experiences based on the expectations set by other industries.
During the next three to five years, the first movers among airlines in data-driven personalization will quickly become the differentiated market leaders. Once the high-value, non-loyal travelers are introduced to their first truly personalized customer experience, their true loyalty will, for the long term, be secured with their new airline brand of choice.