Tom Bacon understands that there are fundamental differences between airlines and hotels that cannot be ignored, but there are also some similarities
The travel sector spans a wide gamut of industries – from airlines to hotels and vacation rental companies to trip planners, metasearch engines and online travel agencies. As travel conferences, like those run by EyeforTravel, where there are representatives from each of these sub-sectors, the idea is to identify common issues that affect any number of these sub-sectors.
There are, however, also fundamental differences between the various sub-sectors so caution is needed. At a recent Eyefortravel conference, one of the speakers wanted to highlight some of the differences between the two largest sub-sectors – airlines and hotels. In doing so, two important questions were raised:
- How do the inherent differences among these sub-sectors of travel impact pricing, merchandising, and distribution?
- Do these differences require radically different approaches to technology and pricing?
Let’s now talk sector differences and converging needs in four core areas: industry consolidation; property ownership; product differentiation; and the network.
As a result of the mega-mergers that have occurred over the past decade or so, the US airline industry is now significantly more concentrated than the hotel industry. Four carriers in the US represent 80% of capacity while the largest hotel brands represent a much smaller share. The mergers are said to drive less price competition and increased ‘capacity discipline’ (less overall industry growth relative to demand growth). The difference in industry structure means airlines can rely more heavily on their RM systems to set inventory levels. Hotels, on the other hand, must monitor competitive pricing more rigorously and potentially override their RM models more regularly.
There are, however, also converging needs! Despite the greater market power associated with the largest four US airlines, they each appear threatened by new, faster growing Ultra-Low Cost Carriers (ULCC’s). Each mega-carrier, therefore, is working toward technology solutions – e-merchandising – that can combat the low-cost threat. Interestingly, hotels are likewise turning to new technology to compete against the hotel industry disruptor - short-term vacation rentals. Despite the difference in overall industry concentration, both sub-sectors of travel are embracing technology as a key way to preserve their existing market shares.
When it comes to property ownership there are also sector differences! In addition to the airline industry being more concentrated, ownership across hotels is far more disperse. The major hotel brands are generally separate from the ownership of specific properties. The result is that hotels rely more on localised revenue management while airlines have much more highly centralised RM departments. There are pricing optimisation systems that are created by the hotel brands but each property in turn has responsibility for managing the systems on a daily basis.
However, new ‘personalisation’ means both airlines and hotels need to go well beyond their current data sources and strategies. Airlines should become more local (like hotels) but both sub-sectors need to embrace new forms of segmentation. Both will need big data analytics and machine learning to apply much more granular approaches to e-merchandising.
Historically, airlines have tried to be all things to all people – they sell the same seat at a $49 promotional fare or a $499 full fare depending on demand. On the other hand, individual hotel properties often target more narrowly – some properties focus more on the most price sensitive travellers while others specifically design their properties to attract customers willing to pay higher price points.
But today ancillary fees give both airlines and hotels new opportunities for meeting different customers’ needs on the same flight or on the same property. Both sub-sectors have challenges as they offer a broad range of experiences, each targeting narrower and narrower subsets of demand.
Customers of hotels are all purchasing the same basic product – a night at an individual property. Hub airlines actually serve different customers – different origin-destination (O&D) combinations – on the same flight. One flight may, in fact, accommodate customers in 30 or more such O&Ds; thus Denver-New York serves Las Vegas-New York, Los Angeles-New York, Seattle-New York, and Sacramento-New York all on the same flight. Such hub-airlines must forecast demand in tiny increments – less than five passengers in each of dozens of city-pairs – all to optimise one flight (‘network’ management). This complexity has driven airline RM analysts to become increasingly reliant on their systems and less aware of unique market requirements.
But the new drive towards ‘personalisation’ will further drive such reliance on technology – for both airlines and hotels. RM will need to manage increased complexity and increased granularity – analysts will rely even more heavily on their systems – increasingly, machine learning not simple algorithms – to forecast demand and optimise pricing.
Although there are major differences in industry structure between airlines and hotels, they have converging needs in technology, personalisation, and segmentation that translate into ongoing learning opportunities across sectors.
Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website
October 2018, Las Vegas