Could New Flight Deals Make Airlines More Like Old Navy & McDonald’s?

A new report says airlines can boost low margins by thinking like retailers.

Jun 11, 2014 at 11:48AM

With recent news about the leisure travel boom and packed summer flights, air travelers can be forgiven for assuming that airlines pocket a nice chunk of each fare they sell. But the airline industry worldwide has a pretty lousy average net profit margin—2.4% overall, which translates to less than five and a half bucks per passenger, according to the International Air Transport Association.

That's closer to the typical 1% margin for the grocery industry than it is to the 5% that publicly traded retailers have enjoyed in recent years. So it seems only natural that one of the travel industry's biggest IT players wants airlines to boost their margins by merchandising like retailers do.

Spanish travel tech company Amadeus, which serves airlines, hotels, and other travel businesses worldwide, estimates that with retail-inspired techniques for giving customers what they want when they want it, airlines could increase "basket size" (a retail term that describes the price of goods per purchase) by up to $47.

Amadeus' report points out several areas where airlines can step up their game. The two most obvious are smart offer timing and value-added bundles.

Making the Extra Value Meal of airline services

Fully half of the travelers in Amadeus' study said they were interested in buying bundled services from airlines, making the value-pack approach the most popular of all purchasing options. The report cites McDonald's (NYSE:MCD) Extra Value Meal as a specific example of a smart value-bundle offering, because it gives customers a cheaper way to buy three things (a sandwich, fries, and a drink) that they would otherwise order separately at a higher total cost. The deal also helps move more product. McDonald's, by the way, has a net operating margin of just under 18%.

Airlines may not be in the business of serving up fries but they can, Amadeus points out, offer a discount to time-sensitive travelers who purchase, say, priority security lane and boarding passes along with their fare. Other options the report suggests include extra legroom, a spa experience at the destination, or another comfort-focused offer.

Adding value-pack purchase options could add up to $25 to each customer basket on its own, Amadeus says. But making those options available a la carte is the second-most popular choice among travelers. Making that easier for flyers could add up to $13 per purchase overall.

A quick look at some major airlines' sites shows some bright spots and lots of room for improvement. Right now, booked customers can buy early check-in privileges on the Southwest Airlines (NYSE:LUV) home page. Delta (NYSE:DAL) flyers can bundle priority boarding with inflight wi-fi or an extra 1,000 frequent flyer miles. American Airlines (NASDAQ:AAL) has a la carte and package options, but they're on separate pages. Users must click on the title of each package deal to see what's included, and prices aren't listed with the descriptions.

United (NYSE:UAL) has the best-looking extra services web page of the four airlines mentioned, with a la carte offers grouped visually by time (booking, arrival, onboard) and place (airport, arrival at destination). But none of the airlines I looked at has an easy-to-find and easy-to-navigate page with a la carte and package deals ready for instant purchase.

Taking a page from the Old Navy playbook

Gap (NYSE:GPS) posted a weak first-quarter performance but still had operating margins of 11.7%. Fans of suburban fast fashion know how Gap's Old Navy brand rolls: with lots of email promotions for sales, holidays, and "Super Cash" events designed to keep shoppers coming back to the store and site.

But the real genius behind Old Navy's marketing is in the timing. Sign up in-store for the mailing list and you'll find a welcome discount offer in your inbox by the time you get home, when you're still enjoying the thrill of your haul and maybe thinking about what you wanted to buy but didn't—yet.

And it turns out, per Amadeus' report, the time right after a trip is when some 25% of flyers are most open to offers from airlines. Other prime times when customers are receptive to airline offers are the booking phase and within two days of a trip, when travelers are wrapping up last-minute details before takeoff.

Old Navy has the right-before-an-event thing down, too. The stores hand out discount vouchers called "Super Cash" from time to time, but shoppers have to wait to use them. Old Navy sends out email reminders right before Super Cash-eligible sales to get more customers into the store.

For airlines, a day or two before a trip would be an ideal time to let customers know if inflight Wi-Fi is available on their plane and if so, to let them buy a pass in advance, rather than leaving flyers to remember to check in on their own to see if their plane is wireless-equipped. And it seems that passengers waiting to clear security would be receptive to a last-minute text option to buy their in-flight drink voucher while they wait.

Making existing deals visible to travelers

It's one thing to create deals. It's another to make sure they're easy to find. As mentioned above, a common problem with the airline sites as browsed on a PC and a tablet is hard-to-navigate menus for a la carte services and bundles.

Signing up for email offers isn't always easy, either. In the case of Delta and American, email list opt-ins were absent from the top of the main page, whereas the Southwest homepage had a "Sign Up N Save" tab at the top. Oddly, Delta and United label their deal signup "Email Subscriptions." That's technically accurate but not the most compelling way to describe an email list that can keep customers up to date on deals and savings.

If Old Navy can build perennial demand for an item as basic as a T-shirt with a flag printed on it and McDonald's can find fresh ways to spin burgers and fries, then surely airlines can adapt those techniques to upsell travel experiences.

The prospect of a bigger basket has got to be tempting to executives and shareholders -- and to contractors like Amadeus who have a vested interest in clients' success. That estimated extra $47 could help bump up the per-customer profit from $5 and change. But to fill that basket, airlines need to give their customers more items to put in it and and easier ways to buy them.

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Casey Kelly Barton has no position in any stocks mentioned. The Motley Fool recommends McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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