Prepaid flights and subscriptions – what’s the difference?

It’s something we hear time and time again. A subscription is just another reincarnation of a prepaid flight. So we’re here today to put that assumption to bed. Let’s clarify the real difference between them, what it might mean for your customers and which to choose, according to your airlines’ needs.

Prepaid flights

Vouchers, flight passes, bundles, travel pass – just what is a prepaid flight? Prepaid flights certainly take on a number of hidden identities but here’s how you can spot one.

They are typically tickets bought at once in bulk, which you can redeem at a future date. They may have terms and conditions attached to them such as limited routes and dates.

Let’s touch on some of the good and the bad.

Pros of prepaid flights

• You’ll spend less on acquiring customers cost in the long run. You only have to attract a customer once and they will fly with you several times with their voucher. This reduces both your sales and marketing spend.
• They generate large upfront payments. This is attractive for airlines who will get a larger payment from one passenger.
• They are an effective way of generating revenue quickly. If your revenue needs a quick boost, running a prepaid flight promo is definitely a good short-term solution.
• It’s what many customers want. For some customers, such as business travellers, this could be the perfect solution. It gives them added flexibility to fly any time, but the guarantee and security to travel on a set route.

Cons of prepaid flights

• Large upfront payments can hinder adoption. These are brilliant for airlines, but many passengers who are used to paying for singular tickets will be reluctant to spend more.
• The revenue growth won’t last forever. Although this is an effective way of generating revenue quickly, the spike of income will eventually taper off and level out.
• The purchasing experience can be confusing for the consumer. Many prepaid vouchers are built with the airline in mind. As a result, sometimes passenger aren’t sure what they are buying, as there are many unstandardized terms used across the industry. Some airlines redirect customers to third-party websites too which customers trust less and reduce adoption rates.
• It is a less resilient business model. As prepaid flights are a transactional business model, they are particularly susceptible to crises like COVID-19. It relies on passengers actively making a booking which they won’t do if they can’t travel.

Subscriptions

So, what is an airline subscription exactly? Well, a customer agrees to pay a certain amount each month and typically gets a single or return flight. The origin and destination as well as any exemptions are specified during the purchase process.

It is different to a prepaid flight. It’s not a reincarnation or variation and it has a completely different business model. From the outside, one main difference is that a subscription allows a customer to pay once a month. This means that it builds an airline incremental revenue as they receive more than a one-off payment. As they have an ongoing relationship, they can build higher life-time value, and receive single customer view insights. Leaving the door open to further build loyalty and upsell.

Let’s explore it some more.

Pros of subscriptions

• They bring you hyper-loyalty. An airline subscription creates a default consumer behavior where the passenger flies with you. They won’t be shopping around for a better deal with your competitor.
• They drastically reduce your customer acquisition cost. Subscriptions lower this cost for a longer period than prepaid flights as the customer is locked in for longer.
• They bring in a higher lifetime value. As a result, subscriptions are extremely profitable due to them bringing in a much higher customer lifetime value and loyalty to an airline.
• Healthy, dependable recurring revenue. Your customer will continue to ‘buy’ with you for the period of their subscription, diversifying your business model and creating predictability for your stakeholders.
• Your revenue is incremental. Even if you don’t sell less during the low season, you’ll still get income from your previous subscribers and this will keep on climbing as your customer base does.
• You can gather value insights and data, leading to monetization. Fully owning the relationship with your passenger (with a single customer view) can lead to all kinds of upsell and cross sell opportunities.
• It’s a simple retail model that customers already understand. In the age of Netflix and Amazon Prime, you won’t need to explain to most customers the concept of a subscription. The barrier to entry and understanding is low.
• It’s very resilient in times of crisis. Subscriptions create a very durable business model as they aren’t based on customers making transactions. During COVID-19 we noticed that customers prefer to weather the storm and don’t rush to cancel them.

Cons of subscriptions

• It’s a new concept for airlines. As a relatively new product in the industry, airlines sometimes question the impact on revenue dilution. However, we believe the real question they should consider is how the lifetime value of each customer can impact incremental revenue.
• It can be a challenge to get the balance right. Ensuring your subscription is viable and profitable takes careful consideration. It’s a different business model for airlines and setting it up needs to be done right.
• It could create conflict with existing loyalty programs. You need to make sure your loyalty programs don’t clash or target the same audience too much as you could introduce the chance of cannibalization.

So which one is better?

Our aim here is not to pit these products against each other. They can coexist successfully, even within the same airline. In this instance, both products would need to address different customers with different needs. In some cases, a customer may not be ready to commit to a subscription, whereas another might see the monthly price and be tempted. Some may have to travel for business in a certain region and use prepaid flights as an easy and quick way to bulk buy their tickets in advance.

One last thing

Whilst these products share some common characteristics, you’ll now be able to decipher their differences.

Once you’ve chosen which one is right for you (or chosen both!), don’t forget that you’ll need to get the right formula for your travelers. Whether you choose to buy or build, applying a customer centric approach and simple user experience guarantees maximum uptake.

Airlines that diversify their revenue streams and offer flexibility to customers will always be in an advantageous position. A variety of products is the best way to create stable, predictable revenue.