The opening question posed by Timothy O’Neil-Dunne, Managing Partner of T2 Impact was the million dollar question: Is the airline industry in recovery?

 

It’s actually hard to know.  Indicators say yes, but overall the situation is still very unclear.  We have a financial recovery where the stock markets are up, yet we’re still waiting for the economic recovery, where employment is still down in many countries.

 

Ironically, the harder to fill front-end of the plane is once again filling up because companies have started to spend again, although the fares are still below the 2008 levels, yet filling up the back-of the plane is proving to be more of a challenge. And economy class represents about 60% of revenue for many traditional carriers.

 

There is also the escalating battle between LCCs and the more traditional carriers. Recently Tiger Airways announced the start-up of Thai Tiger which is an important development in South-east Asia, for the newly-formed company will be using Thailand as the springboard to new markets.

 

While we know that the LCC model has been working and expanding rapidly in SEA, the traditional carriers, possibly with the exception of Qantas/Jetstar, have really lost an opportunity while trying to protect their markets instead of setting up low cost subsidiaries to better compete with the discount airlines.  

 

Full-service carriers are being squeezed in their local markets, where the spokes are not feeding into the big hubs anymore, because LCCs are eating away at their core markets. And it’s these local markets that are required to feed into the more profitable long-haul operations for traditional carriers.

 

The general picture in Asia is that the legacy carriers are losing market share to their LCC competitors, and losing it fast.  Which full-service carrier can claim to have an order of 150 new aircraft in the coming years?  Lion Air can.  Tiger Airways has a big plane order on the horizon as well.  And Air Asia is poised to be the biggest Asian airline by seats by 2015.

 

Yet an interesting conundrum is starting to appear. Should there be a convergence of the low-cost and a full-service model so as to make it easier for customers to fly into an airport on a LCC and fly out on a legacy carrier? How is a passenger to book their flight seamlessly across both models?  

 

This can pose a big disadvantage to the LCC model for it’s taking them away from the proven LCC strategy.  And will the desire of LCCs to increase yields take them away even further from their model, by starting to adopt services that are more common to traditional carriers such as frequent flier programmes, lounges and connecting between networks?

 

Ancillaries have also proved to be a great revenue source for airlines. US airlines earned US$500 million from fees for changing tickets in the past year. This is the best ancillary revenue source for them, even more profitable than charging for luggage. We are to distinguish though between the plus/plus model where legacy carriers are starting to charge for preferential seating vs the less preferred minus-minus model where suddenly you have to start paying for your luggage.

 

With so many unknowns facing the airline industry, it was time to question the panelists consisting of Peter Harbison, Executive Chairman of Centre for Asia Pacific Aviation (CAPA), Marnix Fruitema, Senior VP of Asia Pacific, Air France KLM, Azran Osman Rani, CEO of AirAsia X and Assen Vassilev, VP Strategy and Business Development & Co-Founder of Everbread & Haystack to see if they had any quick-fix solutions.

 

An interesting phenomena that is occurring in today’s airline market is the recreation of the premium class of travel.  Many airlines are eliminating First Class service altogether, as KLM did some 10 years ago, and forming a new and improved business class.  

 

Air France has recently introduced a new premiere economy class which is proving to be very popular.  Did you know that with KLM for example, many of the economy plus products are sold last minute, at the airport, for an extra fee?  Yet how are airlines communicating there products in the general market since there seems to be a resistance to traditional market segments?  The key is to offer choice of products and distribution channels, be it from home, via travel agents or at the airport.

 

It was noted that air fares have also become too complicated given the many alternatives available today and that there needs to be a shift towards a more simplified pricing model with more transparency for the customer.  In some ways it feels that the complexity of the airline industry has outgrown the technology used.

 

As the session and the day were coming to the end, the last question was inevitable.  What is ultimately the winning model for the airline industry?  And this is where everyone agreed. There is no right model for everyone!  But what you do have to be clear about is which customer segment you’re going to stake your claim on.

 

Look at the customers that you serve and define what you’re going to offer them. The problem today arises from many airlines being lost in the dangerous middle ground. They don’t have the operational capabilities of serving the mass market base, yet don’t have a competitive premium product to attract the high-paying segment.