Customer-centricity is the Key to Post-COVID Success for Airlines

Shahzad Chaudhry

The impact of COVID-19 has arguably hit the aviation industry harder than any other. According to The International Civil Aviation Organization, by the end of 2020, we could see reductions of up to 1.5 billion passengers globally, leaving airlines and airports facing a potential loss of revenue of up to USD 314 billion and USD 100 billion, respectively.

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So how can airlines combat this catastrophic blow to their business? In the short term, it is not feasible for them to consider radical business model transformations. For airlines, the short term is all about survival.

Health and safety are now at the forefront of most passengers’ minds, and airlines are stepping up. We’ve seen numerous programs launched, like Delta Clean, Etihad Wellness, and Air Canada’s CleanCare+ in conjunction with trusted names like Lysol and Mayo Clinic, to reassure and rebuild passenger confidence.

Additionally, airlines that had the foresight to invest and build strong loyalty programs are unlocking the value of these programs to generate liquidity. American Airlines’ AAdvantage had an appraised value of at least USD 18 billion to be used as collateral for a $4.75 billion CARES Act Loan. Meanwhile, United Airlines’ Mileage Plus, valued at USD 20 billion, was leveraged as a pledge to receive a USD 5 billion loan aimed at buffering its liquidity.

Short Term Predictions

Bounce back will take longer than expected: We don't anticipate the demand for international travel to bounce back until 14-day quarantine conditions are consistently lifted across popular travel destinations. For anyone who wants to take a vacation, it won't be feasible to spend 14 days in lockdown. However, domestic travel, requiring more than 6 hours of driving, is likely to shift to air. Travelers will put their trust in the sanitation procedures of airlines rather than in that of gas stations and other roadside amenities, as well as seeking to limit their travel time.

Airlines have missed out on the summer peak of 2020, and many will hope to capitalize on the upcoming holiday/New Year peak season. Still, an optimistic scenario will see demand beginning to bounce back by the summer of 2021, and even this will be at well below 2019 levels.

Don't expect prices to drop drastically: Airlines will continue to take a rational approach to pricing. You won't see them announcing considerable discounts to encourage passengers back on board. Revenue management teams will carefully assess demand, protect yields, and model out break-even scenarios. At the very least, a route must meet its Variable Operating Cost (VOC) to be economically feasible.

The “neighbor-free” seat or empty middle row: Empty middle rows and neighbor-free seats cuts down a third of an aircraft’s capacity, making route economics very challenging. Some airlines may offer this temporarily as a confidence-building measure, but it is unsustainable in the long run. However, it could be an ancillary revenue opportunity for airlines. By analyzing spoilage rates per route, “neighbor free” seats could be made available for an additional fee. Some airlines were already offering this feature it pre-pandemic, especially during quieter seasons.

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Loyalty will matter more than ever, although redemptions will change. Major airlines that offer non-air redemptions through partnerships or their own rewards catalogs have noticed an increasing trend in redemptions for gift cards, electronics and wellness products as people look to add comfort to their lives while living on tighter budgets. This unexpected boom offers numerous opportunities to build brand sentiment and maintain a relationship with customers outside of travel.

Despite airlines having opened up seat capacity for redemptions on flights (no blackout periods now!), we expect to see this trend in non-air redemptions continue throughout 2020.

Tier status and points expiry extensions will continue: Airline loyalty programs always have a breakage target, but breakage will take a backseat during the orchestration of the COVID-19 crisis in favor of building goodwill with customers.

Loyalty will pivot from transaction to experience: Bond’s research shows that the transactional aspect of a loyalty program accounts for less than 25% of what drives engagement. An overwhelming 75% is driven by a human-centered approach focusing on personal relevance, convenience, recognition and support, digital and mobile adaptability, and trust.

Frequent flyer programs are historically incredibly transactional. They offer bonus miles, accelerated double and triple miles to buoy up quieter seasons and routes, and many redemption options are limited to air travel. With few people earning points and even fewer looking to redeem for additional travel options, we expect to see a shift towards airlines using loyalty programs to enable better customer experience and create deeper relationships.

Loyalty partnerships will become crucial: During the pandemic, airlines with loyalty programs with strong, non-air industry partnerships were better able to engage with their passengers even when they were not flying. Leveraging these partnerships, they were able to integrate their programs with everyday essentials such as food delivery chains and goods delivery to expand engagement opportunities.

Now is the right time to strategically focus on loyalty programs and expand the existing partnership network beyond the traditional “travel-only focus”, which limits the horizons of innovation to car rentals and hotels to meet customer needs and expectations.

Loyalty fraud is expected to rise: As non-air redemptions rise, there is genuine apprehension within fraud management teams, geared more towards detecting air redemption fraud. They will need to pivot quickly to detect and prevent potential fraud for non-air redemptions effectively.

The Long Haul

Short term survival is all about heavy operational focus and stimulating demand through confidence-building measures. However, for airlines to achieve long-term sustainability, they need to reexamine some long-held, yet often inaccurate, truths. There is a misconception in the airline industry that their business model is Point-to-Point, Hub and Spoke, Full Service Carrier (FSC), or a Low Cost Carrier (LCC) model. These are all operational definitions which highlight the way core processes within the business are structured, but they do not demonstrate how a business generates value for their customers. In short, airlines that believe their core reason for being is the transportation of passengers and cargo in an operating model are doomed to fail.

The reality is that, even before the pandemic hit, today’s passenger’s needs and wants were being reshaped by rapid innovation, personalization, and digital-enabled convenience that they experienced in other sectors. While airlines lagged, passenger expectations evolved into more than being transported from point A to point B. They were not buying a seat inside a composite metal tube at 36,000 feet flying at 500 knots. They wanted to buy a personalized, seamless, frictionless, and memorable experience. Passengers expected the airline to remove as much time-wasting and pre-travel stress as possible, and they preferred mobile apps and social media interactions to solve their problems.

In order to bring the customer right back to the center of their philosophy, airlines need to undergo a digital-enabled Business Model Transformation, which is subtly, but importantly, very different from Digital Transformation. Given their propensity to focus on operations, Digital Transformation within an airline quickly morphs into internal process optimizationIT and system upgrades, enhanced data capture across passenger handling services, departure control systems, increased operational reporting, etc. The focus soon becomes cost reduction and internal efficiencies. While there is nothing inherently wrong with this element of transformation, it sadly ignores the customer.
A digital-enabled Business Model Transformation has the customer at the core. All processes, new technologies, and innovation programs are introduced and implemented to better engage with passengers and enable a seamless passenger journey. Digital-enabled Business Model Transformation delivers a customer-centric evolution of products and services with technology as an enabler, not the driver.

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Clear skies ahead

If airlines want to emerge and thrive following the damage wrought by the pandemic, then they need to reexamine their core reason for existence and transform their business model from transportation to creating experiences and building connections.

People will be cautious about returning to the skies. Airlines that look to build a relationship with their customers beyond flight, infusing humanity into every aspect of a consumer journey, are the ones that will flourish. Using the insights gathered throughout a customer’s interactions will enable airlines to deliver a memorable, personalized, engaging, value-rich experience to their guests, which will foster the loyalty and trust needed to make people feel ready to travel once more.

The real key to unlocking a great travel experience is understanding customer behaviors and preferences, and then using those insights to deliver a reimagined human and digital experience.