For many companies now, the customer database represents the entire basis for the continued financial success of the business. For internet orvirtual companies, this is more obvious. Google is able to provide more relevant responses to searches based on its analysis of historic data, and Uber prices are derived dynamically from the historical relationship of supply and demand. But increasingly, more traditional industries including retailers, banks, and travel companies, are relying on huge databases of customer interactions and competitive information to drive sales.
Revenue accounting data has become more granular too, including the fare, the distribution channel, and ancillary fees. Many airlines have successfully integrated revenue accounting data with other customer data including website search data and social media. More comprehensive data (“Big Data”) is a useful tool for offering customers “the right product at the right price at the right time.”
IATA’s One Order is an industry initiative designed to better integrate financial/revenue data with other airline databases. The more capable the industry is at such integration, the greater the opportunity for customer relationship management, customer engagement, and driving additional revenue and profits.
But these databases – revenue management, frequent flyer, and more fulsome customer engagement databases - accounting at times for 100% or more of an airline’s profitability, do not show up on any balance sheet. Arguably, when data represents a competitive advantage or a barrier to entry, as in the case of Google and Uber, and in the case of new integrated airline customer data sets, it is especially important to recognize them as a real asset. When such databases become a strategic asset and when they represent the foundation for future profitability, shouldn’t investors understand them better?
Databases are a subset of “intangibles” including the brand and most R&D spending. Valuation of an intangible like a database cannot be as precise as valuation of a hard asset. Certainly, lack of precision inhibits such accounting. Nevertheless, as airlines become increasingly sophisticated with data – and when their big data capabilities become the key reason for its financial success, they will be asked to report more specifics about “data” in their financials. Possible schemes include:
Market Based Valuations or Industry Proxies
A supplier that sells data can capitalize on the data but a company that internally develops such data cannot. For data that has a market equivalent, companies can cite the market-based value. IHS, for example, is a data supplier to multiple industries (as a supplier of data, IHS intangible assets, including purchased data and good will, represents 80% of IHS’s total assets); using supplier valuation as proxies could form the basis for companies that choose to compile the equivalent data themselves.
Proper financial disclosure already includes descriptions of possible business risks including potential devaluation of aircraft assets or risk in collect-ability of receivables. Increasingly, airlines will need to include data-related risks and potentially put a number on the consequences of lost, stolen, or obsolete data.
Arguably, a fundamental change in the industry or in customer behavior can reduce the value of historic data. Should such a risk be disclosed?
Airlines that store more granular data, and that invest more heavily in big data than their competitors, justify their incremental investment internally based on an ROI analysis based on projections of incremental revenue or profitability. To aid financial analysts, the incremental investment should be highlighted and capitalized as an asset.
Certainly, guidelines will be required for data-intensive industries to better disclose such assets. Consistency will be required for appropriate cross-comparison of companies within an industry and across industries. And it is likely that such guidelines will need to evolve over time. However, it is clear that such intangibles – often much more than headquarters buildings and even owned aircraft – represent critical elements of profitability that need to be better represented in investor information.For airlines, pricing for thousands of flights is based on such historic data. Sophisticated revenue management systems – said to increase revenue by 5% or more - typically rely on a minimum of three years of history of daily bookings by flight by fare type and by days-before-departure. Frequent flyer databases contain tremendous customer-specific data and often represent at least half of the passengers on a typical flight.