When most people think of flying, they think of a seat, a carry-on bag, and maybe a snack if their airline still gives treats away for free. Business class travelers traditionally get extras like bigger seats and better food. However, a push in the airline industry is now seeking to make your flight much more than that and it is threatening to shake up conventional industry perceptions.
A story of a commodity
Commodities are difficult to differentiate from the same commodity being offered by a competitor. Typically, one person's ounce of gold is worth the same as an equivalent ounce of gold from another individual as it provides no additional advantages to the consumer and has the same uses and properties.
This works all right for commodity trading, where speculators rely on commodities being similar in nature, but it is a major disadvantage when one has a product attached to a brand name being sold to the everyday consumer.
Despite the efforts of airlines to paint planes in new colors, air travel developed a reputation as a commoditized industry. With seats being seen as equally uncomfortable across many major carriers, an airline seat became a unit of something to buy and not the airline seat of a particular airline.
Like most major corporations, major airlines pour a great deal of resources into developing brand names. After all, those commercials aren't just for fun. But the impact of commoditization eats away at the core message of these ad campaigns by lumping all airline seats into one and ignoring the differences between carriers highlighted in commercials.
Changing the product
When someone goes to buy a phone, they may buy an Apple iPhone, any one of Samsung's Galaxy series, or another brand name such as Nokia or BlackBerry. Regardless, most phone consumers consider their phone's unique features and don't just buy it because they need a phone.
Airlines want travelers to feel the same way about air travel to help build loyalty by having customers expect features from a particular airline.
USA Today noted a major change in the industry from just unpleasant fees associated with things like checked bags to other fees paid when a traveler chooses to add an extra product or service. Delta Air Lines (DAL +1.59%) has given flight attendants tablets so they can sell last-minute upgrades to passengers and US Airways (NYSE: LCC) has a program where travelers can have their checked baggage delivered to their house for an extra fee. Even Air Canada (TSX: AC.B) is moving into the passenger extras space by offering to rent iPads to Air Canada rouge passengers for $10 per flight so they can watch the inflight entertainment available on the iPad.
On one end, these extras serve as another way for airlines to enhance their ancillary revenues through the collection of fees for upgrades, products, and services. But they also serve to differentiate their product from that of other carriers. Passengers who do not have time to wait for checked bags may tend to fly US Airways while customers looking for inflight entertainment on an iPad may opt for Air Canada rouge.
But Delta is looking at taking the experience one step further. Just like online retailers that can suggest products often before you even think of them, Delta wants to be the first to suggest an upgrade for you based on your past selections.
Although it's not being used to its fullest effect right now, airlines are sitting on huge amounts of passenger data. As Delta Air Lines CEO Richard Anderson told USA Today, "We have massive amounts of data. We know who you are. We know what your history has been on the airline. We can customize our offerings."
Flying in the future
Major carriers have been looking for ways to differentiate themselves from competitors in an industry with a high level of commoditization. The latest push from carriers toward unique services and even customized offerings has two major benefits. One, it generates additional revenue from fees, and two, it sets the carrier apart from others, making customer loyalty easier to build.
But the potential for airline personalization still has yet to be fully unlocked. Over the next few years, investors and travelers should look for the rolling out of personalized upgrade products targeted to customers. Although I am often a critic of airline fee additions, if carriers can actually create unique innovative products and services as opposed to attaching a fee to a previously free product, then this trend in the airline industry could be beneficial to both passengers and airlines.
