Flight Subscriptions - A Win for Airlines and Travelers
2023 could be the year that sophisticated airline subscription programs become more mainstream
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Flight subscriptions have been in the news a lot lately, especially after Alaska Airlines expanded its program, and Frontier announced an unlimited flight pass offering a year of flights for one flat rate (expected to launch in Spring 2023 ). However, very little has been written about the logic and economics behind these programs and what the future may hold.
In thinking about some of the defining characteristics that a subscription-prone product or service must have, it seems like airlines are ideally positioned to incorporate subscription-based models into their product line-ups. Several elements can make a product more suitable for a subscription model:
Fulfills a basic or aspirational need. This is clearly reflected in the top subscription categories: entertainment (Movies/TV/music), beauty, food, clothes/fashion, health, and education. "Traveling more" consistently makes it to the top 10 most common new year's resolutions. However, travel subscription programs have yet to catch up with this need.
High frequency of use. Related to the previous one, the more frequently customers use the product or service, the more likely they are to sign up for a subscription.
Control of the underlying asset. Airlines own the products and, as such, can define the benefits and the rules of engagement
Consistency and ease of distribution. Customers need to be able to rely on the product or service being consistently available or delivered. Airline tickets are digitally distributed and immediately available.
Complex and fragmented product. The various components of airline tickets can be unbundled and bundled in multiple ways (timing, geographic markets, ancillary products and services, etc...).
Convenience. Subscription products or services that are easy to use and convenient for customers to access are more likely to be successful.
Value. Customers are more likely to subscribe to products or services that offer concrete, understandable and demonstratable value for money.
A few weeks ago, Iñaki Uriz, co-founder and CEO of Caravelo, shared his 2023 outlook on the future of flight subscriptions, predicting fast growth and direct competition between programs.
Given Iñaki’s tendency to base his predictions on unannounced contracts ;-), his outlook certainly piqued my interest. Caravelo is a major player in the flight-subscription world, and since Iñaki seemed to know more than he was letting out, I reached out to him to get his perspective. That conversation formed the base of this deep dive into flight subscriptions.
What is Caravelo?
Caravelo is a travel-tech company based in Barcelona that, over the past decade, has worked with over 20 airlines and has a history of innovative revenue-related solutions. They developed the first flight subscription program for Volaris in 2018 and made flight subscriptions their sole focus since the pandemic.
They are backed by several major industry insiders, including the likes of Alex Cruz (former chairman and chief executive officer of British Airways) and Barbara Cassani (founder of budget airline Go Fly), and claim to be “the only company that has created true flight subscription programs”.
When asked about the claim, Iñaki clarified that by “true” flight subscriptions, they mean programs where users can sign up at any time (as opposed to special promos) and pay recurring monthly fees in exchange for a quota of flights.
José Luis Vilar, Caravelo’s co-founder and CPTO, also joined the conversation and added that Caravelo was able to secure its market position by overcoming several challenges associated with the airline industry’s IT infrastructure, business tools and mindset.
In my research, I came across only four airlines having flight subscription programs:
FlySafair, Alaska, Volaris and AirAsia. Except AirAsia’s all of these programs are powered by Caravelo.
The logic behind subscription programs is simple: customers pay a recurring fee and get access to a product or service. Companies benefit from stable revenue, increased sales, and greater market share, while customers benefit from lower prices, better planning and a better overall experience.
The main customer benefit today is a mix of value for money, but it could soon go beyond that, in particular when airlines start bundling into their subscription programs other privileges such as priority boarding that are reserved for their elite travelers; "I am subscriber" as a social pride or aspiration, not too different from the business traveler that whips out his/her Platinum flyer card to board ahead of everyone else.
Diving deeper into how airlines are using subscriptions reveals some interesting dynamics.
Default-churn Vs Default-retain
A subscription service allows consumers to switch from need-based sales to recurrent purchases, or what the subscription industry would describe as shifting from a default-churn to a default-retain sales model. Churn is the industry term for the loss of a customer and is a common indicator in subscription dashboards. Default-churn sales are those where the customers, after the first purchase, are lost by default.
Aviation is a perfect case in point of default churn. Travelers usually start searching for flights only when they need to travel. Once the need arises, they will shop around, comparing flights, sorting by price, and picking the best option. After the purchase, nothing will happen until the customer needs to fly again and restarts the process.
Subscription-based companies use a different logic where, by default, customers are retained and continue to purchase by default until they choose to unsubscribe. In a program like Volaris’ v.pass, for example, customers pay a monthly fee and get access to a flight to use every month.
The monthly fee effectively acts as a recurrent, automated, purchase that happens independently of the customer’s need to travel. This default-purchase status is key to subscription economics.
Eliminating flight searches
When a monthly purchase of flights is the default, customers find themselves with a steady flow of tickets at their disposal, eliminating the stress of searching for flights and comparing tickets. The passenger simply needs to decide where or when to fly.
Eliminating the flight-search and price comparison process also benefits the airline, since it can reduce its customer acquisition costs and shift that investment to benefit its subscribers by offering more attractive fares without compromising yield. Instead of the airline paying Google, Kayak or Skyscanner for marketing (or losing the sale to an OTA), they are passing on these marketing savings to the customer. Driving subscribers into a flight subscription program means reducing the likelihood of competitors and intermediaries capturing the customer instead.
Since it would not make sense for subscribers that have flights available “for free” to pay money to fly with a competitor, they become loyal to the airline “by default”. This default loyalty is then reflected in an increase in market share and is one of the reasons why airlines are adopting flight subscriptions.
Market share gains
Gaining market share was one of the primary reasons why Alaska Airlines chose to launch its flight subscription in California, a market that it had been trying to break into for a long time with little success.
Public statements from Alaska Airlines executives suggest that the airline was successful at gaining market share after launching its Caravelo-fueled subscription program:
1 of 3 new subscribers hadn’t flown Alaska in at least three years, and that most have committed to more flights than they had taken with the airline at any time in the past.” -- Alex Corey, MD of Business Development and Products, Alaska Airlines (source)
We are seeing a lot of customers who have not flown with Alaska Airlines before [...] and almost all guests that have subscribed are flying more, some significantly more, and we are seeing many guests [...] committing to up to four times more flights than they would ordinarily take.” -- Neil Thwaites, VP for California, Alaska Airlines (source)
Demand stimulation and quotas
As mentioned by Alaska’s executives, driving increased demand is a major reason why airlines are launching flight subscriptions. This is a separate phenomenon from market share gains because it refers to trips that were only taken because of the subscription program.
This increase is caused by the same default-purchase nature of flight subscriptions that we mentioned earlier. Users pay a monthly fee and get access to a quota of flights. Subscribers either use or lose these flights, so they end up taking trips that they may not have taken otherwise.
As a result, airlines can increase the share of wallet that is dedicated to travel, entertainment and general consumption, thereby competing more effectively with non-aviation players. As Jose Luis pointed out, “many airlines don’t realize that their biggest competitors don’t sell flights; they sell movies, TVs, sofas, kitchen mixers and hundreds of other things that people spend money that could otherwise be spent on flights”.
Flight subscriptions can capture this disposable income, and this mechanism is key for airlines like Volaris that have built their subscription program around demand stimulation.
Caravelo recently shared that 51% of all the flights taken with Volaris’ v.pass were completely unplanned, and a further 30% would have been taken with direct competitors of Volaris, like other airlines or long-distance buses.
Volaris further reported that members of the program fly on average 4 times more than the average passenger. In an investor presentation, Volaris shared the results of their discount club v.club that showed a 2x increase in trips taken by the average passenger and a “captive audience” of 700k members.
I am in this camp. Living in New Orleans and having two daughters at Vanderbilt University (Nashville), I would be flying the New Orleans to Nashville route much more if Southwest offered me a subscription program for it. In the absence of it, I am either driving (7 hours drive) or flying only when absolutely necessary (given the $699.96 it costs to fly there this coming weekend, for example).
Iñaki Uriz mentioned to me that the airline's profit per transaction among subscription passengers is between 20% and 50% higher than non-subscription passengers.
Corporate and B2B subscriptions
Looking ahead, we might see airlines applying the same logic to other elements of their business, going beyond a simple discount or flight subscription. When I asked Iñaki about it, he refused to go into details because of existing NDAs, but did provide enough information to make some educated guesses.
An easy-to-understand example is the idea of a B2B airline subscription, which would follow a model similar to the many software subscriptions already used by businesses. These subscriptions could get into the heated competition between airlines for corporate accounts, aiming to lock in market share.
For example, an airline could create a version of their flight subscription product that offers corporations, instead of individuals, the option to subscribe to flights. The effects of these programs would be identical to those of a normal flight subscription, with the only difference being the fact that the airline would be retaining a large corporate customer instead of an individual traveler.
Given the heated competition for airlines to secure the loyalty of high-spending corporate clients, these subscriptions could prove to be a highly effective tool to secure market share in the very lucrative and competitive world of corporate travel contracts.
Iñaki hinted that some airlines are showing great interest in this and that we might see some launches along these lines later this year. He also noted that a first step in this direction would probably be a “discount club”, where companies pay a monthly subscription fee in exchange for better conditions such as flexibility, perks or lower prices in their bookings.
These discounts would not lock in companies completely but would give them a significant incentive to favor the airline, mimicking the behavior of other discount clubs commonly used by airlines.
Ancillaries, lounges, or even in-flight Wi-Fi subscriptions like those available at Alaska, United, or Air Canada offer an interesting gray area between the existing discount clubs and flight subscriptions.
On this topic, Jose Luis noted that most airline discount clubs have been built in ways that won’t allow them to evolve, often misusing existing IT infrastructure to fulfill short-term goals. The lack of a solid infrastructure, he argues, will be a significant handicap in the future, adding that airlines that rely on powerful and flexible subscription setups like Caravelo’s could add “almost anything” to their subscription with very little effort.
If true, this could become a key competitive tool, as airlines fight to lure subscribers to their programs and lock them out of the market. Some evidence of this is already visible. For example, Volaris allows users to customize their subscription with ancillaries and Alaska is including free elite frequent-flyer status into its subscription program.
Paid loyalty debate
The idea of adding perks to a flight subscription or a discount clubs touches on a long-standing debate in the airline industry: paid loyalty. At the core of this debate is the idea that if people can pay (or subscribe) for the same perks that are given to members of frequent flyer programs, then these programs could lose their effectiveness.
Those on the opposing side of the debate argue that getting these perks for “free” in frequent flyer programs instead of paying for them would maintain the program’s attractiveness, and point out that paying for status is nothing new as airlines like Emirates already offer this and LATAM even have a subscription offer.
Iñaki also offered a different perspective, noting that subscribers of a tier that offers multiple flights per month are effectively committing to fly more than most of the airline’s customers, and there should be no reason to deny them the status from the start. As he put it, “subscriptions can be true frequent flyers factories for airlines that use them in the right way”.
Looking ahead, one thing seems clear: airline subscription programs will expand and become more sophisticated. As airlines fight for market share, they will start to utilize business rules and ancillaries to make their subscriptions profitable and attractive.
In the future, we could see airlines evolving their subscriptions to a point where they include not only ancillary services but also non-aviation services and leveraging their existing relationships with various travel companies.
We’re already seeing attempts to combine flights with accommodation rentals to target the growing population of digital nomads and remote workers. Such is the case with a new program launched by Japan’s domestic airline Star Flyer that combines flights and monthly accommodation rentals.
There are a few examples of subscription programs launched by hospitality companies. Selina, for example, offers co-working and co-living subscriptions ranging from $450 to over $3,000 per month and has 1500 active subscribers. Soho House has more than 130,000 members (with a 95% retention rate). It also has an invite-only premium subscription to creative spaces that is rumored to cost more than $4,000 per year. Luxury travel subscription company Inspirato has nearly 16.000 subscribers, 23% of which pay $2500 monthly and the remaining 77% pays $600 monthly (source)
Of course, in talking about going beyond aviation, many will think of the subscription programs offered by the likes of eDreams and TripAdvisor. These offers operate on a similar logic to airline discount clubs, but have one fundamental difference: the companies don't own the underlying inventory (one of the elements I highlighted that make a product more suitable for a subscription model). This makes it difficult or impossible for them to provide specific and substantial customer benefits.
eDreams has successfully grown its Prime subscription base from 1.7 million a year ago to 3.6 million. It seems like eDreams Prime users subscribe predominantly at the time of booking, and the cost of the yearly subscription is more than paid for in that first transaction. However, the retention mechanisms and the future benefits are less concrete. And despite eDreams’ success in building up an impressive subscriber base, the company has been so far unable to translate this into lower acquisition costs, which puts in question the loyalty that this subscription generates.
Tripadvisor launched its $99/month Tripadvisor Plus program in the summer of 2021, but there have been few details since then (no mention in its quarterly results or presentations), which most likely point to disappointing results.
Build or partner?
With so many potential benefits and opportunities on the table, the obvious question is how to get started. Usually, there are three options for these types of projects: build everything in-house, externalize some elements of the development or buy a ready-made solution from a specialized vendor.
Each option has its pluses and minuses. Airline IT teams, for example, have a good understanding of the tech stack airlines work with, but are typically overworked, and have a long list of other high-priority projects to have their highly complex core business running smoothly. They also lack familiarity with subscriptions and would likely need a lot of time to develop the right experience to develop a subscription program.
To solve this problem, airlines can try to outsource the subscription element to companies like Zuora that specialize in recurring payments. This may help, but these companies don’t have any existing solutions that could easily adapt to airline tech and will also only cover the payment part, leaving the airline IT team with the challenge of handling quotas, ancillaries, loyalty programs and a host of other complexities.
At the opposite end of the spectrum, we find specialists (Caravelo being the only flight subscription specialist that I am aware of) that have already built and market-tested solutions. These providers offer well-built solutions that are constantly maintained and developed, allowing their customers to optimize their programs and evolve them without the need for costly new developments. For an implementation (which can be completed in 5 weeks), Caravelo requires minimal input from the airline’s team: around 1/2 person per week (Project Manager) plus 4 hours per week from other teams (marketing, product, tech).
Another advantage of these ready-made solutions is that they come from the start with all the business tools needed to manage the program. When asked to comment on this, Jose Luis noted that the challenge in building these programs comes both from the business and tech side and that a great part of the value proposition of Caravelo comes from its experience in advising customers and giving them a solid and adaptable solution that won’t require costly maintenance and upgrades.
The road ahead
The mechanics of subscription programs and their ability to drive market share, stabilize revenue and create new demand is a great fit for the travel industry as a whole and particularly for suppliers such as airlines.
In the future, it might become normal traveler behavior to subscribe to any part of the travel journey from the taxis to the resorts, similar to subscribing to music, movies or free delivery.
Given the positive preliminary results of the existing flight subscription programs and the flexibility that airlines have in customizing a program that fits their specific strategic needs, it is surprising that there are still so few airline subscription programs. It takes a simple Google image search for “flight subscription programs” to realize the unclaimed blue ocean opportunities that flight subscriptions have for airlines: 23 of the first 30 images are about Alaska’s subscription program (launched with Caravelo)!
I would be surprised if we didn’t see a dozen more airlines launch subscription programs in 2023. This seems like a clear opportunity for airlines to gain an immediate competitive advantage.
A powerful and sophisticated airline subscription program should be…
Flexible: even if the subscription product is specific and well-defined from the consumer perspective, the airline should retain enough flexibility to be able to adjust it over time: price changes, new promos, new routes, new benefits…
Sophisticated to serve travel-specific needs and a system capable of supporting business rules such as advance purchase, booking window, access only to part of the inventory, blackout dates, a quota that expires each cycle, or surcharge options for premium flights.
Able to easily integrate and run on legacy airline systems and connect via API so the airline has the ability to distribute the product to any digital touchpoint.
Simple and intuitive UX. Given that a flight subscription product is a new product, it should be clear to understand for the passenger and use simple and proven UX.
Data-rich so that it provides the airline with insights into the product's performance and allows it to constantly improve and iterate it based on data.
Subscription programs offer airlines a great opportunity to establish a more personal and direct relationship with their customers, structuring the program in a flexible way that addresses both the short-term tactical needs of the airline as well as its long-term strategic goals. Doing so with specialized partners like Caravelo, with the right technical experience and the know-how of both subscriptions and travel, could greatly facilitate the path forward.
In the past, I’ve referred to two a couple of interactive datasets I launched in 2021 and updated every week.
One is the Research & Insights dataset, a searchable and weekly updated platform with 1250 articles and reports, 459 categories and 1087 companies to search, find and discover relevant content easily. There is a $100 cost to access the dataset, but since you are interested in airlines subscriptions, I am sharing with you a public/free view of all content in the Research & Insights dataset that falls under the “Subscriptions” category: a total of 36 subscriptions-related articles and reports. Access here.
For those of you who are not subscribers to the datasets and want to access the remaining 1214 content pieces and 458 categories, you can join the dataset(s) here:
Research & Insights dataset ($100)
Startup & Investors dataset ($100)
BOTH datasets ($145)
Thanks to Iñaki Uriz, José Luis Vilar and Marco Serusi for their patience in answering countless questions
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Great deep dive! A couple of questions:
1) As you know, a flight's price is tied to underlying fare buckets. More demand, higher price. How do these flight subscriptions integrate into the airline's revenue management model? I can't imagine they offer last seat availability so is a subscriber set up for immediate disappointment when they realize they cant use their free flight on Thursday before Christmas even though it is available for purchase?
I feel like this scenario is the true devil in the entire flight subscription offering. The moment a consumer can't access their promised value prop they will cancel and it will be very difficult to regain them. Conversely, setting expectations that your subscription is actually a subscription to flights that are lightly booked is an entirely different value proposition.
2) On the frequent flier end of the spectrum, US airlines with revenue-based frequent flier programs are much, much closer to a subscription offering for their existing frequent fliers and one wonders why they haven't made this logical jump already. For example, United requires $24,000 in pure spend to make 1K status this year. Why shouldn't I be able to subscribe to 1K status for $2000 a month right now and receive all those benefits and a $2000 spending credit for flight purchases in the month? Seems like a no-brainer.