Tailored Travel: Airline Distribution
Changes in airline distribution to allow customized journey choices will benefit airlines and passengers
Unlike the myriad choices available to consumers in your average coffee shop, a passenger booking a flight through a bricks and mortar travel agency or travel website has only price and schedule options to choose from.
They won’t know, for example, that JetBlue Airways offers the opportunity to book a seat with extra legroom, that American Airlines has Wi-Fi on some of its fleet, or that LAN and Iberia offer on-demand inflight entertainment in economy class on long-haul flights. Passengers cannot use this extra information to inform their purchase decision because it is not being displayed on the global distribution systems (GDSs) used by travel agencies.
Compare this with the 87,000 varieties of drink reputedly available at a typical Starbucks, or the shopping experience provided by top online retailers such as Amazon, where visitors are greeted by name and with personal recommendations based on previous purchases.
“Airlines have been investing hundreds of millions of dollars to differentiate their products and services in the marketplace and do not want to be commoditized,” says Al Lenza, a former airline distribution and e-commerce executive who is now CEO of his own company, the Lenza Group. “Historically, GDS distribution has been focused on selling the lowest ticket prices and to date have not proven they can sell these new products and services the way individual airlines want them sold.”
Underlining this concern is an estimate by Atmosphere Research Group that, while absolute numbers continue to grow, business travelers will decline from 45% of the world’s airline passengers in 2012 to 40% by 2017. Leisure travelers display less brand loyalty and will accelerate the commodity issue unless the distribution problem is addressed.
What is more, the passenger of tomorrow will insist on receiving a personalized service akin to their everyday online shopping experiences. Customers aged 22–35 have a lifetime of buying airline tickets in front of them. This age group represents 58% of China’s online leisure passengers and 38% of Brazil’s, according to Atmosphere. This group is only marginally less significant in the
Western world. They make up 34% of the United Kingdom’s online leisure passengers, 29% of the United States’, and 26% in both Germany and France.
A merchandizing world
Distribution obviously has to change quickly. Eric Leopold, IATA Director Passenger, says there is now an opportunity to unleash innovation that will enable airlines to reach all their customers with their new products.
According to the latest IdeaWorksCompany and Amadeus report, ancillary revenue was worth $36.1 billion to airlines in 2012, an 11.3% increase on 2011. But this is just a drop in the ocean compared with other industries. Disney’s ancillary revenues at its parks and resorts account for nearly 50% of total revenue. Customers are offered the opportunity to “buy-up” to early entrance for rides and even receive follow-up emails that provide additional buying opportunities for a host of souvenirs.
Norwegian Cruise Lines generates an extra $51 per cabin a day through ancillary offers. It operates its ancillary services in real time and develops specific offers for particular passengers.
Airlines are developing a range of products that could add value to a passenger’s journey. But they can’t maximize this added value through the indirect channel because such selling is not supported by the legacy distribution model. In the study by Atmosphere, one US airline executive reports that the take-up rate for ancillary offers is more than 20% on the airline’s website. Take-up through online travel agencies is zero.
“The issue is one of transparency and choice,” says Leopold. “It is not a problem of availability of information, but of having the technical ability to cope with the complexity of passing unbundled products on through travel agents.”
In a clear imitation of airline innovation, in 2012 Carnival Cruise Line introduced an ancillary package through different distribution channels that offered early boarding, faster baggage delivery and express access to a guest services desk. Many airlines offer something similar, but it is an option that only appears in certain distribution channels, such as an airline’s website. American Airlines, for example, runs a VIP baggage delivery service through an independent vendor that allows passengers to have bags delivered to their final destination rather than having to wait at the carousel.
Improving choice and transparency
An essential element of any solution to this dilemma is New Distribution Capability (NDC), an open set of XML-based standards that will aid airlines in offering the same shopping experience regardless of channel.
The industry-led NDC will provide a standard data format for airlines to sell all of their products when distributed through travel agents, just as they can on their own websites. This will close the gap between direct and indirect channels. Customers will then be free to customize their journey experience—adding an airport lounge to an economy class ticket, for example—through any channel. This ubiquity will enhance airline competition, bringing even greater benefits to the consumer.
“NDC is providing a path that will enable airlines worldwide to distribute and sell their full product line the way they want to sell them and allow customers to buy these products more easily from the indirect channels,” says Lenza.
NDC will provide an open Application Programming Interface (API) to enable third parties to develop applications for distribution. NDC will be an open source standard available to anyone. This will make it easy for creative developers to write apps to display, compare and sell the full range of airline prices and services.
“So how NDC will look to the consumer depends very much on the ideas of the developers that use the platform,” explains Leopold. “This will drive innovation in the shopping experience.”
The NDC standard will enable:
- The ability to compare air travel products by value as well as by price, and with a personalized service
- The ability to sell to all airlines including low-cost carriers, and all ancillary products.
Leopold stresses that NDC is not about cutting out the GDSs. “NDC is not designed to bypass travel agents and GDSs,” he says. “The standard will allow them to sell in the same way that an airline sells on its own website.”
As a case in point, Travelport, which operates both the Galileo and Worldspan platforms, has participated in the relevant working groups to better understand how IATA proposes to develop standards and in what ways these standards may fairly represent the needs of the end-to-end supply chain.
“Everybody wins,” Leopold continues. “The consumer gets transparency, choice, and personalization. Airlines can differentiate themselves from their rivals. Travel agents get more relevant content. And a GDS gets the incentive to innovate.” Leopold emphasizes that customers will not be required to provide personal information to receive fare quotes.
NDC is progressing rapidly. The NDC foundation standard was adopted as IATA Resolution 787 in 2012. In 2013, the IATA message standard for distribution will be developed and pilot projects will be launched to test the standard. The results of these pilots will be presented at the World Passenger Symposium in October 2013 in Dublin. The aim is for live adoption of the NDC standard in 2014.
“It won’t come a moment too soon,” says Leopold. “Distribution is transforming into commerce. The passenger today is used to having Amazon recognize them and is comfortable with social networks sharing their likes and dislikes. Airlines and their commercial partners must also be able to deliver the kind of shopping experience the passenger expects.”