In-flight duty free revenue has been in decline for some time with a number of high-profile airlines such as KLM, American Airlines and Qantas having ditched the service in recent years. In a study conducted by the Duty-Free World Council and published by APEX, researchers found in-flight sales fell from 7.3 per cent of total global duty free and travel retail sales in 2006 to just 4.6 per cent in 2014. The popularity of – and growing access (in-flight) to – online shopping sites like Amazon in addition to a general desire to reduce costs associated with fuel burn by not stocking these items on board the aircraft might suggest that this figure will continue to decline going forward. We do not take that view, however.
Self-serving up success
One reason for this is a move towards the self-service model that sees items delivered not to the seat, but to the final destination (which could be the passenger’s home address, their hotel, or airport arrivals). There are, of course, customs and excise issues to be ironed out before this approach becomes more widespread and it would obviously make sense to have a network of local partners in place such that items can be sent from and delivered to a location within the same country. But it is worth remembering that new age retailers have no costs associated with the running of a brick-and-mortar store and may be in a position to sell products with duty paid, which can sometimes work out less expensive than a duty-free product.
A legitimate riposte might be to ask why anyone would buy something in an airline’s store if they can (probably) get it cheaper and faster on Amazon. This view ignores the airlines’ two greatest assets. 1) a captive audience and 2) their possession of a wealth of information on passengers around which it is possible to promote highly personalised offers. They are not, therefore, bound to sell items traditionally associated with the duty-free category (tobacco, alcohol and cosmetics) and can build their brand around an essentially limitless product range when home delivery is available. Lest we forget that AirBaltic has famously sold Mini Coopers and even real-estate onboard its flights.
The Korean blueprint
Readers still not convinced should also note that August 2020 saw an investor pay Korean Air $834 million for its in-flight retail and catering business. Korean Airways is widely regarded as the largest airline duty free revenue generator in the world. It offers its passengers “Please wake me up for the duty-free!” stickers and its A380s sacrifice two whole seat rows to house the on board duty-free shop. In 2019, duty free revenue was around $135 million making the airline the world’s most successful in-flight retailer.
Interestingly, Korean Air has announced that it is working to improve sales efficiency by actively operating a pre-ordering system for its duty-free goods. Such products would be delivered on-board the aircraft, obviating the need to stock hundreds of reference items passengers may, or may not, ultimately purchase. Other airlines that have implemented similar pre-ordering capability to great success include AirAsia, Singapore Airlines, Lufthansa, Virgin Atlantic and Finnair.
The case for connectivity
Also worth considering are the partnerships IFC service providers can bring to the table in order to help offset the costs of a session and provide the passenger with free on board Internet. Viasat, for one, is banking on its abundance of satellite capacity to provide a pathway for a passenger to “earn” a Wi-Fi session. In this scenario, the passenger would log onto the IFC portal and see a range of brands to interact with in order to be rewarded with the ability to surf freely. He or she could choose to watch an advertisement for a product from, say, L’Oreal, and then be landed on the website of a partner like Dufry (a Swiss-based travel retailer) to complete the purchase. When they do so, a Wi-Fi session is activated.
In this way, connectivity is an enabler to connect a brand with a consumer. Similarly, Lufthansa passengers will receive a free session pass after a sale is completed on the SKYDeals in-flight shopping platform after the two parties announced a new partnership in September 2020. Lufthansa’s IFC is powered by Inmarsat’s GX solution.
As more and more airlines adopt connectivity and use it beyond a means to simply entertain the passenger, average basket size and transaction values could rise significantly. Right now, few airlines use connectivity to authorise payments in real-time and in doing so, expose themselves to fraud as there is less possibility of detecting whether someone is using a cloned card to pay for goods and services on board. Our understanding is that the proportion of on-board transactions lost due to card fraud is around 2.5 per cent. With connectivity, cabin crew can also check whether a passenger has sufficient funds to pay for an item meaning floor limits could be raised and airlines could promote and sell higher value items. We know of one airline that has resorted to using the pilot’s Wi-Fi in order to authorise the sale of luxury goods like a Rolex watch.
Projections for the future
As is the case with food and beverage and comfort items, there are not too many examples of airlines that currently allow passengers to browse through a digital duty-free selection on an IFEC system. Our estimate of revenues associated with items sold through such platforms was $264 million in 2019. After falling in 2020 due to COVID-19, growth can be expected in successive years out to 2030 when revenues are forecast to be $8.4 billion.
Some of this growth can be put down to a switch having taken place from a manual to an automated, digital process but there will be some organic growth too. In fact, our expectation is that the average spend per passenger will increase from around $90 today, to almost $120 in ten years’ time. However, we also believe that the number of passengers purchasing duty free and other travel retail items will decline slightly over the forecast period; from 2 per cent in 2019 to 1.8 per cent in 2030.
