Flight Subscriptions Might Be Good For Business
I hear a lot of bad product pitches, but I'm intrigued by Caravelo and its flight subscription technology. Also: Does no one from Delta read this newsletter?
The FAA NOTAM outage was all over the news on Wednesday in the United States, and I was interviewed about it on KCRW in Los Angeles, but for you, I have a post about how airlines could embrace subscription programs, and how Delta is making a short-sighted move to bar many employees from its airport lounges.
When entrepreneurs have an idea for a platform that they claim will revolutionize airlines, they often come to journalists first. We’re a gullible bunch, and our readers love learning about buzzy technologies that could make travel easier, even if most ideas will never happen. Plus, founders like to place stories in big-time media so they can seem more legitimate to investors or airline executives.
Most pitches are crap, for a few reasons — and it’s not that airlines are so insular and closed off to new ideas. In some cases, entrepreneurs fail to understand the limitations, such as regulators (no, you can't certify that seat) or because an airline’s back-end technology can't support whatever is being proposed. Other times, products are technically feasible, but dumb. Traveling 100,000 miles a year doesn’t make you an expert on airline economics.
When Iñaki Uriz and I spoke for the first time about five years ago, I was ready with my usual skepticism, but when I heard his pitch about his company, CaraveIo, I was impressed. He had a few ideas, but I was most intrigued about his plan to bring flight subscriptions to airlines: travelers who fly a few times a month could do so for a fixed cost. It felt like an achievable micro-innovation — not so technically challenging as to make it impossible, but a fresh idea for an industry in which pricing strategy changes little, year-over-year. Yes, some airlines have offered their own subscription programs, but CaraveIo could make subscriptions possible for all carriers, including those without resources to create the back-end systems.
I have enjoyed watching Caravelo's success. It hasn't exactly taken off, but the company has picked up customers at a decent clip, most notably Volaris and Alaska.
I spoke to Uriz recently to learn about trends he's seeing, and I wanted to share them with you. To be clear, while this article is a bit rosy, no one paid for this placement. I’ll also note it can be challenging to evaluate small private companies, because it’s tough to fact check what executives say. On occasion, a major airline will speak about a vendor like Caravelo on an investor call, giving some context, but even that’s unusual because the revenue each vendor produces is rarely material. In this case, Volaris executives did speak about Caravelo’s subscription product at their investor day last month, saying they wanted to grow the product’s “markets, types and flavors,” beyond today’s one-flight-per-month, domestic-only options. That suggests the airline likes the platform. I can also tell you I checked with my network of airline insiders before writing this piece, just to make sure Uriz isn't full of shit, and people vouched for the idea.
Here is what I learned from Uriz.
The pandemic has been good for business
We've established airlines are risk-averse. They know how to increase revenue by managing supply and demand, and they generally have little interest in experimenting with anything that might cannibalize revenue. What if a high-value business traveler bought a flight pass, used it all the time, and stopped buying last-minute fares?
Like any good salesman, Uriz spent years trying to persuade airlines they were thinking about this issue the wrong way. He wanted executives to see the potential in a customer’s lifetime value.
“We try to maximize airline revenue,” Uriz said. “Until now, that has been done using revenue management technology — you try to maximize every single transaction. With subscription, you are not so obsessed with every single transaction.”
Airline executives are smart. They get it. But until business people stopped or slowed their travels during the pandemic, many airlines didn’t want to mess with what worked. Now, it’s different. After going through a period of near-zero revenue, airlines see the value in a steady stream of cash each month. Even in the recovery, some carriers are carrying less corporate traffic, and that means fewer travelers booking last minute at astronomical fares.
"I would speak to C-level people at airlines before Covid, and they would say, 'Yes, you are right. This is where the world is going now,‘“ Uriz said. “Then they would say, 'Now, if you don't mind, I am very busy making money here.’”
Airlines could build this on their own, but ...
I often give Uriz a hard time about his proprietary technology, because it’s not like subscriptions are anything new. Companies in many industries have found that subscription pricing helps them smooth out revenues. Heck, I could even buy underwear via subscription. Many non-airline companies don't need a third party to build the subscription platform.
But Uriz reminds me that these are airlines. We have seen airlines prioritize certain projects over others, and we know how carriers can use systems that are decades out-of-date. Airlines rarely have enough time, money or developers for every project, so most probably won’t waste resources on a niche product. (Air Canada is an exception; it has built its Flight Pass program in-house.)
It isn’t exactly a secret sauce, and another company could copy it. But the trick is that Caravelo’s system can work on top of an airline’s reservations system. It is plug-and-play, Uriz said.
"If Delta makes this their No. 1 priority, I would be surprised if they cannot produce a subscription program," Uriz said. "They are thin on resources. But if they have them, they don't have the right knowledge or technology. All of it is focused on booking transactions. The teams they have may not have the right mindset. Airline people are very obsessed about revenue management, yield management and load factors."
I suspect he’s right. Subscriptions have a place at airlines, but this is not a gym or Netflix or Substack. It’s more of a side project, and amid limited resources, why would airlines spend the money to build their own technology?
Arbitrage is important, but customers take advantage less than you'd think.
In my personal life, I love arbitrage. I won’t buy a product from a travel brand unless I think I can win on the deal. And if the price goes down by a few dollars, you can bet I’ll cancel and rebook. Likewise, I only use the frequent flyer programs that give me outsized value for my points.
Some of you are probably like me. Travel is our life, and we not only want the best deals, but we also want to feel as if we emerged victorious in the transaction.
Uriz assured me I’m in the minority. People are busy, and they have less time to stick it to the airline than carriers may fear. Uriz used Alaska's flight pass as an example. The airline sells two versions that cover most short-haul flights between airports in California, Utah, Nevada and Arizona. The cheaper pass ($99 per a month for one roundtrip a month) requires customers to book 14 days in advance, when fares are often less expensive. The pricier pass, meant for business travelers, allows customers to book most fares as late as two hours before departure. It costs $399 per month for one roundtrip per month.
I’d probably book two hours and one minute before departure, but that’s not what others are doing. "People will make bookings way in advance,” Uriz said. “As soon as they know their need, they just go and book.”
Uriz said airlines often eventually discover they need fewer rules than they thought, particularly if their goal is to engage customers rather than wring out every last dollar. One new convert to subscriptions, Frontier Airlines, is one of the few carriers with an all-you-can-fly pass, but it has blackout days, and customers can’t book until the airline is nearly certain the seat otherwise will fly empty.
"Frontier, they have a lot of rules," he said. "They may or may not last. In the very beginning, people tend to be a bit more cautious than they need to. As they learn, they tend to be more comfortable."
Don’t focus on breakage
As an airline, you may think you want breakage, because how nice would it be for people to pay you for a product they don’t use?
But airlines have seats that otherwise would go empty, and the incremental customer that Caravelo brings in is probably not displacing anyone. Airlines should want people to use the passes, because it would suggest they’re more engaged with the program. More engaged people will fly more often and are more likely to renew the subscription when it ends.
In reality, though, Uriz said Caravelo sees significant breakage with its airlines. He said people tend to use about 50 to 70 percent of their flight quota. At that clip, he said, consumers are likely to report they’re happy with the value they receive.
Consider thinking of it as customer acquisition
Uriz wants Alaska to make money directly from his subscription product, but in some ways, he argued airlines should think more long term. Alaska is a smaller player in California, Nevada, Arizona and Utah, with less share and schedule breadth or depth than Southwest. But Southwest doesn't have a subscription program.
If Alaska can sell a customer the flight pass, perhaps because of the buzz surrounding the airline’s first-mover advantage, that person is essentially obligated to fly Alaska for 12 months. It also helps that the customer receives Alaska elite status after buying the pass, making them even less likely to cheat on the airline. We know how hard it is to leave an airline after you’ve been stuck in its ecosystem.
"One big benefit is that they will get new customers and they will make them captive," Uriz said. "The guys who are subscribing to Alaska Airlines, they couldn't care less if Southwest has promo prices.”
This is something Volaris executive vice president Holger Blankenstein mentioned at the airline’s investor day. He noted that this subscription program allows Volaris to generate revenues “out of sight of competitive responses.”
Alaska has been less forthcoming in public statements. Last March, an executive told NBC News “we are tracking just ahead of our full-year projections,” which tells us nothing about sales but sounds cute. (For what it’s worth, The Airline Observer also is tracking ahead of full-year projections.)
Now, another note about Delta and its overcrowded lounges.
What is Delta thinking?
We know U.S. airlines tend to underpay employees and offer too few perks to offset the challenges of working for an airline. But there’s one relatively inexpensive perk that mid-level executives get, and they like it. Many receive free access to the airline’s airport clubs, a goodie that’s maybe worth $600 per year.
Now comes word that Delta, an airline that always talks about how “people” are its advantage, is making that perk less generous. A source shared a memo about a new embargo, effective Feb. 2, barring employees from using the clubs when traveling on non-revenue tickets, including for company business. This includes employees and retirees who bought memberships or paid for a credit card that includes access, as well as executives who receive free club memberships. As a source wrote, technically Ed Bastian cannot use the clubs anymore when traveling for work.
But fear not. The memo provides an alternative. “Public spaces conducive to working are available throughout the airports,” it said. This may or may not include employee break rooms, depending on the facility. Employees on official business could also use their per diem to expense food at a restaurant but they have only $46 per day, including tips, to spend on meals, according to the memo. (I thought this might be a typo, since it is so little money, but I ran it by someone at another airline who said it passed the smell test. “Airlines are cheap,” the person said.)
I get it. The clubs are too crowded and paying customers are annoyed. But I speak with a lot of airline employees, and while they’re often miserable, they really like their club access. Many are going to feel even more undervalued, and as small as this perk seems, I wouldn’t be shocked if some people view it as the last indignity. Maybe Delta can get away with taking away access from retirees, or dependents traveling on free tickets, but this is hitting mid-level management where it hurts.
Delta told employees this is not a permanent policy change, but given its challenges with club overcrowding, I suspect this rule will remain in place for a while.
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