Ask anyone these days how was their last flight and the most common answer is “uneventful”. That is the consumer expectation for flying these days and that speaks volume to the state on the industry.
Since September 11, 2001, the industry has suffered tremendously. This lead to what is called in the industry “un-bundling” which means that rather than a airline ticket including everything, you now pay for everything from luggage to food on board, allowing airlines to monetize their business as much as possible and return to profit.
The airline industry has a very challenging business model. It faces tremendous costs:
- Fuel accounts for about 40% of an airline’s cost
- Labor, determined by union contracts, is an airline’s #1 expense so let’s assume 45%
Add to that long-term leases on airplanes (and parts for maintenance) and you have an industry with a huge amount of expenses – most of them are hard to control. Fuel prices are dictated by the market. Southwest is known in the industry for hedging its fuel purchase (agreeing in advance to purchase fuel at a set price for an extended period of time) which has helped it save money. Airplanes are built by other companies and leased or purchased over a long period. Because their expense is amortized over many years, it is hard for an airline to quickly switch to more fuel-efficient airplanes. Labor contracts are long drawn negotiations with unions that take effect over many years. So costs are locked in over the long-term.
What the industry controls is the service. And what it has done is monetize the service by charging for everything. What it has done is basically commoditized its business (red ocean) so consumers look for price as deciding factor in choosing a flight because paying more for an “uneventful” flight does not make much sense.
The airlines will not differentiate themselves by their airplanes. There are only two major airplane manufacturers with a variety of airplanes that does not change very often.
The airlines will not differentiate themselves by their routes. Most major cities these days have multiple airlines serving them.
The airlines will differentiate themselves with the experience they offer to their consumers.
One approach that has been taken recently by Virgin Atlantic was to redesign its airport terminal, adding comfortable seating in the waiting area, hydration station so you can fill your empty water bottles inside the terminal, lots of open spaces – all to transform and differentiate the “consumer experience” from the regular packed terminals we all dread.
Another approach is to provide great service, on the ground and off the ground. Remember when Southwest attendants were singing and making jokes onboard their airplanes? You had a great time and you certainly felt the change when you travelled with another airline.
The secret sauce has always been the consumer experience, yet it always seems to be the last thing an airline thinks about. That is the one of the few thing that an airline can control and help differentiate it from its competitors. It is important to minimize costs and maximize revenue, but it usually gets you deeper in your industry’s red ocean.
Innovate the consumer experience and profits will take off.