Success in hospitality and aviation has been defined by network scale.
The number of locations and a strong loyalty program offset what has often been a mediocre experience for the majority of travelers. That has driven consolidation and market concentration. The pandemic, while devastating for the category as a whole, also provides a once in a lifetime opportunity for experience-focused companies to challenge the status quo. That includes major players such as Southwest but also new entrants such as Breeze Airways and Sonesta Hotels.
Why the network effect used to dominate.
Lippincott’s definition of a ‘Go-to’ brand and its measurement through Brand Aperture™ provides critical insight into the network effect. In most industries, the stronger the brand equity with customers the stronger the revenue growth. On average, 5x stronger. However, in aviation and hospitality, this relationship didn’t hold. It’s a sign that a free market isn’t fully functioning. People are choosing brands that aren’t meaningful to them and aren’t the cheapest. This led us to explore the question “but why?”.
There are two network effects occurring:
- Network convenience: The primary driver of choice is location. If a company doesn’t serve that location, then no matter how strong the rest of the offer, they aren’t relevant
- Loyalty program: Customer value has been concentrated among a small number of frequent business travelers, under 2% for many programs, who travel more than 100 days a year. These travelers receive a much-improved experience that ‘traps’ them as the alternative is the relatively poor mass experience elsewhere.
For loyalty to be effective you need sufficient locations to consistently serve the frequent traveler. The combination provides an insurmountable barrier to new entrants with the incumbents more focused in winning the 2% at the expense of the 98%.
How the pandemic has changed travel.
Business travel may never be the same again. Many businesses are reducing their requirements for office space. CFO’s relish the improvement to the bottom-line from less travel. Many have now experienced how effective remote working can be. Who still wants to have teams of lawyers, consultants and accountants onsite?
The travelers of tomorrow will shift further to a leisure mix. They will be relatively infrequent, so the traditional loyalty program won’t work. Within this mix will remain high-value customers, the experience seekers. Our research shows that they make up 10-15% of all travelers, have higher income and are willing to spend on an outstanding service. They are active rejectors of the current mass service and once points balances are depleted will buy the status privileges that had previously been gifted.
The pandemic has also loosened the grip of incumbents. Fewer flights mean more open slots at airports that were previously rationed. Owners of hotels are also more willing to switch away from the market-leading brands who are less able to guarantee volume.
Realizing the opportunity in aviation.
If you could choose any airline to your destination, who would it be? When we asked consumers using a choice-based conjoint, a type of research that simulates a realistic market choice, we found something interesting. There is a big difference between the share a brand receives in the research from their actual market shares. This is a demonstration of the power of the network effect over brand:
- Network leaders get 0.3-0.5x share in the research versus their actual market share, i.e. these companies rely on their network strength more than their brand experience
- Experience leaders get 1.6-5x share, i.e., people would strongly prefer to fly them if not for the network strength of others
With the shift in value towards infrequent leisure travelers, the power of loyalty programs is diminished. While location remains key, those companies that deliver an outstanding customer experience, the ‘Experience leaders’ will introduce new flights that compete in the highest volume leisure routes. Their brands are demonstrably more attractive and will win share, an example is Southwest entering Chicago O’Hare. Now is also the right time for new entrants, focused on experience to launch. Breeze Airways has just started flying, launched by the founder of JetBlue. So how will the incumbents respond? With high debt loads and substantial investment in the high value business customer their hope is a return to the previous paradigm before their network advantage is eroded away. At first it will look like they are weathering the storm as passenger volumes rise for all. Initially volume losses will only be seen on individual routes but as the flywheel begins spinning for the Experience leaders, the change in market landscape could be dramatic over the next decade.
With the shift in value towards infrequent leisure travelers, the power of loyalty programs is diminished.
Realizing the opportunity in hospitality.
Many of the largest hotel brands are loved but are considered easily substitutable. It is no surprise then that we’ve seen disruption from digital entrants providing new ways to manage one’s stay. Yet these disrupters are seen as functional tools, useful but not creating emotional connection. There has therefore been competition to see whether the national chains can create new distinction faster than the digital disrupters can humanize and emotionalize.
The change in customer mix presents a new hurdle to hotel chains who have been primarily focused on the business customer. Many of their ‘leisure’ properties have large conference centers attached, creating a cognitive dissonance of sea, sand, and business suits. This presents an advantage to the disruptors who were already leisure focused. It also presents an opportunity for new hospitality brands that can bring novel experiences to the sea of sameness that currently exists, something that the experience seeker will value and be prepared to pay for. The national chains are also vulnerable. In the main they don’t own their own properties. With the network effect of loyalty diminishing owners may look elsewhere. While contracts are long, 20 years or more, the pandemic enabled owners to exit contracts which has led to the creation of several sizeable challengers to the category, for example Sonesta. These challengers are large enough to build familiarity while being small enough to deliver innovations across their network quickly, providing a consistency for the brand that can take over a decade for the national chains to rollout.
Questions to ask yourself as an incumbent
If you’re one of the major airlines or hospitality companies, you should ask yourself three questions:
- Will we return to the high value business traveler as the source of profit?
- If not, are there other forms of network strength that are defensible?
- How can we cost effectively improve brand preference regardless?
Nobody knows the answer to the first question but to assume that the future will remain like the past is incredibly risky, what if it isn’t? So, regardless there’s a need to find new drivers of demand. Credit card point programs have been phenomenally successful at ‘capturing’ those not benefiting from elite status. Earning points to pay for the annual leisure flight keeps customers tied to the airline. Today, the paid tiers are targeted at frequent flyers, offering lounge access. Tomorrow they need to offer benefits for the affluent infrequent flyer. How can you develop new offers that target the experience seeker?
Interestingly, the airlines with the strongest brand preference are only middling in their cost per available seat mile (CASM). They create connection and enable progress, the dimensions of becoming a Go-to Brand, through a purpose that brings social and emotional meaning as much as functional performance. Ultimately, it’s the interrelation of brand and culture in common cause that delivers a more enjoyable and desirable proposition. At its heart, it’s employees able to be agile through the complex and dynamic operations of flying passengers from A to B. From a smiling welcome onboard to how delays and cancellations are dealt with, they are guided by values rather than dictated rules. You can’t manage a thousand touchpoints with a manual.
For some of the incumbents, brand is paint. That won’t be sufficient, there needs to be a clear north star that inspires belief and sustains action across the organization. Are you clear in what your company stands for and how that translates into both daily decisions and moments of truth? Is it a consideration alongside operational and financial optimization? Does CX or Brand have a strong voice in the room when strategic and operational decisions are being made?
As with aviation, it’s risky to rely on a return to the past. The credit card strategy, so successful for infrequent flyers needs reconsideration for hospitality because of the relative price difference between a week’s vacation stay versus the typical flight cost. The majority won’t spend sufficiently to earn fully free stays so alternative benefits will be needed. For example, points+cash plus other perks like recognition and exclusive experiences during the stay, creating anticipation and an afterglow that keeps people tied to the brand.
Ultimately, innovation across the experience is needed. The strength of the network effect allowed cost and operations efficiency to dominate. The result, that without a logo showing one can’t tell one hotel from another. In the larger organizations, the brand function develops new experiences, but these tend to be modules dropped into properties rather than a ground up reinvention of what the experience could deliver. As an example, at one client the brand function couldn’t innovate anything involving employees as they were managed by another silo. That has to change and is still possible. We helped develop both Hyatt Place and IHG’s Even bring new meaning to their categories. Driving this change through established global networks will be tough but will also be essential.
A bright future.
The pandemic has weakened the network effect in both aviation and hospitality while changing the nature of tomorrow’s high value customer. This presents an exciting window of opportunity for those sufficiently bold to act in these newly competitive markets. Winning the hearts and minds of customers through delivering meaningful and distinctive experiences. Those that do will rapidly scale and establish market leadership whether we remain a leisure first domestic travel market or eventually return to the pre-pandemic business mix. Whatever the future holds, it’s good news for the traveler who can at last look forward to a more interesting and enjoyable experience along their journey.