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It’s all aboutthe customerAre Asia’s Flag Carriers really behindthe curve in airline retailing?www.farelogix.com

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For some time, industry observershave contended that airline retailing in Asia is lagging behind othermarkets, such as the US and Europe,where many Full-Service Carriers(FSCs) unbundled their fares andare reaping substantial revenuegains through ancillary merchandising. With eight out of 11 Skytraxfive-star airlines based in Asia1, isairline retailing here really behind thecurve? Shouldn’t we see the superiorcustomer experience and brand offering as a strategic advantage and not something that should be unbundled?Moreover, what are the unique airline retailing opportunities and strategies for Flag Carriers in Asia?Having lived and worked in Asia for more than a decade, mostly in the airline or travel tech verticals, I will shedsome light on the topic and share my take on airline retailing in Asia in this paper.Mark McDonaldDirector – Asia PacificFarelogixBased in Hong Kong, Mark McDonald is Farelogix Director, Asiacommerce, and travel retailing strategies. He also representedPacific. A digital business and technology strategist, Mark hasthe company in the IATA Advisory Forum. Prior to that role, hemore than 20 years’ experience supporting large business andconsulted with airlines on NDC and ONE Order initiatives. MarkIT transformation programs across a number of industries.also held a number of thought leadership positions with CathayLeveraging his deep understanding of the airline industry in Asia,Pacific focused on retailing, sales and distribution, CRM, digitalMark is spearheading the company’s broader expansion into themarketing, travel retailing,and e-commerce. Early in his technolo-region. He is working with leading airlines to support the develop-gy career, Mark held technical roles with industry leading technol-ment of new distribution strategies and revenue generation op-ogy and companies such as Microsoft, Oracle, and Huawei.portunities through the application of next generation technologyfor airline commerce.Mark holds a Master of Science (Management) degree fromNorth Carolina State University and a Bachelor of Economics de-Prior to joining Farelogix, Mark was Regional Director, Asia Pacificgree from the University of Queensland, Australia. Most recently,at OpenJaw Technologies where he was charged with businessMark earned an Aviation Strategy and Leadership certificate fromdevelopment and consulting to industry-leading airlines in HongUS-based Stanford University’s Centre for Professional Develop-Kong, Korea, Taiwan, and Thailand on their distribution, airlinement.www.farelogix.comCopyright 20193

Why Asian Flag Carriers Have Not UnbundledWe can trace the history of ancillary fees back to the 2008 recession and the decision by American Airlines to startcharging for checked bags2. This move aimed to offset the high cost of jet fuel and other effects of the financialcrisis, which had been compounded by the emergence of Low-Cost Carriers (LCCs). In a market characterized byhigh price-sensitivity and lower demand for premium products and services (i.e. lower product-sensitivity), NorthAmerican and European FSCs chose to gradually unbundle the all-inclusive airfare particularly on domestic andsome regional routes. It was a positive move for airline profitability, and in a relatively homogenized market, customers benefited from greater personalized choice.Unlike their North American and European counterparts, Asian Flag Carriers have not unbundled core airline products such as seats, meals, and bags. The reasons for not unbundling provide a window into the distinctive traits ofAsia, including:The unique characteristics of the AsianA greater proportion of “product-travelersensitive” international travel in the regionHigher traffic volumesAirline history and operationsA diverse and fragmented marketNote: Asia’s Flag Carriers refers to full-service airlines including Korean Air, Asiana,Japan Airlines, ANA, Cathay Pacific, Singapore Airlines, Garuda, Qantas, Virgin Australia,Air New Zealand, Philippine Airlines, Malaysia Airlines, Thai Airways, Vietnam Airlines,China Airlines, Eva Air, and the big four in mainland China – Air China, Hainan Airlines,China Eastern, China Southern, and Xiamen Airlines.4

Customer experienceis everythingThe quality of Asian hospitality is world-renownedand springs from a heightened, even culturalimportance. Asian hospitality is characterized bya desire to connect with guests emotionally andprovide value-added experiences. An expectationfor a high-level of personal touch and a premiumproduct remains at the very heart of the travel experience for a significant portion of the Asian travelmarket.In Asia, many travelers still expect their travel to beorganized for them, whether on group tours or bytravel agents. Also, the Asian customers who bookwith Flag Carriers expect the basic features (seat,bag, meal) to be included. It is a widely held here inAsia that unbundling basic elements from the fareruns counter to expectations of these customersand would cause alarm and result in customerexperience and operational issues for airlines.This expectation is reflected in the China regulator,CAAC, mandating all-inclusive airfares.With yield and customer experience so tightly relatedin the region, most Asian Flag Carriers are takinga cautious approach to unbundling, especially asprice-based competition from LCCs is nipping attheir heels. While there are a number of successfulLCCs in the region, including AirAsia, Jetstar, andScoot, most Flag Carriers maintain a strong marketposition with high-quality product offerings.www.farelogix.comCopyright 20195

Fare Families: A Means to an EndTo better address their specific market segments, including theprice-sensitive traveler, many Asian Flag Carriers have startedusing Fare Families to offer flight ancillaries, albeit throughtraditional means and ATPCO fare filing.In Asia, Fare Families are often differentiated by attributes suchas the number of miles or frequent flyer status credits earned,whether the seat is upgradeable to the next class, which seatsare available to be reserved, and even whether advanced seatselection is allowed. However, meals, checked bags, pillows,blankets, and seat selection (during the check-in window) remain included and not charged separately. Additionally, prioritycheck-in and priority boarding are highly protected benefits forfrequent fliers and passengers flying in premium cabins.“Priority check-inand priority boardingare highly protectedbenefits for frequentfliers and passengersflying in premium“cabins.6

Regional Travel in Asia: Big Enough Market for EveryoneWhile unbundling in the US and Europe has given customers welcome choice, the Asian air travel market featuresunique dynamics which have led to Flag Carriers valuing the all-inclusive fare. None of these dynamics is morepotent than the sheer size of the Asia market when compared to other geographic regions.Higher traffic volumes on regional routesRegional travel in Asia cannot be easily compared with routes of similar length in Europe and the US. Of the top100 busiest routes (domestic or international) in the world, 80 of them are in the Asia Pacific market, ten are inNorth America, and the remainder in the Middle East, South/Central America, Africa, and India. Notably, none ofthem are in Europe. The volume of traffic on Asian routes means a larger addressable market and more clearlydefined market segments.Figure 1: Top 100 Busiest Air Routes3R ankA irpor t 1A ir po r t 22017 P a s s e n ge r sN o o Chi Minh City11716,769,823Domestic8Hong nal17BrisbaneSydney7564,742,771Domestic18Cape o BangaloreDelhi17174,183,799Domestic25Hong KongShanghai-Pudong12474,162,347InternationalKuala D i s ta n c e ( k m )Copyright 20197

Fragmentation of wealth across the region (based on GDP/capita)If we use GDP/Capita as a proxy for price sensitivity in airfare purchasing, the GDP/capita in Asia is at USD 13,500 with some territories/countries such as Japan, Korea, Macau, Hong Kong, Singapore, Brunei, andMalaysia with GDP/capita more than double the regional average. Conversely, Asia also has territories/countriesat the other end of the spectrum such as Cambodia, Bangladesh, Vietnam, Philippines, and Indonesia that are wellbelow the regional average.Figure 2: Asian Countries by GDP4With the fragmentation of wealth in Asia comes more distinct customer segments, even down to a territory/country level. With considerably greater passenger volume comes even larger customer segments, enabling bothFlag Carriers and LCCs to successfully operate on the same route by addressing their specific market segmentsand only competing for the overlapping price-sensitive economy travelers. Given the size of the premium “productsensitive” market, Asian Flag Carriers are best placed to service their customer need by retaining an all-inclusiveproduct. In Europe, where GDP/capita of European countries is much closer to the average6, there is less incomedisparity and a more homogenized addressable market. This results in more competition between airlines, greaterlikelihood for commoditization, and therefore greater drive for unbundling.8

High International Traffic VolumeThe third unique aspect of the market in Asia is that thereIt is not possible to compare routes of a similaris significantly more international travel in the region. Oflength such as the domestic-like London-Frankfurtthe top 100 busiest routes in the world, 17 are interna-( 1.5M PAX/year) with say a Hong Kong-Bangkoktional, and 13 of those are in Asia. Of the top 10 busiest( 3M PAX/year). On London-Frankfurt only Britishairports for international travel, five are in Asia (the otherAirways and Lufthansa compete with 18 flights perfive are in Europe).day, with LCCs flying from London airports (e.g.Gatwick, Stansted, and Luton) to secondary airportsPassenger expectations on international travel are moresuch as Frankfurt-Hahn. As for Hong Kong-Bang-product-sensitive than they are for domestic travel, andkok, there are 22 flights per day, with offerings fromall-inclusive fares are expected. The size of the premiumCathay Pacific, Emirates, and Thai for premium andinternational market in Asia drives the competition to offerconnecting traffic, whereas Air Asia, Thai Smile,better products and services.and Hong Kong Airlines service the needs of moreprice-sensitive economy travelers.Figure 3: Top 100 Busiest International Air Routes5www.farelogix.comCopyright 20199

“Competition for the premiuminternational flight experience hasdriven Asian Flag Carriers to createsuperior customer experienceand brand propositions that are a“strategic advantage.Operational ConcernsGiven the above, it is understandable that Asian Flag Carriers have little appetite to unbundle in the same way as theircounterparts in North America and Europe. To compoundthis, the internal effort to create and operationalize newair ancillary products is sizable. Often buy-in is requiredacross numerous, and sometimes entrenched, commercialand operations departments, where any change to existingprocesses is likely to be met with resistance.While holding onto a traditional business model mightmake sense in light of market dynamics, it should not stopvisionary airline managers in the region from finding otherways to create new revenue streams while maintaining apremium customer experience.10