When we think of technology, we normally think of high-flying stocks like Facebook and Twitter or popular consumer product companies like Apple and Samsung. But despite relying on a relatively stable practice -- putting passengers on planes -- for nearly a century, airlines are becoming more tech-centered than ever.
In the process, this creates everything from angry flyers to an emerging airline business model that could play a major role in airline earnings growth.
In September, United Continental (NYSE:UAL) surprised many flyers with an unannounced extreme fare sale. Trouble was, United never intended the low fares to happen. A glitch caused the United reservation system to offer fares that were free except for the 9-11 security fee of $2.50 per leg. After reviewing the matter, the airline decided to honor the fares, a smart move since not doing so could have caused a public relations nightmare.
But United isn't the only airline to give out unplanned discounts. On Dec. 26, 2013, Delta Air Lines (NYSE:DAL) had a similar problem, selling tickets for fractions of their typical price. The problem has since been corrected (sorry, no more nearly free tickets) and Delta said in a statement it will honor the fares.
Due to airline disclaimers, airlines do not legally have to honor the fares, but have chosen to do so to avoid damaging their public images. In the event of enough fares being sold that an airline would face significant financial harm, the airline would still be protected. For now, these glitches are more temporary nuisances for airlines, and are nowhere near as bad as another type of computer issue.
System issues, angry passengers
Airline reservation systems are extremely powerful tools that handle millions of passengers and are the backbone of operations. Trouble is, they don't always function correctly. Far more serious than the free-fare glitch were the computer glitches experienced at United Continental as United Airlines and Continental Airlines merged. Although the time period the glitches lasted for was relatively small, they still left flyers with negative impressions of the carrier, possibly hurting future purchases.
But reservation system crashes aren't unique to United Continental. Only a couple months after announcing the merger that would eventually create today's American Airlines Group (NASDAQ:AAL), American Airlines' reservation system went down, grounding all flights for hours. The delays and cancellations reminded airlines and passengers of the negative side effects of computer reservation systems, but airlines now have a major opportunity to revolutionize their business models by employing the latest in technology and data collection.
A 21st Century SkyMall
Flyers are familiar with the SkyMall magazines in the pockets on the backs of airplane seats, but airlines are finding new ways to cash in on flyers' desire to spend. Data collection is already big business in other fields. Retailers know what you bought, when you bought it, and sometimes even why you bought it. But even retailers can't contain their customers in metal tubes 30,000 feet in the air for hours on end.
This is where airlines are ready to shine. With broad-based pushes to generate high-margin ancillary revenue through things like checked bag and ticket change fees, airlines are looking for new ways to increase ancillary revenue without introducing more anger-inducing fees.
Now, with the data collection abilities available at major airlines, carriers have a treasure trove of data at their disposal. So far, airlines are taking it slow. The Wall Street Journal reported that American Airlines could record flyer's meal choices, but instructs flight attendants not to, fearing flyers would feel their privacy is being violated.
Even so, data available on board other airlines includes things like birthdays, previous purchases and upgrades, and even whether a flyer already ate at the airport and would rather be left alone. All this allows airlines to target services and promotions uniquely to flyers rather than the blanket approach previously seen. Best of all, if airlines can generate additional revenue through targeted selling rather than fees for everything, passengers have more choice and are likely to be more satisfied overall.
Technology for the skies
Despite all the troubles surrounding reservation system crashes and glitches, technology is setting up to be the next source for ancillary revenue for airlines. Using data collection techniques already in use in other industries, airlines can better target products, boosting both earnings and margins.
Alexander MacLennan owns shares of AMERICAN AIRLINES GROUP INC and Delta Air Lines, and has the following options: long January 2015 $22 calls on Delta Air Lines, long January 2015 $25 calls on Delta Air Lines, long January 2015 $30 calls on Delta Air Lines, and long January 2015 $17 calls on AMERICAN AIRLINES GROUP INC. The Motley Fool has no position in any of the stocks mentioned. 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.