Background and Challenge
In the past decade, airlines worldwide have faced particularly challenging business conditions. Volatile oil pricing, downturns in economies, and increasing competition have applied significant pressure on airline profitability. As a result, ancillary income has become a critical, high-margin source of revenue for the majority of carriers.
On a recent engagement, L.E.K. Consulting was tasked by a leading carrier to help understand the best path forward for offering onboard internet connectivity, the latest in a line of ancillary products that the carrier was considering. We brought an alternative business model concept to the airline which they found intriguing. At the airline’s request, we considered the broad set of strategic alternatives available in the connectivity space and recommended the one that not only enhanced the overall customer experience, but also made the best economic sense.
Approach and Recommendations
While access to the internet is a key value proposition for onboard connectivity, our team saw the potential for an onboard network to offer a far more diverse set of entertainment and productivity options than internet alone. Working with the client, our team developed a number of product concepts to test at various price points. Through focus groups and surveys, our team used conjoint and cluster analysis to identify the optimal mix of products based on expected customer uptake. With this analysis, our team built up the business case for its proposed offering, and developed a high-level technological roadmap and implementation plan. Using the conjoint and cluster analysis, the team highlighted the specific options that would deliver the greatest return, and specified the pricing ranges necessary for each product to optimize the return on investment.
Our recommended approach is expected to deliver four times greater revenue per annum for the client than a “connectivity-only” approach. More importantly, with our recommended approach, the airline has an opportunity to use an onboard network as a strategic asset to more efficiently serve the needs of all of its customers while onboard.