Why airlines are betting on bundling

How is the airline industry bracing for economic turbulence? By selling more than flights.

Typically, here in the modern age, a traveler contemplating a journey will start by booking a flight to their destination, and only once that’s been achieved turn his or her attention to the business of booking hotels, rental cars, excursions, and activities. But what if it were different? What if, instead of navigating multiple websites and portals, they could handle everything right on their airline’s website?

With 33% of U.S. adults already using AI to plan or book trips, and 46% open to adopting it in the future, generative AI is enabling airlines to target passengers with personalized offers and convenient bundles.

By collaborating with partners across the travel value chain, what’s more, airlines can enhance profitability, differentiate their offerings, and make the travel planning process smoother, more integrated, and more enjoyable for customers than ever before.

In this article, we explore two strategies to address shrinking profit margins and generate new revenue streams: bundling non-travel-related ancillaries; and offering enhanced redemption options for airline miles across diverse partners.

Bundling 101

What is a “bundle” anyway? As used within the airline industry, the term describes a single retail package comprising a number of different products or services, often offered at a discounted rate to attract more customers and improve sales.

A frequent business traveler, for instance, could receive a bundled offer that includes premium lounge access and expedited security clearance, or a family on vacation could be offered a bundle containing discounted hotels and theme park tickets.

These personalized bundles offer more than convenience. They encourage frequent fliers to redeem loyalty points, and to replenish their supply of points by paying for premium upgrades, thus increasing their overall spending with the airline. By considering factors like peak travel seasons and events, so-called “dynamic pricing” further maximizes revenue by offering the right price at the right time.

To capitalize on this potential, airlines are scouring the broader value chain for possible bundle elements, looking for ways to expand their bundles with non-travel-related ancillaries and provide better redemption options across different partners, within the travel sector and beyond.

Bundling beyond travel

The modern data interface, known as New Distribution Capability (NDC), has made it easier than ever for airlines to create and distribute dynamic, personalized offers across all sales channels, including direct sales and third-party online travel agencies (OTAs)—and these offers need not be limited to travel products.

For instance, a traveler booking a flight may today be offered a bundle that includes a subscription to a streaming service or a fitness app, or access to exclusive online content, such as curated travel guides or access to online tours of famous landmarks. These bundles can be dynamically adjusted based on the passenger's interests and preferences, making them more appealing and relevant.

And these efforts are well underway. American Airlines has already introduced bundles that include memberships to online learning platforms, specifically language learning apps. These kinds of offers have particular appeal to business travelers, or to anyone who wants to make productive use of their travel time.

For those who would rather relax and be entertained, Lufthansa is offering bundles that include access to premium streaming services, as well as a selection of digital newspapers and magazines curated to align with their tastes of individual passengers.

The time to embrace these advanced retailing techniques is now. McKinsey estimates these innovations could unlock up to $45 billion in new value for the global airline industry by 2030. By committing to these strategies, airlines can not only diversify their revenue streams but forge stronger emotional connections with passengers, leading to an increase in loyalty and brand perception.

Making miles go further

Coalition Loyalty Programs are collaborative initiatives where multiple brands share the same rewards “currency,” allowing customers to earn and spend points or miles across a range of different businesses in different retail sectors. By expanding the number of opportunities for customers to accumulate and use points, such programs are that much more effective and building and maintaining customer loyalty.

The airline industry has led the way in developing these multi-sector loyalty programs, partnering with lifestyle brands, event planners, concert promoters, ticketing companies and even convenience stores to expand the range of redemption options for loyal customers, who can now spend their accumulated points of miles on almost anything they want, from hotel stays, to dining experiences, to access to exclusive events.

Or shoes and coffee. Qantas Airways' partnership with Accent Footwear allows frequent flyers to earn and spend points on footwear purchases, earning two points per dollar spent at more than 670 footwear and clothing stores across Australia, while Delta Air Lines' partnership with Starbucks lets members can earn one mile per dollar spent at Starbucks—and double miles on designated Delta travel days.

Bundles: the hurdles

Like most things, bundling strategies for the airline industry come with several inherent challenges:

1.    Coordination

Before offerings from multiple ancillary travel partners, like hotels and car rental companies, can be combined into an airline bundle, all parties need to be ready to participate, and to coordinate their activities across locations. To meet this challenge, airlines must form strategic partnerships and, ideally, synchronize their use of technology platforms to streamline collaboration.

Happily, organizations like the International Air Transport Association (IATA) are stepping up to facilitate strategic partnerships between airlines and various travel service providers. Such partnerships not only let airlines expand their networks and resources to offer a wider range of destinations, hotels and car rental options, they deliver insights into customer tastes and preferences in other sectors, allowing for the packaging of even more enticing bundles in the future.

2.    Technology

It's not enough that all partners in a bundle use the same, or at least compatible digital platforms. It’s also vital that these platforms be up-to-date and fit-for-purpose, able to meet the ever-higher expectations of modern travelers. Most airlines, duly, are modernizing their IT systems to support new bundling strategies.

American Airlines, for example, now uses a Passenger Service System (PSS) to integrate flight bookings, hotel reservations, and car rentals into a single, one-stop-shop platform. AA also uses dynamic pricing models and AI-driven analytics to tailor packages based to customer’s individual preferences.

3.    Delivering real value

None of this means anything, of course, unless the resulting bundles are actually attractive to customers. In sectors as competitive as travel and hospitality, delivering real value that stands out in a sea of retail opportunities poses a significant challenge for airlines. To clear this hurdle, airlines must be unstinting in their creativity and their attention to the needs and desires of customers. In particular, they must actively seek out brands beyond the travel sector with whom they can partner to create more desirable bundle.

Singapore Airlines has done this to great effect, partnering with Canyon Ranch to offer wellness-focused bundles on their long-haul flights, these bundles include wellness cuisines, rest and relaxation amenities, and even guided stretching exercises to help keep passengers happy on comfortable, no matter how long their flight or far their journey takes them.

Buckle up and bundle up

By bundling travel-related and non-travel-related ancillaries and offering improved redemption options for airline miles, airlines can differentiate their offerings and open up new revenue streams. This strategic approach not only enhances the travel experience for passengers but also allows airlines to cross industries, creating new value propositions that better position their brand and foster customer loyalty.