This is a difficult question.

Let me provide two very distinct examples. Singapore Airlines vs. Emirates Airline. Both are known as global airlines with leading onboard service and product, yet the two have very opposite policies when it comes to providing upgrades.

Singapore Airlines is very focused on selling its upper-cabin space and does not easily award upgrades, even operational upgrades when business and first class seats are empty. Singapore Airlines has a very fundamental policy of only selling premium class seats and not giving them away. The logic being that in order to be a premium airline, nobody will buy the more expensive seats if they think that there is a chance that one could get them for free. Not only that, it makes the experience in the premium class much better for the customer since having an empty seat next to you is often cited as one of the most desirable seating outcomes.

Emirates Airline, on the other hand, has a very different policy. In its inventory management policy, Emirates frequently oversells the economy section, using the unsold business class seats as a buffer to accommodate oversell in economy. These upgrades, known in the business as “operational upgrades” are given either at check-in or just before boarding and are allocated based on frequent flier tier and fare basis of the ticket. Not only are economy class passengers eligible for upgrade to business class, it can also cascade to business class passengers being upgraded to first class. Because of this policy, Emirates can get a higher load factor in economy, and also reward its best passengers with last-minute upgrades. This policy is very similar to what US carriers do.

I’ve experienced both practices first hand. For one year, I was commuting between Dubai and Singapore and maintained a residence in both cities. I was a gold member on Singapore Airlines for 4 years and in that time I had enjoyed only one operational upgrade. After quickly becoming a gold member on Emirates, I could count on an operational upgrade on a fairly regular basis. Given comparable schedules and fares, when I was unconstrained to choose either, Emirates became the clear choice for me. Having a top-tier status on Emirates really did make a difference because of the upgrades. Gold status on Singapore airlines meant that I only got 25% extra bonus miles for each flight and access to their second-tier lounge at Changi Terminal 2.   Not much of a recognition.

If you asked any customer, which policy do you like better? The numbers would be overwhelmingly biased to the Emirates policy as the majority of passengers fly in economy class. I would also guess that customers who actually regularly pay for first and business class fares would prefer the Singapore policy for the assured exclusivity and the increase probability of an empty seat next to them.

Yet, the division is not that clear. Anybody who is familiar with the road warrior discussions on Flyertalk.com knows that the skills of the frequent flyer to de-construct algorithms that determine upgrade priorities is quite amazing. For the US carriers such as United and American, frequent flyers will actually buy up into a higher economy fare classes. Based on their research of current inventory by talking to the reservations agent, combined with their tier status and the higher position the fare gives them in the upgrade priority list, many can predict the probability of an upgrade with a very high level of certainty.

My question, which policy is better – limited upgrades or liberal upgrades – from a purely business standpoint? Since many high-value business passengers actually do fly in economy class due to travel policy restrictions, does rewarding them with these upgrades actually drive incremental revenue from loyalty or does it cheapen the brand for those who otherwise would have purchased the fare for the higher class?

Limited upgrades policy

Pros:

• Provides a better experience for the highest paying customers
• Preserves the exclusivity that customers are seeking
• Increases average passenger yield because less economy class tickets are sold

Cons:

• Missed opportunity to reward your best customers for their loyalty
• Higher restrictions on economy class inventory = lower load factor
• Loss of revenue as customers move to competitors with more liberal upgrade policy

Liberal upgrades policy

Pros:

• Provides a better experience for the most loyal customers
• Provides a distinct benefit at very little costs (only marginal cost being the meals and beverages)
• Provides incentives to become a top-tier member

Cons:

• Dilutes upper-class fares as customers will be more likely to choose the economy class fare with the expectation of an upgrade
• Dilutes the overall value of the product and exclusivity
• Operationally more complex to assure consistent upper class service (cabin staffing, meal loading)

So, from a purely business perspective, which policy makes the most sense? Will the potential of product and upper class revenue dilution be offset by increase passenger loyalty? The answer is impossible to either predict or measure as you can’t get into the customer’s mind as to they will actually do, and if you could, it would be impossible to measure, so we must answer this from truly a sense of business intuition.

So what do you think?

1. Fleet modernization including the retirement of 103 aircraft including all B747-400s, A300-600, MD81 and MD90 and replacement with modern B737-800 and B787, with a net cut to fleet by 40%

2. Route rationalization including the slashing of domestic and international routes to focus more on the new Haneda Airport routes, US, Europe and Asia, with a net cut of 22%

3. Focus on the core business – consolidation of owned entities and sale or liquidation of non-transport businesses

4. Removal of cargo aircraft and focus on combined service cargo (passenger bellyhold)

5. Waiver of debt and additional capital injection

6. Management restructuring and job reductions of 30%

7. Marketing – “Aggressive” utilization of alliances

8. IT upgrades

While all these are necessary to address existing cost inefficiencies, what is fundamental missing is the attention to a key reason why JAL is in its position in the first place – they have steadfastly clung to an old model, “The Wings of Japan” and have not taken the effort to transform themselves as a truly global airline.

While Tokyo Narita was one of the original global transit hubs that served the rapid growing Asia Pacific region, JAL has primarily relied on local traffic. Based on concessions gained after World War II, the US carriers set up huge operations in Japan, making Narita the most important gateway in Asia Pacific.   US carriers enjoyed unreciprocated powers that allowed them to carry passengers through Japan to beyond destinations in Asia, without having to provide reciprocal benefits to Japanese carriers in North America making Narita a highly lucrative hub for US carriers for over 40 years.  Nonetheless, JAL was able to grow and thrive by focusing on the Japanese customer.

When Japan was in a high growth mode from the 1960’s to 1980’s, Japanese were enjoying newfound wealth and prominence on the world stage. For JAL, focusing on Japan was a profitable business model – serving as the flag carrier taking the citizens of one of the largest economies of the world across their expanding global commercial empire and wealthy tourists to far off lands. Japanese tourists were some of the highest spending travelers in the world. More importantly, for years Japanese were slow to globalize, learn English and become comfortable in non-Japanese environments. Combined with a traditional strong sense of buying Japanese allowed JAL to focus profitably on one of the most price-insensitive consumer groups during the high-growth economy.

As markets liberalized and evolved, the game changed but JAL did not. Looking at some of the most successful global network carriers in the world, such as Emirates Airline, Lufthansa and Singapore Airlines rely extensively on carrying non-nationals from points outside their home countries to points beyond via the headquarters base. JAL simply never developed this market to anywhere near its potential, while its home-town competitor, ANA has done a much better job at it and has been steadily beating out JAL as a result.

Not only that, the Japanese consumer has changed dramatically as well. The population of Japan is rapidly aging; at the same time the youth consumers, compared to their previous generation, are very price sensitive and careful consumers. On the positive side, the new generation is also much more willing to go to a wider variety of places and do so on their own.

Change for JAL is very hard, since coming from such a privileged position with such a powerful national brand, it is difficult to adapt. Holding back the change are many elements of the company’s infrastructure and business process still in existence reflect the business heritage. Some examples of this legacy are still very prominent in the structure of JAL and its enterprises:

• JAL’s reservation system, JALCOM, has two separate partitions; one strictly for domestic routes and one for international routes. This was originally developed to service the needs the domestic point-of-sale market . In the age of alliances, code shares and shifting patterns of inbound passengers going to points in Japan beyond the major international gateways, this division no longer serves a need and makes O&D planning much more complex.

• Revenue management policies are still managed around group bookings; large blocks of inventory are restricted to group sales, are held back and not released until shortly before the departure dates. When Japan’s tourists first started to venture abroad, they did so in groups. These were organized groups of well-behaved travelers in floppy hats following the tour leaders’ flag. As Japanese tourists became more comfortable travelling on their own, they started to organize their travel on a bespoke basis by themselves, yet the old practice of the pricing of group travel still remains intact. Combine this with the immense power of distributor power of large travel agencies that still dominate the market, the way JAL prices and distributes its product has changed relatively little since the 1970’s. Large blocks of inventory is still held and dedicated for group travel sales by travel agencies, at the expense of both business and FIT leisure customers. While the age of Japanese tourists travelling in large groups is gone, now the practice of managing pricing and inventor y on group processes keeps JAL from providing customized fares, maximizing high yield business sales as well as web-direct sales.

• JAL does little to promote itself as a global carrier to non-Japanese. When was the last time that you saw an advertisement or promotion, either to fly JAL to Japan, much less to points beyond in Asia?

• JAL has ownership two of the local GDS systems that comprise the majority of bookings in Japan – Axess and Infini. Both of these systems run on a version of the Sabre GDS. The complex commercial terms of these joint ventures keep JAL locked into their existing distribution agreements and core IT infrastructure and constrain them from using new vendors and technologies.

• JAL was very late to the alliance game but and has been slow to maximize the potential of the oneworld alliance. This has been mentioned as a key element of the restructure plan, but getting the other items in place first will be key to making the alliance really work.

Other airlines in Asia have done a similar transformation. When I think of Korean Air, it was not even five years ago that KAL was thought of as a second-tier Asian carrier. Like JAL, KAL was rapidly losing share to upstart Asiana. KAL did a lot to overcome a very poor safety record, its brand image and product distribution in global markets. Now KAL is seen as a strong competitor to JAL, stealing Asia traffic from JAL over KAL’s Incheon hub.

To illustrate the current gap in sales and distribution, the following example to highlight the fact that JAL has a long way to go in the way they price and sell their products to foreign markets. I my example, I priced a very common and competitive itinerary that connects in Tokyo and is served by both ANA and JAL, as well as both of their US and Asian competitors and alliance partners. Note that in this case, ANA showed fairly consistent pricing and availability across all of the online channels while JAL showed a vastly different picture across channels:

• JAL’s airline website did not offer the best pricing or availability – in fact it had best price inventory unavailable for two key days (20th and 21st departure) – likely this inventory has been allocated to Japan point of sale through agencies.

• JAL offered more competitive fares via Zuji.com (local Asia based OTA) and the best price inventory of the 20th and 21st was also available.

• Using the most popular Meta Search (Kayak), uncompetitive fares were only available via US-based OTAs (Oribtz, Expedia, Cheap Tickets) and did not offer JAL website fares.

This analysis is just a single data point based on online bookings, yet is indicative of the miss-alignment of JAL’s current distribution and marketing strategy – merely a symptom of a larger problem. I’ve seen similar and consistent results over the years when looking at Asia Pacific travel options where JAL should have been in there with a competitive offer and was not. I’ve attached the screen shots that I used for my analysis here.

I think that JAL can once again be the pride of the Asia Pacific region. It has a lot of great fundamental assets – a legendary brand, excellent service, Japanese image of politeness and grace, modern equipment and a strong position in what is still one of the largest and most important travel markets in the world. In addition to the cost savings measures of the turn-around plan, JAL should also integrate with this strategy a new value proposition that positions itself as a premier global connecting carrier not just for Japanese customers, but for the rest of the world.

The coming of the online distribution “perfect storm”. New options for customers to access supplier content continue to proliferate. At the same time, suppliers more and more asserting their ownership of content. Search is finding better ways to translate needs into requests in ways that customers want. OTAs, once seen as the game changers in the distribution landscape, are now the incumbent player that is being challenged from both ends. It is playing out right now in the USA as we are seeing with both American Airlines with Orbitz and Delta with the secondary players. American and Delta are taking the first steps because they have the market presence to leverage, expect smaller carriers to follow closely and the trend of fragmentation will eventually come to Asia.  On the other side is search, with the Google acquisition of ITA very likely to pass regulatory hurdles. The combination of fragmentation of content by suppliers and the ability for search to now take on a new role of aggregation, OTAs will face a huge challenge to maintain their viability. Traditional OTAs will respond upping efforts to secure content and define their unique and targeted value propositions –  the ones that don’t will start to see their relevance rapidly erode.

Social Media grows up. What we have seen in the earliest experiences with airlines in customer service will continue to migrate back to traditional channels and social media will focus more on integration with marketing and corporate communications functions. The biggest innovation will happen as travel suppliers use Social Media tools to shift from a one-to-many to enhanced one-to-one relationships,what I’m calling the “move from the mob to me”.  This will happen as airlines integrate of social profiles into CRM databases.  You will see at least one innovative airline do this in 2011 to allow them to provide customized products, services and offerings based on the unique needs profiles of enthusiastic customers. This also is a perfect opportunity for OTAs to strike and to develop a differentiated business model to stem off the inevitable threat from search.

Useful location based services appear on mobile. True innovation for the customer will be introduced in 2011in the form of location-based services that go beyond just checking in at your favorite coffee shop. Customers will be finding ways to linkup with likeminded people on the move, and airlines will offer and use these new services to gather data on customer-specific travel patterns .  Since really good social applications tend to be sticky, there will be a strong advantage for the first mover.  Again, this is an opportunity for both suppliers and intermediaries so don’t squander the opportunity before the competition figures it out.

Return of simple pricing. Customers are becoming increasingly fed up with hidden fees and unbundling. Airlines will respond by moving from ala-carte to set menu – you will see more packaged fares return that contain checked bags and assigned seats. There will also be a move to common standardization among carriers in the way that fares are presented to the customer. Ancillary revenue will still continue to be in the spotlight, but will shift from unbundling to a focus on sales of new products and services such as onboard rentals of handheld devices and travel-related services such as hotels and mobile phone SIMs. Suppliers that understand this, and intermediaries that are able to help them execute these new offerings will benefit from this change.

Continued Low Cost and network carrier convergence. The majority of growth in the Asia Pacific region will come from Low Cost Carriers (LCCs) in the form of new joint ventures and mergers. At the same time, organic growth from the legacy carriers will be cautious and moderate. With the increased penetration of low cost carriers in Asia, continued LCC growth requires them to take on more complexity normally associated with legacy carriers to expand distribution presence and market offerings such as GDS distribution, interline, code shares and alliances. These changes will mean that LCCs will continue to broaden their appeal to customers that normally don’t consider LCCs. Yet, these changes will come with their own unique LCC flair and LCCs will be able do so without having to match all legacy airline costs and complexities. The new opportunity will be for intermediaries and solutions providers to come up with new ways to anticipate the needs of the evolving LCC model.

So what about the Year of the Customer?  Customers will see new ways to be stimulated to travel, suppliers will offer new ways to sell their products and we will see new and exciting offerings. It’s good news if you are a customer, it’s also good news if you are a savvy supplier, intermediary, solution provider or application developer that can anticipate and respond to the changes. If you have your head in the sand, the opportunity will rapidly pass you up and antiquated business models will be further challenged. So let’s start by focusing on the customer!

In Asia, AirAsia X operates as a franchise of the brand AirAsia, which is Asia’s largest low-cost carrier. The franchise is able to keep costs down by using a common ticketing system, aircraft livery, employee uniforms, and management style between the two carriers.

After a false start, AirAsia X is getting into long-haul markets at an aggressive pace. In November 2009, AirAsia X started direct flights from Abu Dhabi to Kuala Lumpur, only to discontinue the flights just a few months later. Now AirAsia X is launching a host of new long haul services to places like Japan, UK and Australia, but this time with something different.

By AirAsia X CEO Azran Osman-Rani’s own admission, more than 30% of their flights involve a connection; and these are the ones that they can see – the real number might actually be higher. Operating a low-cost, long-haul service without some benefit of connection services is problematic.

Several months back, I had built my own self-connect. It was for a flight from Singapore to New Delhi, India via Kuala Lumpur on AirAsia and AirAsia X. While the fare was significantly cheaper – about 50% of the fare of Singapore Airlines – but it was a bit of a nail-biting experience.  Since low cost airlines on short haul routes in Asia work on a very tight “just-in-time” schedule to minimize turn times, schedule changes and disruptions are part of what you have to deal with when you buy a low fare ticket. AirAsia made it fully aware to me that I bore the responsibility that if for some reason the Singapore to Kuala Lumpur sector suffered a delay, I would be responsible for the loss of the Kuala Lumpur – New Delhi sector since the ticket was non-changeable, non-refundable. Not only that, I had to clear immigrations and customs at Kuala Lumpur, so I left in a lot of time (four hours) for my connection just to make sure. Nonetheless, I was still nervous at the possibility that I could lose a lot if there was a disruption or change in schedule that was entirely not at my fault. The length of the connect, plus the uncertainly factor, really detracted from the service factor of the trip, and the only reason I was willing to put up with it and take the risk was that the savings were so significant. If the fare was only 20% less than the next cheapest one-stop ticket, I would not have done it.

Now, AirAsia offers the same journey, but this time as a though-fare with interline checked baggage. Not only that, AirAsia has worked with the Kuala Lumpur Low Cost Terminal to develop a transit facility to avoid going through immigration and customs – saving a lot of hassle in the process.

Yet, the AirAsia service is different than a legacy connection or interline. I’ll call this a “soft connect”. Since AirAsia and AirAsia X are technically separate airlines, a connection between them is effectively an interline. But here is what is different:

* While the through-fare provides a single PNR and check-through baggage for the entire trip, it does not go as far as a normal network carrier in the protection of the passenger in the event of a delay –re-accommodation is limited to getting the passenger on the next available flight (no option for booking on other airline) and does not provide transfers, meals or accommodations if an overnight stay is required.

* In the segments that I observed, the O&D fare appears to be a combination of the sum of the fares of each segment plus a “connection premium” – meaning that it costs more to buy the combination of the fares. This is distinctly different from legacy carrier practice where an O&D through fare is less than the sum of the price of the individual segments (traditional O&D revenue management practices put a high premium on non-stop fares and discount connecting segments when combined on a connecting journey).

This concept unique since it’s a hybrid of the low cost model and the traditional legacy model. In this case, in the event of a disruption or schedule change, part of the potential burden is borne by the customer since AirAsia is limiting the compensation to boarding of the next available flight.

Also, in the revenue management practices, AirAsia has avoided introducing the complex O&D pricing structure. What are the advantages of this? From the airlines side, they can still practice O&D pricing techniques without the additional complexity of managing the paired segments. From the customer’s point of view, the service of the connection is worth the extra cost; if they were extremely price sensitive they could book two individual segments and bear the schedule risk themselves. Pricing the schedule this way also gives the customer additional flexibility – stopovers can be chosen without any additional costs (in fact it would actually cost less).

More about the “connection premium” because I think this is where the model is truly unique. I’m not sure exactly how it works but here is what I think. This fee could be considered a mandatory insurance premium where the funds go to pay for a “policy” that covers you in the event of a miss-connect. I could envision that the fees go into a pool that are used to “top-up” and fare difference or internal costs that the airline incurs as a result of the re-accommodation. Since the airline has the best view into the schedule and on-time performance statistics, the connection premium could be priced based on the observed chance of disruption for any given segment. In the examples I’ve provided, the price of the connection premium varies by route. The premiums could be varied to cover the expected costs based on unique schedule factors observed for each route.

This type of practice would be advantageous since it allows AirAsia to keep its low-fare, segment based revenue planning structure intact for each airline (AirAsia and AirAsia X are effectively two airlines), as well it paves the way for simple-structured interline agreements with other carriers. It has been rumored for a while that AirAsia will interline with Jetstar – this would be the perfect platform in which to do so.

From a personal perspective, I’m now much more comfortable in considering an AirAsia connection in Kuala Lumpur for my next flight. Because of this new model, I’ll require less of a fare gap because of the new convenience avoiding immigration controls, but more importantly the risk-premium I’ve subconsciously assigned due to the fact that in the past all of the risk was mine, will now be much lower. Now, I’ll be willing to accept less of a fare gap versus AirAsia’s network competitors, so in this “sample of one”, its revenue-positive for AirAsia and if the “connection premium” covers that costs of the connections, it’s a win-win for both AirAsia and myself.

This is distinctly different from other industries such as banking and telecommunications where the customer has an account. From the time a customer becomes an account holder, the enterprise has a full view of all the behavior and contact that the customer generates. Every time you use an ATM or make a phone call, your bank or service provider has a detailed track of all of your activities and can use this data to make accurate assessments of customer behavior, value and even can accurately predict “churn” , or a slow-down or change in activity that signals that you may be soon leaving, or have developed a parallel relationship with a competitor. Even if the customer gets to the point of terminating the relationship, the customer must still contact the company to close the account. The data for these businesses are truly rich in information and opportunities for captive engagement.

The airline, on the other hand, has mountains of data but little information. Customer data exists in patchwork of largely unconnected systems that include CRS tapes, loyalty systems, complaint management systems, revenue accounting systems, frequent flier databases, etc. It is estimated that a typical airline has about 26 different customer databases. Since each one records a specific transaction that is not tied to each other, it is very difficult to do and only few airlines have been able make the connection – and those attempts have been on an ad-hoc basis, not an on-going, real-time basis. Compare this to a bank or telecommunications where each and every transaction is tied to a customer and a lifetime end-to-end review, as well as a predictive view of the relationship is possible.

So, what do airlines really know about their customers? The answer is surprisingly very little. They know about “the converted” – those customer that are already their customers and frequent flyer members on their own program (versus on an alliance partner), but they know little else. Even the converted are not the total picture – airlines estimate that only 40% of all fight segments are recorded against mileage programs, and some of the highest value customers are not even members, or are the members of a partner or alliance member’s program. Compounding the problem is that fact that FFP programs often exist as separate profit centers within the airline; some programs have even gone so far as being spun off into another separate business entity. What this means is that the FFP programs are typically set up as any free standing business to both minimize cost and maximize revenue. This can lead to behavior such as cancelling miles and focusing on non-core sales. FFP program groups often keep member data close to themselves and can put restrictions on how the airline uses it. As a result, FFP data integration into customer CRM profiles is often very limited.

When airlines try to segment their customers, the best database that they have to rely on is the FFP database. Since the database only gives a partial view of the total customer base, the analysis will never provide a complete view. Of the three types of customer segmentation – needs, behavior and value – needs segmentation is by far the most difficult of all to model. The common method is to take behavior and translate that somehow into needs, augmented with an overlay of focus groups and questionnaires. It is very difficult to do this on a specific customer basis and typically only provides a broad view based on a hypothesis-driven process. Again, this is often done on a one-time ad-hoc basis, there is a large subjective component and the profiles are not dynamic.

So what is the solution? Social CRM can play a big role into getting a more dynamic view of the customer. Already, we are finding out that customers are willing to surrender an amazing an amount of personal data for just a little utility.

In the example of Lufthansa’s MySkyStatus.com, it is a free service for anybody that wants to use to post their comings and goings to their friends, either by an email update or a posting to facebook. The beauty of this service is that anybody can use it (no need to be flying on Lufthansa) – with this Lufthansa can aggregate data about people that may not be customers now as well as those who may be in the future – for example your FFP members when they don’t fly you and the activity of non-customers (potential future capture).

This is just one example of giving a little and getting a lot. Now what happens when you combine efforts like this one, with your other social media initiatives and tie them into a the customers CRM profile? A huge opportunity to fill in the rest of the iceberg.
Ever notice how your facebook and Twitter friends announce their comings and goings? How about other programs like Tripit where your specific flights are shared with your friends and even your Linkedin profile. Customers are giving away loads of information that at one time would be considered “private”.

New advanced technologies in name matching now make it possible to link these public personas with a customer segment profile held in a CRM system, unbeknownst to the customer. But even more advantageous would be to allow the customer to opt-in their profile into social media feeds. Allowing the airline to access their preferences and history, would be beneficial to the customer if they were confident that it would result in customer-specific benefits and offers highly customized to their profiles and not just one-size-fits-all spam.

By linking personal information and opt-in surveys, Social CRM is the most important opportunity facing airlines now in building critical customer-specific profiles to enhance customer service. Rather than simply looking at Social Media as a way to address crowds, airlines should now be using it as a way to make the customer relationship a lot more intimate.

• Drive customers to lower cost direct channels (airline.com)
• Rationalize call centre activities
• Reduce commissions
• Optimize corporate incentive programs
• Negotiate better rates globally with GDSs
• Direct connect and GDS bypass

The important thing to note about the traditional distribution strategy is that it is both focused internally and also places emphasis on cost reduction, not service. Yet, distribution remains one of the most important gateways to the customer experience; not only is it one of the first Touchpoints in the customer experience, distribution channels hold the key to engagement and a continued relationship with the customer.

While driving sales to online channels is one of the best ways to encourage a direct relationship, it is not necessarily applicable to some of the most important customers that still rely on the agency channel. No matter the channel the customer chooses, airlines should be looking for every opportunity to bring the customer to closer and more direct interaction during the entire travel process.

If you ask anyone, “what is the key to a good relationship?” almost every answer will inevitably include “regular communication”. Yet, many times the elements of these conventional distribution strategies conspire to minimize customer engagement due to the fact that many of these channel Touchpoints (online, call centre, check-in counter, etc.) drive measurable costs. With a customer-centric distribution strategy, not only should channels should be optimized to provide the most cost effective and customer-appropriate channel for a particular service, we should also be looking for new opportunities to build 1to1 engagement with the customer. Some of these opportunities may have additional costs, but their returns could be invaluable.

A 2009 Gallup poll quantified the impact of customer and employee engagement. They found that increasing customer engagement can lead to a 70% increase in bottom-line results; combining better customer engagement with employee engagement could lead up to a 240% increase.

Not only are does customer engagement drive real results, top leaders across all industries are recognizing the need to get closer to the customer. In the 2010 IBM CEO survey comprising the interviews of 1,541 CEOs, general managers and senior public sector leaders who represent different sizes of organizations in 60 countries and 33 industries stated that the priority that was clearly above all was to get closer to the customer.

To create a customer-centric distribution strategy, the essential first step to get to know who your customers are. This must start with a full segmentation study that not only covers behavior, customer lifetime value, and most importantly customer needs.
For large network airlines, this can be a complex undertaking in its own right. An airlines customer segments are diverse and can span many counties and cultures. Not only that, an airline’s customer needs change by the type of travel they are undertaking; a customer is in a different need state when flying corporate than when he is on a holiday with his family. Nonetheless, it is important to get the big picture on what the most important customer needs are for your airline. To take an extreme case, a distribution strategy for British Airways will be vastly different from RyanAir where cost reduction and increase of ancillary revenues is indeed a main priority.

What is often missed in cost-based distribution strategies is the chance to harness the myriad opportunities to increase 1to1 customer engagement. A good example is PNR control. A cost-based distribution strategy says that an agency booked PNR should be handled by the agency with the justification that with an agency booked PNR, the cost of servicing the customer should be borne by the agency since the agency is being paid for the booking. A customer centric distribution strategy would offer the customer the chance to access the PNR through direct channels such as the website. Why? The chance to increase customer engagement.

Some other examples of increasing communication with the customer could be encouraging a customer to download a mobile application and check-in at the airport for special offers and events. Another missed opportunity is when a customer purchases a fare at a discounted rate that does not qualify for mileage accrual. The customer has no incentive to link that purchase to the rest of their history. While mileage may not be accrued, airlines can encourage a customer to log in with the FFP number in order to receive some special perks or recognition.

The current industry hype now is all around social media. While it is now essential to have a social media strategy to communicate to a larger audience, don’t lose the focus of developing closer intimacy with your individual customers by diverting too much of your attention to the crowd. The real value to growing your airline brand and to create advocates is to encourage more 1to1 contact to share information, preferences and solve small issues before they become big problems.

Because of the breadth of transactions and complexity in a travel journey, the airline industry is probably more data and transaction-rich than just about any other industry. Internally, a typical airline has more than 26 disparate databases that contain customer information and are accessed in some way before, during and after a travel experience. Yet, this is just within the airline itself – not to mention the fact that from the time that someone thinks of travelling, buys a ticket, and takes the trip, they will have come in contact with multiple touchpoints – many of them are third parties – separate organizations or organizations that represent the airline. The problem is that not all of these systems share the same information.

What does this mean to the traveler? Let’s take the case where someone buys a ticket from an agency (online or offline) and goes to the airport to check in. In this case, the airport customer service is outsourced to a local ground handling company (a very common practice). The traveler views (rightly so) that the contact is with the airline. Yet, the check-in agent, because they are operating on separate systems, might not have all the pertinent information from the customer – FFP number, fight history, special needs, etc. Also, any differentiated service that the airline may wish to provide to a customer with sophisticated CRM systems may not be available by the check-in agent. Airlines wishing to carry out next-generation customer service initiatives just won’t be able to provide an integrated single view of the customer without a system that can bring everything together along all of the customer touchpoints.

At the heart of any air trip is the Passenger Name Record (PNR) which is created in the airlines’ host PSS systems. Many of the larger, traditional network carriers, are relying on the legacy systems that were built and designed based on 1960’s technology. While some progress has been made in decoupling functions from the legacy infrastructure, airlines are still less agile than other industries in implementing change due to the deeply imbedded and inflexibly legacy PSS systems.

Next-generation PSSs and service-oriented architecture promise a new era in business agility and development flexibility that can help airlines deliver that holistic view of the customer. Many airlines now are looking to upgrade their systems simply because the legacy systems are becoming too costly to maintain in with increasingly complex technical demands.

As airlines make these investments, there is unique opportunity to take advantage of the new system’s ability to both bring together the disparate systems that exist within an airline, as well as the external systems that the PSS connects with. As a passenger, imagine in the future where there is seamless service across all the touchpoints in your end-to-end trip.

This is not a spoof – United actually had such a service from the 1950’s to the 1960’s when the industry was still regulated in the United States.

In the current era when airlines are struggling for profitability, and services that we used to take for granted are now “unbundled”, how could United afford to provide such a luxurious and narrowly targeted product? Many point to the fact that the industry was regulated at that time, and this is just another indicator that maybe we should consider the re-regulation of the industry.

The fact that the industry was regulated truly was the reason that United could offer this product. By the late 1940’s, US airlines started to introduce a coach class service. Prior to this, all seats were first class. The difference compared to current practice was that first and coach class service was flown on separate fleet configurations and special schedules so as not to dilute the core first class business. Sound familiar? The reason it does is because this innovation two classes of service was very similar the low cost airline revolution that would follow decades later.

The difference in the 1950’s was the US carriers were regulated by the CAB (Civil Aeronautics Board – the forerunner to the FAA). The CAB closely regulated routes and fares. For airlines to raise fares in the long term, the only way they could do so would be to show that costs had increased since the CAB allowed airlines earn a fixed return on capital. At the same time, the increased popularity of coach service was rapidly eroding revenues. Showing an increased cost base (even for a temporary period) was the only way to increase fares. The Executive service was a brilliant solution to increasing the average seat cost that would be calculated over the entire cost base. This exclusive and luxurious service was effectively subsidized by allowing United to increase coach and mainline fares. This service continued on the DC6 and was carried over in 1961 to the French-made Caravelle, the world’s first rear-engine jetliner. The service was finally discontinued in the mid-1960’s.

The lesson to this story that the airlines practices of segmenting service levels with product is nothing new, and the same battle with low-fare flight options is the same as well – the difference being in the de-regulated environment, given customer choice, fares and service levels tend to move downward in the absence of subsidy incentives.

I recently saw this posting in YouTube of a customer service situation gone seriously wrong at Air India. The video quickly got over 45,000 views. Certainly nowhere near the impact of the infamous United Breaks Guitars, now with over 9 million views, but the Air India video really highlights the fact social media can significantly and negatively impact an airline that does not have its service infrastructure right, the new transparency means that whatever goes wrong has the potential to be broadcast to the world. Both of these cases are not a social media issues in themselves because when something like this comes out, no amount of tweeting, or response videos can ever make it right because the only solution that customers will believe will be to address the underlying customer service problems straight on.

In the case of United Breaks Guitars, it was a breakdown of process on multiple levels. From the indifferent care of the baggage handlers, the compensation policy, to a complaint management process that is arguably more optimized to frustrate a customer in the hope they go away, than to address a service failure. United employees were dutifully following well established internal company guidelines and internal escalation policies. It was not until the full force of public opinion came down on them, did United make an exception to the rule.

In the Air India situation, it is a clear case of a problem starting at operations (how the new airport and the airline work together), the lines of communication, the ability of the front line employees to respond to the situation, as well as training for managing a disruption. In the end, the employees taking over the gate announcements signified a total loss of control of the situation. How much worse could it get?

Early on, when airlines started get into Social Media by opening twitter accounts and establishing facebook pages, many found out that it was impossible to keep up with a flood of negative comments. Listening to customer complaints on Twitter and Facebook is good, but if the infrastructure and policies are unable address underlying service issues, then what use is a social media policy unless and organization, policy and resources are re-aligned to respond?

Many airlines are also seeing social media as a source of new revenue. While there may be many opportunities for promotions that were in the past handled by email, the use of “Twares” and special last-minute offers on twitter could also be a symptom of a larger problem of revenue management policies. With unsold seats left, it is sometimes unclear if revenue management has been properly doing their job. As customers learn to game the system (for example – purchase refundable tickets and monitor announcements for last minute deals and then cancel their original reservation) ,the over-use of this channel could ultimately result in a dilution of core fares. The reason is that twitter and other social media channels, by design do not have the ability to wall-off certain groups – these messages once they are sent become quickly indexed by search engine and are easily assessable by anyone. Many also think of social media users as a distinct segment. While this may have been true in the past, social media use is quickly becoming mainstream.

While a social media strategy is no longer an option – travel suppliers that do not have a plan to embed a social media into their customer service strategies will be the minority, and will be foregoing and amazing opportunity to interact and engage their customers.

Yet, before they adopt social media tools and dive into a social media strategy, they must first ensure that the underlying customer services fundamentals are in order. Ask first if:

1) Do your employees have the appropriate information and training to be able to deal with customers – to address specific needs, handle enquiries, and speak on behalf of the company?
2) Are your employees empowered to make the decision, take the action or make the statement necessary to address a service situation?
3) Are the appropriate formal processes, exception guidelines and rules of escalation in place?
4) Are the available real-time technologies being used to facilitate the flow of information to necessary to enable these decisions and actions?

Introducing an a social media strategy without addressing the above will result in an ineffective program, or worse, increase work load and lead to confusion and frustration of your employees. Companies with world-class customer service generally have these points already in place. For those that don’t, the new world of social media should be a wakeup call to get the basics right….right now!

“If I had been at Kitty Hawk when Orville Wright took off, I would have shot him down as a public spirited act for the benefit of future capitalists”  Warren Buffett

“If you want to be a millionaire, start with a billion dollars and open an airline. Soon enough you will be a millionaire”  Sir Richard Branson

There is no better way to illustrate the fundamental challenge of profitability in the airlines business than to look at the combined performance of the IATA carriers, which in 2009 represent some 230 airlines in 118 countries that account for 93% of the world’s international scheduled air traffic (based on available seat kilometers).

Recent reports from IATA on the state of profitability are looking promising – 2010 the airline group is on track for a forecasted $8.9B profit, dropping to an estimated $5.3B in 2011.   These are two good years following a spate of bad years.  Note that IATA’s forecasts are subject to wide swings – just last March, 2010 was forecasted at a $2.8B loss.

But how about in the long run?  Looking back over a forty year time frame from 1972 to 2011 (forecast), it’s a pretty gloomy story.  Of the 40 years, only 22 of those years show combined profits.  In that 40 year period, the industry is projected to lose US $4.3B, and this is inclusive of forecasts for 2010 and 2011 which are projected to be some of the best years in recent history.

So that we can say in the long run, this is an industry that cannot consistently cover its costs.

There are a number of factors that conspire to work against this industry, which I write about in a series of posts.   It often makes people wonder why this industry keeps attracting capital over the years.

With any deeper analysis of averages, there are always outliers.  Indeed, there are some notable exceptions to these dismal statistics – airlines which consistently buck the averages with consistent profitable performance over time, something that will be the topic of future articles here on CCAirways.com.