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The Merchandising Evolution (and why NDC
Matters)
John Thomas Global Aviation Head L.E.K. Consulting
NDC in Ac)on Topics
! The evolution of consumer expectations
! Merchandising’s potential
! Why does NDC matter?
! 10 questions to ask about your ancillary strategy
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NDC in Ac)on How have consumer expectations evolved?
Let’s go back to 2007…
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NDC in Ac)on The customer experience just seven years ago…
Facebook had 12 million users (no mobile)
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Mobile looked like this (no iPhone/Android) Amazon revenue was $15 billion (no Kindle, no Prime in most countries)
23 airlines reported global ancillary revenue of $2.5 billion (no 1st/2nd checked bag fees)
NDC in Ac)on Things have changed
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250
500
750
Global PC / mobile device unit sales Millions of units
PCs
Smartphones / tablets
12 11 10 09 08 2007
Information and purchasing capabilities are now personal and ubiquitous
Source: IDC, Gartner 5
NDC in Ac)on Things have changed
People are getting information from peers and highly targeted ads
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610
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1506012
0
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400
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1,000
1,200
12 11 09
Facebook active users Millions of people (beginning of year)
10 08 2007 13
Source: Facebook
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NDC in Ac)on Things have changed
E-commerce and personalized recommendations are mainstream
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48
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0
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Amazon total revenue Billions of dollars
11 10 09 08 2007 12
Source: Amazon 7
NDC in Ac)on Consumer expectations are changing too
! Too much information puts a premium on curation; offers come to me
! Omni-channel learning, trial, and purchase experiences
! Assume you’ll remember me
! Customization, menus, and targeted / personalized options and extras
! My price
! Information opaque and inaccessible; “know what you want and go hunt for it”
! Single channel for discovery and purchase
! Anonymity the norm
! Limited choices; accustomed to standard offers and a “one size fits all” experience
! One price
Tomorrow Yesterday
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NDC in Ac)on We are caught in this seismic shift at a time of transitioning to being more B2C
! Much more direct B2C relationships with our customers
! Taking back control of selling to our customers even though some of that will still happen through 3rd parties
! Forced into B2C to reduce distribution costs and increase revenue effectiveness
! Heavy reliance on 3rd party distribution
! Focus was on marketing to customers not selling to customers
Today Yesterday
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NDC in Ac)on As we shift to being retailers, traditional retailers are way ahead of us
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NDC in Ac)on Meanwhile, ancillary revenue has grown…
3633
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1310
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20
30
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5043
A La Carte
FF / Commission
Global airline ancillary revenue (estimates based on reported) Billions of dollars
13F 12 11 10 09 08 2007
Source: IdeaWorks, IATA
Ancillary revenue isn’t optional, it’s oxygen
Global total net income is expected to be ~$12 billion
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NDC in Ac)on … and helped crown a new set of leaders
2.5
1.0
2.0
1.5
0.5
0.0
Top 10 airlines by economic profit, 2008-12 Billions of dollars
0.3 0.3 0.4 0.4 0.4 0.5
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EP ranking ’03-‐12
61 1 59 4 6 5 7 2 3 N/A
#1 #2 #3 #4 #5 #6 #7 #8 #9 #10
Source: Capital IQ, Bloomberg, CompuStat, DOT Form 41, L.E.K. analysis
EMEA Asia-‐Pacific
Americas
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NDC in Ac)on A vision of merchandised ancillaries
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Right offer
Right place
Right person
Right price
Right time
! Room offered with OTA in booking flow ! Meal/seat sent to his mobile the day before / in airport
Example
We believe merchandising in this way can double ancillary revenue
! “John, a 35-year-old infrequent flier with us, visiting Disney World with his gluten-allergic infant”
! Discounted hotel room ! Gluten-free meal paired with empty adjacent seat,
etc.
! Room offered at a discount to drive ticket purchase ! Meal/seat offered at premium (unless inventory high)
! Room offered during initial comparison shopping ! Meal/seat offered during check-in
NDC in Ac)on Why does NDC matter?
Future new standards and tools enable powerful new strategies
The freedom and power to change the game
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Historically, legacy technology dictated ancillary strategy
What should you be asking yourself before implementing the technology?
“What should we do?” determined by
“what can we do?”
NDC in Ac)on 1) What is the overall strategic objective?
! Incremental revenue and profit?
! Customer experience enhancements?
! Rewarding and reinforcing loyalty?
! Reduction of core product cost through unbundling?
! Passenger behavioral changes?
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NDC in Ac)on 2) Who is your customer?
Customer segments (historical)
Customer segments (today)
• Mostly male passengers, usually 34-55, who travel business itineraries
Business Travelers
• High-income individuals, couples or families traveling for leisure
High-Income Leisure
• Mostly male passengers, usually 34-55, who travel 20+ business itineraries p.a.
• Often business class passengers traveling alone
Road Warriors
• Mostly male passengers, usually 34-55, who travel <20 business itineraries p.a.
• Economy class travelers more likely to travel with colleagues
Occasional Business
• Male and female passengers over 55, who travel for leisure purposes exclusively
• Value-oriented, economy class passengers Retirees
• High-income individuals, couples or families traveling for leisure • Travelers who value comfort, often on long haul flights High-Income
Leisure
• Younger, tech savvy passengers under 30, traveling for pleasure, college, or job opportunities
• Value-oriented, economy class passengers
Etc.
• Older individuals, couples or families traveling to visit friends and/or relatives
• Primarily middle-income, economy class travelers VFR
• Value-oriented travelers, particularly families traveling for entertainment or outdoor recreation
• Primarily middle-income, economy class travelers
Package Vacationers
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Young Singles
NDC in Ac)on 3) Do you treat them as accounts? Do you understand their journey?
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Boarding / take-off
Planning
Booking
Managing
Dreaming
Inflight Deplaning Airport
Hotel
Transport
Return journey
Need states Destination
-focused
Frugal
Practical
Stressed
Bored
Excited
Leisure passenger journey
NDC in Ac)on 4) What does your brand stand forand what experience should you aim to create?
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What customer experience will fulfill your brand promise?
What do you aspire to mean to passengers?
What do people associate with your brand today?
NDC in Ac)on 5) What products and services should you offer?
Repackaged B2C
Airport Lounge Packages
Family Traveler Packages
Child Traveler Packages
Business Traveler Packages
Core Product
Enhanced Mix of B2C & B2B
“Window Shopping” (On-line stores)
On-line Gambling
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Enhanced B2C
Internet On-Board
In-Flight Entertainment
Food/Beverage On-Board
Upscale Amenity Packs
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Core B2B
IFE/Web Advertising
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Core B2C Baggage Fees
Booking over the Phone
Confirmed Seat Assignment Fee to Stand by
Ticketing Fees Miles Rationalization
Unaccompanied Minor
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2
1
1
1
6 7
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Experience Packages
1 Product 2 Flight Experience
4 Airport Experience
6 Mileage and Status 7 Customer Service
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3 B2B
B2C B2B
Enhanced B2B
Enhanced Advertising
Consumer Trials 3
3
Enhanced B2C Premium Seating
Lounge Access Priority Baggage
Priority Security
Priority Check In and Boarding
Elite Status a la carte Mileage Purchase
Trip Protection Insurance
Repackaged B2C
Subscription Services for Amenities
FF Gaming Bundles
Entertainment Packages
Enhanced B2B
Vacation Packages 2.0
Off- vessel
On- vessel
Core B2B
Traditional Advertising
Hotel Partnerships
Mileage Redemption
Rental Cars
Financial Services
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NDC in Ac)on 6) What costs a fee vs. what is free? What should you bundle together?
Fully Bundled A la Carte
Bundling of Ancillary Products / Services
Enh
ance
men
ts O
ffere
d
Low
High
Merchandising
Unbundling Enhancements
Bundle Optimization
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NDC in Ac)on 7) How do you target, personalize, and price dynamically?
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Merchandising engine
NDC in Ac)on 8) How do you advertise and sell across channels?
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! Have consistency across all channels, both direct and indirect
! Think outside the box online
! Advertise differently than you sell
! Use channels for different things (exploration vs. sharing vs. problem-solving vs. impulse-purchases vs... )
NDC in Ac)on 9) How do you deliver without operational compromise?
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Generally requires:
! Strong core operations to begin with (e.g., on-time performance)
! Simplicity through technology
! Training and tools for frontline staff
! A cultural shift and extensive communication
! The ability to measure and course-correct
NDC in Ac)on 10) How do you turn product developmentinto a core capability?
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To make this a competitive advantage, you need:
! A well-oiled new product development (NPD) process
! Measurement and metrics to conduct product portfolio optimization
! The structure, staff, and processes to manage the products
! Ongoing strategic investment in the technology
NDC in Ac)on L.E.K. has advised on nearly all marquis ancillary revenue implementations…
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Client example Project emphasis Results
#1 Full Service Carrier in Americas
#2 Full Service Carrier in Americas
#1 LCC in Americas
Major Value-‐oriented Brand
l Advised on fee strategy generaRng hundreds of millions of dollars in incremental revenue
l Helped airline unbundle their services to maximize $1.4B in potenRal ancillary revenue
l Full merchandising strategy development and implementaRon with an esRmated $1B in addiRonal revenue gained
l World class product improvement and industry-‐leading digital interface
l Increased priority service offerings to aZract high-‐value passengers
l MoneRzaRon strategy of extra legroom on aircra[ resulRng in annual profit increase of >$150M
l Developed wide variety of lucraRve ways for customers to buy-‐up to improve their customer experience
Pioneering Flag Carrier*
l Industry leading personalizaRon of the airport experience
l Groundbreaking strategy to moneRze revenue streams on back of new fare class structure; incremental hundreds of millions of dollars**
l Industry leading traveler “opRons” and incorporaRon of upselling and loyalty program to build a comfort product that is the airline’s most valuable feature
Major European Airline Brand
l Complete brand-‐equity aligned Ancillary Revenue strategy and execuRon, leading to transforma)onal economics
l CreaRon of edgy services consistent with world-‐leading brand proposiRon
NDC in Ac)on …and is recognized as a world leader in Travel Ancillary Revenue
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Strategic Partnerships NewsleZer Partner Brief
Istanbul, Turkey (2008)
Los Angeles, CA
Frankfurt, Germany
Vienna, Austria (2009)
Merchandising Thought Leadership – Sample speaking Engagements and Published Work
NDC in Ac)on Thank you
! Website: www.lek.com
! Email: [email protected]
! LinkedIn: L.E.K. Consulting / John F Thomas
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