Wi-Fi services may never be directly profitable for airlines, but a broader view of their value could favorably skew the numbers.
In-flight connectivity (IFC) solutions generally prove to be money-losing affairs for airlines when considered in isolation. And if low single-digit usage rates are any indication, high ongoing fees for the service aren’t flying for passengers, either. As the market matures, however, the Wi-Fi connection won’t be regarded so much as a profit center, but as a key differentiator and enabler for other connected offerings. Might that be enough to balance the equation when it comes to the initial investment?
Indeed, more airlines, such as Southwest, Air Canada, Emirates and Etihad, are moving toward a freemium model – at least when it comes to their top-tier flyers. “In this case, the cost of providing the free service is justified by passenger satisfaction metrics and returning passengers,” says Daniel Welch, senior research consultant for Valour Consultancy. “This is a positive move away from just focusing on direct revenue from session passes, which has never really been an option, at least in isolation, for covering the associated fees of IFC.”
Business models where in-flight Wi-Fi is sponsored are also being explored, although they don’t always fully cover the costs. “To date, very few airlines have made this work, primarily due to low take-up rates,” Welch says. The sponsorship strategy is a chicken-and-egg scenario, he adds, whereby brands rightly want to see evidence of a successful service before sponsoring it, and airlines need brands to help make it successful. Take-up rates under a free model are typically around 40 percent, which would naturally make it more attractive for brands, but until the airline secures a sponsor, it must cover the ongoing service costs on its own.
There are also significant concerns regarding return on investment from advertisers, as is common with new marketing channels. Welch notes the challenges in tracking those returns for sponsors, while highlighting the emergence of service providers that manage sponsorship relationships. “We see firms such as Aircom Pacific, Rokki and TP-Link coming to the fore with the sole purpose of monetizing an airline’s IFC service, by bringing brands to the table or through engaging applications and marketing. This could be useful for airlines that don’t have the internal capacity to deal with these tasks,” he says.
“We expect the nose-to-tail story to increasingly resonate.” – Daniel Welch, Valour Consultancy
Meanwhile, onboard Wi-Fi optimization is also growing in relevance as airlines and suppliers seek to trim costs from different angles. RebelRoam, for instance, offers a smartphone app that it says optimizes data-heavy video streaming to lower resolution, thereby reducing bandwidth consumption and cost. Some satellite service providers are exploring cost-to-serve reductions as well, but, according to RebelRoam CEO Henri Ploom, that could result in a “serious conflict of interest because they meter by consumption.”
Ploom suggests airlines “abandon the one-stop-shopping strategy and seriously consider choosing best-of-breed solutions within the IFC stack of services.” He highlights that RebelRoam has recently conducted preliminary trials of its Wi-Fi optimization solution with AirAsia, reportedly yielding a 25 percent data reduction.
The promise of operational savings is one more justification for the cost of IFC, Welch says, citing as examples a possible reduction of fraudulent payments through real-time verification and fuel savings achieved through better route planning supported by real-time weather updates. Few airlines have advanced this approach so far, “but that will change over time,” Welch says, “and we expect the nose-to-tail story to increasingly resonate.”
“At What Cost?” was originally published in the 9.3 June/July issue of APEX Experience magazine.