Digital Transformation in the Airline Industry
By Branchspace | 29 January 2020
For any airline heavily invested in and increasingly reliant on technology, keeping abreast of disruption is only successfully accomplished through anticipating trends and evolving with industry.
As it stands, the two most fundamental recent trends and probable future directions of evolution in the airline industry are consolidation and digital transformation. If the former tends to happen often spontaneously and opportunistically, driven by the ever more acute competition and over-fragmentation of the market, the latter requires deliberately and carefully planned initiatives, typically relying on complex, long-term programmes and often massive investments.
As an industry, we are on the verge of becoming (once again) mature digital players, with many of even the most full-service and network-minded carriers either approaching or having already exceeded the 50% direct digital distribution threshold. At the same time, NDC, in spite of all its challenges and limitations, has become the preferred strategic indirect distribution channel and a genuine driving force behind the ongoing transformation of the industry.
But what does digital transformation mean? As a concept, we mean the strategic re-engineering of an organisation’s operations, technology and processes for the digital customer. This includes everything from the digitisation of manual processes to the shift towards data-driven, customer-centric thinking.
Nevertheless, a number of common misconceptions about what digital transformation entails and misrepresentations concerning how it should be approached (and executed) are making transformational digital programmes some of the most challenging and risky of airline endeavours. So risky that in fact there have been a remarkable number of significant failed initiatives in the recent years (often affecting highly reputable, industry-leading carriers).
In an industry that is so reliant on technology that one single IT failure may mean a complete interruption of operations for up to several days – and where its associated investments, running costs and effects are such that they can actually make or break an airline business – it is crucial to develop a good understanding of how to approach digital transformation. Those carriers that have failed to innovate or have bitten off more than they can chew often quickly pay the price of their mistakes, whether that means massive investment write-offs, loss of trust and appreciation of their customers or simply falling behind their competitors.
What Drives Airlines towards Digital Transformation
There are a number of reasons why airlines and airline groups embark on large-scale, transformational digital initiatives:
- Simplification, automation, streamlining and cost optimisation of their business
- Functional limitations, especially those related to delivering more customer-centric and tailored product offering and experiences
- Business continuity risks, mainly related to reliance on legacy technological solutions and/or security
- Reducing dependencies, constraints and costs related to legacy distribution models and the disproportionate power of a few oligopolist providers
- (For large airline groups) Group consolidation and enabling more effective, centralised control and governance processes
Whether you are looking to reduce your IT costs, enable more dynamic and personalised merchandising, future-proof your fundamental commercial technology stack or ensure that termination of the Full Content Agreement with your GDS partners is both commercially viable in the short term as well as a strategic win in the long term, our experiences and insight may be of use. Below, we’ll tackle some of the challenges airlines face in their transformation initiatives, and detail our recommendations.
Challenges for Airlines
Digital transformation is not easy. There are several challenges airlines face when looking to modernise their approach.
Achieving effective personalisation in online spaces is particularly challenging. Everyone wants to be like Amazon – for example unbundling and re-bundling within the shopping basket, personalised and contextualised offer management, and seamless handling of delivery and service issues. This kind of interface remains highly desirable for those in the airline industry, but it is difficult to replicate.
Last year McKinsey released a report that was critical of the weak attempts to improve hyper-personalisation by airline companies. To improve customer experience, the report suggests investment in better digital assistants, faster page load times and a more sophisticated approach to displays on smartphones.
The constraints of legacy distribution, especially in cases where GDS Full Content Agreements are still in place, is also a hurdle for airline companies. Ideally, airlines want to avoid diverting customers away from their website, but contractual barriers present a challenge to the design of an airline’s digital product offering and experience.
The maturing of IATA NDC and the emergence of ONE Order is indicative of the airline industry’s intention to simplify the ordering process for customers. However, some have noted that, without the proper introduction of interline, NDC is incomplete and will remain a challenge.
The aggressive revenue targets for all sales channels have also become a challenging dilemma for airlines. This is especially true for those focused on the digital side of business. The technical and business complexity of digital transformation is often underestimated.
How to Approach Digital Transformation
In previous transformation efforts, several airlines have taken a top-down approach that aims to transform with detailed requirements, traditional procurement and in a heavily engineered manner. In some cases, the implementation has been heavy-handed. A big dramatic solution has often been favoured to replace the incumbent solution completely and in one go.
As best practice, the approach to any transformative project should keep the following in mind.
- Consider Best-of-Breed Architectures
When there isn’t a single off-the-shelf solution available on today’s market, some co-creation with a combination of vendors is inevitable.
With a multitude of best-of-breed vendors, delivery requires a synchronised approach. Select vendors who are prepared to align their development sprints in order to foster agile delivery of end-to-end use cases.
- Take Smaller and Faster Steps
A series of smaller and faster steps are better than one giant leap in terms of implementation. With regard to the migration approach, airlines should consider introducing a new solution to run alongside the incumbent platform (side by side) and gradually shift users towards the new solution. This requires clear thinking about which use cases to focus on and how to maintain a coherent customer experience in the transitionary period. It also requires flexible IT operating models within the airline to manage dual solutions.
- Data-driven View of the Customer
Equally, it is important to remain focussed on the customer in challenging transformation projects. Explicit customer profiling is feasible, and as a facet of a data-driven strategy, it works well to enable personalised product offering and a better UX.
Investment in UX/UI designs should occur early on to promote clarity of the use case amongst your vendors’ teams. Understanding the experience from the customer’s perspective is required from all providers, even those working on ‘back-end’ components.
- Marginal Gains and Consolidation
New contracting models are required to foster agile and incremental delivery. Airlines and industry vendors have tended towards 5-year contract terms in the past. However, in the area of digital retailing, shorter contract terms are a better way of coping with changing needs.
Technical consolidation without a similar business process simplification and adaptation is likely to fail. If you take the approach that all business processes should be left intact and only technology should align with them, this is likely to create huge technical complexity and constrain the benefits of transformation.
Airlines should carefully assess which components should be replaced or transformed and which should not. Transformation should not always be forced on components that are performing well (e.g. because of abstract architectural considerations). An ideologically driven complete transformation is unlikely to deliver equal value across the entire tech stack.
It is useful to make a pragmatic evaluation or breakdown of components into the following categories:
a. Components that in themselves deliver substantial value through a transformation (e.g. bringing significant cost savings or revenue generation);
b. Components that don’t directly deliver substantial value through transformation but are needed as enablers / dependencies for other components (e.g. enablers of agility);
c. Components that fall in neither (a) nor (b) and which may not need to be transformed (or at least could be treated with lower priority).
Be prepared to sacrifice scope on an ongoing basis in order to deliver to original cost, effort or timeline targets. It is important from the outset to define an allocation of scope deliverables that can be postponed or de-scoped entirely when/if necessary. Ideally, these should not be positioned as ‘droppable’ until the moment when it is absolutely necessary in order to preserve the critical path.
The race to achieve successful digital transformation in the airline industry is good for competition and, ultimately, good for travellers. We can see that airlines that either refuse to innovate or attempt to take dramatic leaps in their digitisation process tend to fail more often than not. Whatever the pressure for a perfectly comprehensive solution, an incremental and pragmatic approach is much more likely to succeed and deliver value more quickly and safely.
Learn more about how branchspace can help boost online converison. If you have any questions, drop us a line and we’ll be happy to help.