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By Jeffrey Rothfeder  |  Posted 02-05-2005 Print Email
: Generating Revenue"> Generating Revenue

These kinds of suggestions are not new to the network carriers, but even as they struggle with how to keep their identity as full-service airlines, and achieve hefty cost cuts at the same time, they can't afford to neglect shrinking revenue.

Since 1978, airline revenue per seat-mile has declined an average of 1.8 percent annually. This reflects post-deregulation competition, marked by low-cost carrier fares as low as $200 for a round trip from New York City to Los Angeles, and by price wars, such as Delta's recent 50 percent fare reduction, which was matched by other large airlines. Making matters worse, most passengers have very little loyalty to individual airlines; they simply buy the ticket that meets their needs at the lowest cost. Or, as Forrester's Harteveldt put it in a report: "Airlines don't own their customers; they lease them flight to flight."

To illustrate this, in a 2002 study, Forrester found that 39 percent of United's U.S. passengers also flew on American Airlines, 28 percent flew Southwest and 21 percent traveled on US Airways. Numbers like these are particularly vexing to the airlines, because they discount the value of the large carriers' heavily promoted frequent-flyer programs, which hold out the inducement of free tickets for repeat business.

As it turns out, these marketing campaigns fail to engender significant customer loyalty and each year cost the airlines as much as 10 percent of their total passenger miles in redeemed awards.

In order to keep revenues from falling any further, and to give cost cuts a chance to have a positive impact on bottom-line earnings, the airlines are beginning to realize that they have to do a better job of using the huge storehouses of information they have collected about consumers from ticketing, Web sites, e-mail, frequent-flyer programs and credit cards. Most of this information has gone untouched, lost in the database systems that were layered one on top of another every time a new customer service application or an Internet ticketing program came online.

Airline executives say that improving their ability to alert customers to special deals based on their travel habits, or customizing the flying experience—that is, giving passengers meal or entertainment preferences without making them feel like it is an imposition, or calling passengers by their names, the way some high-quality hotels do—is a must if carriers want to build a loyal customer base.

But achieving this level of data mining requires replacing legacy systems with a much smaller, integral network, says British Airways CIO Paul Coby, and most carriers are unwilling to commit to such a wholesale investment in technology. Coby, who was named to his post at BA just days after the Sept. 11 attacks, has received strong support from the airline's management to do whatever he must to modernize the company and eliminate its wasteful technology.

Now, in the middle of what he calls a post-Sept. 11 "strategic fight back," Coby says that perhaps his most important accomplishment to date is overhauling the airline's internal network so that customer data is now available in a form that can be used to the advantage of both the business and customers at the marketing, sales and operational levels. Coby sees it as a competitive edge that's responsible, in part, for the company's recent stellar performance in a disastrous business environment. In fiscal 2004 (ended March), BA was one of the few standouts among network carriers, with operating income of $740 million, an operating margin of 5.4 percent and a sharp turnaround from a loss of $202 million two years earlier—and BA managed this even though revenue has slipped 8 percent in that period. "My view has been that IT revolutionizes the airline industry once a decade," says Coby.

"Our relationship with our customers is changing completely. We know what customers want by how they interact with us. And we are building simplified systems that allow us to respond to customer preferences."


"Few Survivors Predicted: Why Most Airlines Are Caught in a Tailspin"

Knowledge@Wharton, Jan. 26–Feb. 8, 2005


Flight for Survival: A New Business Model for the Airline Industry

By Tom Hansson, Jürgen Ringbeck and Markus Franke
Strategy & Business Magazine
Summer, 2003

Although they may be progressing too slowly for their own good, the large airlines are in fact addressing some of the basic flaws in their overly complex business models.

Delta and United, for example, are creating hybrid flight networks by trimming their hub-and-spoke operations where possible and shifting business to newly launched low-cost carriers such as Song and Ted. These new companies are still a very small part of the large carriers' operations; nonetheless, they have surprised many airline analysts by operating at costs per seat-mile on par with discount carriers.

And all of the large carriers are at least paying lip service to the importance of finding technological solutions to their most profound problems. Recently, for instance, the airlines have begun to turn up the heat on travel agents to use Internet-based booking for purchasing tickets rather than the large mainframe systems that have been the industry mainstay for years.

If successful, this lobbying effort could save the airlines as much $10 per ticket, experts say.

But experts argue that these are piecemeal changes and that nothing short of a radical departure from the past will save the airlines this time around. The consensus for the future of the U.S. airline industry is that it will be composed of one international carrier, possibly United; two large domestic carriers, perhaps Delta and Southwest; a smattering of regional airlines, which can also provide network services, such as Alaska Airlines; and a few low-cost carriers, with JetBlue leading them.

That's conjecture, of course. But what isn't in doubt is that the threat to the mainline carriers, despite their post Sept. 11 rhetoric, is primarily internal—linked more to their own operational deficiencies and lack of imagination than to any external problems they can conjure up.

"This isn't child's play," says UNC's Kasarda. "It's an industry that's not going to look the same ever again. Look, in a strong wind even turkeys can fly, and the airline industry has shown that in the past. But now there's no wind—and a lot of turkeys."


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