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LSG Sky Chefs – Whitepaper Buy-on-Board: a Viable Alternative Mark Booth, Senior Business Analyst
LSG Buy-on-Board: Sky Chefs Whitepaper a Viable Alternative 10 2010
Buy-on-Board: a Viable Alternative Today, Buy-on-Board (BoB) is becoming more and more common place in the airline industry. In a survey carried out by LSG Sky Chefs in 2010, conservative estimates of the airline industry’s global BoB revenue were put at just over 1.1 billion Euros annually. This figure* was expected to rise by more than 120 million Euros by 2012 at an estimated growth rate of almost 12 percent. This whitepaper examines the different business models available to airlines providing their passengers with BoB services and looks at the potential pitfalls as well as the advantages of each model. It also draws comparisons between the airline industry and the relatively successful BoB operations in the rail industry. Furthermore, it details the fiscal value of the global market on a region-by-region basis and looks at the predictions for the coming years. * Figure includes meal and beverage, and in-flight retail services, but excludes traditional duty free sales.
Table of Contents Forty years of Buy-on-Board
4
BoB Today
5
BoB Tomorrow
6
BoB and the Supplier
8
BoB Business Models
9
Supplier Model
9
Profit-share Model
10
Commission Model
10
BoB – the Rail Industry
11
What can Airlines expect from Suppliers?
12
BoB is here to stay
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LSG Sky Chefs Whitepaper 10 2010
Forty Years of Buy-on-Board
Fourty years of Buy-on-Board
Buy-on-Board has been around in some shape or form in the airline industry for about 40 years. In the 1970s in the UK, for example, the charter airline Court Line, (previously known as Autair) offered customers “seat back” catering in order to keep costs down. Pre-packaged meals could be purchased from cabin crew members, who would unlock a compartment located in the seat in front of the passenger in order for them to gain access to the meal. The savings from this type of service (as opposed to offering full-service catering) eventually led many other major UK charter airlines to adopt some form of BoB model on short and medium-haul flights. Following deregulation in the United States in 1978, a host of low-cost airlines sprang up around the country. People Express Airlines (launched in 1981), for example, introduced a number of interesting ancillary revenue models. One of those entailed passengers buying their tickets once they were onboard the aircraft. Moreover, the airline offered BoB on domestic short-haul and international long-haul flights. Deregulation did not occur in Europe until the late 1990s, but with it came the launch of some of the most successful low-cost airlines to date, such as easyJet and Ryanair, that manage to squeeze out a large percentage of their revenue from their ancillary business models, including aggressive BoB operations. In recent years, the rise of BoB, and in particular the shift in legacy airlines’ offering from full-service catering to all passengers to BoB in Economy Class, can be attributed to a number of different factors.
According to Virgin America Economy passengers are willing to spend up to 21 USD on onboard services
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First, after the 9/11 attacks in New York, when airline passenger numbers dropped, many U.S. airlines began introducing BoB meals on domestic routes. Although the move was met with skepticism by most Economy Class passengers at the time, acceptance has increased significantly. In fact, “according to airlines’ studies, passengers are actually happier paying for something they want to eat, rather than getting free food they don’t. Virgin America points to research that revealed that Economy passengers are willing to spend up to 21 USD on onboard services (including food and entertainment), but that the food needs to be fresh and cocktails high quality.1” Second, the rise in competition on lucrative routes from high-speed trains has forced airlines to rethink pricing strategies, as some passengers migrate to rail travel, mainly in Europe. With lengthy security checks and delays, airlines can no longer claim to get passengers to their destinations faster on short-haul journeys. For example, on Sweden’s busiest commuter route from Stockholm to Gothenburg – a distance of around 400 km (250 miles) – Swedish Rail
1 CNN.com September 2009
Buy-on-Board: a Viable Alternative
has increased its market share by 20 percent in the last eight years and now handles 70 percent of all passenger traffic. At the same time in France, where the TGV (high-speed) trains travel at a speed of 320 km (200 miles) per hour, “wherever the TGV network has expanded, so domestic air traffic has fallen or air routes have ceased completely.2” This is also the case even before new lines open, for example, “Air France ... reduced its flights to Strasbourg from 12 to 8 and cancelled all flights between Paris and Metz, while ... easyJet abandoned its Paris-Marseilles flights altogether.3” Third, the continued growth of low-budget airlines in domestic markets has forced legacy airlines to become more competitive in terms of both prices and services. According to U.S. data released in May 2010, “domestic carrying capacity for the nation’s legacy carriers declined by 85 billion available seat miles between 2003 and 2009, or by 21 percent on average. Over the same period, domestic capacity among low-cost carriers Southwest Airlines, JetBlue Airways, AirTran and four other small carriers rose by more than 84 billion available seat miles.4”
Swedish Rail handles 70 percent of all passenger traffic between Stockholm and Gothenburg
Fourth, the economic recession changed passenger behavior once again. With corporate travel budgets being tight, many Elite passengers have had to downgrade to Economy Class. This may be one of the reasons behind Continental Airlines’ decision to finally follow suit with the other American legacy airlines and introduce BoB services in Economy Class. According to the Associated Press, with this decision “Continental expects a 35 USD million annual benefit, from cost savings and added revenue.5” BoB Today Today’s market, which generates revenues in excess of 1.1 billion Euros6, can be broken down into established markets such as Europe, North America and the Pacific region, and emerging markets such as Africa, Asia, India and the Middle East and Latin America. In established markets, where BoB is readily available on many airlines (including charter), the opinions of passengers of both low-cost and legacy airlines have shifted from reluctance to acceptance as offerings improve. “What started with the sale of basic snack boxes has ballooned into a virtual arms race among airlines to provide fresh, healthy sandwiches and salads to domestic passengers. United recently added items such as a turkey and asparagus wrap and an Asian chicken salad, 9 USD each, and American’s new partnership with Boston Market includes a Chicken Carver and an Italian chopped salad, among others (all items are 10 USD), on select routes.7”
A typical BoB mealbox
Emerging markets on the other hand are either in their infancy or are yet to introduce the BoB concept to airline passengers on a large scale. In this breakdown there are however exceptions, such as Brazil, India, South Africa, and UAE among others. 2 www.railway-technology.com 3 CNN.com November 2007 4 AirFinancials.com April 2010 5 USA Today March 2010 6 Conservative estimates according to LSG Sky Chefs BoB survey, 2010 7 CNN.com September 2009
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LSG Sky Chefs Whitepaper 10 2010
Estimated worldwide in-flight BoB revenue in 2010 0,9 bn €
lower estimate
0,8 bn €
middle estimate
0,7 bn €
upper estimate
0,6 bn € 0,5 bn €
0,2 bn € 0,1 bn € 0€ Latin America
North America
Asia
Oceania
Africa
Europe
India, Middle East
1.553.560.000 €
0,3 bn €
651.150.000 €
The figures are based on estimated spend per passenger: LSG Sky Chefs BoB survey 2010
1.097.000.000 €
0,4 bn €
Total Revenue
As BoB becomes the norm in established markets, airlines in emerging markets, such as Africa and Latin America, can benefit from the learning curve that caterers have gone through.
BoB Tomorrow As airlines face continuous pressure to reduce costs and create revenues, caterers, that have traditionally been considered a “necessary cost” by many airlines, can become revenue drivers by offering the right mix of BoB, retail and other ancillary revenue drivers. In order to provide this, a caterer needs to understand the market and identify which products meet the expectations of specific airline passengers. This is particularly important as, according to conservative estimates from a recent LSG Sky Chefs survey, the BoB in-flight market is expected to increase by almost 12 percent by 2012. Estimated worldwide in-flight BoB revenue in 2012 1,0 bn €
lower estimate
0,9 bn €
middle estimate
0,8 bn €
upper estimate
0,7 bn € 0,6 bn € 0,5 bn €
0,2 bn € 0,1 bn € 0€ Latin America
6
North America
Asia
Oceania
Africa
Europe
India, Middle East
1.736.200.000 €
0,3 bn €
739.250.000 €
The figures are based on estimated spend per passenger: LSG Sky Chefs BoB survey 2010
1.231.900.000 €
0,4 bn €
Total Revenue
Buy-on-Board: a Viable Alternative
In established markets we can expect BoB sales to increase significantly, as Louis Carvalho, Senior Director Catering Product and Technology, Air Canada mentioned in a recent LSG Sky Chefs interview, “Buy-on-Board is here to stay and the airlines that figure out how to do it best will be the most successful. This is particularly important for legacy carriers that have to balance their offering to Elite passengers and those flying in Economy. However, with a captive audience, there is no reason why, with the right products at the right price, airline ancillary revenues should not continue to grow.8”
“… there is no reason why, with the right products at the right price, airline ancillary revenues should not continue to grow” Louis Carvalho, Senior Director Catering Product and Technology, Air Canada
Additionally, Stephen Kingsley, US Airways’ Managing Director of Onboard and Cabin Services expects BoB to expand geographically. “It wouldn’t surprise me if some airlines introduced a full Buy-on-Board program for Economy passengers travelling on trans-Atlantic routes, particularly as a number of U.S. airlines are already charging for beverages on certain international routes.9” However, this novel approach was attempted unsuccessfully by United Airlines in 2008, which quickly scrapped the idea after passenger outcry. In Chief Customer Officer Graham Atkinson’s letter to the market, he addressed the issue in no uncertain terms, “We ... have decided not to move forward with the test of offering customers Buy-on-Board options in United Economy on certain trans-Atlantic flights. We will continue to offer complimentary hot meals on those flights.10” However, one airline that has implemented a BoB program on long-haul flights is the Australian low-fare carrier Jetstar, which operates a number of scheduled flights from Australia to major destinations in Asia as well as Hawaii. “We offer a range of services to accommodate all our passengers,” says Susan Young, Head of In-flight Services. “In Star Class, Jetstar’s Business Class, passengers get premium service, including a choice between three meals and a selection of beverages included in the price of their fare, while in Economy Class passengers can pre-book meals as an added extra when purchasing their fare, or purchase meals and beverages on board. Both the meal options in Economy Class work well.11” In emerging markets, we can expect the airlines that have already achieved a certain degree of success with their BoB services to expand those operations. In Africa and much of Latin America, most airlines are likely to await for demand to grow and for a proven business model to be developed within their region before implementing BoB programs. As Nigerian Eagle Chief Executive, Dapo Olumide says, “The cheapest fare is perceived as value in Europe, but not in Africa. It is counter-intuitive that, amid the widespread poverty, you need to give Africans a full-service airline. You have to give passengers what they perceive to be value.12” This was also emphasized by Kenya Airways Chief Operating Officer Bram Steller who states, “At this stage it is more important for us to improve our network and frequencies than start a battle over who pays for a sandwich.13”
8/9 In-flight supplier survey June 2010 10 Smartertravel.com September 2008 11 In-flight supplier survey September 2010 12/13 Flightglobal.com December 2009
Emerging Markets – BoB is not considered a priority in most emerging markets at the moment
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LSG Sky Chefs Whitepaper 10 2010
BoB and the Supplier
Air Canada offers BoB in Economy Class on a large number of routes in North America
Over the past 10 years, the responsibility of an airline’s supplier (e.g. caterer) has altered significantly. The basic onboard offering as we know it has changed for many airlines – caterers now need to work much closer with them in order to predict passenger habits and behavior. This clearly suits the larger catering companies that have an in-depth pool of passenger statistics from around the world, which they can call upon to support their efforts. However, as Louis Carvalho from Air Canada stated, “The airline catering arm of our business remains very challenging. So far the hardest question to answer is still – will the passenger on the red eye flight who sat on the last row want a fresh sandwich or not?14” Air Canada isn’t alone in thinking this way. “Finding a happy medium between passenger satisfaction and supply and waste management, is one of the toughest challenges we face in BoB today,15” said Fitz George, LSG Sky Chefs North America Vice President Sales and Services.
“Finding a happy medium between passenger satisfaction and waste management, is one of the toughest challenges we face in BoB today” Fitz George, LSG Sky Chefs North America, Vice President Sales and Services
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On the other hand, Alaska Airlines has managed to reduce waste and improve customer service since it moved to a BoB model. According to Marketing Managing Director, Greg Latimer, “We were throwing out so much food back in the days when we gave everyone a free sandwich. It wasn’t a quality product, to be frank, so we invested in a good Buy-on-Board program. We designed the program to meet the needs of our customer.16” One way of dealing with waste is to offer pre-booking options. Award-winning low-cost carrier Air Berlin, for example, offers passengers the option to order standard or gourmet meals on their website when they purchase a ticket. The option is still there to purchase onboard, but this way they can stack the odds in their favor when determining how many passengers will want onboard meals. Commenting on this, Air Berlin Senior Executive Thomas Ney said, “We earn, not burn, money. It’s not so much about ancillary revenue. It’s about costs you don’t have any more.17”
14/15 In-flight supplier survey June 2010 16/17 ATWonline.com June 2009
Buy-on-Board: a Viable Alternative
BoB Business Models There are three main BoB models that airlines use to deal with their Buy-onBoard service provider (e.g. caterer). The model used determines which party takes the financial risk and reaps the potential rewards from BoB sales. Not surprisingly, each model has an upside and a downside for both parties.
Supplier model
0
100
Commission model
Caterer’s risk
50 50
Profit-share model
Airline’s risk 100
0
0
20
40
60
80
The various BoB business models, LSG Sky Chefs 2010
100
Supplier Model The supplier model works very much like a conventional airline catering contract, whereby the airline informs the caterer of exactly what they want on each flight and the caterer ensures that their choice is uploaded. This is used very effectively by Ryanair, which handles virtually all ancillary activities in-house. The model is ideal for low-budget airlines that specialize in profiting from ancillary options. Ryanair, for example, is considered by many airlines to be the world leader in this field. The carrier generated ancillary revenues of 663.6 million Euros from 66 million passengers in 2009.
Ryanair is considered the benchmark for ancillary service by many airlines
Advantages for the airline: The airline has full control over what goes onboard and in what amounts. By allowing the caterer to purchase all the goods and prepare the food, they can benefit from economies of scale. Disadvantages for the airline: The airline takes all the risk. This is particularly difficult for airlines that are introducing BoB for the first time or are growing their BoB model and adding new routes, as it demands an in-depth understanding of the balance between passenger satisfaction, waste management of fresh products and sales of low-cost/high-revenue BoB goods. Condor, Germany’s leading charter airline has employed a supplier model for over ten years “The supplier model gives us complete control of our in-flight retail operations, which naturally then allows a great deal of flexibility for us to determine the exact product mix we want to have onboard. For example, we can test and roll-out new, more profitable products and remove any unsuccessful items from our catalog as and when we choose. Our suppliers focus on providing high-quality products, while we focus on ensuring passenger expectations are met profitably.18”
18 In-flight supplier survey September 2010
“The supplier model gives us complete control of our in-flight retail operations ...” Michael Lins, Head of In-flight Service, Condor
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LSG Sky Chefs Whitepaper 10 2010
Profit-share Model The profit-share model is a shared risk/shared responsibility scheme through which airline and caterer work in partnership. It requires a good relationship between caterer and carrier because it usually entails them working closely together to develop products and predict BoB sales in order to streamline inventory. Typically in such a model, the two parties divide any losses or profits according to a pre-set arrangement.
BoB enables airlines to offer passenger more variety on flights
Advantages for the airline: The airline and caterer combine their knowledge of passenger behavior and statistics in order to predict BoB requirements. Furthermore, the caterer can use its expertise in providing BoB that meets brand expectations and provides profitable ROI. As risks and returns are shared, it is easier to find the balance between passenger satisfaction and supply and waste management. Disadvantages for the airline: The airline no longer has full control over the passenger offering. They have to share profits from BoB sales with the catering supplier.
“We are now working together with caterers to successfully grow the business and develop new innovative products” Louis Carvalho, Senior Director Catering Product and Technology, Air Canada
Like most North American carriers, legacy airline Air Canada began offering BoB services in Economy Class on domestic routes after 9/11. Originally operating with a commission model, they now have a partnership agreement with their caterers. According to Senior Director Catering Product and Technology, Louis Carvalho, “We are now working together with caterers to successfully grow the business and develop new innovative products. And as the caterer does not absorb all the risk we can provide an improved offering which in turn results in increased customer satisfaction levels.19” Commission Model The commission model is a low risk model that offers airlines a clear advantage due to the fact that the caterer takes all of the risk, but it also offers them the least control. This model is most often used by airlines that are introducing a BoB service. Advantages for the airline: The airline does not need to take on the financial risk of introducing BoB. It is the caterer who assumes responsibility for waste, damages, etc. The airline can even rent out sales space to a caterer to increase revenue. Disadvantage for the airline: The airline does not have as much control over the BoB goods on sale. As the caterer is trying to avoid unnecessary wastage, they may reduce the amount of fresh products available. The caterer may also increase the offering of high revenue products and reduce branded items to cover any potential losses.
10
19 In-flight supplier survey June 2010
Buy-on-Board: a Viable Alternative
When US Airways introduced its BoB program after 9/11 they did so with a commission model. As Stephen Kingsley of US Airways said, “At the time no one was sure what was going to happen, and this model enabled us to assess our BoB operations without taking on any further risk. Of course, the downside with this is that the caterer doesn’t want to incur losses either, which can have an effect on the final product. It’s a case of finding the right balance, particularly in that first introductory period when passengers are already skeptical.20” BoB – the Rail Industry Airlines are not the only travel operators looking to save costs and/or increase revenues with BoB operations. In the rail industry, many operators are battling to change old perceptions of their onboard catering offering. Just like airlines, rail companies have a lot of competition from food vendors, restaurants and cafés, both at the starting point of a journey and at the final destination. Many of them also provide lounges for First Class passengers, who get extra services once on board. As with many low-budget airlines, there is also a quick turnaround at stations – it’s not unusual for a caterer to have to load food and beverages for hundreds of passengers in 5 to 10 minutes. Unlike the airline industry, however, weight is not an issue, which means products can be stored onboard trains to cater for extra demand. This is essential as, due to last-minute bookings, the number of passengers can increase by as much as 40 percent on the scheduled day of travel. In Sweden, for example, where Swedish Rail competes with Scandinavian Airlines on major routes and 115,000 passengers travel on trains every day, First Class passengers on the “early bird” trains get a free breakfast, and when traveling during any other time of the day, they can pre-order meals by awardwinning chefs for as little as 13 Euros. In Economy Class, the bistro cart has gone through a radical change since the days of state-run railways. Fresh sandwiches and meals are always available, as is a wide selection of beverages and snacks. All products are benchmarked with the food and snacks that are readily available from vendors at stations. “We are offering our passengers a service,” said Mikael Hallberg, Head of the high-speed X2000 trains at Swedish Rail, “When somebody travels on one of our trains we want them to feel satisfied, not that they have been cheated over a cup of coffee. By providing quality goods that are comparable with competitors on the ‘other side of the platform,’ we can still turn a profit, while improving the perception of our services. It’s thanks to this type of initiative that we have grown our catering turnover from 7 million Euros to 20 million Euros over the last five years.21”
Bistro onboard Swedish Rail X2000 high-speed trains
“By providing quality goods that are comparable with competitors on the ‘other side of the platform,’ we can still turn a profit” Mikael Hallberg, Head of the X2000 trains
Another reason why Swedish Rail has managed to grow their BoB business on major routes is a well-functioning incentive scheme for cabin crew. This pits sales staff against one another and challenges each member to improve
20 In-flight supplier survey June 2010 21 LSG Sky Chefs BoB survey July 2010
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LSG Sky Chefs Whitepaper 10 2010
their “score card.” Employees who achieve the highest sales can win trips and other prizes. However, the main incentive is competition with colleagues. In fact this system has been so successful that it is being rolled out across the entire Swedish Rail network. Swedish Rail works closely with its caterer, even though they use a Supplier business model. The partners meet on a weekly basis to discuss new initiatives, which has led to major cost savings over the past five years. One of these was a massive reduction in waste, achieved thanks to a new strategy that allowed fresh food that was stored in chillers to be sold on return journeys of three to five hours rather than being thrown away. What can Airlines Expect from Suppliers? As the market has changed, so too has the experience that caterers can bring to a partnership. Those with a broad range of customers, such as low-cost carriers, legacy airlines and/or customers from related markets, can add a wealth of knowledge that covers different passenger needs and generates significant value.
BoB products – tailored to individual requirements
Perhaps most importantly, a caterer can help an airline achieve balance. For legacy carriers this means finding a balance between high-quality in-flight services in First and Business Class and the BoB offering in Economy Class. It also means balancing suitably-priced BoB products that create revenue, reduce waste, uphold the airline’s brand and satisfy passengers. For low-cost airlines it means providing the balance between revenue-driving products and passenger satisfaction. As former Ryanair Chairman and IATA executive Patrick Murphy said on the difference between the two types of airlines, “It boils down to price and product competition. Either you’re the lowest price or you’re differentiated.22” For legacy airlines, the right type of branded products plays an important role. Ryanair may be able to sell their self-branded goods. However, passengers on a legacy airline may not be as appreciative of airline-branded vodka. “Expectations are all important,” says Janet Titterton, Business Planning Director at Collinson Latitude. “With low-cost carriers, you expect a basic product, but passengers expect the price premium of traditional airlines to be justified. It goes back to the customer proposition and value promise. If the brand makes no promises to deliver, that’s one thing. But if a premium brand is looking to make a quick buck, passengers won’t like it.23” Predicting demand is also crucial in achieving the right balance. It enables the airlines to reduce waste and thus costs, as well as to optimize onboard sales and profitability.
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22/23 Flightglobal.com November 2009
Buy-on-Board: a Viable Alternative
The caterer can also support an airline with a number of different sales optimization solutions. This ranges from designing marketing material, such as menus and e-mails that attract the passengers’ attention and influence purchase, to providing payment solutions and tools. Sales optimization can also be driven through designing snack boxes that are appealing and contain a number of high ROI items. Additionally, a caterer can play a key role in optimization by offering staff training. Caterers should also support airlines with innovations that will increase BoB revenue streams. This includes sourcing efficiencies, packaging of fresh foods, new product lines, etc. Brazilian airline Gol, for example, is now offering passengers a BoB food and drink service on top of its standard basic refreshments. “With this we are definitely changing the culture of how people are flying in Brazil. It will be expanded [in 2010] because passengers are accepting it very well,” says Chief Executive Constantino de Oliveira Jr.24 BoB is Here to Stay Knowing that BoB is here to stay, making the right decision and choosing the right partner from the get-go can help an airline differentiate itself, increase its revenues and improve passenger satisfaction. As Jim Davidson, president and CEO of Farelogix points out, “We’re getting back to where meals become a value rather than an attention diverter. This can create new revenue, save on waste and preparation costs …. Customers will choose a flight because they are offered choices.25”
Gol - a market leader in BoB services in South America
“We’re getting back to where meals become a value …” Jim Davidson, president and CEO of Farelogix
In summary, the flexibility, variety and returns that can be attained with a BoB model make it a very viable alternative to traditional catering onboard and one that presents carriers with a true opportunity to differentiate themselves.
24 Flightglobal.com November 2009 25 ATWonline.com June 2009
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