In-flight revenues: inside the garden wall

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For years, on-board retail consultants have urged airlines to view aircraft as flying superstores. The phrase "monetise your cabin" is all too familiar to airline marketing managers, whose efforts in this regard have produced mixed results.

Even with the advent of higher-bandwidth in-flight communications, the dream of using connectivity to turn aircraft into true cash machines has not been fully realised.

The traditional pay-for-service model used for in-flight wi-fi in the USA is under pressure, while the cost, time and regulatory hurdles surrounding the installation of in-flight mobile connectivity has prevented service providers from gaining the level of traction they desire in certain markets. In an effort to address these dynamics, airborne connectivity stakeholders, together with airlines and retailers, have stepped up efforts to attract airlines' captive audiences with solutions aimed at generating new revenue streams.

 
Can the industry keep up with tech-savvy travellers? Picture: Image Source/Rex Features
"Once you provide connectivity to an aircraft, a variety of applications present themselves both for the passengers and the airlines - paid and unpaid - and lots of things can happen now that there is an information link to the ground," says Wendy Campanella, vice-president of business at Row 44, which has been contracted to equip Southwest Airlines' entire fleet with high-speed in-flight connectivity from the middle of this year, following a four-aircraft trial by the carrier.

VIRTUAL MALL
Row 44's business model gives airlines the freedom to fix their own brand and price points for in-flight wi-fi. Passengers willing to pay to use the internet on Row 44-equipped aircraft via their own personal electronic devices will gain unfettered access to a high-speed, Ku-band satellite-based service that supports high data rate applications such as voice over internet protocol (VoIP) - where permitted - and live television via IPTV.

However, for passengers unwilling to pay for an internet session, a free, advertisement-supported virtual shopping mall could be at their disposal. Available to all Row 44's airline partners "should they choose it", the California-based company's informally named Skytown Center is a "quick-start walled garden" that offers online shopping, select whitelisted URL web sites and other content, and "can be very easily personalised" by an airline, says Campanella. "Many airlines will build their own in the long run. So this makes it easy for them to get in the gate."

Famous for its quarterly in-flight shopping publication, SkyMall will manage retail partners for the Skytown Center, while multichannel retailer HSN will offer its live online video programming. Mobile audience media company JiWire, meanwhile, will provide advertising from its client list of more than 100 top brand advertisers.

Campanella says: "The passenger who hasn't paid a penny can now shop at shopping partners that Row 44 and the airline has an agreement with, or book tickets, schedule golf tee times, and make reservations."

The solution is viewed as a financial win/win for Row 44 and its airline customers. Everything passengers do via the Skytown Center will cause "some coin to flow somewhere in the direction of Row 44 and the airline so the airline always participates at least" says Campanella, adding that while the financial details of such arrangements can be "complex and varied", the bottom line is that "this is not just an amenity, it is designed to make money".

SHAKING THE MONEY TREE
Row 44's decision to augment its offering with the Skytown Center comes at a time when consumers increasingly expect wi-fi to be free, in locations such as hotels, coffee shops and even fast food restaurants. As such, the pay-for-service model for in-flight wi-fi - particularly in the USA on short- and medium-haul routes - may not ultimately survive.

"Things on board aircraft go free, then back to being charged. Airlines bundle and unbundle from one to the next, depending on their strategy. My sense is that most carriers are expecting to run with a paid model [for unfettered wi-fi access] for now, but we also do believe there will be continued pressure on that," says Campanella.

"The underlying idea for us is that the trajectory will go pretty much how they are going on the ground, and more bandwidth will be desired. That's why we've designed a high-bandwidth [Ku-band] solution from the beginning and we don't have congestion points and can expand."

Row 44 partner SkyMall is anxious for the Skytown Center to be rolled out to gauge take-up rates. "That's a missing component at this point and then it would depend on how the airlines want to handle it in terms of how that information is shared," says SkyMall vice-president of airline marketing Casey Christ.

Another in-flight connectivity provider looking outside the pay-for-service model to provide both itself and its airline partners with new revenue opportunities is Aircell, which, in contrast to Row 44, retains full control over the branding of its domestic air-to-ground based connectivity solution Gogo, sets its own pricing and orchestrates sponsorship and promotional deals with retailers.

AirTran Airways and Virgin America have equipped their entire fleets with Gogo. Delta Air Lines is in the process of fitting its domestic mainline fleet with the in-flight connectivity service, while other US carriers and Air Canada are in various stages of equipage.

A few web functions are already offered free via Gogo, including access to Frommer's online travel guides and to a limited selection of articles from The Wall Street Journal. In addition, various sponsorships are running with carriers at any given time.

Aircell has an arrangement with SkyMall, for instance, whereby Gogo customers on AirTran and American Airlines can have their wi-fi fee rebated to them as part of their purchase of goods at SkyMall's online store.

"SkyMall is not technically whitelisted on the Gogo portal. That's the important nuance to it," says Christ. "In the Row 44 environment, the customers do not need to pay for the SkyMall service, as it is part of the Skytown Center. On AirTran and American's Gogo-operated flights, passengers need to pay for the connection fee and then we direct the customer to a unique web site where they can complete the transaction. As long as they meet the appropriate [purchase] amount, we deduct the appropriate wi-fi fee."

Yet Aircell also sees the value in more fully monetising its web portal to create new revenue opportunities. The company's strategy includes taking advantage of the ability to whitelist URLs to create a walled garden experience for passengers who do not want to pay for unencumbered access to the Gogo in-flight wi-fi service.

The new web portal functionality will take Gogo "way beyond what our capability is right now" and allow Aircell and airlines to better engage third-party vendors, says Aircell executive vice-president, airlines John Happ.

"This functionality and its corresponding value to advertising and sponsorship partners - and airline partners - is obviously relatively basic. However, when we couple it with the ability to do market-specific campaigns and promos as is coming a little later in the year, a whole new dimension is enabled."

Factor in the sizeable number of airlines and markets tied into the Gogo ecosystem, says Happ, "and you begin to see the compelling advertising and marketing opportunity this represents for many companies. Any way you slice it, it seems clear that there will continue to be a growing array of revenue-generating opportunities made available above and beyond revenue generated via Gogo connectivity alone."

ENTERTAINING NEW IDEAS
But Aircell is pursuing other potential revenue generators. Taking advantage of the 1 terabyte of server storage already on board Gogo-equipped aircraft, the company intends to launch a video service that will allow passengers to download movies, television shows and other content for a fee.

"Between summer 2010 and the end of this year and into the first quarter, we're doing an extended test [of the service]," says Happ. "We have one airline confirmed and there is still a pretty good chance that we'll expand that to a second airline."

Various price points will be tested during the pilot, with $5.99 representing "the low end of the first-run movies", says Happ.

Some carriers will use funds gleaned from these types of solutions to pay down what is owed to Aircell, which financed some installations. "There are some airlines that took advantage early on of Aircell providing capital in exchange for other terms and revenue share, but in all cases there is significant revenue share," says Happ.

"The way to think of this is a portion of an airline's revenue share is going to be applied to the pay down of the equipment. It is very much in the airline's interest to pay that down as quickly as possible so that they are able to participate in far greater revenue shares."

The Aircell executive notes, however, that there are "many other airlines and aircraft fleets flying today and in the pipeline that simply purchased the equipment and we, of course, share revenue in those scenarios as well".

In-flight entertainment and connectivity consultant Michael Planey is not convinced that Aircell and its airline partners are experiencing a windfall of revenues, however. "I always believe there is money to be made, but the question is - is it profitable in the long run? Whatever the first percentage is mitigates the cost [of installations] but there is still a substantial lack of profit guarantees in this business," says Planey.

He points out that sponsorship arrangements, whereby a company such as Lexus or Google, sponsor free Gogo sessions for travellers, has been regularly employed by Aircell and the airlines.

"The airlines have been handing out freebee sessions left and right. AirTran was giving it away for free sponsored by American Express. The result is that usage numbers go up, but it doesn't necessarily mean you're turning a profit. You're not necessarily generating enough dollars that way to make it work," Planey adds.

WHO PAYS?
Aircell is not the only in-flight connectivity provider to finance installation of equipment in exchange for revenue dollars. OnAir, which offers GSM/GPRS and in-flight wi-fi solutions via Inmarsat L-band satellites, recently severed a relationship with its largest customer, Ryanair after the two parties failed to reach agreement on the proceeds and timing of fleet-wide deployment.

Ryanair had operated OnAir's mobile connectivity service on 50 Boeing 737s for about a year. Sources say Ryanair wanted a considerable number of additional shipsets to further the programme, but OnAir will unwilling to cover the cost of further installations.

If mobile connectivity providers provide hardware at a nominal cost and have to make the money back on revenue "then they have no choice than to push as hard as they can in every direction to generate fees", says Planey. "The question becomes - how will they capture the mobile service dollars that are being generated by people on the ground for stuff that's non-voice that's delivered to your cell phone? So, they need to start to bridge the gap between voice and all the mobile data services. The idea is for the airline to enable the services already available on the ground in the air. It's not happening a lot right now. The vast majority of what's happening is voice calling and SMS."

The introduction of value-added cellular services is forthcoming, notes Peter Tuggey, the chief commercial officer of AeroMobile, which is fitting Emirates' entire fleet with mobile connectivity. For example, AeroMobile has been working to harness its service to offer in-flight, real-time credit card authentication.

At present, credit cards are swiped via wireless handhelds on aircraft, but the transactions are processed when the aircraft gets on the ground, which sometimes results in fraudulent purchases and limits the ceiling for the value of items that can be comfortably sold.

Broadly, however, to achieve mass-market status, mobile connectivity stakeholders need to find a way to move to a model where there is barely any price premium between in-flight services and normal services, suggests Emeka Obiodu, mobile strategy analyst at technology consultancy Ovum.

"In Europe, where the EC's influence has forced down roaming charges, we do not believe passengers will be prepared to pay more for in-flight services. Providers should also be prepared to look at an advertising-funded model for the business. Nevertheless, providers must first cut the cost of providing services," says Obiodu. "Aircraft makers, in-flight equipment makers, airlines, satellite operators, mobile operators and service providers such as OnAir all want a share of what is, in reality, a small market," he says, adding that if low prices are ever to materialise, some partners will have to forego a profit or be removed from the value chain.

Ultimately, however, the industry needs to find a way to continue moving forward with equipage to keep pace with tech-savvy travellers. Mobile connectivity "is almost becoming a birthright or demand we expect to have anywhere we go", AeroMobile director of commercial sales Adla Hendry told attendees at a recent World Airline Entertainment Association (WAEA) single focus workshop dedicated specifically to in-flight connectivity.

"Do I need both cellular and wi-fi on board? Yes, if you want to offer service for the widest possible range of devices to the largest number of passengers," she adds.

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