There is a lot of money riding on the Internet. Last year it contributed an estimated $750 billion to the value of the US stock market. Three years earlier it had accounted for little more than $60 billion. Trends so far this year show a continued upswing in the Internet economy as the number of users worldwide reached 100 million, with 80 million of them in the USA alone.
Growth has been phenomenal across all Internet value sectors, but a look at the relative growth winners reveals the dynamics of this marketplace. Sectors focused on the consumer mass market and e-commerce have been the biggest winners, collectively creating more than $120 billion in market value.
Successful Internet e-commerce designs are now looking less like online versions of brick and mortar retailers and are becoming more information-based, tailoring the purchasing experience for online consumers. Jeff Bezos, chief executive of the online book retailer Amazon.com, says: "If we have 4.5 million customers, we shouldn't have one store. We should have 4.5 million stores."
As e-commerce grows, the Internet matures and market penetration increases, airlines are well placed to make a move. Travel already takes a significant proportion of Internet sales and is expected to lead e-commerce growth. No matter whether you look at frequency of purchases, value of sales, or purchasing population, travel emerges as one of the top categories.
And online travel is expected to continue to grow disproportionately over the next few years. Forecasts of online retail sales in the USA in 2002 show travel to be the single largest category, at almost $12 billion. This online revenue figure - projected by Jupiter Communications - is almost double that of the next highest sector, PC hardware. Another forecast, by Forrester Re-search, suggests online travel sales in the USA will grow to $30 billion by 2003.
Millions of customers are already using the Internet to research and buy travel. Within two years, Jupiter forecasts that more than 8% of all North American airline tickets will be bought on-line - up from 2% last year. As well as ticket sales, the airlines have other ways of taking advantage of the Internet. They can boost their market awareness, brand image and established customer relationships, and can provide a wealth of customer information in their frequent flyer databases.
The incumbent airlines already have brand leverage and, as the Internet evolves, will be well-placed in the growing battle over customer access and relationships.
Online travel race
The airlines have not been sitting idly by, of course. All major US carriers can now take bookings through their websites. But their offerings so far have generally fallen short of customers' needs and require further tailoring. In a recent survey by NPD Online Research, only 18% of users said they consistently found the travel information they were looking for online. A major criticism is that the sites are not responsive to core needs, are hard to read and are slow to get through.
Meanwhile, a great number of other competitive travel websites have been introduced, sponsored either by other industry players, such as hotels and online travel agencies, or by other information systems-based companies such as Microsoft and, more recently, Oracle. The competition is fluid, however, and no single winner has yet emerged in the online travel race.
So given the obvious importance of the Internet to an airline's core economics, to customer relationships and to new business opportunities, what range of Internet options should airlines consider?
Below we highlight six strategies for airlines to explore to harness the potential of the Internet and to assess their potential economic impact. These illustrate the range of options, whether focusing primarily on cost savings, on developing customer relationships, or on creating new business designs.
1. Operating cost savings
The Internet can be used to make dramatic cuts in operating costs, perhaps spawning the next "Southwest" business design. In other sectors, major companies such as Cisco have made dramatic savings in back office costs through the creative use of the Internet to transform or digitise internal processes. Cisco and Federal Express used the Internet to achieve savings in their operating costs in 1997 - saving 6% and 1% respectively. This strategy succeeds by streamlining processes and reducing administrative and purchasing costs, while improving information capture and decision-making.
2. Distribution cost savings
So far, most airlines have focused their Internet initiatives on the ease and convenience of online ticket sales - and with good reason. Within the next five years, Internet bookings are expected to rise fourfold. According to America West, direct distribution costs can be reduced from $23 to $6 per ticket by booking online. As an ever-greater proportion of direct sales are conducted online, further indirect capital and overhead costs should also fall. But carriers should note that customer satisfaction with existing booking capabilities is weak, and this strategy will depend on continual innovation and creation of incentives to get passengers to book online.
Airlines have been taking advantage of the lower costs to stimulate last-minute sales at lower prices through e-saver fares, which are sent via e-mail to registered subscribers, and open fare auctions held on the Internet. Airlines can save not only on booking fees, but also on marketing and sales costs, potentially rewriting the rules on traditional airline promotions.
3. One-to-one relationships
The Internet will host the next wave of airline marketing. Being connected with their customers online gives airlines the opportunity to develop highly personalised and targeted offers designed to build the loyalty of top customers. Using this connectivity, an airline can tailor valuable marketing programmes, such as incremental getaway offers, to these customers. Because profits are concentrated among a relatively small portion of an airline's customer base, a one-to-one marketing strategy could have significant impact on profits. To be successful here, the airline would need to be able to identify its most profitable customers and then create meaningful offers that will drive loyalty higher.
4. Relationship extension
An airline's online customer base represents a high-value audience for many businesses because of its focus on a fairly rich and sophisticated market segment. Airlines can generate non-airline profits from their websites by providing these customers with a conduit for other products. Today, airlines employ this strategy by packaging direct mail offers via frequent flyer newsletters. However, most of these offerings are poorly targeted advertisements for low-value products.
Using the Internet, airlines could increase the precision of their offers, which would increase the interest of the customer and improve the return rate. Carriers could charge a healthy commission for transactions and referrals. This strategy might make traditional airline marketeers nervous, but in the Internet world it is a common and lucrative practice.
5. E-businesses
Customers do not simply buy tickets - they arrange travel. This presents a new business design opportunity for an airline: to create a site that helps customers plan their travel and provides draws in users with a broad array of related services. That could include direct bookings for air and ground transportation and hotels, together with loyalty schemes and more. There is the added potential for advertising sales. As a rule of thumb, targeted websites can achieve three times the hit rate of those aimed at a general audience.
There are already some strong contenders. Sabre's Travelocity, Microsoft's Expedia and Preview Travel have all developed popular sites. Travelocity and Expedia each booked more than $250 million in sales last year and Preview took over $200 million online through six million registered subscribers. These agencies are fast entering the ranks of the top 25 travel agencies in the USA. And the growth continues to propel them up the volume rankings: Travelocity booked $9 million in just one week in January.
Despite fierce competition, such anticipated growth suggests that much opportunity remains for airlines to explore their market positioning. With high brand recognition and the ability to draw traffic to their sites, it would seem the field is still open for carriers to investigate creation or partnership opportunities in the travel "infomediary" space.
6. Auction marketplace
Some people in the industry believe that an auction-based travel marketplace is a far-fetched idea - but others say it is inevitable. Auctions have the potential to alter significantly the yield management landscape as we know it. At the very least, the success of a travel auction business could erode the value of current computer reservation systems and other pricing and revenue management controls. Airlines may think that an auction marketplace might erode the value of their assets, but other potential market entrants many not feel bound by such constraints.
Priceline.com in the USA has already initiated developments in this arena with its "name your price" matching of airlines seat buyers and sellers. There has also been selected online auctioning by Cathay Pacific and other incumbents. A broader business design could include point sales or auctions as a potential currency, while generating new media advertising and transaction revenues.
If there is a marketplace winner in this area, it is likely they will be well rewarded. As of early March 1999, the market value of eBay, an online auction marketplace that went public in late 1998, had soared to $21 billion - double the value of American Airlines. Although market history suggests this cannot be sustainable, it is a fact that cannot be dismissed.
Assessing the opportunities
So what value might there be in airlines pursuing these Internet strategies? Even modest assumptions about their potential impact suggest hundreds of millions of dollars in market value potential.
Forecasting in the e-commerce arena is highly speculative, given the unprecedented growth of the medium. But the figures shown in the market value creation chart represent a rational estimate based on current projections and conservative assumptions about the impact of the strategies.
What is clear is that there are multi-million dollars opportunities for airlines on the Internet and the value creation potential for the industry is a far cry from merely selling expired inventory via e-mail. Significant profits and market value can be achieved by fully embracing e-commerce and doing it correctly. This requires a commitment to thinking differently about the basics of business opportunities.
As online travel players scramble to "own" the customer relationship, it is clear that the stakes in the online travel race are high and may have a bearing on future strategic control of the industry.
| Mercer estimates of potential online value creation opportunities for airlines | ||||||||||
| Cost savings | Relationships | Travel information | Auction | |||||||
| operating | distribution | one to one | extension | aggregator | marketplace | |||||
| Airline earnings impact ($m) | 100 | 96 | 30 | 21 |
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| Airline earnings multiple | 8x | 8x | 8x | 8x |
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| New media analog/revenue multiple |
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| Preview travel x27 | **eBay x27 | ||||
| Market value estimate/analog ($m) | 800 | 767 | 240 | 168 | 321 | 2,700* | ||||
NOTE: *estimate based on $15 billion airline. Analog Mkt value at Feb 99 **eBay mkt value currently $9.7 billion. Travel is forecasted to represent 29% of online retail sales.
Source: Airline Business
