Etihad’s Airline equity investments strategy started in 2011 have been a Disaster

Abu Dhabi based Etihad are big investors in other airlines. With investments in Air Berlin and Alitalia already marking an $808m loss on the airline’s books, it looks like Jet Airways is shaping up to become the latest in a string of disastrous investments. Why do all Etihad’s investments go so very wrong?

I remember as it was yesterday being in former EY Chief Strategy Officer Kevin Knight office along other senior executives (2013), kindly advising him to read ‘The case Swissair’ book, unfortunately only available in German or French… His answer was straight forward: ‘we already studied it but following a different path…’ Obviously they didn’t learned from Swissair Grounding following a very similar hunter strategy developed by McKinsey & Company back in 2001. Unfortunately as EY Equity partners strategy is falling apart, it is an evidence that at least they didn’t understand in a proper manner the Swissair case and it is a shame considering the trust and money they got from Abu Dhabi leadership.

So, why have all Etihad’s investments been such a disaster? Etihad A380Etihad have made some terrible investments. 

With India’s Jet Airways grounding, it looks as if they are set to become the latest in a string of failed investments for Etihad. With pilots going unpaid and planes grounded due to non-payment of leases, it looks like the curtain is falling on Jet once and for all.

Over the previous few years, Etihad has attempted to buy its way into closed markets by investing in failing airlines. Time and again they’ve grabbed a stake of a struggling carrier, believing they can turn things around and make those airlines profitable. In the majority of cases, that has not been the outcome, and instead Etihad have been left with yet another failed investment to absorb.

Why does Etihad keen investing in failing carriers?

For Etihad, they were somewhat late to the party. Despite being backed by the richest Emirat in the UAE, the airline struggled to make a place for itself in the shadow of its larger, more well established neighbors, first overall its cusins in the north (Emirates) and Qatar Airways, all of them known in the airline industry as the Middle Eastern Mega Big Three.

To make Abu Dhabi a hub for connecting passengers would mean drawing some away from the competition. And how could they compete with the likes of Dubai and their mega hub?

In an attempt to build the hub of Abu Dhabi and compete with Emirates and Qatar, Etihad have deliberately targeted failing airlines for investment. Their purchases have included a 29.2% stake in Air Berlin, 49% in Air Serbia, 40% in Air Seychelles, 49% in Alitalia, 24% in Jet Airways, 21.8% in Virgin Australia and 33.3% stake in the Swiss carrier Darwin Airline. Darwin rebranded as Etihad Regional from March 2014.

Etihad hoped that, by investing in these airlines, it would make inroads in hostile nations and build feeder traffic for Abu Dhabi to become a hub to rival Dubai. Unfortunately, this came at a price, and not one that most of these airlines could absorb.

Where it all went wrong

Etihad thought they could simultaneously restructure their investment partners and make them profitable too. They went about things relatively aggressively, demanding major changes to routes and schedules, in some cases even demanding to be put in control of the airlines altogether.

Understandably, they were met with resistance. Naresh Goyal has, for years, been unwilling to give up control of Jet Airways, and wasn’t about to hand over the reins to Etihad either. For them, new routes to Abu Dhabi simply made no sense, no matter how much money their benefactor was pumping into the business.

Most of these airlines saw a gold plated, state backed cash cow in Etihad. They thought their investor would simply keep pumping in money, while everything stayed the same. They were in for a shock, when Etihad tried to change anything and everything they could.

Etihad was met with resistance to change, unwillingness to comply, and well organized, unionized labor forces who were adept at saying ‘no’. The end result was the collapse of both Air Berlin and Alitalia, with both airlines filing for bankruptcy in 2017. This was made worse when Air Berlin’s administrator sued Etihad for €2bn last year. In Switzerland, Etihad sold Darwin in 2017 after strong resistance from Swiss.

Not all of Etihad’s investment attempts have been failures. Virgin Australia and Air Seychelles have been doing fairly well, and Air Serbia succeeded in bringing in the feeder traffic Abu Dhabi wanted. However, these were small successes in a stream of severe failures which left Etihad down $808m by the start of last year.

The future of Etihad

The fallout from all this has been that Etihad are now curbing their ambition to become a hub and spoke airline to rival Emirates and Qatar. They are trimming back routes, cancelling deliveries of planes and becoming little more than a middling airline serving Abu Dhabi residents rather than the global market.

Under the leadership of the board of directors chaired by H.E. Mohamed Mubarak Al Mazrouei, the future for Etihad is shaping up to be different, but not necessarily bad. Projections are that the airline will continue to post losses up until around 2022, but that these will become smaller over time. 

To turnaround the struggling airline, Tony Douglas was appointed as Chief Executive Officer on January 2018. With Tony at the helm, a major restructuring started to take shape. This had led to cuts in services, with many of the exuberant frills now gone from the carrier, and cancellation of airline orders. Job losses have been massive too, with more than 4,000 departing the company over the last 18 months.

Their appointment of UAE national Mohammed al-Bulooki as the new COO is very telling of the direction in which the airline is heading. Al-Bulooki is clearly being groomed to become the next CEO, as part of the airline’s strategy to ‘Emitarise’ their business, bringing more UAE nationals into high ranking positions.

With a new focus on local service and cultural values, Etihad is shaping up to be a decent national airline. It’s unlikely they’ll ever really make a dent in Qatar or Emirates market share and doesn’t really make sense for them to try. Hopefully this new direction for the airline will, in time, see it becoming the profitable, successful venture that it always should have been.

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Planning Start-up Airlines?

At 1BlueHorizon Group we have been receiving many start-up airline project papers from all over the world. They asked us for our opinions, advice by presenting their business plans or executive summaries. Unfortunately, most of them contained unrealistic plans or plans not meeting regulatory requirements. Most of the principals of the projects had no knowledge or experience in the airline business, some worked in the airline industry but they didn’t have sufficient knowledge and experience as they worked in the particular department of the airline business without knowing other departments of the airline business.

We are happy to give our opinions and advice. Often we give guidelines and contact details of professionals who may be able to give them what they are short of.

There was a case from an African nation and its business plan contained the round the world route as its route plan with 5th freedom in every destination its flights stop. Obviously, the principals of this project had no knowledge of ‘Air Service Agreement (ASA)’. ASA contains traffic rights, passenger capacity of the aircraft, frequency, allowed destinations, other conditions. ASA is signed by countries involved, not the airlines. Certain routes start-up airline is planning to operate flights may not be covered by ASA as the government of country start-up airline is based does not have ASA entered with the government of the country which destination of the start-up airline is located OR particular destination(s) is not covered by existing ASA between these countries. ASA governs air transport traffic rights and it is recommended to check with relevant government authorities that planned flights are covered and allowed by existing ASA. Start-up airline may request its government to amend existing ASA with counterpart country’s government or establish new ASA if there is no ASA between them. You can’t operate scheduled service without ASA. You are welcome to contact me if you require further information on ASA and sample contents of ASA.

Airline business, especially, scheduled airline service is regulated and nationality rules apply to its ownership. Most of the countries in the world have the nationality rules requiring airline company licensed in their countries to have majority shares to be owned by its nationals. Commonly 51% of shares or 50% plus 1 share to be owned by the nationals of the country. International scheduled air services governed by ASA’s signed between countries involved are national rights of each country entered into ASA’s. This means only airlines majority owned by nationals of participating countries are allowed to utilise traffic rights allowed in ASA’s.

There are some exceptions. Australia allows non-Australian majority based airline for domestic flights only. The USA restrict foreign ownership in any US registered airline to maximum 25% of shares.

There were many cases the principals of the projects seeking 100% foreign investment for their start-up airline projects. They do not realize nationality rules apply to the airline business. No investor would invest in the airline project without any investment of the principals of the project.

For sales & marketing plans, the principals of the projects should know many aspects. If the planned airline is a full-service airline interline and SPA (including IATA MITA, MPA) should be considered and GDS should be considered too. The principals of LCC should examine their projects are really targeting LCC market. It is not right to think LCC will succeed regardless of area of operation. There are certain markets where LCC’s are not received well due to cultural differences. The right form of the airline should be decided out of the full-service carrier, LCC, the hybrid carrier.

Selecting the right aircraft type is also a major issue. The selection process should be based on range, capacity, performance data and so on. It is recommended to start with leased aircraft until the airline is well established. It is important to have the cash for operations so the purchase of the aircraft should not be considered until the airline has sufficient cash to cover aircraft purchase and operational expenses. It is recommended to check the commercial market value of the aircraft. You may find aircraft cheaper to lease or purchase than other aircraft in the similar category.

It is recommended to have the capital equivalent to minimum 3 months operation without revenue or higher. If you have the capital sufficient enough to operate flights as per timetable for 3 months without any passenger, cargo revenue, your airline shall most probably be considered ongoing concern. This is the minimum capital recommended for the start-up airline projects.

The airline business is not corner shop business which you can do whatever you want. The airline business is regulated business and international rules also apply. It is recommended to seek professional advice to ensure your project is doable, complying with regulations.

The principals of the airline project should have seed funds of their own to start with. You are welcome to contact me if you need my opinions, advice. It is pity to see people wasting their time on impossible airline projects which are out of regulatory requirements and other conditions.

You may contact us by e-mail to info@1bluehorizon.com

U.S. airlines drive against Gulf carriers is not a surprise…

Did you remember what was Boeing reaction after being overtaken by Airbus in the late 1990? They argue that European governments have violated free-trade rules by subsidizing Airbus for decades… I was just shocked, even disgusted considering the aviation pioneer from the US, following live Richard Quest on CNN and listening Delta Airlines CEO Richard Anderson unacceptable comment related to the 9/11. For me, clearly you’re losing the debate when you try to link your opponent to 9/11!

Regardless of that comment, the problem of the US Legacy carriers is much older than 9/11 (in 2001). Much of what has gone wrong can be traced in 1978 when the Airline Deregulation Act was adopted. Airline deregulation, a useful step in principle, was never about building a strong industry; it was about lowering ticket prices by creating competition. A decade or so later, three of them (Trans World Airlines (TWA), Continental Airlines and Amercia West – were in Chapter 11 bankruptcy proceedings. The Nord American U.S. Big Three (American Airlines (& US Airways)  197 mio PAX / 954 A/C, Delta Airlines 171 mio PAX / 719 A/C and United Airlines / 138 mio / 70) were themselves under serious financial pressures and complaining bitterly about the protection from creditors afforded carriers in Chapter 11 and the far wars to which they were addicted.

I am not convinced that the real problem is because the Middle Eastern airlines are government owned as such… My lecture is that they are scared that their goal aren’t to maximize profit for the airline but for the country, which is something US airlines can’t compete with as they have to maximize shareholder value. MEB3 will reinvest any profit in their fleet and offering to have more passengers using their respective hub. This is their main reason d’etre… not to make any investor / shareholder happy.

For sure, I would not under estimate the resolve of the US Government/system. They are capable of using a wide range resources and winning is more important than time. Look again at their dispute between Boeing and Airbus – how many years and the real question is ‘who is cheating better than the other’… It will take age… and the mean time the Middle Eastern Big Three (MEB3) growth will be more or less stabilized… as you can’t grow forever, unfortunately…

What it basically boils down to is this:

  • The Middle Eastern Big Three carriers are government owned, so the US airlines claim they’re no longer competing with other airlines (not private businesses), but rather directly with (foreign) governments
  • Clearly this wouldn’t be an issue if the Middle Eastern carriers weren’t gaining so much market share; this scares the US airlines, because the growth of the Middle Eastern carriers seems endless
  • Is this even really a fair complaint, when US airlines have also benefited from governments over the years?

Bottom line:

  • As I’ve said before, I think the truth is in the middle. If the US airlines want to go after the Middle Eastern Big Three carriers, they really have to go after all airlines that are government owned. And if they do, that’s a slippery slope. Where does it stop — if they’re 100%, 50%, or 5% government owned?
  • So while I’m all for fair competition, I think I side with the Middle Eastern carriers here. Part of competing in the global airline industry means accepting that life sometimes isn’t fair and that not all airlines are on a level playing ground, from staffing costs to capital to profit goals.
  • But if the argument is that it’s not ‘fair’ to compete with government owned airlines, it hardly seems fair to single just three airlines out.

Sure, each side uses information or one bit of fact or the other to support their case, but at the end of the day, I have to feel the playing field is not level. If Delta was making similar claims against most of their European rivals (who are publicly traded for the most part) then it’s a different story. Stop complaining and continue to improve your offering to be able to compete at the same playing field of services as the company here… In Europe, Lufthansa is clearly following that way…

The US Carriers have to think about their pioneers who start the aviation 112 years ago, what I would call the ‘Wright brothers spirit’… They have also to consider the full picture… about these subsidies and their effect… about the overall impact of that matter on the US economy and not only on their airlines… Also, they have to realize that the Middle East is the hub of global aviation for a basic geographic fact: The Gulf is situated just 8 hours flying time from two-thirds of the world’s population, well placed to tap into many new and emerging markets in Asia, Africa and Latin America….

‘Les chiens aboient, la caravane passe’ as we say in French (‘sticks and stones may break my bones’)… More seriously, today we still have only two key aircraft manufacturers and I can see real damage in the Boeing Gulf carrier’s relations. They are looking for the best available product, and if they will stop considering Boeing it will have a big impact on their fleet as Airbus will not be able to double its supply chain. For sure, as part of that commercial war, the US department of trade will have to analyze very carefully the whole situation, in particular the U.S. aerospace industry benefiting greatly from their size and expansion. It represents a lot of money for the aerospace industry that means real, high skill and high paying U.S. jobs…

Again, I think it’s a slippery slope. There are dozens upon dozens of government owned airlines, yet they’re only going after the ‘Middle Eastern Big Three Air Carriers’ and I am pretty convinced that without Delta Airlines CEO Richard Anderson ‘comment’, those US Carriers and certain European BIG players would continue fighting a rearguard action… and we would’ny talk about that matter so openly… only behind doors… as per definition competition is not fair!

(Dubai TV March 2015)

http://vod.dmi.ae/media/265419/%D8%AE%D8%A7%D8%B1%D8%B7%D8%A9_%D8%A7%D9%84%D9%85%D8%A7%D9%84_14_03_2015

The implications of the downward trend in oil prices

When oil prices shot up a few years ago, many transportation and delivery businesses started adding fuel surcharges to their prices. This year, the Airlines’ spend on fuel will drop to $192 billion, from around $204 billion last year. Indisputably, the drop in the cost of oil is a huge factor in the airline industry, where 30 percent of all expenses are for fuel. But airlines, along with other industries with large fuel expenses, have been slow to respond with lower prices: since June the spot prices for jet fuel fell from $2.84/gallon to $1.51/gallon those days. This is the magic about airline pricing in general where each carrier determines what fees to tack on, and they can use those additional revenues to cover any expenses – not just fuel – and we might have a split view of this. Just because fuel prices decline doesn’t mean fares should. But if you as an airline are going to specifically tie a piece of your pricing to fuel under YQ surcharges, then under transparency principle it better go down as well as up.

The general argument that airfare should be pegged to fuel costs (or any cost) makes no sense to me. Airlines should price based on demand for the product and demand is strong right now worldwide and not only for the growing Middle Eastern carriers. During the next downturn, fares will fall regardless of what fuel prices are doing. It’s all based on demand. The response to this is usually, ‘yeah, but airlines blamed fuel prices when they jacked up fares before.’ That is true. But that’s because a business needs to make money. Back in 2007/2008 ($145 a barrel in 2008), that wasn’t possible since spiking fuel prices and depressed economy made things ugly. But fares had to go up quickly so airlines could try to lose as little money as possible. Airlines didn’t increase fares with impunity, however. They had to slash capacity in order to be able to have a level of supply that could support higher fare levels. As the economy improved, capacity slowly increased with fares going higher as well. As you can imagine, when I hear people saying that fares should go down just because fuel prices have gone down, I disagree. But I do draw the line when it comes to fuel surcharges. Airlines have used surcharges in a variety of ways over the years. For the most part, they’re just an easy way to change pricing on a mass scale. But in many cases, we’ve seen airlines call them fuel surcharges. Then we’ve seen some quote along the lines of ‘we didn’t want to increase prices but we had to add a surcharge because the price of fuel is so high.’ If you’re going to specifically tie a surcharge to the price of fuel, then you better damn have it fluctuate as fuel fluctuates. Some airlines agree. Air Asia or Virgin Australia Airlines just eliminated their fuel surcharges. For other like Qatar Airways or Qantas they ditched also their fuel surcharge but it’s going to raise its base fare to offset the cut, basically without any reduction in the ticket fare but much more transparent. For other carriers, in particular Europeans or Americans, the drop in oil prices is too recent to justify removing surcharges or cutting ticket prices, but if the price of a barrel of oil stays around $50 for 12 months, that might be enough… Really? A year? Here we just miss to consider a small detail: as airlines hedge most of their fuel costs, it will take some time for the reduced cost of fuel and many players are not ready to be transparent with their fuel-hedging positions, a strategy close to gambling, especially for those who lose heavily! Anyway, the law of gravity – what goes up, must come down – applies to jetliners. It just doesn’t seem to cover airline surcharges and as we know also other costs have been increasing — costs of labor, cost of aircraft rent, cost of buying new planes. Whether the recent fall in price of oil represents something more significant than just short-term imbalance of global supply and demand remains to be seen, but if it continues, airlines would be motivated to keep their older, fuel-guzzling jets flying for a few more years and delay new orders in hopes of saving money. We can’t yet predict if it will last or how the air carriers will react, but I think now would be an excellent time for caution as something has changed despite very low interest rates… Definitely what is good news for the airlines raises questions for the jet makers which have been riding a wave of demand for the latest fuel-efficient jets, driven in large part by the stubbornly high price of oil… We may be about to enter one of those ‘interesting’ periods in the business again.  But as we’ve previously warned, all bubbles eventually burst.  Will lower fuel prices burst the narrow-body order bubble?  We’ll find out soon.

‘Is the First Class future an exclusive step above it?’

Is the First Class future to take premium flying ‘to the next level’ or a way to project an image of the airline brand excellence?

The airline industry has traditionally lagged behind other tourism sectors when it comes to creating customer profiles to anticipate their needs, but in the recent past the airlines have increasingly benchmark against trends in the hotel sector in order to meet customer expectations. They learn to tailor their offerings to take account of passenger preferences and tastes much like the hotel industry does efficiently since a decade. Soon a text message will tell you what gate you’re departing from, and another one later will tell you when that gate is open, allowing you more time for some last-minute shopping, reflection in the think pod or a few extra exercises in the gym, depending on your mood. During your flight, you’ll stream movies on your tablet and use the same device to do some online supermarket shopping so that when you arrive home from your two-week holiday you’ll have a bag of fresh groceries waiting for you. What looks unlikely to change is airline policy on the use of mobile phones. It’s been proven they’re perfectly safe, but the ban will be maintained on them on privacy and comfort grounds. We may not be on our phones but we’ll spend a lot of our time online. Superfast broadband connectivity will be standard on all airlines, allowing passengers to download content directly on their mobile devices. Those screens on the back of the seats will disappear as airlines work to create lighter seats, which will significantly reduce the weight of the plane and the fuel burn that accounts for 40 per cent of an airline’s total costs.

Even there’s a lot of competition in the back of the airplane, the fares are so dramatically higher in the front of the plane that they have incredible margins for carriage. The carriers make a lot of money on people who pay premium fares and the biggest changes will definitely take place in the front-end seats as the world’s airlines scramble for position in the intensifying race for loyalty. In recent years, the airlines have become wiser in adjusting their cabin mix depending on the route they fly. The top operators worldwide are all offering an experience comparable to that available in First for almost two decades and more generally raising the question related to the need for First-Class cabins as flat-bed seats becoming the norm including finer dining, high-end toiletries; amenity kits; free pyjamas and fancier limousine to the airport, cradle corporate customers in once-unimaginable comfort, making the premium on front-row seats harder to justify. The upgrading of the Business Class isn’t presenting a fairly faithful mirror of what’s happening in the larger economy: the disappearance of the middle class?

If the line between business and first class is fading, also the gap between that new ‘front-row seats’ flying which appears to be absolutely stunning and flying private is starting to close. Private jets are more and more competitively priced. What’s more, business travelers, the main clientele for ‘Upper’ Class’, might opt for the private jet route because of the time savings as you don’t have the hassle of checking in, you decide when you want to fly, and when you land you literally walk right out of the airport. For sure and it is not a surprise, the ‘Middle East Big Three’ Award winning airlines are leading the battle to design the most appealing, most comfortable Business- and First-class seating arrangements to take premium flying ‘to the next level’. You never see airlines featuring the last row of seats in their ads and that opulence may be as much about projecting an image of their home state (a gateway that helps visitors form an impression about the country before they land), as selling seats to passengers willing to spend $20,000 on a one-way ticket vs. say, $40,000 to fly private with the schedule flexibility and related privacy of a business jet. It’s a select group of people who are willing to pay for the luxury, the ultimate attention, for the total privacy and business jet operators are competing on that segment too and MEBA the ideal event to feel the pulse of that booming sector…

‘Which strategy to survive the Squeeze?’

The Middle East Big Three have all adopted different strategies to grow: which one works best?

 These are tough times for the airline industry. Buffeted by fluctuating fuel prices, overcapacity, and low-cost competitors, airlines are struggling to stay airborne and financially vulnerable. In Asia, low-cost carriers (LCCs) have seen passenger volume explode, causing the growth and profits of legacy endpoint and the non-Chinese Asian hub carriers to suffer. Already among the top performers in terms of growth and profitability and on track to be soon at least twice the size of any other long-haul carrier in the world, the Middle East Big Three (MEB3) carriers are squeezing the business of traditional global carriers with very different strategy and products.

Since its establishment in 1985, Emirates strategy has shied away from traditional airlines alliances One World, Star Alliance and Sky Team, saying it prefers to go it alone by buying planes and investing in products instead of buying shares. The much younger neighbor ‘down the road’ Etihad (2003) is building scale by acquiring network through organic growth, code share partnerships, minority investments in other airlines, and Abu Dhabi as hub to take also advantage of the Middle East strategic location on the world map with 60 percent of the world’s population within six hours. Last but not least, Qatar Airways (1994) is pursuing a third strategy model by joining the airline alliance One World. The long-term success of such strategic move is not just on gaining network benefits but also on integrating the back end of operations to gain cost and scale advantages with on top of that a very high end offering to passengers and the youngest fleet within the industry. To get a broader picture, Saudia strategy is also to be considered as a fourth model, focused on building from the indigenous catchment area with a population over 30 million – soon to be seen as one of the ‘MEB4’.

To survive and prosper in the face of these changing dynamics and ongoing margin pressures, virtually every participant in the industry must rethink its strategy, business model, and tactics to strengthen their competitive positions. De facto, the MEB3 as long-haul hub carriers and the low-cost carriers are better equipped to ride the storm and especially in Europe hurting very hardly the legacy carriers. The performance gap between these leaders and the traditional legacy airline or even weaker carriers is likely to increase, and this is definitely not unique to the airline industry, for two reasons. First Middle Eastern carriers are starting to grow stronger in terms of the attractiveness and effectiveness of their hubs by increasing the number of connecting flights from the expanded network of destinations and the overall capacity. They are doing this through better scheduling, routing, network coverage and massive investment on new aircraft and airport infrastructure. The second reason is that demand is evolving in these carriers’ favor. Because of geographic advantages, they are well positioned to participate in about 60 percent of global interregional flows (both point-to-point and connecting), including the Middle East to North America and Europe, India to North America, Europe to Africa, northeast Asia to the Middle East and Europe and from Australia and New Zealand to Europe.

The rapid expansion of Gulf carriers has obviously posed a particular problem for European legacy airlines. Did they underestimate the power of those highlighted strategies with strong vision and commitment to deliver? Aside from British Airways with a revenue-sharing agreement with Emirates for 17 years until 2012, the two other main European industry leaders Lufthansa and Air France are both planning to expand their low-cost units to respond to competition from Gulf airlines and budget rivals. This kind of thinking is not necessarily the best path to take, even under shareholders pressure and frequent flyers shifting to rivals with better overall customer experience. Using the power of air traffic agreement to limit airports access in particular country or beginning to calibrate its strategy to do something against particular competitor is definitely not the appropriate answer and the danger to fail is high. There are definitely a number of ways that industry participants can respond and prosper. Forward-looking companies will rethink their strategies and find ways to capitalize on the opportunities presented by the growth of travel and tourism worldwide.

New magic words for airliners: ‘Ancillary Revenue & Big Data’

The airline industry is an enigma. On the one hand, it is limited and constrained by complex and what appear to be outdated economic regulations. Yet on the other hand, it is an industry characterized by rapid change, innovation and new technology. It is a dynamic growth industry, but achieves only marginal profitability. In short, it is an industry of contradictions and like most other modern industries on a daily mission to generate revenue, curtail expenses, and boost profits, therefore airline senior executives are today extremely interested in two hot topics – Ancillary Revenue and Big Data. Everyone is seemingly talking Big Data, along the whole song-and-dance between passenger and airlines, and airports, around ancillary revenues and customer experience.

Nowadays the whole airline industry is seeking the extra mile by maximizing revenue per flight, which implicitly includes all ancillary revenues as well as the airfares paid. To cope with pressures on top line revenues from ticket sales amid intense competition, Big Date should be the magic potion to boost ancillary revenue. The ancillary revenue revolution sees airlines unbundling their service offering and charging passengers for items they wish to purchase or sue. Air freight and baggage fees are one of the fast growing items in ancillary portfolios that also includes seat allocation, in-flight services and products, related travel products, in-flight advertising, airport lounges access and increasingly diverse opportunities. For sure, to be innovative difficult choices have to be made as much of what has to be done affects costs as well as revenue, without to underestimate the sacrosanct business principle that success often depends on being the lowest-cost provider – not low fares. If that is not possible then the offer has to differentiate and obtain a premium for a higher standard of service. With most organizations just beginning to understand the value of the available data, there is still enormous competitive advantage to be gained from slicing and dicing the vast amount of data being collected in the Web 2.0 world even the airline industry as others is facing significant obstacles in dealing with big data, including security issues and a shortage of trained staff and the need to develop new internal capabilities. Airlines need to unlock their data from silos and gain a holistic view of it so that they can make unique associations and ask important questions about passengers and products with a technology solution that integrates their data stores, identifies behavior patterns and draws meaningful associations and inferences. Summarized, to leverage productivity and profits exponentially, Big Data and ancillary revenue will involve moving from historical insight to predictive information from the heart of the organization and not at the edges.

For an industry which practically invented the concept of customer experience as part of the pre-flight and in-flight services as well as some of the most successful customer loyalty programs with airline miles being at the forefront, it is quite disheartening to see most of the western legacy carriers struggling for survival due aging infrastructure without sufficient funding to renovate or replace it, airport closure during the night, employee unions. High fuel prices and rising operating costs threaten airlines’ profits and make it a high stakes business to be in – leading travel providers to look for innovative and nontraditional revenue sources. Instead to have been creative enough, the Legacy carriers stood by the principle of a price that included everything. From the mid eighties, they fully underestimate the new entrants from the Middle East with their hybrid approach of offering unbelievable services by just changing the traditional mind-set to make more money from its passenger to what can it be done to add more value for my passengers. Today instead to be combative against strategic location evidence and finding way to protect their market, the traditional legacy carriers should focus on the creativity and innovation spirit of yesteryear, the true engine for the economic growth. So, can we put back the romance and adventure in flying that it once was? It’s time to get creative and move up the value chain. The next generation of passengers demands not just a flight but an experience, a personalized one, and no doubt at all that the Middle East carriers will keep the current innovation momentum…