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Connecting the Business and Pleasure of Flying

Nov

30

2016

by Panasonic Avionics / in Business

Connecting the Business and Pleasure of Flying

HOW TO MEASURE THE VALUE OF IFEC

The airline industry is going through a period of change that is unprecedented in terms of the number of dimensions and speed with which this change is occurring. Advances in seat design, connectivity, and real-time data analysis are some of the factors leading to dramatic improvements in airline’s operational efficiency.

In parallel, a similar level of change is occurring with regards to the information and choices available to passengers, and the devices they choose to use. Our industry – inflight entertainment and connectivity – sits at the epicenter of this change. We see firsthand what possibilities are created by real-time broadband connectivity both in terms of the operating efficiency of the aircraft and its crew. We also see how advances in consumer technology and connectivity can improve the passenger experience on and off the plane.

Although the pace and level of change often seem overwhelming, it is worth remembering that the fundamental principles of running a successful airline remain unchanged:

  • Operational efficiency – notwithstanding the windfall from the recent drop in the fuel prices, the airline industry continues to have very challenging economics. Given limited pricing power, cost containment has to be a core aspect of every airline’s strategy.
  • Passenger engagement – generating passenger demand through offering attractive options for destinations, schedules, pricing, and a distinctive travel experience is the other core aspect of every airline’s strategy.

What distinguishes an attractive partner to the airlines from a mere vendor is the ability to help them improve their performance on both of these dimensions. In the case of Panasonic, connectivity and associated services (weather, flight tracking, real-time payment, etc.) together with our worldwide network of maintenance and repair stations, enable airlines to optimize their cost structure, while our entertainment and productivity solutions deliver some of the most visible aspects of the airline’s passenger experience.

A true partner needs to enable airlines to improve both their efficiency and engagement, connecting the business and pleasure of flying.

As recently as six years ago (when the launch of the iPad created the first widely available alternative to an embedded inflight entertainment (IFE) system), the calculus for an airline was simple – “Does the provision of inflight entertainment support my positioning as a quality airline and can I recapture the cost of the IFE system through my ticket price?” Airlines needed relatively little advice from Panasonic to make the decision. Almost always, the answer was “yes” for a premium airline and “no” for a budget/charter airline.

A true partner needs to enable airlines to improve both their efficiency and engagement, connecting the business and pleasure of flying.

Fast forward to the present day and some form of IFEC is now an expectation for almost every airline. Today, the key questions are “What kind of IFE best supports my positioning and my passengers’ expectations? How can IFE be used as an e-commerce platform? What level of connectivity is required for passenger, crew and aircraft usage? What emergent technologies are relevant for me to factor into my decision?”

In this complex environment where there are no easy “one size fits all” answers, airlines are looking to Panasonic to provide expert advice on how to connect the business and pleasure of flying. They look to us to counsel them on the trade-offs between the costs and benefits of different options. They look to us to identify the technical, competitive and cultural factors that need to be taken into consideration in order to define the optimal solution. The most visible proof of our commitment to identifying the solution that makes the most sense for each customer is our Net Present Value model. This explicitly measures the financial implications of each of the options in terms of the levels of investment, and the nature and scale of the expected returns.

Based on our experience of working with the world’s top 100 airlines, we have developed an approach that profiles the economics of different IFE and connectivity options based on a customizable six-category model. Using an appropriate system lifetime (typically we use 7 or 10 years) and an airline-specific discount rate, this allows us to identify the IFEC configuration that creates the most value given the strategic and competitive context of each airline.

Airlines appreciate the clarity that this brings to the IFEC investment decision. The two cost categories in our model – initial capital cost and annual operating costs – provide the airline with a detailed understanding of its total cost of system ownership (including connectivity costs, maintenance expense and incremental fuel burn).

This total cost of ownership (TCO) can then be compared with the benefits that the airline derives from their investment. Our model classifies these benefits under four categories:

  • Operational efficiencies enabled by connectivity – such as real-time flight path optimization
  • Ancillary revenue generation – such as internet sessions, pay-per-view content and advertising
  • Ticket price realization – the role of the IFEC experience in sustaining PRASM (Passenger Revenue per Available Seat Mile) yields, and
  • Passenger advocacy and reputation – the value of the enhanced perception of the airline and resulting passenger loyalty.

Providing airlines with an economic model of how to approach the decision about investing in IFE and connectivity demonstrates our commitment to connecting the business and pleasure of flying and helping airlines enhance their business value.

In this complex environment where there are no easy “one size fits all” answers, airlines are looking to Panasonic to provide expert advice on how to connect the business and pleasure of flying.

Airlines have become very thorough in their assessment of the total cost of ownership (TCO) of an IFEC system. The cost of acquisition of a high end IFEC solution is typically well below 10% overall TCO. At the same time the expenses for content can make up half of the overall cost.

On the contrary, the assessment of return on that investment is often done one-dimensionally, solely based on the basis of revenue opportunities generated by the system during the flight. A balanced evaluation of the ROI for an IFEC solution needs to take every aspect of the Net Present Value model into account. Some of those aspects, such as the upfront cost of acquisition important for the purchasing departments, are relatively easy to quantify. Other factors, such as the impact on the airline brand and customer loyalty more relevant for the marketing departments, leave some room for interpretation. However, there are tools like the Advertising Value Equivalency that are commonly accepted standards helping with the quantification of those factors.

The integrated, cross departmental evaluation of the value of an IFEC solution will be essential in our joint effort to connect the business and pleasure of flying.