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Airline retailing: The value at stake

A new report explains how the industry can capture $40 billion in additional value—and the challenges that must be overcome.

Retailing, the latest development in airline sales and distribution, is one of the biggest industry disruptions in recent years. In a word, retailing allows airlines to sell new products in new ways, directly to consumers. To get there, airlines and others in the current sales and distribution system have developed three critical new concepts, starting with the New Distribution Capability (NDC), technology that allows for airlines to include a great deal more content (such as legroom, seat pitch, ancillary offers, and other essential attributes) in their offering to travel agencies and consumers. Similarly, ONE Order streamlines the current system of dozens of orders and confirmations for each part of the offering into a single order-management system. Finally, a third element—dynamic offers—builds on these technologies to offer customers flexibility in what they want, and similar latitude to airlines in what they charge for these options.

Already, several of the world’s largest airlines have embraced retailing, and have started to develop systems and standards that can light the way for the rest of the industry. These early adopters are already selling a healthy percentage of their tickets through new retailing approaches and NDC channels. Yet many others have held back. Some airlines have said they are reluctant to invest in what seems to them to be unrefined concepts. Others, particularly smaller and regional carriers, see the potential, but are not sure how they fit in.

To help these carriers develop their strategies, International Air Transport Association (IATA) and McKinsey have jointly researched the potential for retailing. Our key finding is that the potential is promising: the industry might realize up to $40 billion in new value annually by 2030 (equivalent to 4 percent of current industry revenues). Put another way, modern retailing might be worth up to $7 per passenger. That should be welcome news to an industry that, despite some strong economic tailwinds, does not consistently make economic profits for its shareholders.

More specifically, retailing can produce value for airlines in five ways: development of new offers (the largest source of value, at an estimated $22 billion), enhanced revenue management, an optimized distribution mix, better targeting of and engagement with consumers, and optimized payment and fulfillment.

To be sure, retailing will require some investment from airlines. Modern technology does not come cheap; the industry will likely need to spend between $3 billion and $15 billion over the next ten years. Nor is that all: airlines will also need to consider carefully their needs and their strategy. Some will likely want to partake of only part of the total opportunity; others might opt for a comprehensive strategy. Both kinds of strategy will require new ways of working, especially for currently siloed distribution teams. But for those that get it right, the retailing opportunity is too good to pass up.

About the author(s)

Riccardo Boin is a partner in McKinsey’s Milan office. Alex Cosmas is a partner in the New York office. Nina Wittkamp is an associate partner in the Düsseldorf office.
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