Distribution - Sum of the Parts
Airlines must be able to offer a full range of products through all available channels. Airlines International looks at a way forward for the industry
Airlines have developed a range of optional services beyond the straightforward travel fare, offering them to passengers in new and innovative ways.
Unbundling the product means that passengers can pay a basic price for the flight itself and then choose from a range of service add-ons, such as preferential seating, priority boarding, meal service, and baggage. Passengers are thus being empowered to pay for the products and service level that they want and need. A family of four may opt to pay extra for inflight entertainment and extra baggage, while the business traveler may opt for lounge access.
It is a crucial line of income. Ancillary revenues were worth in the region of $32.5 billion to the industry in 2011 according to an Amadeus and IdeaWorks report. That’s an enormous 43.8% increase on 2010.
To make the most of the potential, airlines need an efficient distribution system. Offering distinct products to the consumer directly via the airline website is one channel that is working well. But at least 50% of the world’s flights continue to be sold through travel agencies, which rely on global distribution sytems (GDSs) to display and compare airline products. And the areas of comparison are limited to some very basic metrics such as price, time, and routing—just as they were four decades ago.
Although GDSs have made an invaluable contribution to the industry and made global distribution possible, a GDS screen today looks much like a screen from the 1970s. They are unable to handle the rapidly increasing range of product offerings from airlines.
“Many customers expect airlines to innovate and develop new product options—and airlines are certainly responding,” says Montie Brewer, former Chief Executive of Air Canada and now a Member of the Advisory Board for the travel technology company Everbread. “However, we see a bottleneck in getting the two parties—customers and airlines—together. There is a real challenge in getting these new products and services to the customers in the way they now want to purchase them while legacy cariers are still using the old structures and networks they relied on in the past.”
The GDS bottleneck
The result is that unbundled product options are often available only to passengers who book direct with airlines via their websites. Air New Zealand, for example, can only sell its innovative Skycouch product through its website. It means the airline is selling only to a particular segment of its customer base, restricting revenue. The consumer is also affected, suffering through lack of choice.
“The current situation is harmful to airlines and the consumer,” says Brewer. “Airlines are becoming increasingly sophisticated in the types of product they are offering and consumers are becoming increasingly sophisticated in their purchase decisions. The frustration is that these trends are being stymied by the outdated systems of the GDSs.”
Despite these restraints and the relatively high cost of distributing their product via GDSs, airlines are reluctant to pull out of the arrangement because they risk losing a key distribution channel. Equally, travel agencies do not want to give up using GDSs because they receive commissions from the airlines and there is typically a heavy contract termination penalty. Moreover, contracts with GDSs frequently state that agencies cannot distribute airline products unless it is via the GDS.
“There is no real competition at the moment, and GDSs won’t invest because they don’t want or need to,” says Brewer. He believes that it is time for a new approach. “We need to find a new way for airlines to present their full product or data offerings via a new interface,” he adds.
Towards a new standard
A single industry standard platform, connecting airlines, agencies, and consumers and facilitating the correct information flow, would resolve the problem. “If we can have an industry standard, more and more airlines will be able to leverage the system and will come on board and start offering their data and products,” says Brewer.
For many, this is not an optional upgrade but a necessity. The modern consumer’s requirements go far beyond the 40-year-old GDS offering. “The consumer’s expectations change at an ever-increasing pace, driven by the Internet, mobile, social media, and the choice available across always connected channels,” says Cormac Whelan, CEO of Datalex. “This means that if an airline wants to effectively retail, merchandise, and differentiate their product to their customers, they must do so at the same pace. They must surprise and delight if they want to connect and add value to the traveler. It’s retailing 101. There are millions of retailers outside of travel who do this every day. The key here is having the right tools and platforms to support your retailing needs.”
IATA has already begun work with all aviation stakeholders to develop the standards and infrastructure necessary. The project will come under IATA’s Simplifying the Business banner and the existing electronic miscellaneous document will form the basis of the work. This year will also see the publication of a five-year project roadmap and a full presentation of the business case for airlines. This work will give a better idea of the figures involved. One estimate by LEK Consulting, however, suggests that airlines could be missing out on as much as $50 billion by not offering a full suite of products through the GDSs. “We will set standards so that there is a common way for information to move between travel agents and airlines,” says Eric Léopold, IATA Head of Passenger Services.
The new platform will increase choice and facilitate a high degree of personalization. Cutting-edge online retailers, such as Amazon, welcome a customer by name. They also recommend products based on previous buying history or trends within your customer segment. “For example, imagine a traveler usually takes premium economy on long-haul flights,” explains Léopold. “The airline could say most customers that buy premium economy also like lounge access—so here’s our offer if you’re interested.”
Indeed, a number of other parties are watching such developments with interest. Websites with massive penetration, such as Google and Amazon, could suddenly find that they are in a position to take advantage of such an open, standardised system, benefiting all parties.
“It’s up to the airlines what products they offer and where,” says Léopold. “So they can still drive traffic to their website by making certain offers only available at that location. What we’re doing is giving airlines and customers far greater flexibility.”
The need for transparency
“Airlines should be able to distribute their full range of products to agencies and consumers for free,” says Montie Brewer, former CEO of Air Canada and now a Member of the Advisory Board for the travel technology company Everbread. “They should not be held to ransom by the GDSs, which are already taking a significant cut from an industry that is struggling to make a profit. Once airlines are set free from the shackles of the GDSs, we can expect to see considerably more unbundling of products, and the development of a range of new services that can be sold alongside the flight itself. All this could be handled through a common interface, which would have great benefits for both the aviation industry and consumers alike.”
There is concern about potential regulation in the United States, however. This could require airlines to disclose all their fee information in a specific manner that fits with the architecture of the legacy systems being operated by the GDSs.
While there is no question that products and costs must be transparent, requiring airlines to distribute that information to travel agencies through high-cost and outdated GDS-mandated technology would have the opposite consequences of what is required, dramatically slowing the consumers’ ability to access the dynamic, personalized information that is available through third-party technology today.
Technology with origins dating back to the 1960s, such as that imposed upon travel agencies by the GDS middlemen, simply cannot support the nature of the data required to provide accurate, dynamic price quotes consistent with the way consumers are buying travel today.
“It is important that US legislators and federal regulators recognize that as monopoly suppliers, GDSs have no incentive to innovate in order to allow passengers to purchase the airline services that meet their particular needs,” says Douglas Lavin, IATA Regional Vice President for North America. “Regulations that compel airlines to sell their products and services through antiquated GDS systems will put a damper on the innovation we already see on the part of airlines and third-party providers in this area.”