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IFC Monetization Needed to Stimulate Further Adoption

Earlier this year, I wrote an article which spoke about the In-Flight Connectivity (IFC) industry entering a phase of action rather than talk, as various service providers set to work on backlogs built up in recent years. It began as 2017 came to a close and has continued throughout 2018. A notable, and perhaps worrying, side effect has been a relative lack of new IFC deals compared to previous years. With 2019 predicted to be another quiet year as far as announcements go, the key question is — why the slow down, and what is needed to bring back momentum?

The majority of early adopters and what might be considered low hanging fruit are already offering — or are in the process of rolling out — IFC services. Our quarterly IFC tracker indicates 91 airlines offered passenger Wi-Fi at the end of June 2018, with many more under contract. There are a significant number of commercial airlines still to target, but the pool of unconnected aircraft is becoming increasingly concentrated with operators that remain unconvinced of the business sense of IFC and/or cannot afford the upfront Capital Expenditure (Capex) and subsequent Operating Expense (Opex).

Swaying those that remain unconvinced would perhaps be easier with strong case studies, but compelling examples are hard to find. It is reasonable to assume continued challenges around service consistency, low passenger uptake, and high costs are all factors behind the lack of positive headlines. Average IFC take-rates continue to hover around 5 to 8 percent when a paid model is in place, which most airlines feel they must implement to recoup the costs associated with high ongoing service fees. This, in turn, dampens potential ancillary revenue generation from the sale of session passes. For those passengers willing to pay, service consistency is often not where it should be, compounding the issue and causing some airlines to shy away from marketing their IFC service to passengers. Not necessarily the headlines prospective airline customers want to hear.

Of the success stories that have gained traction, the case which arguably stands out the most is JetBlue’s free service with Viasat, mostly because it is one of a few that is endorsed by the airline, passengers, and the industry. It also demonstrates how the airline has managed to monetize IFC, in this case through its (now scaled back) partnership with Amazon.

With new announcements seemingly on pause, there is a need for more success stories. But first airlines, with support from service providers where appropriate, must define what monetizing IFC looks like to them and build a strategy around that. It can be easy to assume the answer is for airlines to offer Wi-Fi for free to all passengers. Indeed, IFC take-rates tend to jump to up to around 40 percent when doing so. But sponsors are proving hard to convince (discussed below) and even if this weren’t the case, the economics of the freemium model rarely stands up to scrutiny. Simply put, most IFC services would become unusable or cost the airline a small fortune if every passenger on board was to connect. Such a situation would only add more strain on those in the middle layer of the IFC value chain.

Many airlines therefore face the decision of charging passengers to access the Internet or absorbing the cost associated with a free service. A tough one to explain to stakeholders looking for a quick Return on Investment (ROI) — especially now the price of jet fuel is once again marching northward. But airlines are finding ways to limit losses and at the same time find alternate ways to justify ROI beyond simply selling session passes. Some of these approaches are discussed below.

Retaining Top-Tier Customers

Many carriers offer free IFC to frequent and top-tier flyers as a value-added service. In this case, the cost of providing the free service is justified by improved passenger satisfaction metrics and repeat customers.

Increase or Maintain Ticket Sales

More carriers, such as All Nippon Airways, NOK Air and Japan Airlines, offer free Wi-Fi specifically on short-haul/domestic flights to stand out in increasingly competitive local markets. In these circumstances, the cost of providing the free service is assumed to be absorbed in ticket sales.

Tiered Pricing

Where completely free services cannot be accommodated, airlines are deploying tiered packages that allow passengers to access low-bandwidth applications, such as messaging apps, or a limited connection for free. Charges are applied to access faster services. This model is similar to what we see on the ground (in hotels, for example) and ensures passengers can still surf for free whilst costly data hogs are charged accordingly.

Sponsorship/Advertising Revenue

An ideal situation for airlines is generating a revenue stream from advertising or sponsorship. This is a path most airlines would like to take, however, very few have made this work. Brands will only come to the fore if they feel there will be enough eye balls on the screen but this is challenging for airlines with small fleets and for those that achieve low IFC take-rates. Ironically, sponsorship typically allows airlines to offer a free service in some capacity, increasing take rates and making it an even more attractive offer for brands. But getting over the initial hurdle of demonstrating the ROI to potential advertisers and sponsors is a difficult task.

Cost Savings Through Operational Efficiencies

Some airlines are beginning to offset the cost of providing IFC by moving operational data, such as real-time weather updates, maintenance data, and real-time payment verification, over the passenger connectivity pipe. Similarly, crew devices are being connected so that Customer Relationship Management (CRM) databases can be mined in real-time to enhance the passenger experience and leave a lasting impression. Despite much commentary around the large operational savings that can be made through IFC, few airlines are deploying this model. But that will change over time and we expect the nose-to-tail story to resonate even more so with those that are notoriously cost conscious. Any IFC system that can promise significant savings, or ‘pay for itself’ will almost certainly be of interest. VS