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Date: 22 April 2013

Remarks of Tony Tyler at the ARC Travel Executive Council in Washington

Good evening. It is a great pleasure to be able to address the members of this group. I recognize that I am the only one standing between all of us and dinner, and with that in mind I will keep these remarks relatively brief.

In a few months we will celebrate 100 years of commercial flight. On 1 January 1914 Tony Jannus piloted the first scheduled flight between St. Petersburg and Tampa, Florida, carrying a single passenger. By the way, I’m afraid there’s no truth to the rumor that this passenger was actually a travel agent on a “fam trip”.

Joking aside, the vantage point of nearly a century of operations provides an excellent point to pause and reflect on the amazing transformation aviation has brought. This year, our industry will safely and securely transport more than 3 billion people—equivalent to around 44% of the world’s population--and 48 million tonnes of cargo—representing around 35% of world trade by value. This activity supports 3.5% of global GDP, equivalent to $2.2 trillion annually. We connect people to business and reunite family and friends. And by bringing people of different cultures together, we foster opportunities for greater understanding and friendship.

But airlines could not do it alone. You are important business partners in this endeavor. Our relationship is built upon decades of cooperation and working together, underpinned by the enormous value that we provide to one another.

I’m guessing that for most if not all of you, the Airlines Reporting Corporation (ARC) is a much more familiar name than IATA, which does not provide billing and settlement services within the US. So please excuse this brief commercial. IATA accreditation through the Passenger Agency Program provides travel agencies with access to more than 240 IATA airline members around the globe and to a further 160 airlines that have joined the IATA Billing and Settlement Plan (BSP), while the IATA BSP, and BSPlink provide a single standard interface, greatly simplifying the invoicing and payment process between yourselves and multiple airlines. Last year, the BSP processed $249.4 billion in payments with a 99.971% collection rate.

Conversely, airlines have access to an experienced, motivated and highly capable sales force of IATA-accredited travel agents. Approximately 60% of airline tickets by value are sold via the travel agent/global distribution system (GDS) network. A significant share of this represents higher-value business travel tickets that have a disproportionate impact on our members’ financial performance.

As I said, we are business partners. Partners can at times have different perspectives and these differences can create tension in the relationship. It is the successful resolution of that tension that makes a relationship durable. Today there is a natural tension between airlines and the agency community. Airlines want to modernize and maximize the efficiency of their distribution networks and reduce distribution costs, whereas the agency channel largely depends on the fees that airlines pay the GDSs. Paradoxically, those fees, contribute to making the agency channel among the most expensive ways to sell a ticket. And whereas advances in IT and communications technology have lowered the cost of everything from mobile phones to laptops to televisions, we find that the cost of distributing our products through the GDSs inevitably rises, although the capability of the channel to display our products has changed little over the decades.

I am sure that through interaction and dialogue—in formal channels such as those between travel agent associations and IATA and ARC or informal ones like this event—we will continue to develop our partnership. At the end of the day, we need each other to do business successfully.

And, as we are in the same industry, we must be guided by its economics. Aviation is a very tough business and this year is no exception. We expect a 1.6% net profit margin. That’s $10.6 billion in profits on revenues of $671 billion. That does not even cover our cost of capital. Since 2003 airlines generated about $5 trillion in revenues. But we struggled to cover costs and the industry barely broke even with a net margin of only 0.1%. There’s no denying it—we work in a very challenging business. And everyone involved in the airline industry—and the value chain for that matter—must keep that in mind.

Notwithstanding this, we have a positive story to tell. If you look back over the $5 trillion break-even decade, you will see change in every aspect of our business. That airlines are making even a small profit this year—with weak economies and jet fuel around $130 per barrel—is evidence of the enormous improvements and efficiencies that have been achieved through hard work and some sacrifice. We only need to look back to 2008 when we worked together to eliminate the paper ticket for an example of the fundamental transformations that have been achieved—to our mutual benefit.

In the time remaining I’d like to focus on how airlines are managing the top line—how and what they sell—and what they want to do even more differently in the future. I am, of course, talking about New Distribution Capability (NDC)—an IATA-led project that, like e-ticketing, will only be successful if all stakeholders in the distribution chain recognize the great potential of enhanced communications in the internet era.

It’s no secret that the buying—and selling—of airline products is more complex than 7-10 years ago. Fare unbundling and the introduction of ancillary products means that customers have many more choices and decisions. Depending on the airline, air travelers may have the option of adding a day pass to an airport lounge, priority boarding, a seat with extra legroom, a special meal, or onboard Wi-Fi.

Customers value these options. And airlines benefit from being able to recover the cost of those services from those passengers, who freely choose to use them, rather than bundling those costs and asking those passengers not benefitting from those services to participate in paying for them.

Additionally, they provide an important revenue stream to airlines while dampening the rise in ticket prices that one might expect to have occurred, given the jump in fuel prices and other cost inputs over the past decade. In fact, we estimate that without the additional revenue from these ancillary products, revenues would have been $10 below cost on a per passenger basis in 2012. Including ancillary products revenue per passenger exceeded cost by $2.

But there is a problem. The pre-Internet messaging standards that are used to deliver airline fares and schedules to your agencies and online travel sites through the GDS channel cannot easily support modern airline selling practices.

So consumers who buy directly from airline websites have access to more options to customize their travel than those who buy through travel agents.

Whose problem is it? We are all focused on the customer. And it is certainly a problem for them. It is also a problem for you as agents. And it is a problem for airlines because they cannot sell all of their products and services to their highest yielding passengers through the agency channel owing to outdated technology.

In fact, it is already a common phenomenon that air travel consumers do their preliminary shopping through an online travel site and then go directly to the airline website, where they believe they will get a better offer—and have access to more options. They also know they can be recognized on the airline’s website, and have their loyalty rewarded.

The industry’s solution is to modernize the communication channel between airlines and travel agents using XML. The goal is to give travel agents the same ability to sell these products that airlines already have on their own websites. In a nutshell, that is what NDC is about—and I believe that it is good for travelers, their agents and the companies that do the flying. But it means change. And not everyone in the travel value chain is enthusiastic about change—to put it mildly. As a result, a lot of misinformation has been circulated. So with your indulgence, I’d like to spend a few minutes clearing the air.

Broadly speaking, these myths occur in three areas:

  • The airline/agent relationship
  • The ability to comparison shop
  • NDC and passenger privacy

The airline/agent relationship

The first myth is that NDC is about creating an alternative distribution system that will eliminate the role of the GDSs and travel agents. In fact, GDSs are strongly encouraged to adopt the NDC standard and GDSs and travel agents are participating in the NDC Direct Data Exchange Working Group that is developing the NDC standard.

NDC is not a plot to bypass the travel agent, either.

Let’s face it: airlines do not need NDC to bypass the travel agent: it is already occurring. Every airline that sells tickets off its website is bypassing the travel agent for that portion of sales. Many low cost carriers do all in their power to discourage travelers from using a travel agent. Some even make it impossible. But the majority of airlines recognize the value that the agency community brings to their business. And they want to be present in every location where the customer wants to buy.

We don’t intend to dictate where our customers can shop. But we do want to ensure they have access to all their options--at the point of sale—whether it is an airline website, an online travel agent (OTA), a brick and mortar agency or a travel management company. NDC will make this possible. NDC will bring more value to the travel agent channel, by giving you the ability to see and sell the same products airlines already offer on their own websites. It is inclusive, not exclusive.

The ability to comparison shop

A second myth is that because NDC does not require fares and schedules to be filed with a third party, fare transparency and competition will disappear. I find this argument to be the height of absurdity.

No airline is required by law or regulation to file fares—it is a commercial decision that has its origins in the pre-deregulation, pre-Internet era. Furthermore, it is an indisputable fact that not all airlines file fares and not all airlines participate in the GDSs; and that includes some very large airlines that are household names, including Southwest Airlines, Ryanair, easyJet and AirAsia to name a few. So the customer already is losing out on the ability to comparison shop through the GDSs. In reality, airlines will still have the ability to file fares under NDC. Regardless of whether they do so, however, the consumer will be able to comparison shop between airlines using NDC. But with one major difference: travelers will be able to compare the full value of the airline offer including additional products and services, not just the base fare, as is the case today.

NDC and Passenger Privacy

There is yet another myth, which is that in an NDC environment, airlines will require travelers to divulge personal information in order to receive a fare quote. It is then claimed that airlines will use the information to bias their fares up or down, based on the perceived needs and willingness of the traveler to pay.

Let me assure you in no uncertain terms. No customer will be required to provide any more information than is currently provided via an airline website, an OTA or a travel agent—which is to identify themselves as an adult or child and, in the US, whether or not they are an active member of the US military.

Those customers who choose to provide additional information, such as a frequent flyer number, may receive a tailored offer that combines additional services and products that the traveler may have purchased in the past.

The origins of this myth lie in the fact that Resolution 787, which created the foundation standard for NDC, contains samples of personal data that airlines could request from passengers. Why are those data fields mentioned in the resolution? Simple: Resolution 787 is focused exclusively on the development of a new XML-based data transmission standard. The standard includes all fields that could be requested--not mandated--by airlines or others to authenticate the customer now or in the future. This avoids the need to continually revise a standard as laws and regulations or business practices evolve.

Turning to the allegation that NDC will allow airlines to price discriminate against consumers, this defies logic. The multiple offers that travelers and agencies can generate under NDC will make it competitively nonsensical for any single airline to price on a willingness to pay basis. That kind of discrimination presumes monopoly power, which in an industry as intensely competitive as the airline business, completely defies logic and sound economic principles.

A related concern is that passenger privacy protections will be violated. In reality, airlines, travel agents and GDSs are already subject to privacy regulations and laws governing the use of passenger data in almost every jurisdiction in which they operate. Nothing about NDC changes these obligations. Nevertheless, IATA recommends that airlines adopting the Resolution 787 data standard review their privacy policies to ensure that they unambiguously provide for data received from search requests seeking personalized offers.

All of the myths I described above are getting a very good airing, because those who support the status quo view NDC as a competitive threat to the existing indirect model—a model that is dominated in the US by two companies and globally by three. Some of these are dead set on preventing anyone from challenging their enormous market power and they have shown that they are not above telling a few tall tales to try to scare people into rejecting NDC.

But we live in a transparent world. And the myths will be de-bunked. That is why we are confident that the efforts to ground NDC before take-off will fail.

As you may know, we have filed an application with the US Department of Transportation (DOT) seeking approval for Resolution 787. There is nothing unusual in this step—IATA is required to file any and all resolutions and recommended practices coming out of its various conferences with DOT.

I believe that DOT will approve Resolution 787—and in the meantime we are moving forward with the help and support of many partners from across the travel value chain. It’s an open process for all those who have something to contribute. That is why we continue strongly to encourage travel agents and technology providers to get involved and join our working groups, participate in the technical meetings and receive a first-hand understanding of what is being accomplished and where we are moving.

This year we plan to launch some pilots to provide us with a better grasp of the challenges of implementation as well as the costs that may be involved. To achieve this, we are also looking for companies to partner with us.

Seeing is believing and we are eager to share our vision of what air travel shopping should look like. There is no reason that consumers should not enjoy all the travel options available to them, regardless of the shopping channel. And there is no reason except an out of date legacy model that prevents you from being able to offer your customers the same experience that they can find on an airline website.

We want to give you that opportunity and hope you will join us.

I will stop here, in order to take some questions.

Thank you

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