The airline industry is in tailspin, hoping for a recovery some time maybe next year.
It will take years to make up for last year’s losses. But it’s basically always the same story; losses in bad times wipe out the profits of previous fat years.
In good times the airline bosses get obese and act like there is no tomorrow.
But what does a real entrepreneur do when he’s about to hit rock bottom or when everything is going the wrong way? He reinvents himself.
Most industries in the world have been through a metamorphosis over the last ten years and many have adapted.
The music industry doesn’t make money the way they used to; the Telkom industries doesn’t; nor the computer manufacturers; or the movie industry – and the list goes on.
But the airline industry refuses to change. The best thing they have come up with so far is trying to disintermediate the resellers and fight with the distributors – ie the GDSs – and sell over the Internet.
SAS, for example, have done not one, not two, not three, but seven savings and turnaround plans and they still don’t get it right.
Now they are talking about the eight plan. SAS can do 100 turnaround plans and they still won’t get it right.
They are trying to get back to a market that does not exist anymore.
It is easy to forget even Ryanair once was a losing carrier just like everyone else. It took an absolute menace like Michael O’Leary not to turn it around but redefine what business they are in.
But lets do something even more radical than Ryanair. Let’s look at crowdsourcing the aircraft.
Lets have a quick look at the problem in aviation.
For airlines, customer acquisition costs, distribution and general overheads are too high, they sell to few seats and at too low price.
The aviation industry also blames high fuel costs and the cost of aircraft leasing.
I’m not going to comment about that here, because all industries have costs for producing a unit and you have to calibrate your business to compensate for the costs – or do something else, like selling hot dogs.
In short there’s a shortage of ownership and guts.
But let’s look at how we could solve the actual problem – not counting, of course, legacy problems, IATA, government involvement, politics, unions etc:
- Say that an airline decides to crowdsource – effectively they will stop selling and give customer service at point of sale of its own inventory.
- The airline also stops all marketing activities.
- The airline basically focuses on finding the most attractive routes and to service them at absolute lowest costs.
- In this scenario very little overhead will be needed. An airline can even have its registered base in a country where salaries and taxes are very low.
- The airline opens its API for the inventory system to anyone, say a reseller or licensee.
- To resell you have to license the API and sales system, which allows the airline to track all sales and payments in real time.
- The airline has a rock bottom price, which cannot be undersold; the price should cover the basics to operate, airport fees etc but not more.
- The airline can at any time decide to increase or decrease frequency or simply decide to discontinue a route. So, a lot of guts is needed.
- The reseller/licensee is able to sell and package the inventory wherever, however and to whoever he wants. He can take as much or as little risk as he wants.
- The reseller/licensee is the contracting party towards the passenger, not the airline as it is today.
- The reseller/licensee would pay the airline a flat fee plus a percentage of the gross profit. The airline cannot yield and price as they do today, that will be at the discretion of the licensee.
This approach would open up a floodgate of innovative approaches from the market on how to price, sell, market and distribute the airline inventory.
And, potentially, in five years it would change the market dynamics.
There are of course hundreds of holes in the idea about the crowdsource scheme as described.
The core of my message is this: the aviation industry has severe problems that will not be solved by a few airline execs around the world.
What they should do is allow the crowd to solve its problems by simply letting go – people (all the fat overheads); the closed distribution models they operate under; the legacy; the business model; but, most of all, the prestige.
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Interesting idea. The airline industry is always going to be a bit precarious due to its high level of capital intensity and sensitive demand, so ideas to introduce greater flexibility definitely have merit.
My reservations in this case concern the level to which branding and product differentiation are important, particularly in the frequent flier / long haul markets. It may be that the most profitable segments of these markets are sensitive to branding and service differentiation, which would undermine the attractiveness of crowd sourcing from the supplier perspective?
My view is that the most likely outcome will be continued growth and dominance of the low-cost model, with a smaller but profitable ‘brand’ market since it seems that there are still plenty of people who value a recognised airline brand and are willing to pay.
Yes, very good. Rather naive and nothing new, but nonetheless. It has been said for some time (which may paraphrase what is being said here) “If you can’t make money flying from A to B, don’t fly from A to B”.
There is a major difference twixt a limited route, short haul operation which may cherry pick and a global air travel operation. It is rather silly to suggest otherwise. Further,it seems to fail to occur to many that air travel does not consist of flying from point A to point B. In case no-one had noticed, many of the (legacy) airlines fly globally (not just 2 hours down the road) and many of the travellers using those services need to be able to travel, not on a simple point to point ticket, but on a ticket that may span airlines, indeed, continents. This type of travel is, incidently, highly profitable.
Consequently, all the airline relaunches (as is SAS) have to accommodate a global travel solution rather than the rather simplistic outlook promulgated here. The method of selling and distributing air travel did not come about overnight – it evolved over a very long time period and, indeed, worked rather well – mainly because the fares charged were on balance, realistic. It was only when certain routes were cherry picked and someone decided that the Great Public had some inherent right to cheap air travel, that things went awry. True, this has left the legacy airlines with some big issues to tackle but to follow the suggestions mentioned here, which demonstrate a rather tenuous grasp on the reality of global air travel, would make such global air travel effectively unworkable.
To achieve effective global travel you need to have interlining, you need to have minimum connecting times, you need to have the Global Distribution Networks – the GDS. Without these, which are managed through or consult through IATA (I don’t believe IATA is best but it’s all we have got) much global travel would simply not be possible – or become so haphazard that journey times would become impossibly extended.
Further, most of these wildly fanciful suggestions are usually made by people who enjoy the (sometimes unsustainably cheap) networks of the developed world. They are not made by (and show no acknowledgement of) the issues affecting the developing world. They do not acknowledge that many legacy airlines provide desperately needed links to outposts of that nation’s old empire (Air France and Cameroon, SN Brussels and the Gambia, TAP Air Portugal and Angola to mention a few) without these links many would suffer privations – the routes are not very profitable (if at all) yet to cut them could spell disaster for the developing nation concerned. Many of these routes were cross-subsidised from more profitable routes – so next time you take your nice cheap London to Paris on Cheapo-air just spare a thought for some developing corner that as a result, may lose it’s one connection to the developed world.
So, yes, legacy airlines do have an issue – and it is not one that can be solved in such a simplistic manner without making global travel unworkable and great privations for many. The answer, it would appear and could be argued, would be for cheap short haul air travel to be taxed heavily to allow legacy airlines to charge realistic and sustainable fares. Unacceptable? Really?
Apart from not stopping their marketing activities, airlines (think LCC as examples) are already doing most of the things suggested, so the technology and the ‘guts’ already exist.
Hmmm…pretty interesting!
The issue of APIs in particular is quite a vexing issue with most of the airlines hesitant or unwilling to release the same; and this is more so with budget carriers. This needs to be sorted out and really quick as airline inventory literally goes abegging in most cases…
But the point about airlines stopping all marketing activities is a bit too much…just take a look at Gulf carriers – Emirates, Etihad, Qatar Airways and the like. Marketing and Brand positioning have made them what they are today, and this has paved the way for other global airlines to follow suit. Surely cutting down overhead is no excuse for curbing down marketing campaigns.
But I must agree the other points are extremely workable and present a really good case for airlines…