As we enter 2011 we are witnessing a stronger than expected recovery in the global airline industry with increased demand and more stable cost structures. After numerous profit upgrades, the world’s airlines anticipated a profit of $US 15.1 billion in 2010.
However, the current recovery remains fragile with Europe lagging behind with expected losses of US $1.3 billion in 2010 and Asia and Latin America surging, indicating a very divergent global picture. Furthermore, net margins in the airline remain extremely low at 2.7 percent (and are expected to fall further to 1.5 percent in 2011) because airline recession strategies often centered on realigning to deliver value to customers through low prices, co-branding, and packages.
This is an industry that already contends with many factors out of its control such as huge capital requirements, high operating costs, government policies, a reliance on ground operating systems, strict aviation regulations, strong labor unions, pressure from environmental groups, not to mention volcanic ash clouds and of course the weather! On top of all of this, airlines will have to get used to being in a constant state of flux driven by evolving demographics, the influence of technology and changing customer demands.
Consolidation has continued as airlines struggle to adapt to a post-recession era of lower profits and price competition. Following the merger between Delta Airlines and Northwest Airlines in 2008, United Airlines and Continental Airlines announced a merger in May 2010, and Southwest has announced its planned acquisition of AirTran to increase economies of scale and competitiveness. In 2011, expect to see more of the same. British Airways and Iberia have already agreed to a five billion pound merger in order to expand their international presence and airlines in the Asia Pacific.
Global travel will continue to expand with the main growth coming from Asia and emerging markets. It’s estimated that by 2020, Asia-Pacific will account for nearly 22 percent of arrivals, up from 18.3 percent now. Asia Pacific will also account for nearly 32 percent of all travel spending, up from 21 percent today.
A huge potential revenue stream will come from catering to travelers from emerging markets, particularly Brazil, India, Russia and China. However, a key challenge for many international airline brands will be how they cater to very different customer tastes.
We continue to see an increase in the growing importance of ancillary revenues and earnings from non-core operations with airlines increasingly unbundling products previously included in the ticket price, such as seat assignment and passenger preferences for meals, entertainment, and internet access. Longer-term, we may even see greater variety of cabin classes catering to differing customer tastes and affordability.
There is also a huge opportunity for the more “trusted” airline brands to further cross-sell services provided by third parties such as insurance, car hire and hotel rooms — providing a more seamless customer experience.
Adoption of mobile technology for both entertainment and business needs will continue to transform the in-flight experience, for better or for worse. Brand owners need to have a clear strategy that aligns all aspects of the customer experience around their brand promise to determine what and how technology is implemented.
On the ground, the travel industry continues to be transformed by social media, with large numbers of consumers choosing to book accommodation, flights and activities directly online, based on the advice of fellow holidaymakers and travelers.
Twitter, Facebook, Flickr, YouTube and online blogs have been used as advertising and promotion platforms, and some airlines have developed iPhone apps for online booking and check-in, targeting specific market segments and developing brand loyalty to the carrier.
Ultimately, airlines will increase profitability in a sustained way by creating unique customer experiences that are meaningful and relevant, with a clear understanding of which touchpoints are genuine drivers of purchase.
Airlines that continually question their business models and adapt to constant changes in customer behavior will be those that prosper most in 2011 and beyond.