ExpertFlyer is proud to introduce its new One on One blog series of one-on-one interviews with some of the most knowledgeable and influential professionals in the travel industry. Each month, ExpertFlyer will sit down with an executive in the travel industry to provide insight to changes in the industry and how it affects the way you do business. It’s another way ExpertFlyer is providing additional information to empower the business traveler.
This month ExpertFlyer sat down with Cory Garner, Director of Merchandising Strategy for American Airlines who discusses the “unbundling” of services in the airline industry.
“The most interesting part of the ‘unbundling’ trend has been underreported — the airline industry is on the verge of giving the customer more visibility and control over their flying experience.”
— Cory Garner, director of Merchandising Strategy, American Airlines
What exactly does a Director of Merchandising Strategy do at American Airlines?
If you have ever ordered a hamburger and been offered a combo meal, shopped for a new car and been tempted by the leather package or bought something on Amazon.com only to be prompted to buy something that similar customers have purchased in the past, you have experienced merchandising. As director of merchandising strategy, I place the right products at the right prices in front of the right customers for American Airlines customers to purchase.
What prompted the need for this new position at American Airlines?
This wasn’t a priority back when airlines sold three products – first class, business class, and coach. It is the unbundling of the airline product (e.g. checked baggage sold separately) that has created the need. Airlines have seen their product set grow from three into the dozens. When you consider the number of possible combinations of these products, an airline may offer millions of different unique customer experiences. Rather than overwhelm the customer with all possible combinations, airlines realize that they need to anticipate and/or solicit the needs of each customer and offer only the most relevant products and product combinations, and that’s where merchandising strategy comes in.
When and how did the unbundling trend take hold?
The unbundling of checked baggage draws a lot of attention as the beginning of the trend, but fees for optional services have existed in the industry for many years. Charges for services, such as ticket changes and transport of heavy baggage, among others, were already common at the beginning of the last decade.
The modern era of unbundling began when carriers started charging for services, such as call center ticketing and onboard meals in the early 2000s. These unbundling initiatives were driven by a detailed review of airline cost structures. Expensive services or processes deemed not to be competitively essential were cut out completely. Other services that were attractive to a subset of customers were kept in place, but offered as a separate charge. The idea was that these optional services, if truly valued by customers, should be able to fund themselves.
What specific marketplace factors, if any, have played a role in the unbundling process?
The economic pressures of higher oil prices and a soft economy have caused carriers to begin looking at unbundling in a new light — as a customer segmentation exercise. By breaking apart the airline product into a collection of smaller services and introducing new services, such as onboard Internet connectivity, airlines can compete for customers using offers that range between a basic fare with fewer services to a full fare with everything attached, plus a multitude of combinations in between. In so doing, airlines can adapt the customer’s travel experience according to their needs.
The airlines’ practice of unbundling services has generated its share of negative press and customer backlash. How, specifically, does the customer benefit if they have to pay more for services that they already had?
Admittedly, the transition from a bundled world to an unbundled world has been painful at times for both airlines and customers. Airlines have been faced with the challenge of reconfiguring legacy technology from selling just flight tickets to selling a variety of services that can be mixed-and-matched in thousands of ways. Some customers have voiced their disdain for the process, labeling it “nickel-and-diming.” In the end, I believe customers will recognize that airlines had to first break apart their services before they could be reassembled in interesting, cost-effective ways to benefit both airlines and customers.
I also believe that the new world will prove to be worth the wait. The customer — not the airline — will ultimately control which services are included or excluded from the cost of their trip. Customers that know exactly what they want will be able to speed through the booking process. Customers that want a rich comparison between airline offerings will have full details available. The door will be opened for airlines to compete on the relevance of their service offering rather than just on the base fare. The net result will be that the customer will be more likely to get exactly what they want and the airline will be able to break free from the notion that it supplies a commoditized product.
What special benefits can your frequent flyers expect to gain or maintain as a result of the breaking apart and reassembling of services?
In the same way that unbundling allows us to provide a higher level of service to customers that pay more on a transactional basis, it also allows us to differentiate the level of service we provide to customers in exchange for their loyalty over time. There are a number of services already in existence, such as Priority AAccess, that we exclusively award to our elite level frequent flyers for free. We believe that it is important to maintain a clear distinction between the services and pricing that we offer to our elite level flyers, and I expect that to continue.
How have frequent flyers reacted to changes, thus far?
Positively. Now that there is a price tag associated with many of the services that our most frequent flyers receive for free, it is becoming easier to place a value on maintaining loyalty to a single carrier. Unbundling has given us a new way to reward customers for their loyalty, and I think that has paid off for both them and us.
What other changes or adjustments to customer service do you see the airline industry instituting in the future?
The unbundling trend will continue to cause carriers to become more customer-focused in determining which services to introduce and ensuring that the services that they deliver are good value for the money. I am starting to see more airlines segmenting their customers according to their needs rather than their value to the airline. This allows airlines to think more creatively about how they will meet those needs. In addition, for the services that are being charged separately, there is a greater sense of accountability on the part of the airline to make sure that the services are being delivered consistently. The improvement in baggage delivery success rates since the unbundling of checked baggage has been remarkable. I think all of this signals higher customer satisfaction going forward.