So British Airways is going to offer its customers financial services too . . . When the company announced its intention in March, it joined a list of well-known brands, including Virgin, that have stepped out of their traditional business to put their brand on financial products and services. Is this the beginning of a trend for airlines? A clever concept for extending BA's brand equity, securing additional revenue and cementing customer loyalty? Or a dilution of the brand and a risk to the core business? Can airlines avoid the downside financial risks? What can they learn from other "brand venturers" who have moved into financial services?
In the UK, the trend for non-financial companies to move into financial services is a growing one. Travel agents such as Lunn Poly and Thomas Cook have been selling their customers travel insurance for decades and the Marks & Spencer department store chain has been providing financial services since 1985. In 1996 Kwik-Fit, one of the world's largest independent automotive parts repair and replacement specialists, started offering car insurance over the telephone to customers who had visited its centres for car repairs. Tesco and Sainsbury, the top two supermarket chains in the UK, entered the personal financial services market offering credit cards, savings accounts, personal loans, mortgages and pensions as well as the traditional groceries in 1997. In April, Boots The Chemist pharmacy chain launched a range of health and travel insurance policies to buy over-the-counter along with medicines and suntan lotions.
A move into financial services is not new in the airline industry either. American Airlines, through AMR Investment Services, a subsidiary of its parent company AMR, has been offering financial services through direct mailings to AAdvantage members since 1986 and Virgin entered the UK financial services market in 1995 with Virgin Direct.
Attractive marginsThe business concept is straightforward. With a large base of loyal customers buying your core products, you can offer them other services that meet their needs and reinforce their perception of your brand. The price is competitive because the commodity financial products that you offer - savings accounts, mortgages and personal loans - are competing with the existing level set by large, inefficient institutions with expensive retail networks and overheads. Your customers gain a real benefit and the perceived value of your brand is reinforced, while at the same time you can still earn a highly attractive margin. If you lend your brand to the financial products already offered by other experienced institutions, you need not even bear any real risk. Surely, this is a win-win equation for the airline and its customers alike?
But airlines that are considering venturing into financial services need to be able to answer four crucial questions before they consider such a move:
* Will I really add value to my target customers?
* Will the financial products and services I offer deliver superior quality?
* Will financial services fit with my brand values?
* Will my core business be able to support the new venture financially?
Before stretching its brand to new product and service offerings, an airline needs to know which customers it want to focus on. Boots, for example, knew that more than 85% of its customers were women, and Sainsbury knew that only 69% of its customers paid off their credit cards in full each month. As a result, Boots launched insurance products targeted at female customers, such as pregnancy and child injury cover. Sainsbury launched a second Visa card with a lower interest rate for customers with revolving credit.
Adding real valueThese and other companies found that traditional market research had its limitations in gaining insight into customer needs. Surveys were expensive and data often inaccurate because they were based on customers' perceptions of their own buying patterns rather than on their actual buying patterns. Today, however, loyalty schemes and data capture at point-of-sale allow companies, including airlines, to build data warehouses with millions of customer records that they can mine to find out much more about their customers and their customers' needs. An unprecedented level of data accuracy is now possible since the database is refreshed with each transaction. Boots now has 8.5 million loyalty cardholders, Tesco over 10 million, BA has 3 million Executive Club members and American's AAdvantage programme has 32 million members. As Tim Mason, marketing director of Tesco, says: "If you don't use the information you have, you're not a customer-facing business."
The next challenge is to identify the financial products and services, if any, that will add real value to the relationship with the customer. People who are bombarded with direct mail every day need to be able to see at a glance that a new product or service will make their lives easier or more pleasant than traditional financial products. For example, Kwik-Fit car insurance offers lower premiums to many of its customers supported by a best-in-class service, and as the Kwik-Fit insurance renewal reminder arrives on the doormat the motorist remembers that he has been meaning to take the car to a Kwik-Fit centre to have the brakes tested. The parent company's "share-of-face" with the customer increases as a result.
Data mining tools based on smart statistical techniques help companies decide which brand extensions to offer.
The new product or service offered has to differ, in some way, with existing products or services to add real benefit. When Virgin began in 1995 by offering a personal equity plan (PEP), it was the first to explain a previously complex product clearly to the customer. It has gone on to offer the first one-stop bank account that combines a current account, flexible mortgage and credit card facility in the same account.
Sainsbury used the insights it gained into its customers' needs to create a savings account that offered greater convenience (longer opening hours) and better value for money (higher interest rates) and customer service than a high street bank. Some 700,000 customers have deposited over £1.5 billion ($2.5 billion) with the company in the account's 13 months of operation.
BA, like American, will no doubt focus on products that meet the needs of its Executive Club members, most of whom are high-earning executives with an international perspective. While they tend to be knowledgeable about financial products, research shows that many have little time or inclination to shop around. They seek value-for-money, convenience and simplicity. While other players have focused on commodity financial products, BA and other airlines that are considering offering their frequent flyers financial services may offer more sophisticated products, reinforcing the "exclusive" image of club membership, alongside the mainstream products. Private banking, unit trusts focused on speciality areas, foreign currency or ECU-denominated mortgages are all possibilities.
The customer must perceive the product as competitively priced and delivering real value for money.
Easy to underpriceUnderpricing traditional, inefficient competitors is easy as a data warehouse is also a powerful asset when it comes to launching a new product or service and providing direct access to the target market at minimum cost. Brand venturers' conversion rates are high: for example, 30% of the customers Kwik-Fit call buy a policy, well above the average for the insurance market, and the renewal rate is above 80%. Brand venturers can pass some of the cost savings back to the customer, in higher interest rates or lower insurance premiums, and still make a healthy margin.
Another customer benefit is simplicity. Companies like Marks & Spencer and Virgin have been able to demystify financial services. In a recent survey in Your Money Direct magazine, where products were short-listed by value offered and then rated on service provided in telephone tests, Sainsbury won the "best direct personal loans provider 1998" award and M&S the "best direct pensions provider 1998" award - evidence that the new products and services launched are adding real value to the customers.
Brand venturing comes with a risk, however. If the new product or service does not deliver on its promise, or if service support is poor, the core business and the company's brand will suffer. Virgin Rail has inherited old rolling stock problems, including faulty engines and ineffective air conditioning, along with its rail franchise and has to rely on a third party for track and signalling maintenance. As a result, trains often run late. Is Virgin delivering a service below that of its competitors or is there simply an expectation that it should be able to deliver a better service? When you have a strong brand, customers expect you to be able to deliver a better quality of product or service than the existing providers simply because you can deliver it in your core business. Should these problems continue in the long term, they could damage the reputation of the core Virgin businesses and customers might start to wonder "if Virgin Rail is poor quality, maybe their airline and their fund management is too."
To avoid these and associated diversification risks, brand venturers are going into partnership with flexible, traditional providers who are willing to provide the products and services and leave the branding, marketing and sales to them. UK-based insurance company Royal & Sun Alliance carries the risk with Boots' travel and health insurance policies, and provides the underwriting and claims services, while Boots brands the products and provides retailing and marketing skills. Sainsbury's partnership with the Bank of Scotland enables it to be a customer-friendly, low-cost bank, safe in the knowledge that the actual banking is being handled by an expert. Virgin has taken a similar route with 50% of Virgin Direct owned by AMP, the Australian insurer.
Keen and willingFinancial partners are keen and willing to "white label" their products as they recognise that the brand venturers are offering new channels to the market and the costs of customer acquisition are significantly lower. Both Royal Bank of Scotland (Tesco's partner) and Bank of Scotland offer more attractive deals through the partnership accounts than their own-brand accounts because of the lower cost of customer acquisition and service delivery. RBS, which is also in partnership with Virgin on Virgin One, a telephone-based bank, has stated that it sees its future in similar partnerships.
Not all the partnerships have been successful. When it launched Clubcard Plus, the first combined shopping and savings account, Tesco partnered with NatWest Bank, a traditional UK high street bank. The partnership floundered when Tesco's ambitions to expand into financial services by offering loans, mortgages and pensions came into conflict with NatWest's own ambitions. By contrast, Tesco's new partner seems a natural choice - RBS provides the banking, its subsidiary Direct Line provides the insurance services and its strategic partnership with Scottish Widows provides the pensions.
Who might BA partner with? HSBC, the only UK high street bank yet to white label products, or NatWest? A Swiss private bank? Thomas Cook or American Express? In view of BA's high value customer base and ability, through the Executive Club, to cherry pick affluent customers, there is likely to be no shortage of financial institutions willing to partner with them.
Airlines planning ventures in the financial services market also need strong brands and the right brand values to support the diversification. A new report from the UK-based think tank, The Henley Centre, shows brands which are trusted by consumers will find it easier to extend themselves into new products and services, as long as their brand values are relevant to the new activities. Sainsbury, for example, has taken its brand and core values of integrity, trust and value in food retailing to create a powerful proposition with the same underlying values in financial services.
Areas where consumers feel vulnerable to making the wrong decision, like financial services, are ideal for brands like Virgin and BA in which their customers have high confidence and trust. It is important that brands remain true to their values in new ventures and that they give something back to the core brand, otherwise the customers are likely to become confused. Therefore, an airline with a poor reliability record and weak brand is unlikely to be successful in a venture into financial services.
City analysts will also expect any new brand ventures to be relevant to the core brand values and company mission. For example, when Boots announced its intention to start selling health and travel insurance, most analysts welcomed the move, seeing it as a sensible way for Boots to leverage its brand and strong customer loyalty in health and travel care, with low running costs and the potential to make large commissions on policies sold. But one analyst added a note of caution: "They obviously have to be careful not to dilute the brand. I wouldn't want to see Boots suddenly become an estate agent or a travel agency."
Tesco now states its mission as "continually increasing value for customers to earn their lifetime loyalty." With no reference to food, the mission allows greater flexibility for developing new ventures. When BA's mission was "to be the best and most successful company in the airline business" and a key objective "to be genuinely the world's favourite airline", a move into financial services would have been difficult to justify. Its new mission - "to be the undisputed leader in world travel" - gives the opportunity to diversify from its core airline business.
The last three words of the new mission, however, may limit the range of financial services needs it can meet. Pensions and unit trusts are not obviously related to travel. Offering travel-related financial services, such as foreign exchange, travel insurance and credit cards, though closely linked to the company's mission, may constrain the business case. A wider offering may be necessary. Bundling travel insurance, foreign exchange, personal loans (perhaps foreign currency mortgages for holiday homes) and credit card services for members into a global services product, similar to the one recently launched by Thomas Cook, could be a logical next step. Having a single and reliable point of contact for handling insurance claims, accessing currency, finding a doctor and repairing your computer would be a real benefit to frequent flyers. A tie up between BA, Thomas Cook and Europ Assistance, perhaps?
Brand owners seducedInvestors have been caught out over the years by brand-owners who have been seduced by diversifications which have proved to be unhappy ventures, such as SAS and its move into the ownership of hotels. Shareholders need to be convinced that the core business can support the new venture in its early years, that the business case makes financial sense in the long term and the risk has been managed.
Unless the core airline business is financially healthy and running smoothly, a venture into financial services would be a mistake. The new venture will require investment; Virgin invested $23.7 million in Virgin Direct and, despite the $2.5 billion invested to date in Virgin Direct's products, it does not expect to make a profit until the year 2000. New ventures also require large amounts of top management time. Even those in partnerships with experienced providers have to dedicate marketing and sales time to the new venture. BA set up its consumer financial services division two years ago, prompting speculation that it was planning to offer a full range of personal financial services. Given the effort and management time required to implement the step-change programme and the delay in the alliance with American, postponing the move until now was a sound decision.
Most airlines can mine their frequent flyer databases to find financial products and services that will add value to their target customers. Most will be able to deliver superior quality by partnering with experienced players already in the market who are willing to white label their services. But only a few airlines have the brand strength,values and healthy, cash-generating core businesses to support a venture into financial services. The others should stick to their knitting.
Source: Airline Business
