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The time for airlines to digitise and reassess their competitive positions has come

17 July, 2018

Airlines may have enjoyed a run of good results, buoyed by steadily rising demand and an extended drop in fuel costs. Global industry-wide passenger traffic grew by 8.8% percent in 2017 and in Ireland this was 6%. Despite the increased pressure on margins from rising fuel and labour costs, IATA still expects the world's airlines will generate a return on invested capital (ROIC) of 8.5% this year. In its recently published mid-year review of the economic performance of the airline industry the association says this will be the fourth consecutive year in which it has adequately rewarded its equity owners.

But Europe’s already cut throat airline market has just got tougher. Some commentators are saying oil prices will rise to US$90 a barrel by next summer, we could see more airlines heading for collapse. And the entry of Level into the short-haul market will further intensify competition. Will we see more consolidation in the market?

Several trends suggest there could be clouds ahead. Oil prices are increasing; and given geopolitical uncertainties including rising protectionism and potential aggressive trade-wars, recent growth trends may all change, making it harder to maintain recent high levels of profit per passenger. A sense of urgency is required now; figuring out how best to exploit the financial headroom attained should be a top priority for airline industry leaders.  Heightened competition from new entrants, pressure on ticket prices and more demanding passengers are challenges. Airline leaders are very aware that they need new and more resilient strategies. Two essential drivers of these strategies are the use of digital technologies and the development of sharper, more nuanced competitive positioning.

The digitisation dilemma

Digitisation is top-of-mind throughout the commercial airline industry, but moving beyond buzzwords like AI and IoT to actual applications can be difficult. Think in business terms about what digital technologies enable; what opportunities they offer to grow the top line and reduce operation costs simultaneously.

Airlines, airports and direct-to-consumer distributors – travel and lodging providers such as TripAdvisor, Google and Airbnb – are all vying for pieces of business or recreational passenger budgets. The technology companies have an advantage in this battle: consumers like the convenience of one-stop shopping on seamless digital platforms.

To capture top-line growth in this competitive environment, airlines need to incorporate the best of what these so-called channel consolidators do and offer innovative holistic and attractive travel distribution programs. They need to ensure that their direct distribution channels (primarily websites and phone banks) and loyalty programs can deliver personalised service and offers to business and leisure customers.  Simply put, airlines must combat ticket commoditisation by developing, alone or in partnership with global distribution systems, enhanced merchandising applications that will allow them to cross-sell and upsell using their privileged access to millions of global travellers.

Carriers cannot afford to focus solely on ticket sales, leaving other companies to pick up the ancillary revenue – including accommodation, rental cars, entertainment and personalised itineraries – that surrounds the flight. Airlines will need to build extensive digital marketing capabilities, integrating the reams of customer data they collect into a complete view of the traveller, transforming the insights yielded by this data into compelling offers (i.e. we know where you and the kids have stayed at Euro Disney, would you like a discounted hotel room next year?) and constructing an interface and apps that make them stand out in a crowded market. Airlines have much more to do in fully embedding the opportunities that automation and artificial intelligence present.

At the same time, airlines need to use digitisation to enhance and optimise operations – to reduce costs while improving service. They need to put technology to work in predicting and preventing equipment failures, in optimising processes and productivity on the ground and in providing better and timelier information to employees.

Airline leaders also need to keep in mind that digitisation is also a tool for tactical innovation. Your business strategy – the company’s short and long term goals – will point the way to the customers you want to win, the offerings you hope to provide that attract these customers and the right channels for reaching them.  When those objectives are known, you can identify the technologies that best support them.

Creative competitive positioning

The once clear-cut competitive landscape in the commercial airline industry continues to evolve. Low-cost carriers (LLCs) are still gaining market share from full-service carriers (FSCs) but the differences between the models are shrinking and we will see hybrid approaches gaining traction, while some carriers will operate separate but clearly segmented airlines under a single corporate umbrella. Globally we are also seeing low-cost carriers upscaling their offering.

This competitive positioning is driven by the varied needs of the market’s consumer, the market’s maturity, the level of market consolidation and the ability of an airline to satisfy expectations within a market better than its competitors. Making an assessment of the market is a complex undertaking that will produce wildly different results by region. In Europe, for example, the competitive field remains fragmented; major European airlines are facing stiff competition from local low-cost carriers and more recently some Middle East airlines are increasing their activities in Europe. As a result, European airlines are shedding volume on Europe-Asia routes while yields on intra-Europe flights are shrinking. In the US, a wave of consolidation has yielded fewer and larger airlines that seems to be enforcing more discipline on fare levels and capacity expansion.

As an airline leader, once you have chosen the most potentially lucrative competitive position by market, you must consider how to best construct the business that will inhabit it. Does your airline have the elements – that is, network, fleet, operating model, a reasonable cost-to-serve structure, digital capabilities and the right partners – needed to thrive in the your future business environment? If not, how will those elements be obtained – through organise growth, consolidation, M&A or joint ventures?

The need to address competitive positioning is made more serious by the fact that no market is safe from competitive threat.  Massive investments in infrastructure in the Middle East will ensure that the region continues to develop as a travel hub. Although China’s airlines are still focused on domestic demand, inevitably they will turn their attention outward – bringing huge fleets and large amounts of capital with them.

In response, European airlines will not only need to defend their home markets, but also need to more aggressively consider how to enter emerging markets.  Making equity investments in emerging markets is a particularly good way of achieving the latter. Such investments can give airlines a seat at the table in growth markets with high barriers to entry and position them as preferred partners in the expansion plans of the airlines in which they invest. Most important, these equity investments buy the means with which to build a flexible global airline strategy and align with a business model that seeks to maximise returns from profitable routes while expanding into emerging regions and getting a piece of the revenue as international travel patterns evolve.

In summary, the future of airlines will depend on how well they digitise their operations and respond to daunting competitive threats.  But the opportunities are there.

Contact us

Yvonne Thompson

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 7147

Ronan Doyle

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6559

Brian Leonard

Partner, PwC Ireland (Republic of)

Tel: +353 1 792 6179

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