Airlines in the digital age – Optimization or transformation?

Digital optimization vs. Digital Transformation

The emergent technologies and new players disrupting almost all industries have given Digital Transformation a lot of hype. Leaders have already learned by heart the failing story of Kodak, who didn’t recognize the disruptive value of digital photography or Blockbuster, who lost their entire business to Netflix for being late to the online streaming game. So companies, including airlines, are rushing in the race of digitization in fear of losing out to competitors. Two-thirds of leaders believe they are embarking on the digital transformation journey, however, only 10% of them are actually doing it⁽¹⁾.

Digital optimization is the process of improving current operating processes and/or business models with the use of digital technology while digital transformation means exploiting the latest digital technologies and practices to create new revenue streams and sustainable digital business models. Both of which have their own pros and cons. While the former provides quick wins, it might not be enough with the fast-paced development of technology and customer demand. On the other hand, the latter can be revolutionary for the organization but it can also risk major business disruptions if not carefully implemented with the right people and technology.

So with the ongoing price war and the ever-increasing customer needs, the real question is which strategy should airline adopt to stay competitive and profitable?

Digital optimization in airlines

Digital optimization aims to utilize technology to improve efficiency, customer experience and increase revenue through existing income streams and allow airlines to be on a par with their competitors. So in this case, technology only works as an enabler to allow the current systems, processes and human resources to be more effective. While it might sound mundane compared to Digital Transformation, digital optimization is absolutely crucial for airlines to obtain quick wins without too many changes.

To stay competitive, the majority of airlines are already implementing some sorts of digital initiatives to optimize their processes and improve efficiencies. An example of optimization in airlines is the use of Analytics and Artificial Intelligence by Philippine Airline to collect, analyze customer data and conduct targeted marketing to drive sales. Another example is Air Canada developing a skill for Amazon’s virtual assistant, Alexa using machine learning and artificial intelligence to respond to questions related to Air Canada such as fare quotes and flight status. With the key focus on delivering an efficient and seamless customer journey, 60% of airlines have seen up to 20% YOY increase in passenger satisfaction and nearly half of the airlines recorded an improvement in processing speed up to 20% (Statista, 2019)⁽²⁾. In the aforementioned cases, Philippine Airline’s approach has driven interest in Philippine Airlines by more than 20% YOY and by the end of 2017, their share of total ticket sales driven by digital marketing increases by 5%⁽³⁾ while the initiative from Air Canada has enabled convenience and provided a ‘human touch’ to customers.

Despite the smaller scale of change and the existing successes in the aviation industry, digital optimization still poses certain challenges for airlines including organizational silos and resistance to change from employees. The nature of airlines leads to a strong risk-averse, error-free mentality. While this mentality is crucial, this can prevent employees from adopting new ways of doing things to be more effective. On top of that, digital optimization requires cross-functional, cross-departmental collaboration, meaning the change will be organization-wide. Therefore, the change management process and good employee training program must be in place for the changes.

Digital transformation in airlines

Compared to Optimization, Digital transformation is taking one step (or multiple steps) further to reimagine and radically change the way products and services are delivered. Transformation typically involves creating or renovating holistic digital platforms at the core of business operations. Because of such grand efforts, digital transformation is typically used when the industry is highly competitive with disruptive start-ups and competitors. While the airline industry doesn’t have that high level of competition as other industries because of its high barriers to entry, if an airline wants to disrupt the market and rise above its competitors, digital transformation is the strategy the airline should follow.

Fortunately (Or unfortunately) for incumbents, no airlines have successfully transformed themselves but many of them have started the process. Some airlines are searching for, recruiting and sometimes acquiring technology start-ups with interesting in-flight applications. For example, JetBlue Technology Ventures has partnered with Air New Zealand to manage all innovation in air travel coming out of Silicon Valley. Some airlines are even proactively developing applications of their own to transform their businesses, not just waiting around for innovations. This is the case of Lufthansa and RyanAir, both of which have expanded their R&D departments to explore and test out new processes, technologies and business models. Lufthansa’s Innovation Hub, for example, is experimenting on eliminating the check-in procedures, which will reinvent the whole customer journey if success. Another good example is Air New Zealand, which is considered to be one of the leading digital airlines as they are continuously exploring applications of new technology and introduced them to improve the customer journey. Air New Zealand has explored mixed reality, as well as simultaneous translation for its multilingual customer base using Google Pixel Buds. Meanwhile Delta Airline is developing new applications to provide a seamless journey at baggage collection and security checkpoint.

All of the above experiments these airlines are performing sound far-fetched because they are. That’s what makes transformation so difficult. To really transform, airline leaders have to dig deeper as they are not giving what customers want or what employees want, they are giving what customers and employees will want, just like Daniel Burrus – a Technology Innovation expert said: “Clients today don’t know what they want, because the things they most want are things they don’t yet know are possible. Give your clients the ability to do what they can’t currently do, but would want to if they only knew it was possible.” So the most obvious risk for pursuing the transformation process is identifying and developing the right new processes/tools for the end users before they even know that’s what they want. The answer to the question of how to overcome this dangerous risk is Data and Creativity. These two elements support each other and complement each other to help produce Digital Transformation initiatives for airlines. While data provides insights into how the processes work, their effectiveness and predictive improvements in the future, Creativity is the source of ideas to help solve the identified pain points and reinvent processes, tools and business models. Both of which are scarce resources for airlines as discussed in ‘Airlines digitize to take off’ article (link), digital talents might not find aviation an exciting industry to be in and the majority of customer data is owned by third parties like OTAs, making it difficult for airlines to obtain.

The Answer

So in short, airlines could opt for optimization as the industry is not being disrupted heavily just yet and this strategy could help them improve their current business models while generating higher profits thanks to increased efficiencies and meeting customer demands. However, optimization can only do so much. In the longer term, airlines must transform their business if they don’ want to be left behind by competitors and start-ups. But with that said, transformation is a difficult process and airlines cannot do it overnight. It isn’t for everyone if they don’t have the right resources to support throughout the process. In order to make the choice between transformation and optimization, leaders need to do the following:

Whichever strategy leaders opt for, they must first be able to differentiate between the two and make sure there’s a rationale for their choice.

Reference sources
⁽¹⁾ Gartner. 2018. Digital Business Transformation: A U.S. Perspective.
⁽²⁾ Statista. 2019. Airline passenger experience in U.S. – Statistics & Facts.
⁽³⁾  Think with Google. 2017. Philippine Airlines’ Digital Transformation Takes Flight After Success With Search.