Software Takes Flight at Airlines. How to Book Gains.
A necessary evil. That’s how many Americans view air travel.
Very often, flying is the only way to cover long distances fast enough to do what you want to do. Like bask on a Yucatan beach for eight days instead of three.
Travelers still hate it.
Airlines know their industry brand sucks. To improve customer experiences, the biggest players are investing heavily in new technologies.
Their progress is a lesson for other industries.
It’s also important for investors. It’s underlying these stocks’ valuations.
To transform their brands, the major airlines turned to software. This move was an easy one to predict, if you’d read the famous article “Why Software Is Eating the World.” Marc Andreessen, the co-founder of Netscape, penned the op-ed article for the Aug. 20, 2011, issue of The Wall Street Journal.
That was when investors were still reeling from the effects of the worldwide financial crisis that was sparked in 2007-’08. They assumed the global economy was hopelessly impotent.
Andreessen, a software developer and venture capitalist, saw a very different future.
The billionaire – who sits on the boards of Facebook, eBay and Hewlett-Packard — saw how software was infiltrating every aspect of business. He saw the potential for new business models as well as tremendous gains in productivity.
In the airline industry, all the major carriers have come to the same conclusion. They have been implementing strategies, big and small, both to improve their bottom lines and to make travel easier … and therefore more appealing … for passengers.
For American Airlines (AAL), the focus has been on moving closer to the customer. For a while, passengers have been able to check-in with a few taps on their smartphones. This year, AAL began moving all of its consumer mobile applications to IBM’s cloud for a rework. The goal is to bring the same functionality to airport kiosks. It even hosted an internal artificial-intelligence “hackathon” to help employees learn the benefits the new software could bring to customer service.
Delta Air Lines Inc. (DAL) and United Continental Holdings Inc. (UAL) have gone even further. At the Minneapolis-St. Paul International Airport, Delta passengers will soon be able to self-check bags using facial recognition. Software will match data collected from passport photos, then link that information to luggage. United is using chatbots. Thanks to a new Alexa skill, domestic fliers can experience a hands-free check-in via the popular Amazon voice assistant.
At Southwest Airlines Co. (LUV), the major action is taking place behind the scenes. In May, the carrier announced a new booking system from Amadeus IT. In addition to making it easier for passengers to book international flights, the new platform allows more flexibility for lucrative ancillary fees. (Think food, drinks, entertainment, seat upgrades and baggage fees.) Worldwide, these fees are expected to earn tens of millions of dollars in 2017.
For the industry, the motives are transparent. Improving customer experience is vital for courting increased loyalty. That is not a terrible goal in an industry that’s famous for low margins and fierce competition.
Airlines want to lock in customers. And their investment appears to be paying off …
In May 2017, a J.D. Power survey found overall customer satisfaction had increased by 30 points, to 756 out of 1,000. Satisfaction has been trending upward since 2013. And it’s been increasing fastest at traditional carriers.
According to research published by the Bureau of Transportation Statistics, in 2016, sales at domestic airlines rose to $168.2 billion. The bulk of these gains went to the big four carriers. American and United shares almost doubled in the second half of the year on rising unit revenue growth.
Airlines found a way to increase their market share using loyalty programs, while implementing new fees to enhance unit revenue growth.
It’s the potential Andreessen saw back in the bad old days before the current bull market for stocks began.
I’m not suggesting investors buy airlines. It is still a deeply cyclical business with many variables. What is noteworthy for investors is how all of this came to be. It is a software story.
Finding and investing in the companies making it possible, such as Alliance Data Systems (ADS), is the key. The time to do that is now.
Best wishes,
Jon Markman
P.S. Write this date down: Wednesday, Oct. 18. That’s when my Edelson Institute colleagues kick off a three-day Supercycle Investment Summit. This summit will be jam-packed with investments that are set to soar not just from megatrends like we’re seeing in technology, but also from the cycles behind those megatrends. Registration for this three-day symposium is free. But attendance will be limited. Don’t wait. Click this link to reserve your seat.
