5th December 2017, Global – The airline industry has long viewed Big Data analysis from an operations standpoint and as a means to boost efficiency but has been lagging in realising that the Big Data goldmine is really in the collection and monetisation of Inflight passenger data, which can provide a new significant revenue stream that will redefine air travel. After all, it is precisely the successful collection and monetisation of user data on an epic scale that has created Alphabet (GOOGL:US), Facebook (FB:US), Tencent (700:HK), Alibaba (BABA:US), Baidu (BIDU:US) respectively the world’s 2nd, 5th, 7th, 8th and 138th largest companies within an amazingly short span of less than 20 years.
In 2016, the world’s airlines flew 3.8 billion passengers, clocking about 9.3 billion Inflight passenger hours with virtually all this Inflight Big Data not collected and monetised by the airlines.
With the global airlines’ thin net profit margins averaging only 4.5%, it will become more pressing for airlines to find alternative streams of income to boost their profitability.
We estimate the collection and monetisation of global Inflight Big Data is worth US$100 billion additional revenue per year, a number that will dramatically increase with advances in Internet of Things (IoT) technology.
This could potentially boost the global airlines’ enterprise value by at least US$120 billion (based on the airlines’ current valuations) to as much as US$500 billion (if the airlines’ valuation multiples expand towards the global internet giants’ levels as investors begin to value them as growth stocks).
Chart: Global airlines flew 3.8B passengers, clocking 9.3B Inflight passenger hours in 2016
Chart: Global airlines net profit margin (latest reported financial year)
ONE OF THE LAST GREAT FRONTIERS FOR DATA MINING IN THE MODERN DEVELOPED WORLD
Modern-day collection/monetisation of user data largely relies on free internet services to gather Big Data and then analysing it in real-time with Cloud Computing. As inflight internet connectivity has historically been unavailable or when available, usually highly inferior to internet access on the ground; inflight passenger data has remained untapped and represents one of the last great frontiers for data mining in the modern developed world.
Clearly, the prerequisite is that airlines will need to ensure fast and reliable inflight internet connections for passengers. However, it is equally important for the airlines to find ways to collect and monetise this flow of Inflight Big Data otherwise the value of the Inflight Big Data would accrue to the internet giants instead.
Many passengers might be uncomfortable with their data being collected and monetised by the airlines but in reality, the internet giants have been doing precisely that for many years with their free internet services: Android, Baidu, Bing, Facebook, Facebook Messenger, Gmail, Google Drive, Google Maps, Google News, Google Photos, Google Search, Instagram, Line, LinkedIn, Outlook, Pinterest, QQ, Snapchat, Tumblr, Twitter, Vimeo, WeChat, Weibo, WhatsApp, Yahoo, YouTube ….. well, the list goes on but the message is clear – Once connected to the internet, there is no escaping the reach of the internet giants.
While there are certainly legitimate concerns about privacy and corporate over-reach, the debate as to whether user data collection/monetisation constitutes a legitimate and desirable business practice has long been settled in favour of the internet giants like Alphabet (GOOGL:US), Facebook (FB:US), Tencent (700:HK), Baidu (BIDU:US). Even the most prominent privacy advocate of all, Apple has been collecting billions of dollars over the years from Alphabet in return for setting Google as the default search engine on its Safari web browser.
VALUE OF AIRLINES’ EXISTING PREFLIGHT PASSENGER DATA HAS DIMINISHED IMMENSELY IN THE AGE OF BIG DATA AND CLOUD COMPUTING
Outdated airline analysis overvalues the passenger/user data that the airlines currently possess especially through their loyalty programmes. Much of this is Preflight passenger data like nationality, full name, mobile number, birthday, address, the passenger is travelling alone versus in a group or on a business versus leisure trip.
In today’s world, the airlines’ ability to monetise Preflight passenger data has diminished immensely because the internet giants have the same data and much more through their provision of various free internet services to users numbering in the billions. Facebook itself has 2 billion Monthly Active Users (MAU) while Alphabet offers a comprehensive array of free services like Android, Gmail, Google Search, Maps, YouTube, Google Play, News, Docs to enrich its profile of each user. Facebook and Google are available in over 100 different languages while most airline websites are only available in 10+ languages or less.
Furthermore, the internet giants are able to analyse Big Data in real-time speed with the world’s most advanced Cloud Computing facilities and monetise it with their highly extensive advertisement and partners networks.
INFLIGHT CAPTIVE MARKET ENVIRONMENT ENABLES PASSENGER INFLIGHT BIG DATA COLLECTION MONOPOLY
While it is impossible to compete with the internet giants for user data on the ground, the airlines have no equal in the sky. The typical inflight experience is one of the most captive market environments ever. Excepting catastrophic emergencies, there is no exiting while an aircraft is airborne. Within the limits of the law, the entire aircraft cabin is monitored and controlled by the airline. Apart from the restrooms, everything that the passenger does is in full view of the airline. Communications with the rest of the world is controlled by the airline whose equipment enables internet, telecommunications services onboard. Even inflight data roaming plans purchased from external providers have to be compatible with the airline’s equipment in order to function normally. For the flight duration, the airline can have a monopoly on the collection of passenger data.
By combining their passengers’ existing Preflight data with the Inflight Big Data and analysing all that in real time with Cloud Computing, the airlines can achieve exponential gains in data monetisation.
Chart: Preflight Data + Inflight Big Data = Exponential gains in Big Data monetisation for airlines
AIRLINE PASSENGERS ARE A HIGHLY VALUED DEMOGRAPHIC FOR ADVERTISERS & RETAILERS
Airline passengers, especially premium leisure and business travellers, are highly valuable to advertisers and retailers because of their higher incomes and spending levels. Even low-cost carrier passengers who are more budget conscious are likely to spend more especially when on holiday.
Passengers’ behavioural patterns change immensely while inflight because they are confined to their seats and a small, cramped aircraft cabin where entertainment options are limited. On long flights, even trips to the aircraft restroom are a relief from all that tedium. Due to the lack of distractions, passengers are much more likely to pay attention to targeted advertisements delivered to their smartphones or Inflight Entertainment (IFE) system.
On longer flights, the amount and value of Inflight Big Data also increases exponentially as deeper insights are obtained on each passenger’s current interests, mood, preferences, priorities.
HOW TO INCENTIVISE PASSENGERS TO ALLOW THE COLLECTION/MONETISATION OF THEIR DATA?
The internet giants provide free access to extremely useful internet services to incentivise people to allow the collection/monetisation of their personal data. Similarly, the airlines will have to offer something in return. Incentives can take the form of free, fast and reliable inflight internet access via an app or Inflight Entertainment (IFE) system. The inflight captive market environment transforms fast, reliable internet access which is commonplace on the ground to a much valued service in the plane.
For Low-Cost Carriers where ancillary income accounts for a significant portion of revenue, incentives can even take the form of lower airfares.
INFLIGHT ENTERTAINMENT (IFE) SYSTEMS WILL BE AN UNPARALLELED DATA COLLECTION AND MONETISATION TOOL
IFE systems have many drawbacks, they are expensive to install and maintain, the extra weight adds to the aircraft fuel costs and the technology lags high-end smartphones and tablets that see new models every year. Low-cost carriers don’t even bother to install them.
However, if correctly designed and programmed, IFE systems are not only ideal for the purpose of collecting/monetisation of passenger/user data but can also incentivise passengers to provide that data. Imagine providing the latest IFE systems (free & fast internet connection, high-definition screen, noise cancelling headphones, thousands of apps, games, movies, music) normally reserved for premium passengers to economy class passengers; the participation rate for the economy class passengers would skyrocket. Furthermore, IFE systems are more convenient and comfortable to use on a cramped airline seat increasing passenger participation. The much larger screens on IFE systems also allow more space for targeted advertisements to be displayed side by side with the passenger’s preferred content.
Most importantly, there are significant advantages for a company when their customers use a device specially designed by the company (Example: Amazon hardware like Echo Speakers, Fire tablets, Fire TV sticks, Kindle E-readers are sold at cost or loss to push Amazon products & services to customers).
Since the airline can not only design but own and control the IFE systems, it can track how much time the passenger spends on each website or movie and even each passenger’s keystrokes and clicks on the system. Passengers’ orders for drinks and food can be directed through the IFE systems, giving the airline even more insights. Based on that data, the airline can then display their partners’ real-time targeted advertisements or even directly sell products and services (travel insurance, hotel & rental car bookings, tourist attraction tickets, city tours, duty free products, etc).
The airline can even influence the passengers’ web browsing activities via the IFE systems. They can increase the loading speeds for partner websites or even outright block access to non-partner websites in extreme cases.
Through the IFE systems, the airline can also channel web searches exclusively through a partner’s search engine. In 3Q17, Alphabet alone spent US$5.50 billion Traffic Acquisition Costs for its Google search engine, even a small percentage of that will represent a significant potential revenue stream for an airline.
To increase the passengers’ usage of IFE systems, the airline can implement a two-tier internet access system whereby wi-fi is chargeable while the IFE system’s internet connection is free.
PARTNERSHIPS WITH ARRIVAL AIRPORT RETAILERS TO SELL PRODUCTS & SERVICES TO PASSENGERS
Based on the Inflight Big Data, the airline can also partner with arrival airport retailers to sell products and services to passengers. By sending targeted coupon codes or special offers to the passengers’ smartphones, the airline can encourage the passengers to buy from the arrival airport retailers instead of heading to the city retailers.
SMARTPHONE, SMARTWATCH, SMARTSPEAKER, SMARTHOME ….. TIME FOR THE SMARTPLANE?
These days, it seems everything is getting a ‘Smart’ prefix attached to it. Marketing gimmicks aside, this is a reflection of the continuing advancement of Internet of Things (IoT) technology whereby physical objects (usually connected to the Cloud) are embedded with sensors, software enabling them to collect and exchange information.
It is only a matter of time before the creation of a ‘Smartplane’ (yes, you heard it here first) that can use sensors and image recognition software to accurately measure passengers’ reactions to targeted advertisements, movies, music, food and even changes in the aircraft cabin like noise, temperature, turbulence with the contained nature of the aircraft cabins helping to filter out external variables.
These insights into a much valued demographic like airline passengers have countless applications and are likely to prove to be the most profitable over time.
Chart: How airlines can monetise passenger Inflight Big Data?
GLOBAL INFLIGHT BIG DATA COULD BE WORTH US$100 BILLION ADDITIONAL REVENUE PER YEAR, BOOSTING THE GLOBAL AIRLINES’ ENTERPRISE VALUE BY AT LEAST US$120B TO AS MUCH AS US$500B
We estimate the collection and monetisation of global Inflight Big Data could be potentially worth US$100 billion additional revenue per year, a number that will dramatically increase with advances in Internet of Things (IoT) technology.
Based on the top 20 largest airlines’ current EV/Sales valuation of 1.2x on average, this implies that the Enterprise Value (EV) of an airline rises by US$1.2 on average for every US$1 additional revenue generated from the collection and monetisation of global Inflight Big Data.
More importantly, the airlines’ valuation multiples will also expand if the global airlines learn how to monetise Big Data like the Internet giants. The average EV/Sales valuation of the top 20 largest tech companies that monetise user data in the world is 5.1x (or 4.7x excluding outlier Weibo). This is 4 times that of the 1.2x EV/Sales of the top 20 largest airlines in the world. Therefore, every US$1 additional revenue generated from the collection and monetisation of global Inflight Big Data could potentially raise an airline’s Enterprise value by as much as US$5!
Based on our estimates that US$100 billion additional revenue could be generated per year by the collection and monetisation of global Inflight Big Data, this could boost the global airlines’ enterprise value by at least US$120 billion (based on the airlines’ current valuations) to as much as US$500 billion (if the airlines’ valuation multiples expand towards the tech giants’ levels).
Chart: EV/Sales Valuations of Top 20 Largest Airlines in the World (2017)
Chart: EV/Sales Valuations of Top 20 Largest Tech Companies that Monetise User Data as a Core Business in the World (2017)
AIRLINES’ EQUITY VALUATION MULTIPLES COULD MORE THAN DOUBLE IF THEY LEARN HOW TO MONETISE BIG DATA LIKE THE TECH GIANTS, DRIVING INVESTORS TO VALUE THEM AS GROWTH STOCKS
We believe that investors could begin to value airlines that are able to harness their rich source of passenger Inflight Big Data like growth stocks given their improved long-term revenue and earnings growth prospects.
The average P/E valuation of the top 20 largest tech companies that collect and monetise user data as a core business is 28x (or 26x excluding outlier Amazon). This is more than 2 times that of the 12x average P/E of the top 20 largest airlines in the world. It is therefore possible for the global airlines’ valuation multiples to more than double from their current levels, approaching the average valuations of these top 20 largest tech giants in the world if the airlines learn how to collect and monetise passenger Inflight Big Data effectively.
Chart: P/E Valuations of Top 20 Largest Tech Companies that Monetise User Data as a Core Business in the World (2017)
Chart: P/E Valuations of Top 20 Largest Airlines in the World (2017)
WORLD’S 20 LARGEST AIRLINES’ TOTAL CURRENT MARKET CAPITALISATION AMOUNTS TO ONLY 7% OF THE WORLD’S 20 LARGEST TECH COMPANIES THAT MONETISE USER DATA AS A CORE BUSINESS
The current market valuation of the global airlines sector is tiny compared to the tech sector that monetises user data as a core business. The combined current market capitalisation of the top 20 largest airlines in the world amounts to only US$313 billion and the average market cap of each airline is US$16B. In comparison, the average market cap of the top 20 largest tech companies that monetise user data as a core business is 13 times larger at US$214B and the combined market cap of these tech companies amounts to US$4.3 trillion!
Chart: Top 20 Largest Airlines in the World by Market Capitalisation (2017)
Chart: Top 20 Largest Tech Companies that Monetise User Data as a Core Business in the World by Market Capitalisation (2017)
ALPHABET (GOOGL:US)’S CASH BALANCE ALONE IS EQUIVALENT TO THE COMBINED MARKET CAPITALISATION OF THE WORLD’S THREE MOST VALUABLE AIRLINES
At the end of 3Q17, Alphabet’s cash balance amounted to US$100 billion. This is equivalent to the market capitalisation of the three most valuable airlines in the world – Delta Air Lines (DAL:US), Southwest (LUV:US), Ryanair (RYA:ID) or the combined current market capitalisation of the 7 most valuable airlines in the Asia Pacific region, namely Air China (753:HK), ANA Holdings (9202:JP), China Southern Airlines (1055:HK), China Eastern Airlines (670:HK), Japan Airlines (9201:JP), Singapore Airlines (SIA:SP), Hainan Airlines (600221:CH).
Chart: Alphabet’s cash balance is equivalent to the combined market capitalisation of the three most valuable airlines in the world
Chart: Alphabet’s cash balance is equivalent to the combined current market capitalisation of the 7 most valuable airlines in the Asia Pacific region
WILL PASSENGERS TRUST AIRLINES TO PROTECT THEIR PRIVACY?
Airlines’ reputation are a mixed bag, some like ANA (9202:JP), Emirates, Singapore Airlines (SIA:SP), are generally well regarded while the American carriers are better known for overbooking and poor customer service. In contrast, internet giants like Alphabet (GOOGL:US) and Facebook (FB:US) have well-honed friendly public personas and are often seen as drivers of innovation and credited with creating much prosperity around the world.
While the airlines have long been collecting and monetising passenger data (Mostly Preflight Data), it has mostly been small-scale and not very successful. Inflight Big Data is on a whole different level and on a much larger scale, collecting and monetising it will bring about more scrutiny from the regulators and public than ever on the airlines.
THE BALL IS IN THE AIRLINES’ COURT FOR NOW BUT WILL THEY DROP THE BALL?
Despite their well-honed friendly public personas, the internet giants make for fierce and extremely well-resourced competitors. Undoubtedly, the airlines will have to work with the internet giants but will the airlines see the Inflight passenger data collection/monetisation business as a core revenue driver and be equal partners with the internet giants or will they simply choose to focus on transporting passengers and cede the gains?
For the most part, airline corporate culture is conservative and largely focused on operational excellence and safety which makes perfect sense in an industry where carelessness can lead to catastrophic accidents. However, to succeed in the Big Data business, the airlines will also have to embrace experimentation and innovation. Or simply put, would employees from Alphabet or Facebook want to work in an airline and would airline corporate culture be accepting of them?
For now, the final outcome is still up in the air.
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