Smart Commercial Planning
Staying Agile and Innovative Requires Vision, Intuition and Enhanced Analytics
A perspective on different approaches to commercial planning, coming from within and outside the airline industry, can help airlines compete more effectively in a hyper-competitive 21st-century marketplace where tech-savvy customers are demanding and receiving a greater number of options not just in price and service, but in ways to quickly and conveniently generate and access their full range of choices.
Due to the sheer complexity of the airline business and uncertainties that naturally arise in this always-hectic business environment, commercial planning within the airline industry has always presented a substantial challenge.
But in recent years the challenge has grown even more severe, largely because of essential factors including increases in government regulations and intervention, as well as the state of economies and developments in the political sphere.
To cite a few examples, there has been:
- An increase in competition involving new and powerful airlines, but also involving new players in the distribution space;
- An increasingly commoditized marketplace;
- A changing makeup of customers (for example, the millennials and “digital natives” who have a tendency toward attitudes of impatience and intolerance of mistakes and technological defects, as well as the new middle classes in emerging markets) and those customers’ expectations in relation to customer experience, brand, loyalty schemes, ease of shopping and transparency with regard to marketing offers;
- An upheaval brought about by the ubiquitous presence of the Internet, social media platforms and personalization apps.
On the flip side of the equation, however, new opportunities in commercial planning have also come into play.
These opportunities tie directly to new technologies involving greater realms of information, communication and integration, in addition to airlines’ expanding experience in:
- Merchandizing to grow revenue, differentiate businesses and products (to retain existing customers and acquire new customers), and build loyalty to develop pricing power and increase market share;
- Establishing increasingly successful virtual networks, as exemplified in international operations by Virgin Australia’s partnerships with Air New Zealand, Delta Air Lines, Singapore Airlines and Etihad Airways;
- Developing dual brands such as those introduced into the marketplace by Qantas Airways, Singapore Airlines, Virgin Australia and Air Canada.
In light of both severe challenges and exciting opportunities, success in commercial planning now requires much more innovation and agility.
For example, innovation is necessary to develop new products and services (surrounding the core product) that provide a higher profit margin for an airline while at the same time enhance the travel experience for customers. It also enables an airline to remain agile in the ability to adapt quickly with regard to the dynamics of the marketplace.
This new mandate in commercial planning, incorporating innovation and agility, requires sophisticated and integrated real-time planning systems, processes, techniques, analytics and metrics, accompanied by a vision and a shift in the mindset:
- From operations, product and process centricity to customer centricity;
- Toward strategic partnerships with technology providers to implement and distribute customer-centric products effectively;
- Creating a balance in focus between analytics- and intuition-based planning, based largely on the realization that many areas of competitive behavior are new, with little historical information to analyze.
All these items point to the need for a different mindset. And this mindset must incorporate vision-focused commercial planning, systems and processes that can provide a complete view of targeted customers, as well as a suite of comprehensive, integrated planning techniques that enable planning in real time.
Real-World Insights from Other Businesses
Good examples can be found in the marketing streams of various industries.
In the rapidly moving, ever-changing fashion industry, think about these principles in relation to Zara’s innovative Spanish-based, internationally acclaimed supply chain management, with its agile planning processes and its incredibly insightful understanding of targeted customers, bringing new styles and “fast-fashion” items to its stores while that specific fashion trend remains at or near its peak.
Netflix, an entertainment business, through streaming, enables customers to see on-demand movies and TV shows, commercial free, on Internet-connected screens (televisions, computers or mobile devices), including personalized, rank-ordered recommendations.
And when further contemplating effective incorporation of innovation and customer centricity in the planning process, another excellent example comes from Amazon, with its strategic thinking and logistical philosophizing around the idea of using drones to offer a realistic same-day-delivery option to its customers.
Let’s begin the airline discussion with two critical components of airline commercial planning that impact all other areas: networks and schedules.
Future Mobile Travel Experience
Wearable technology, such as the Apple Watch and Google Glass, is the latest in mobile technology that can be worn rather than carried. This advanced technology is expected to enhance the travel experience with its real-time interactive communication capabilities.
The Network/Schedule Equation
While past network- and schedule-planning exercises have relied more heavily on the rigorous application of sophisticated analytical models, operations-research techniques and forecasting processes (such as Quality of Service Index, or QSI) and less on intuition, it’s essential to bear in mind that all viable solutions could change in the future as uncertainty intensifies in the areas of regulatory policies and the state of economies.
Having taken due note of that caution, then, it’s useful to observe the intuitive lessons that abound from fairly recent airline history. What, for example, might have been the role played by sophisticated network and market-share models as opposed to pure vision and intuition in the following instances?
- Emirates made a strategic decision to offer double-daily service between Dubai and Mauritius, flying Airbus A380 aircraft in both directions.
- Turkish Airlines implemented a strategy to offer service from its hub in Istanbul to approximately 40 destinations in Africa.
- Norwegian Air Shuttle made the decision to offer transatlantic service between the United Kingdom and the United States, competing not just on lower fares, but also using marketing initiatives through social network platforms.
- WestJet initiated a strategy to offer one-stop service between Canada and Ireland.
- Vueling Airlines’ investment to develop a brand that is perceived to offer more premium service features than the other major European low-cost carriers (LCCs).
These strategic decisions are, of course, independent of one another, having been debated and carried out by individual airlines. And they all illustrate that smart commercial planning requires not only sophisticated models, but also vision and intuition.
The models must also take into consideration, for example, new dimensions in service, such as those provided by:
- Airlines-within-airlines (Qantas/Jetstar, Singapore/Scoot and Air Canada/Rouge),
- Virtual networks via strategically aligned partners (Emirates/Qantas),
- Virtual networks via strategically aligned partners in conjunction with possible codeshares in a traditional alliance (Etihad).
Drilling down further within scheduling, the necessity to decide on the correct balance between capacity and expected demand has become even more challenging, literally involving various levels and disparate types of uncertainty.
For airlines with a mixed fleet, to some degree it has been possible to adjust capacity 30 to 45 days prior to departure, to either accommodate extra demand or reduce spoilage through the processes of demand-driven dispatch and close-in refleeting.
And today, with dynamic merchandizing, there are even more possibilities to increase revenue per customer, given that load factors are already very high. By including ancillary revenue and loyalty in the revenue-optimization process, the fleet/schedule combination can be adjusted much closer to departure, to better match capacity to demand.
Again, this aspect of planning requires the use of close-in-refleeting techniques in addition to a totally integrated revenue optimization model in which optimization is based not just on inventory and price, but also on ancillary revenue and loyalty based on dynamic and contextual basis.
Then, for the day of departure, smart commercial planning must be based on proactive service-recovery systems and processes that are incorporated into an airline’s network operations center.
Visionary technology will enable an airline to undertake scenario planning well in advance of an irregular operation, and produce optimal solutions for the crew and aircraft movements, and for the strategic groups of passengers. All functions and communications within an airline’s operations department must be fully integrated to “connect the airline” to deal with short-term disruptions in real time.
Connect The Airline
Irregular operations are now almost regular operations. As such, all functions and communications within an airline’s operations department must be fully integrated to “connect the airline” to deal with short-term disruptions in real time. It is the elimination of breaks in the connectivity (the dotted-line in the figure) that will enable an airline to reduce costs and increase revenue through an increase in customer experience. Keep in mind that creating a demand-driven schedule is one thing.Executing it in real time is another.
The New Network/Scheduling Horizon
Clearly, within network and scheduling, on every flight an airline now competes on price and service delivered by the brand, as well as ancillary revenue generated by context-based offers that enhance the customer experience.
So the network must be optimized to fulfill the stated and unstated needs of targeted current (and future) customers.
The object within smart commercial planning is to optimize revenue per customer, not revenue per seat, while building the brand and loyalty.
Smart commercial planning must therefore enable an airline to adjust price and service levels to not only meet market competitive dynamics, but also brand promises and expectations. Moreover, the network- and schedule-planning systems must enable an airline to take into account the revenue from cargo.
Defining an airline’s network and strategy lays the foundation for other key strategic decisions relating to fleet, products, partners (alliance or equity) and distribution.
Distribution And Its Changing Dynamics
The distribution sphere, as a good example, has been changing very rapidly.
First of all, LCCs and airlines from emerging markets have been growing swiftly, and they are both now aiming for a larger portion of the corporate market.
Second, new third parties have begun to synthesize vital information on customers, insightful information that could be sold to airlines.
Third, the application and effectiveness of digital advertising has been steadily increasing.
And fourth, the metasearch landscape has been migrating from more of a pure marketing platform toward direct incorporation into the distribution channel.
Considering the context of all these developments, it might well be effectively argued that the term “distribution” should be changed to “selling.”
It can quite safely be said that within the changing “distribution” landscape, some airlines are developing a tight focus on direct “selling” by synthesizing capabilities to offer the right product to the right customer at the right price at the right time, and in all events through the right channel.
To achieve such a distribution-strategic goal requires the capability to engage with customers at different touchpoints through mobile technology and make situation-based offers to individual customers, as well as possibly, targeted on-line and off-line agents.
Airline Tests Wearable Technology
Early last year, Virgin Atlantic, in collaboration with SITA, became the first airline to test how the latest wearable technology, including Google Glass and the Sony SmartWatch, can best be used to enhance customers’ travel experiences and improve efficiency.
Further Important Considerations
Then there is the question of the cost of customer “acquisition” and “retention.”
These efforts require specific and holistic customer insights that can only come from knowledge of customer identification and establishment of comprehensive data profiles that, in turn, are developed from historical transactions and dramatically transformed customer relationship management, as well as dramatically transformed loyalty schemes.
Consequently, the need to create and present a personalized offer is easy to envision but difficult to execute, as it requires a deep understanding of customers (that is, of their preferences, as well as their value scores), an understanding that changes even for the same customers depending on the situation and context.
This depth of understanding can result only from robust customer research and analysis of customer behavior (about pain points and A/B testing, for example) and customer value scores by type of value (a good example involves differentiation among commercial value, operational value and social value).
Leaving aside the capabilities needed to truly gain a competitive advantage through the use of the direct channel, global airlines should take steps to optimize their channel mix (through the use of various sub-channels within direct and indirect channels).
Also, airlines should strive to find innovative ways and use comprehensive systems to reach out to their actual customers, as well as potential customers, while customizing personalized experiences for the higher-yielding corporate and, in some countries, government market segments, as well as agents.
In recent years, airlines worldwide have posted fairly lofty profit levels, resulting primarily from the generation of high revenue levels through the sale of ancillary products and services. Although low-cost carriers and ultra-low-cost carriers have been the leading beneficiaries, now hybrid airlines and full-service airlines are moving forward aggressively in the merchandizing arena.
On a global basis, ancillary revenue rose in 2014 to an annual total of around US$50 billion. And that astonishing 2014 level could easily double in the next five years.
But while airlines have done a good job of optimizing revenue from the sale of flight inventory (using standard revenue-management techniques encompassing inventory and price), carriers are just now beginning to improve their strategies and tactics relating to merchandizing, although on a static rather than a dynamic basis.
Airlines recognize that they transport millions of passengers, representing a broad spectrum of the population. They also envision that they should be able to craft powerful strategies and tactics to go much deeper into merchandizing.
However, developing new products for sale on a dynamic basis requires significant investments in merchandizing. And these are investments in “non-core” initiatives that are not related to such essential activities as buying aircraft and building maintenance facilities.
On such non-core initiatives, airlines need to show a positive return on investment. And this is where the vision comes in — again, coupled with data, technologies and analytical tools and techniques, as well as investments to gain access to customers.
Assume, for example, that the vision is to improve the travel experience through the entire journey. Precisely what must an airline do to make this vision become a reality?
One likely possibility: The facilitating technology could be mobile devices.
Keep in mind that mobile devices provide more than just mobility, as well as more than just a channel for pushing out information. Mobile devices keep people constantly connected (some to share information with and from people they trust). And those mobile devices can be used to pull in exactly the information they need, in the format they need and at the time they need.
What is needed, then, is an investment to improve the mobile travel experience.
Residence Butlers Onboard
Last year, Etihad Airways introduced its new cabin class, “The Residence,” a separate section of its aircraft with three-room suites for its ultra-first-class customers. The three-room suites include a living room; bedroom and dining room, equipped with leather and tweed seats; mood lighting and in-seat massage chairs; hi-definition flat-screen televisions; a double bed; a mini-bar; and a shower. Guests of The Residence cabins are also assigned a personal butler, in uniform, throughout the entire flight.
The Greater Future Mobile Travel Experience
There is, therefore, a need to develop travel services that work across the spectrum of smartphones of today, to wearable technology and computing of tomorrow (such as Apple Watch and Google Glass) to improve the on-the-go travel experience by enabling interactive communication in real time when the time element is very important.
Features must include not only visible messages, such as critical real-time flight alerts, but also voice command with information based on location. A customer, for example, might say, “Find me the next flight to Amsterdam.” Or the customer might ask, “What are the visa requirements for Country X?”
Customers are also likely to demand mobile payment systems, a capability that must therefore be included in mobile devices.
When it comes to data, smart commercial planning needs access to data that can lead to decisions in real time, for true agility. Of course, airlines gather, analyze and interpret varying amounts and types of commercial data to gain profitable insights and to develop strategies and tactics.
The problem has been that different groups within different functions work with different sources (both internal and external) with different degrees of validity of the data. Network planning, sales and pricing, for example, work with different data marts. And the problem escalates when an airline group has multiple brands — Air France and KLM, British Airways and Iberia, and the airlines within the Lufthansa Group.
What continues to be missing is the availability of one source of data, as well as cross-functional and seamless integration, within single airlines and within brands, so executives can devote more time to the proactive development of strategies and timely tactics and spend less time arguing about the validity and interpretation of data.
Also missing is a planning system that provides a sequence of interactive and enlightening screens to deliver commercial business intelligence — integrated, real-time information on the performance of the network, schedules, fares, revenues, profitability, channels and other elements, as well as the means to drill down to get detailed information.
New Global Challenges
Smart commercial planning requires enhanced analytical tools coupled with vision and strategic insight to both enumerate and evaluate competitive challenges and strategic opportunities.
Turkish Airlines, along with the fast-growing “Persian Gulf Three” of Emirates, Etihad Airways and Qatar Airways, are collectively presenting monumental challenges for the older-generation global airlines — challenges relating to the sharply upward trajectory of Turkish, Emirates, Etihad and Qatar as new and powerful competitors.
These global players have been able to quickly and incisively envision tremendous opportunities to transport the enormous anticipated traffic to and from emerging markets (traffic based on growing middle classes, and stimulated largely by LCCs).
And the new global players are achieving amazing results largely through the development of connectivity. This requires a holistic approach to network planning — not just current routes, but routes that have come out of strategic visions and plans.
Such visions cannot possibly be properly and fairly evaluated through the use of standard QSI techniques. QSI models, to be truly effective, must be dramatically transformed to take into account the quality of the product, as well as the respectability of the brand.
Highly strategic insights are also necessary in relation to other potential competitors, such as those based in China, to properly evaluate penetration of the intercontinental markets or digitally transform offers not just by recently successful carriers such as Air Asia X and Jetstar, but also by new types of LCCs including Norwegian Air Shuttle in Europe and Brazil-based Azul in South America.
And let’s not overlook the imperative to decipher the potential vision and long-range-planning prowess of Ryanair jumping into the transatlantic market, or digitally transforming its offers. In other words, QSI methods must also take into account new product concepts and their accompanying appropriate price points, rebundling of the unbundled core product, and inclusion of experiential options such as those proposed by Etihad in its premium cabins, particularly in first class.
Extreme In-flight Luxuries
Emirates takes customer experience to new levels with its private suites equipped with shower spas, ambient lighting, personal mini-bar, private cinema, fully flat beds and fine dining.
A Hypercompetitive Business
The airline business has become hypercompetitive with the entry of powerful airline competitors and new types of emerging distributors as “sellers.”
And that business calls for customer centricity, with customers desiring a higher level of customer experience and more personalized services, given that customers have gone mobile, digital and social.
These factors are leading airlines to turn to customer-experience innovations for product differentiation and customer loyalty.
Designing and implementing a superior customer experience while competing with increasingly powerful and brand-attractive full-service airlines, innovative hybrid airlines and ultra-low-cost airlines must now be part of smart commercial planning, particularly for passengers in economy class, which is the growing segment.
Smart commercial planning calls for embracing new technologies and processes (for example, technology to manage the customer experience).
And it also calls for an “outside-in” customer-service view, meaning what customers want to “buy” on their terms and through their selected channels, not what airlines want to “distribute” on their terms and through their preferred channels.
When a carrier decides to dramatically change its strategy, it must also consider redesigning its organizational structure to work more closely with other members in the travel chain to provide more personalized service and an enriched customer experience (the physical as well as the digital experience).
It’s really a mandate for much greater innovation and agility in airline commercial planning, with unwavering commitment to customer and experience centricity, not process centricity.
And it also requires leveraging inspiration from other business market leaders who have not only thought outside the box, but have been willing to go outside an entirely different box — Zipcar, Uber and Airbnb, just to name some examples.
That’s airline commercial planning with a flair for the future and a flair for success.