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Insights

The Perfect Fit: Does your inflight retail business model actually work for you?

March 30, 2021
About the author Michael RaaschMichael Raasch
CEO, Omnevo

In my last blog, I referenced the fact that more than 30 airlines had gone bust and that many others had discontinued their inflight retail programs long before the pandemic. The aviation industry, its inflight retail sector and the wider travel retail industry have needed to rethink their business models for many years. That need is no longer just pressing. It is now critical to survival.

Travel retail needs increased penetration and consumer engagement, with reduced overheads and far greater efficiency in operations and supply chain than is practised at the moment. Incremental and ancillary revenues must be identified and maximised, with as little cost as possible. Industry players need flexibility and space to innovate beyond the boundaries of pure retail and to incorporate vital services such as F&B or entertainment. All this must be delivered at the highest possible standard, while creating new and exciting products which set the sector apart. This requires a modus operandi that is tailored to creating a sustainable business that sets itself apart, rather than reverting to outdated or clumsy models which come with limitations built in.

Creating differentiation will allow the market to compete with digital powerhouses such as Amazon and Alibaba – not by challenging them, but by doing what they cannot. There are examples of excellence out there already. AirAsia’s ‘Super App’ brings together multiple services, while Singapore Airlines and KrisShop have crafted an online shopping experience which stands as a viable business by itself - sans flying passengers. Each of these successes has a clear USP and a business model crafted to deliver the value propositions that its customers crave in the best possible manner, often far beyond the limiting confines of "inflight" or "onboard".

There are three possible approaches: Every airline and inflight retail business needs to decide which one will allow them to stand out and prosper, sustainably.

Model 1: Insourcing

Historically favoured by many larger carriers in the traditional inflight sector, this programme involves keeping all aspects of the business in-house. It delivers complete control for the business in question; the products and services provided can be kept on-brand, and both the offer and its profits tie into the wider business.

But to deliver a quality omnichannel experience requires immense trial (and often error), investment in skills and application of relevant technology, especially in the modern world. Consequently, the scope for collaboration, which breeds innovation and excitement, is also severely limited because of the belief that "everything" is – and therefore can be – done in-house.

Most importantly, this approach strips the business of any entrepreneurial spirit, with most companies seeking to deliver only what is necessary, without the drive to create or identify new opportunities. The business will have to be really be run as a retail business, rather than an airline one – which history has shown to be a real challenge for airlines.

Probably the biggest advantage of this model is the ability of airlines to leverage their usually-strong brand affinity – including their loyalty and frequent flyer databases – to drive necessary traffic to their retail offerings. Given that the Cost of Customer Acquisition (CAC) is particularly significant for all retail businesses, this offers a sizeable advantage for airlines, albeit one that probably can be leveraged better than it has been over the years.

Model 2: Outsourcing

Many airlines have also thought that it is easier then, to employ experts to provide the services and overall program. External companies often bring their own specialist knowledge and expertise. This keeps a lid on costs for the airline and delivers a reliable fee, usually in the form of a minimum annual guarantee (MAG), while allowing them to maintain a focus on their core business of flying people from A to B. It also opens up the possibility of benefitting from new or even existing partnerships which the external provider has in place.

However, it comes at the cost of being locked-in to a deal with an inbuilt imbalance in priorities and interest. This segregated approach requires another player, a disrupted data flow and a loss of opportunities for in-house creativity and product creation. All of the risk transfers to the concessionaire. The airline has signalled its willingness to accept a minimum fee through a hands-off approach to the business and its customers, while the concessionaire is cut off from the wider airline business – operating essentially as a closed book. When the economy, industry or the retail business takes a downturn, the airline will have little to no control over any part of this business, or the eventual customer experience, while the concessionaire will only be concerned about survival. As for customers, well, good luck to them!

On the issue of CAC, this is particularly a problem for concessionaires, to whom the airline has outsourced its program. Unlike airlines, concessionaires do not enjoy access to large databases of frequent flyers – or any flyers for that matter – therefore relegating the inflight retail business potential almost exclusively to the whims and fancies of purely impulse-based, on-board purchasing.

Model 3: The Hybrid Model

Hybrid models might offer more ideal outcomes than either full in- or outsourcing. Particularly in challenging times of economic and business uncertainty, agility and innovation are key requirements. Brand custodians (airlines) and specialists (suppliers, concessionaires) working together might just represent the best way to retain the flexibility and creativity required.

By working in genuine partnership with an invested outside party that shares common interests, industry players can create a win-win scenario, with mutual investment in the success of the business. The airline can maintain control of the product by having the last word, but the fulfilment is delivered by experts – allowing each side to play to their strengths. Like any partnership, though, this requires transparency and collaboration on everything from data to product and pricing. Neither party runs everything nor avoids all risk, but the possibilities become more empowering for everyone in the game, including customers. Best of all, airlines retain their ability to actually market to their travelers and drive not only more customers to their retail offers, but also lower the overall CAC in the process.

So what model might work best for you?

The correct model for each business will be as different as the businesses themselves and they must be adapted to suit. The Hybrid Model offers most flexibility in that regard, but the Insourcing approach can be made more flexible with the addition of the right partners and a few structural tweaks. The experience of Singapore Airlines, Lufthansa or Air Asia in relocating their retailing excellence into separate companies from the airline - with autonomous management while retaining deep ties into core marketing and loyalty engagement strategies – seem to be quite successful so far.

Variety is what makes the market exciting and successful. But too many companies have been stuck using outdated or unsuitable models and methods for too long and it is beginning to show. To create something new, a new mindset is needed along with appropriate business models that actually work.