Disruptive technologies bring turbulence for traditional airlines

Carriers face headwinds despite benign performance in the tourism industry as they begin to face similar pressures to those exerted on hotels.

The skies ahead for carriers in Hong Kong and elsewhere in the region look gloomy, if not downright stormy.

Cathay Pacific, Asia’s biggest international airline, is bracing for tough times ahead as a lethal combination of weak economic outlook, low demand and stiff competition force carriers to slash fares to fill seats.

The airline posted a dismal performance for the first half of 2016, with net income down 82 per cent. Full-year profit figures are also expected to drop on the back of overcapacity and intense competition.

Over in Singapore, the mood has been equally bleak. In November, Singapore Airlines posted a 70 per cent plunge in net profit for the second quarter.

The International Air Transport Association (IATA) expects profits among airlines in the Asia-Pacific region to fall 13.7 per cent in 2017 to US$6.3 billion.

The irony is that the travel industry in Hong Kong and Singapore is doing well. Asian airports have been reporting healthy traffic and flights within the region dominate rankings of the world’s busiest international air routes.

Industry observers noted that airlines had been doing everything right and that traffic was growing but performance had still been turbulent. Is it just a matter of getting through the economic doldrums, or is there something more fundamental that is awry?

A look at other parts of the travel industry could provide some answers. Despite a healthy growth of overall tourist numbers in the region, many hotels are seeing little growth in occupancy and equally discouraging revenue figures.

Hongkong and Shanghai Hotels, which owns the Peninsula hotel chain, reported a 43 per cent drop in profits for the first half of the year. Many other hotels are seeing a decline in occupancy and room rates.

Hotels’ woes lie in the growth of global home-sharing network Airbnb, which eats into the traditional hotel industry’s pie. A report by Morgan Stanley showed more customers were shifting from hotels to homestays.

The rise of Airbnb signals a bigger trend in the travel industry; disruptive technology is revolutionising the nature of the industry and changing the way it does business.

In addition to factors like overcapacity, fuel costs and a chaotic operating environment, technology firms are increasingly giving airlines a hard landing.

Technology firms are poised to play a much bigger role in the travel industry, potentially upending the way airlines conduct business.

For instance, Google, which bought flight data company ITA (2011) to power its flight search tool, introduced Destinations in March 2016, a mobile travel agent, and more recently, a travel app called Google Trips.

This threatens to disrupt the travel agent industry, which airlines rely on for distribution of their tickets.

How should the airline industry respond to such disruption?

Airlines have to develop their business models in three ways to cope with the new operating environment.

First, airlines will need to turn towards alternative means of selling seats.

For decades, the airline industry relied on the Global Distribution System (GDS) technology, a tool used by travel agents to book airline tickets, hotel rooms and car rental services.

Each player had a defined role to play in the GDS. The hotels, airlines and car rental companies listed prices and rates on the system and it was up to the travel agents to sell them to consumers.

This worked because it was neat and efficient. But the system is quickly breaking down now because of the ease in which travellers bypass the usual middlemen. Few people rely on travel agents to book holidays – most do it themselves.

In fact, boutique airline research firm Atmosphere Research Group described the current distribution process used by airlines as “outmoded” and “rigid”.

By 2021, digital direct channels – websites and mobile – would contribute 45 per cent of airline bookings, Atmosphere said.

In this new technology-fuelled environment, airlines need to find new ways to reach out to their customers. They need to become full-serviced retailers to sell seats directly to customers.

This means having to create booking systems that are intuitive to the digital native, developing apps that appeal and connecting consumers with the type of flight experience they want. In short, airlines have to place the customer first.

Examples of airlines that have recognised the power of direct retailing include RyanAir and AirAsia, which have mastered the art of selling through the web and social media.

Second, customisation is king. To thrive in a world where the individual is placed first, airlines will have to personalise services and products to cater to each individual’s needs.

Seats used to be compartmentalised into the various classes such as economy, business and first class.

But the traveller today wants to be able to choose the exact type of experience they are comfortable in. Why pay for luggage if they are only bringing a backpack? Someone might be willing to pay for a bed but not the business class service experience.

Airlines such as Scoot are increasingly giving travellers multiple options to customise their travel experience and, correspondingly, costs.

Some airlines are even going to the extent of accepting alternative modes of payment, instead of the usual credit card.

Universal Air Travel Plan (UATP), a payment network owned by major international airlines such as American Airways, British Airways and Lufthansa, has partnered with bitcoin payment processor Bitnet to accept the virtual currency.

Third, corporate travel is also changing rapidly. Once seen as the most loyal of consumers to legacy airline experiences, consummate business travellers are now adopting new ways of booking their travel plans.

A report by Global Business Travel Association, a travel industry body, showed that more business travellers were making direct bookings for their travel needs instead of relying on travel agents.

In fact, many made a beeline for Airbnb, with data from travel expense solutions provider Concur showing that corporate spending on the home-sharing service jumped 42 per cent from a year earlier.

Tracking such expenditures are becoming increasingly problematic for companies as many have traditionally relied on travel agents who are now being side-lined.

As such, companies are turning to new solutions such as expense management technology that can facilitate the monitoring of travel expenses, which is crucial in helping them manage rising costs.

As more companies take up these travel expense solutions, airlines too need to integrate with these same platforms to be in sync with their biggest customers. Several such as British Airways and Iberia Airlines have already done so; more are expected to follow.

The travel scene is changing rapidly. Just as the rise of Airbnb signalled a rocky road ahead for hotels, airlines need to be pay greater heed to the disruptions in the industry so they can continue to keep their heads above the clouds.

It’s time for airlines to update their marketing playbook for growth to take flight. If they do not adapt and get onboard new platforms and be part of this connected journey, they may be grounded for good – no matter how good an actual flight experience they offer.

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