Profits Ain’t Peanuts (Part Three: Take a Byte)

In this third instalment of Profits Ain’t Peanuts we discuss the use of PEDs on board aircraft, inflight connectivity services, and IFE.

In today’s world data is vital and content is king.  Communications have changed significantly over the past decade with improved cellular service, greater access to satellite services, not to mention all the slick gadgets on the market we have now incorporated into our daily lives.

Though the percentage of the world’s population who has access to these facilities only around 30%, the percentage of the travelling public who uses devices to connect to email, chat with friends, make telephone calls and video calls, read books, watch movies, and just about anything else you like, is much higher.  Airlines have to keep up with the times.

Welcome to the skies of WiFi.

Recent changes in policy by the regulators have now permitted the use of PEDs on aircraft, and the use of connectivity services like Gogo®.

In the quest for market superiority, airlines have added data access services to their list of inflight services, and the race is on to find the ideal mix of speed and capacity suited to passengers needs.

Boeing paved the way with their Connection by Boeing service, which they actually began developing in the 1980s (demonstrating impressive future-vision), and introduced in November of 2000.  The tragic events of 9/11 squelched the prospects of this service in commercial airlines and it was discontinued in 2006.

It was all a matter of timing.  Gogo® (formerly Aircell) waited until 2008 to début the cellular-based air-to-ground service on American Airlines; a service they’d developed since 1991.  They’ve had astounding success.

In addition to supplying a need for passengers, Gogo® also contribute to airline revenues by sharing their fees with their airline customers.

Airlines have taken advantage of Gogo® services, as well as the services of other WiFi satellite-based suppliers such as Row 44, who offer higher broadband speeds and also share revenue.

Southwest Airlines partnered with Row 44 to offer broadband WiFi service in their aircraft, and DISH to provide free live TV and select fee-based on-demand entertainment.

Recently, Southwest Airlines has also announced the availability of text-only service on Apple devices at a reduced rate.  Text-only service is available for $2.00 a day compared to the $8.00 a day charge for full internet use.

This move is targeted at customers who only want to keep up to date by exchanging text messages with friends and colleagues on the ground.  They have announced plans to expand the service to Android devices in the near future.  It raises the question whether adoption numbers are lower than expected, even though you could argue that the $8.00 a day fee won’t break the bank.  This latest development is key, and I’ll come back to it.

Jet Blue’s new Fly-Fi™ service supported by the ViaSat Ka-band network has recently gained a lot of media attention because it offers satellite-based broadband at higher speeds than other competitors.  Recently, JetBlue shared adoption data for their Fly-Fi service with the Runway Girl Network which would indicate that there is indeed high demand for this service, though they concede that most adopters choose the free-option.

There is some contention over whether those speeds are sustainable with higher demand for the service, but this is largely academic.  If passenger adoption figures are largely predicated on choosing the free-service or low-rate service options, they may not flood the broadband stream with demand for bandwidth, especially not if that would involve paying a higher rate to enjoy live TV, stream movies, or play online games.

The revenue benefits to airlines of supplying this service is questionable.  Mary Kirby, of the Runway Girl Network said in a Dec. 18 post:

While connectivity has become a ‘must-have’ for airlines determined to retain their business travelers, the revenues generated from inflight Internet – whether from fee-for-service, advertising and/or product sponsorship (or all three) – do not cover the cost of installing the hardware on aircraft and providing the service. Yes, the operational benefits gleaned from inflight connectivity will ultimately help to underpin the business case. But for now, airlines and their connectivity providers are subsidizing the service, and admitting as much.

This might account for certain airlines choosing to offer free WiFi service to their customers.  Norwegian Airlines already has chosen to offer free WiFi and CEO Bjørn Kjos has told the Wall Street Journal in a recent interview that customers will demand free in-flight WiFi.

Watch the Wall Street Journal video interview of Norwegian Airlines CEO Bjørn Kjos.

Perhaps this attitude is not surprising coming from Norwegian.  Efforts by Nordic countries, both the Swedes and the ground-breaking Finns, have been integral to the UN declaring Internet access a basic human right.  But I feel that Bjørn Kjos’ policy is more business pragmatism than social altruism.  

Even as airlines introduce fee-based internet access, free WiFi is already in such demand by travellers that hotels (who famously charge outrageous prices for their peanuts or cashews and what have you) are increasingly offering free internet access to their customers in order to remain competitive.

This brings us back to the point about Southwest offering text-based service at reduced rates, most of JetBlue’s adopters selecting the free-service option, and the possible self-regulated demand for whatever broadband speeds are available on the aircraft.  Passengers may not use WiFi as liberally as expected when they have to pay for it.  Other airlines offering the free service also do not seem to have run into any problems from excess demand for bandwidth on their aircraft so perhaps the use of the technology has not yet caught-on.  While that may change, it could take a while.

It may also be a matter, as one extreme frequent flyer told me during a follow-up to the What Matters Most Survey, that seasoned travellers have better things to do in-flight than fiddle with their devices, like rest, relax or sleep.

So is there a high demand for WiFi or isn’t there?  Will it be the next great differentiator, or was the Connexion by Boeing failure attributable to more than just bad timing?

The success of Gogo® alone would indicate there is a strong future for connectivity providers in aviation, but we must consider Gogo®’s  service structure before jumping to any conclusions.

1) It is possible to sign up for a Gogo® account and use the service on any airline in their network.  That multiplies the utility of their service .

2) Because of the specific mix of airlines who offer Gogo® connections, Gogo® gains a greater share of the total segment of passengers interested in this connectivity.

3) Gogo® also packages their services in such a way that passengers can select whether they want to use the full internet capability, only text and talk (where you’re allowed to talk) or wireless IFE.

In other words, the success of Gogo® hinges not only on the service they provide but also in their distribution and packaging of that service.

For their part, in the Low-Cost Carrier sector, Ryanair has been slow to offer WiFi services.  They only recently announced that they are considering providing GDSs WiFi services, but they have not published exactly when this will happen.  It may seem that Ryanair is behind the game in this respect, but when you consider the experience they had when they introduced an inflight entertainment option in 2004, their decision to take it slow on WiFi adoption seems sound.

Michael O’Leary was confident that this inflight entertainment aboard Low-Cost Carrier flights would be revolutionary.  Indeed it was, but not until later and not in the manner which Ryanair introduced it.  The short-haul flights, and limited content offerings killed this initial Low-Cost IFE introduction attempt by Ryanair after only a few months of service.  It seems reasonable that this time around Ryanair would rather come in after everyone else has had their go; once they’ve had a chance to identify the optimum provider and pricing model, proving the business case.

PED vs IFE 

The ready-access to PEDs permitted by recent changes in policy by the regulators, brings into question whether passengers will begin to prefer their own “bring-along” entertainment options over airline-supplied IFE.  Mary Kirby makes a strong argument in favor of the long-term prospects of IFE in an article published on Dec. 31.  We’re still a long way from passengers choosing their devices exclusively over airline-supplied IFE especially on long-haul flights.

Realistically, passengers have grown to expect this service on long-haul routes, and often judge the quality of airline service on the content selection, user-friendliness of the device, and reliability of the devices’ function.  We’re not likely to see IFE disappear from seats for long-haul flights.

Passenger feedback obtained from the Jet Travellers Network also suggests this.  In a recent conversation with a frequent flyer and commentator, I raised the question of IFE.  His response was good food for thought.

“Until we see a leap in wi-fi bandwidth in the air to allow for streaming (not likely soon, before investment in present systems is recouped),” said Gary Dare, General Manager at Space Codesign, “we’ll see a combination of people bringing their own content aboard on PED’s supplemented with IFE’s.”  He also expressed that airline-IFE offerings which allow streaming, capitalising on available broadband in the aircraft, would be in high demand.

On short-haul flights, the dynamic changes. There are many short-haul flights which offer no IFE equipment on board so passengers do not expect it.  Passengers are more likely to plan-ahead and download content to their devices to enjoy in-flight.

On those short-haul flights which do offer an IFE option, passengers may opt either way, enjoying the airline supplied programming options or their own entertainment depending on their mood on a particular day.  There is no reason to expect that customers would demand an IFE option onboard short-haul flights, despite the trends by certain carriers to introduce these services, if for no other reason than the passenger may just not want to bother with IFE over a short flight.

Short-Haul vs Medium & Long-Haul

I believe that at the crux of analysis on the use of PEDs, IFE, and WiFi on aircraft is the length of the flight.  This is not a matter of what will be successful for Low-Cost Carriers vs Traditional Carriers.  All airlines will see the demand for their various service offerings fluctuate according to the length of the journey and the basic passenger make-up.  Business passengers may indeed elect to stay up to date with corporate email and texts, even splurge on high-broadband applications, but tourist passengers are less likely to do the latter.  (Of course, if you read Profits Ain’t Peanuts Part Two: Nuts for Business, you know that I believe the whole focus of what airlines decide to do in the cabin is to meet the needs of business customers with tourist customers reaping the benefit.)  Whether or not charging for the service will ultimately ultimately result in airline revenue is still to be determined.  I suspect it will not.

Airlines who have already decided to offer free service may have reached the same conclusion.  In the end, the revenue which airlines can reap from a fee-based access is limited.  The value-added service will be far more attractive to the target customer.  It may tip the scales in favor of the free-access airline when all other factors are equal or similar.  There is another reason for this.

Entitlement Theory

I have a theory that the greater aviation dilemma stems from its generous roots.  Much as passengers know that we’re no longer in the “good old days” of aviation, and that services and comfort standards have changed, the complaints we see about the industry tie-in directly with a sense of loss of what was once reputedly a higher standard.  (We can counter-argue that service and cabin comfort has increased dramatically since the first days of aviation, as has safety, but perception is reality.)

This sense of loss is so prevalent that it extends to generations who never flew the during the days of wine and roses before deregulation and privatisation.

Aviation created a mystique early, and did such a great job at establishing the concept of flight chic that it is permanently embedded into the DNA of travellers.  It passed down from generation to generation, despite the ever-changing realities of our industry.  It’s very much like an appendix, and it’s always threatening to burst.

We are the jet-set industry; no denying it.  While economic necessity, good business practice, sound safety concerns, and passenger budgets restrict our movements and guide our decisions, our customers feel entitled to more when they take off the ground.  That is true of all passengers, from those who opt to travel with Low-Cost Carriers to those who refuse to fly unless it is in first class on a five-star airline.

Though frequent flyers may have become somewhat jaded, and claim that they expect little from airlines “these days,” deep in their hearts they yearn for that special treatment, recognition of their status, and a little something extra.  Also, the very fact that they have airlines to complain about makes them set-off from the crowd, and they know it.  Flying is still a badge of status as much as it might be a badge of courage.

We have set customer expectations as high as our flight-altitudes allow, and we really can’t bring them down again.  Part of those expectations is that our industry is cutting-edge, modern, even ahead of its time.  We can do better on that, and the incorporation of WiFi, for the purposes of maintaining that future-vision image alone, is worth it.

Success will hinge on addressing that sense of entitlement and catering to it in whatever manner best suits the airlines’ business model.  Airlines who ignore the entitlement theory entirely cannot be expected to endure.  Even if it comes down to the bag of peanuts, let passengers have their fill.  It will pay off in the end.

We’ll be exploring more on this theory of entitlement during the next episode of Profits Ain’t Peanuts: Nutty Seating this Monday.

Now that we’re at the half-way mark of Profits Ain’t Peanuts I have to ask: how’s this serial format working for you as a reader?  Have I hit the mark by dividing my longer and related articles into bite-sized related pieces, or do I still have a long way to go before I get the recipe right?  Let me know.  Your feedback is valued.