Learning to live with the hybrid

In the future, there will be less stratification of airline models and consumers will find it easier to choose which airline they want to fly with – in much the same way they now shop at retail stores.

Gordon Locke, Vice President, Airline Strategy, Sabre Airline Solutions/Sabre Travel Network, said there were now, broadly speaking, five types of airlines – global network carrier, traditional flag carrier, domestic/regional, low cost airlines and start-ups.

And then there’s the sixth – the hybrid model “which represents the convergence of a few of these models”, said Locke.

“In the future, you will see airlines falling into three distinct categories – high end, value and low cost, no frills. There will be less differentiation in the actual business model but more differentiation in the way airlines style their services and brand their experiences.

“It will be just like in the retail market.”

Citing US examples (Neiman Marcus – high end, Target – value and Walmart – low cost, no frills), he said, “They are very different business models but all three carry similar products.”

Locke said that consumers, who were getting smarter, were pushing for the industry to simplify “so that the consumer knows what he is buying”.

In the meantime, however, consumers will have to contend with an increasingly confused and crowded market in which the hybrid model, the focus of a recently-released study by Sabre Airline Solutions, is adding complexity to the price structure. (Read more here.)

The hybrid model, said Locke, is an attempt by airlines to seek out new revenue streams in a “perfect storm” scenario.

“Costs are rising. Recession is setting in. Inflation has arrived. Airlines have to manage costs far more vigorously and, at the same time, look for opportunities to grow revenues in an increasingly competitive marketplace.”

Airlines are trying to move away from price to choice, he said. “Charging for ancillary services is working as a revenue opportunity and it also works to add choice for the consumer. All things being equal, choice can tip the balance for the consumer.”

Ryanair and Easyjet charge more for priority boarding passes. American Airlines is now charging US$25 for a second checked bag for domestic customers and will charge US$15 for first checked bag from June. JetBlue is selling extra legroom for a fee. Tiger Airways has started charging for checked baggage.

“The problem is when an airline starts adding too much choice – it can get a little overwhelming for consumers. But you will see more airlines experimenting with this space,” said Locke.

All this is making it harder for consumers to compare price which presumably is what the airlines are aiming for. The Internet stripped airlines of their emperor’s clothing and laid bare their fares for all to see.

Now, Locke said, consumers will have to buy based on “the perception of value”.

“That’s why the brand experience is so important and must be consistent across all channels,” he said.

Locke sees the hybrid model taking off faster in Europe than in Asia because the pure low cost model on the continent is being squeezed by rising costs as well as competition from other forms of transportation while network carriers “try to outsmart each other” with their search for new revenue streams.

“In the next five years, we will see airlines – both low cost and network – move to the middle ground in Europe.”

According to Locke, the pure low cost model would have a greater survival rate in Asia, due to the geography of the region and the diversity of its market.

Locke also pointed out two other trends that would drive the airline industry in future – social networking and trans-global affiliation.

“Social networks have become a powerful force in influencing people’s decision on how they travel and it is crucial for airlines to understand that. If one traveler has a bad experience, it could affect your brand.

“With trans-global affiliation, we are seeing the shift in global culture. A large Indian population in the US, for example, can have an impact in how a brand like Jet Airways or Kingfisher is marketed. It’s patriotism beyond borders, and you have to understand how to tap into that.

“Interlining and codesharing with other carriers is one way – a lot of airlines that will not join an alliance are now capable of setting up networks on their own.”