The International Air Transport Association (IATA) is forecasting global profits for the airline industry of approximately $30 billion in 2017,* down from a peak of roughly $36 billion in 2016 given an uptick in expected fuel costs. With this backdrop, L.E.K. sees the next five years as critical for airlines to continue their transition from subsistence to sustainability via investments in both product and customer-facing services.

While the capacity picture has behaved relatively well in regions like the U.S., airlines must resist the temptation to upset the more profitable balance the industry has achieved. In particular, capacity growth in markets such as China and Trans-Atlantic present significant potential risks.

What are the biggest challenges and opportunities facing the airline industry this year?

While each carrier will face a unique set of challenges, we seethree that pervade the industry:

1.     Recalibrating revenue management. Globally, carriers are increasingly adopting new fare structures, which are not just based on the traditional advanced purchase timelines but also include or exclude different features (such as checked bags or upgrades). As these products expand, airlines will need to adjust revenue management techniques to reoptimize inventory allocation and pricing. For example, carrier models must accommodate the surge in value fares, forcing a rethink of how demand has traditionally been forecasted. Moreover, the growing importance of ancillary revenue requires that revenue management teams increasingly incorporate a “full customer value” lens.

2.     Securing the right partners. As the skies open and antitrust immunity (ATI) becomes more prevalent, airlines are revisiting the traditional alliance architecture and contemplating game-changing joint ventures (JVs). This remapping of alliances risks leaving some carriers in compromised positions as new lines are drawn around them. We see continued activity as various protagonists seek partners that can fill network gaps, provide enhanced customer offerings, and effectively achieve the virtual scale that all network businesses desire.

3.     Transforming customer experience. Modern travelers are looking for greater control over their journeys and respond favorably when airlines assist them in this effort. Carriers that can get this right stand to gain on high-margin upsell opportunities as well as stronger customer satisfaction (and retention). Successful execution will involve substantial focus and resources, and requires, essentially, an evolution from an operations-based culture to a customer-centric one.

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