The race to boost online sales is starting to take on a new twist as carriers start focusing more on yields and quality of traffic rather than sheer volume
Since the turn of the century airlines have been in a mad dash to drive bookings to the web. In the process, despite succeeding in slashing their distribution costs, the shift to online channels has had some negative, unforeseen consequences. Yields have plummeted and in many cases the cost of supporting airline websites has turned out to be much higher than anticipated, in part because sites have become inundated with searches from online agents and even robots.
"It's by no means a given that online is the cheapest channel," says Travel Technology Research partner Ian Tunnacliffe. He explains that after factoring in back office costs and payments to IT providers, for some carriers the cost of online bookings is higher than the cost of travel agent bookings. Most consultants, IT suppliers and airlines say few if any carriers are actually incurring higher costs for online than traditional bookings, but nearly everyone agrees online bookings are lower yielding and concede the cost savings generated by shifting bookings online have been given away in the form of lower fares.
"The internet has not been the best friend to airline yields," says Duncan Alexander, managing director of consultancy Encomium. "The genie came out of the bottle in terms of transparency and that has had an effect on yields." Adds Tunnacliffe: "Airlines have opened up Pandora's box by becoming more transparent. A lot saw rushing online as a panacea. Distribution costs have been halved from 20% of total costs to 10% but they've given that 10% to the customers."
Tunnacliffe, Alexander and other consultants say carriers are being forced to take a hard look at the web and search for new tools aimed at improving their online yields and conversion rates. For many airlines the focus is no longer about shifting more passengers to the online channel but trying to extract more revenue from existing online customers.
"I think the big gains have been made. The focus is now more on maximising the opportunity from the existing traffic," says Martin Child, managing director Europe for online marketing firm Webloyalty. Adds Aer Lingus corporate affairs director Enda Corneille: "We've succeeded in channel shifting. Now it's a matter of increasing the pie."
Aerlingus.com, which only began taking bookings in 2002, now accounts for 72% of the carrier's bookings, including 86% in Ireland and 89% in the UK. Corneille says after five years of consistent gains there are limited opportunities to shift more customers online, but Aer Lingus still sees opportunities to use the web to generate new revenues.
The latest focus for Aer Lingus, which like most low-cost carriers is already selling a full range of ancillary products online, is a new breed of web-only combination fares. Corneille says the carrier in March will start selling online fares that combine Aer Lingus' two point-to-point networks, which now take passengers from Ireland to continental Europe or the USA but generally do not connect continental Europe with the USA.
In April Aer Lingus will also begin selling on its website a combination ticket with JetBlue Airways that will take passengers from Dublin or Shannon to over 40 US cities via JetBlue's New York JFK hub. The unique partnership is designed to increase online revenues for both carriers by tapping their existing online customer base.
Aer Lingus and JetBlue "have such a high level of distribution through the web, so we're really excited about the ability to put our two websites together and create one seamless transaction for the customer," says JetBlue chief executive Dave Barger.
Online business now accounts for 80% of JetBlue's revenues. This is unlikely to increase as JetBlue has just reintroduced global distribution systems. But new web-based links with Aer Lingus and other foreign carriers that serve JFK will ensure JetBlue's online revenues continue to grow.
Spanish low-cost carrier Clickair is also planning to use the web to introduce a new combination fare that will take passengers between two European points via Barcelona. Clickair chief executive Alex Cruz says Singapore-based Tiger Airways pioneered this type of ticket, which creates new revenue opportunities by connecting city pairs without incurring any of the traditional costs associated with a hub and spoke network, such as baggage transfer.
Clickair has already introduced several innovative products aimed at driving online revenues, including giving a single passenger the option of buying two seats to ensure the adjacent middle seat is empty. "These gimmicky little smart things can be done on the web. They don't impact my cost base at all but provide new revenues," Cruz says.
He adds that 97% of bookings under the Clickair code are now made online, including 85% on clickair.com. Clickair flights also carry the code of part-owner Iberia and tickets sold under this code, which account for 30% of Clickair's revenues, are sold through all of Iberia's channels including GDSs.
Airlines with online channels accounting for over 95% of bookings are generally low-cost carriers which have launched in the last few years, which is the case with Clickair. The one big exception is Ryanair, which launched in 1985 and has been able to move an incredible 99% of its bookings online since introducing an internet booking engine in 2000. "We've always made it cheaper and easier to book online," Ryanair explains. "That's a central part of our strategy."
Monarch Airlines, which now sells 90% of its tickets online, also expects online sales for its scheduled operation to plateau because it is unlikely the 10% booked by travel agents will shift. E-commerce manager, Ian Chambers, says the focus is more on growing online revenues than increasing volumes. "There is an opportunity now to twist out extra revenues from the passengers we have," Chambers says. "That's where the profit comes from these days."
Monarch has already introduced fees for checked bags and pre-assigned seats, which most low-cost carriers also offer. Chambers says the focus over the next year will be to increase Monarch's conversion rate. This will be achieved by making booking easier, in part through new payment options, and giving customers more choices. "The more options you have the less likely you'll lose them," Chambers says.
While some carriers are starting to see web sales plateau, others see more opportunities to further grow volume. For example, Southwest Airlines is confident it can continue to shift more sales online. "When we got to 50% [online bookings] a lot were asking: How far can we go?" recalls Southwest Airlines senior director of marketing communication Anne Murray. "Now we're at three quarters."
She adds sales on southwest.com will continue to grow but the carrier is also focusing on improving its online yields. Last November it introduced fare categories aimed at business travellers and offering such perks as priority boarding and a complimentary alcoholic beverage. Southwest has also begun selling products aimed at its leisure customers, such as theme park tickets.
"We've got some great tools on the website to allow the customer to find what they are looking for," Murray says. "We've always been a great airline site. We like to say we're now a great travel site."
Emirates also sees opportunities to shift more bookings online. The carrier will not say exactly how many of its bookings are made online but consultants estimate it at only 10-15%. Emirates vice-president of e-commerce Theunis Potgieter acknowledges Emirates sells less online than major carriers in Europe and North America. He attributes this to Emirates being primarily a long-haul operator and having a different customer profile. But Potgieter says Emirates' online revenues have doubled every year over the past four years and are expected to continue to grow at annual clips exceeding 100%. "We don't see that softening in the next two to three years," he adds. "We're seeing continued growth. You've got to remember Emirates is growing fast and we're able to piggyback on that."
While 20% annual capacity growth at Emirates is helping increase online sales, it is also adding products to further drive web sales, such as a Dubai stopover package and a new calendar-based fare tool. "We're just scratching the surface," Potgieter says. "The web is part of our distribution strategy. We'll expand it with different products."
Reservation and e-commerce platform supplier Navitaire says carriers in the Middle East as well as Eastern Europe and certain parts of Asia and Latin America continue to chalk up high growth in online sales. But it says web bookings in Europe and North America have generally reached a plateau or are only increasing slightly.
SITA director of internet and integration solutions Michael Cunningham paints a similar picture: "A lot of European and US carriers have reached a plateau on online sales."
Cunningham adds many carriers in emerging markets have so far struggled to shift sales online, which in turn has kept the global industry average for bookings made online below 40% (see charts, left and right). Passengers in these markets generally prefer to use their travel agents and may not be able to book online because they do not have an internet connection or a credit card. Cunningham says the focus now for airlines in these markets is to increase online sales not through direct sales on their websites but by migrating travel agents online.
Late last year SITA launched a travel agency portal that allows agents to bypass the traditional GDS feed and book directly on airline websites. Cunningham says the launch customer, Greek carrier Aegean Airlines, saw its proportion of online bookings grow almost immediately from 18% to 30%.
Only two carriers are now using the portal but Cunningham expects to soon sign up about another 12 carriers, mainly from Eastern Europe, Latin America and developing parts of Asia. "This is ideal for emerging markets where credit card and internet penetration isn't as high and customers typically use travel agents," he says.
Cunningham says carriers in emerging markets are also looking to drive up direct online sales by introducing new payment options. He says "book now/pay later" and "Western Union type of payments" are becoming popular in countries with low credit card usage or where consumers are wary of using credit cards online. SITA will introduce a mechanism in Russia later this year where cash will essentially be accepted online. Cunningham says there are opportunities to introduce country-specific payment mechanisms in several emerging markets, allowing passengers to book online but pay through other means, including mobile phones.
Emirates is also looking at new payment options, particularly in Africa. "We try to localise the product as much as we can," Potgieter says. "It's a hurdle if you don't have the right payment options."
Last year Monarch became the first European carrier to offer Paypal, an online payment service with over 150 million users worldwide, and Chambers says it already accounts for 2% of its bookings. Cruz says Clickair also plans to use Paypal and claims the area of payment options is one of the few places carriers can innovate online these days. "The ability to be innovative when selling on the web is difficult for most carriers," says Cruz, explaining that carriers find it difficult to innovate because they are tied by their reservation systems.
"There will always be limitations with third party suppliers," agrees Chambers. But he adds Monarch, which last year launched a redesigned website with a new low-fare finder and a quicker booking process, has been able "to push" its supplier. Cunningham says carriers, through customer advisory groups, can persuade IT providers to make improvements if they are beneficial to several users. But for specific changes carriers need to internally develop improvements and bolt them onto their reservation system.
Ryanair says it had to introduce several new ancillaries, including checked bag fees, by bolting them "on the side of the existing programme". But it adds the upgraded reservation system it activated in February has "more room for additional extras" and "allows you to be a lot more creative".
"We've always been a great airline site. We like to say we're now a great travel site"
Senior director of marketingcommunication, Southwest Airlines
Datalex chief executive Cormac Whelan says adding extras such as preferred seating "is very difficult to do in the legacy environment". He claims several carriers as a result have decided to move their e-commerce platforms from reservation system suppliers such as Amadeus
to e-commerce specialists such as Datalex. "More and more customers are starting to take control back," Whelan says.
Amadeus global director airline direct channel Philippe Der Arslanian responds: "We have the same agility if not more as other suppliers out there. We position the product in the most flexible way. Airlines need flexibility to implement the strategy they want. They should not be asked to adapt to the product but the product should adapt to them."
Amadeus says 75 of its reservation system customers now also use it for e-commerce, including half of the world's top 50 carriers. Der Arslanian acknowledges carriers often complain about the slow pace of new developments, but says carriers should take some of the blame. "We've been serving customers online for 10 years. All along we've seen resistance to change," he says.
But even if the technology is becoming more flexible, coming up with unique ideas and innovative web strategy is becoming more difficult. "Where are the differentiators?" Alexander asks. "Everyone is catching up to a certain level of services. Everyone is learning from each other."
Desktop products could offer carriers the latest technology tool for driving online sales. Southwest Airlines is widely considered the leading airline when it comes to developing desktop widgets, having introduced "Ding!" in 2005. Customers who download Ding! to their desktops get a message every time a special fare is available between their home market and any of their 10 preferred destinations. Ding! fares are not available on any other channel, not even southwest.com.
Southwest senior director of marketing communication Anne Murray declines to reveal how many bookings Ding! generates but says it now has three million users and has been successful at persuading frequent fliers to make more incremental trips. "It is a strong loyalty play and has a strong pass on factor." Ding! has attracted the attention of Spain's Clickair. The carrier's chief executive Alex Cruz is impressed with how Ding! gives Southwest a new direct link to customers, and this persuaded Clickair to develop its new desktop product, "clickup". A few other carriers have introduced desktop widgets and other devices such as customised e-mails to promote online bookings but Cruz says these are not as robust or attractive as Ding!
Amadeus global director airline direct channel Philippe Der Arslanian says "social networking" could be the next big thing in the world of airline websites, with friends being able to shop together, pick their flights and pay for their own bookings separately at the same time. "This whole social computing arena is very promising," he adds.