IAG's investments followed easyJet's announcement earlier this year that its partnership with the incubator Founders Factory had selected two travel start-ups for its accelerator programme. The Lufthansa Group established its Innovation Hub in 2014 and started a new partnership with Californian start-up investor ‘Plug and Play’ in 2016.
While these three groups chose external partners, Ryanair has its inhouse Labs team, set up in 2014. Air France-KLM is alone among Europe's big five airline groups in not having a distinct and dedicated digital incubator/accelerator programme, but it has recognised digital's strategic importance.
Much of the airlines' rhetoric concerning these developments suggests that they are trying to associate themselves with the forces of disruption, but this will take more than rhetoric. The airline industry has clearly been slow to prepare for disruption, albeit some are at least now making a start.
Through the Hangar 51 programme, IAG is looking for new entrepreneurs that will transform the aviation industry and revolutionise the customer experience through new technology, products and services. It aims to bring "cutting edge digital start-ups into the heart of our business".
Glenn Morgan, IAG’s head of digital transformation, says: “We want them to tell us what we don't know”. This should help to give IAG access to technologies and new ideas that it would otherwise not encounter, but the challenge will be to make the appropriate ones a successful part of its own operations.
Stephen Scott, IAG's head of global innovation, says the big benefit of investing in start-ups is getting innovative ideas quickly to market. “Speed to market in corporates has been more challenging over the years because of the highly regulated market we work in, so to be able to construct innovation rather than just have ideas and get it into the market quickly is really important,” he adds.
LCCs have been a big driver of transformation with the development of the internet one of the main catalysts for the segment’s evolution in the mid-1990s. The first digital business to consumer retail platform, the internet provided the opportunity to sell direct to the customer, not only reducing costs, but also giving the potential to develop a more immediate relationship with the customer.
In Europe, low fare airlines such as easyJet and Ryanair were far more responsive than incumbent legacy airlines to the opportunities offered by the internet, and used their first mover advantage to devastating effect (although this was not the only factor in their success). Legacy airlines responded initially by setting up their own LCCs, but this first wave of legacy owned low fares airlines did not last (think of BA's Go and KLM's Buzz, for example).
One of the lessons for legacy airlines was that cost efficiency, operational efficiency and a simpler product needed to become central to their core operations. The same is true of digital innovation and its importance to retaining control over the customer relationship.
Those airlines that are seeking external start-ups as a source of technological innovation are widening their access to disruptive business models and technologies. They do not have all the skills internally, so must look outside. However, in order to progress sufficiently to meet the challenges they face, they must also internalise the necessary skills. This requires balancing the focus on external sources with developing an internal culture that can very rapidly adopt the resultant innovations – not an easy balance to strike.