- 26 сентября 2013, 16:00
- Harvard Business Review
Ever since Leonardo Da Vinci started scribbling designs for flying machines in his notebook, aviation has attracted bold, blue-sky thinking. Aviators continue to dream big: see Airbus’ sublimely odd design for a jumbo jet that mimics animal skeletons as a recent example. But since deregulation in 1978, airlines in the U.S. have done everything Da Vinci could have asked of them—except make money. Between 2001 and the end of 2008, for example, no less than 15 U.S. airlines filed for bankruptcy. Around 2008, however, something unexpected occurred. Airlines suddenly leveled off. In the past few years, profits have become positive across the industry, and market caps are soaring from prior lows.
So what happened? The turnaround can’t be attributed to a bold, Da Vinci-esque initiative such as new carbon fiber aircraft, the pioneering of new markets or even low-cost innovation. Rather, it was the result of something far more modest: the slicing of airlines’ base offerings into customizable “options and extras.” The most famous of these options was checked-bag fees, but most of the recent innovations have focused on “upselling” passengers into an improved experience (e.g., selling fast-track boarding, lounge-access, extra leg room and others). In 2012, the major U.S. airlines earned an estimated $12.4 billion from such “ancillary revenue” alone, grown from a negligible base six years ago. For many airlines, this simple innovation was the difference between survival and insolvency.
We term the steps that the airlines took to save themselves “edge strategy” — the strategic monetization of the huge value that often lies untapped on the edge of a core business, but which many businesses miss because they are focused on nurturing their core. In the case of airlines, many carriers had become trapped by thinking of themselves only in terms of their company’s core offering: transporting passengers by air from Point A to Point B. The breakthrough came when the airlines collectively realized that they should think of themselves not as pure transportation providers but as providers of travel solutions. They recognized that they had many different types of customers, all with different needs (beyond needing to get somewhere), and all with differing willingness to pay for goods and services.
At the time, airlines already let some people experience travel differently — boarding the plane first, sitting in a better seat, relaxing in an airport lounge. But these services were typically only accessible via a first-class ticket or through elite status on a frequent flyer program. Of course, some people who didn’t fit into the above buckets are still willing to pay for some of these upgrades. And since the capability to provide these services was already in place, all the airlines had to do was provide passengers the ability to buy them: the additional “ancillary” revenue would be nearly all profit. United Airlines first introduced checked-bag fees and other extras in February 2008, but within months all the other major carriers, except Southwest, joined them.
As part of this shift, airlines realized that some people didn’t need everything that was included in the sale of a standard ticket; this opened the door to unbundling the “one size fits all” offer — and led to the introduction of fees for checked bags. Many business travelers never check a bag but historically subsidized the substantial cost for leisure travelers who did. Today, those who need the option pay for it. Many passengers grumbled, but the impact has been undeniably positive for the industry. Last year bag fees alone generated $3.6 billion in revenue in the U.S. Imagine where the industry would be without this?
An edge strategy can either mean capturing profit from peripheral products (e.g. extra leg room, on-board meals, etc.) or it can mean unbundling core products and pushing them out to the edge as options (e.g. bag fees). When we work with businesses, we ask them: What is your edge strategy? If they don’t have one, we point out that many companies have, like airlines, been handsomely rewarded after adopting an edge strategy:
- Movie theaters are in the business of selling movie tickets, but for years have made most of their profit from high-priced popcorn and other concessions that enhance the movie-going experience.
- Cruise lines drive a huge part of their business by bundling optional extras and pre-selling to their guests before travel.
- Rental car companies generate significant incremental profit charging a small number of customers a fee to refill the car, or to add supplemental insurance.
- Consumer electronics retailers have combated their razor thin margins by offering additional warranties and premium installation services.
- Retail banks found many ways to unbundle elements of their core offering that not everyone needed, like check-processing.
- Insurance companies have recently introduced many ways to personalize coverage and build significant ancillary business in the process.
The margins for edge offerings can be extremely high. They leverage existing resources and captive customers, who often tend to be less price sensitive (think of the price of a soda at a movie, or in a hotel min-bar). It has also never been easier for a company to find its edge. Technology has dramatically increased the potential for creating options around most core offerings. We simply know more about customers today, thanks to the ability to capture and crunch vast oceans of marketing data and put it in the hands of employees on the front lines.
In the mid-2000s, U.S. airlines had a profit crisis that needed to be fixed fast. Necessity was the mother of invention. More stable oil prices and fewer empty seats due to reduced schedules played a role in the turnaround too — but it was an edge strategy that allowed airlines to grow their profit line quickly even while taking less risk, and in some cases making their customers happier. It was a simple, elegant solution to a complex challenge. And that’s something of which even Da Vinci might have been proud.