“From Service to Value”
Ladies and gentlemen, good morning. It is difficult to believe that only two years have passed since the first World Passenger Symposium, and in that relatively short time, it has become a leading event for participants in the air travel value chain. I would like to thank our host Aer Lingus for their strong support as well as our sponsors who help to make events such as these possible.
In just a few months, we will celebrate the 100th anniversary of scheduled commercial aviation service. On 1 January, 1914, the airline industry was born when Tony Jannus piloted a Benoist flying boat carrying a single fare-paying passenger between St. Petersburg and Tampa, Florida. A photo of that first flight shows the passenger sitting beside Capt. Jannus in an open cockpit, exposed to wind and weather, as well as potential bird strikes. I very much doubt that most modern air travelers would find that level of comfort satisfactory, to say nothing of the views of safety and security regulators.
Joking aside, we have come a long way since the days of open cockpits and wooden planes. The St. Petersburg-Tampa Airboat Line offered two flights a day. Today, the industry offers closer to one flight every second; and this year, the world’s airlines are expected to carry more than 3 billion passengers—equivalent to around 44% of the Earth’s population. By the end of 2017, that number could be closer to 4 billion. Aviation makes possible $2.2 trillion worth of economic activity and supports some 57 million jobs around the globe. We have become the mass transit system for the global economy.
For this transformation, we must credit the enormous advances in aviation safety that changed air travel from a high-risk adventure to a routine part of daily life. Passengers assume that when they board a flight they will arrive in one piece at the other end, whether that journey covers 300 miles or 3,000 miles. And that assumption is correct. Last year the Western-built jet hull loss rate was just 0.20 per million flights, or an average of one major accident for every 5 million flights. At that rate, if you took a flight every day, odds are you could go 13,500 years without an accident.
We must also recognize the development of global commercial and technical standards for aviation, which made possible the creation of an integrated global air system. Passengers take for granted the fact that they can travel to practically anywhere in the world on a single e-ticket, paid for in a single currency, issued at a single location, regardless of the number of different airlines that provide the service. But achieving this took a lot of hard work. The important job of ensuring global connectivity continues to be carried out today, and by many in this room.
Finally, we must acknowledge the impact of efficiency gains and market competition that helped to bring the price of air travel within reach of much of the population. Airfares are one third lower--in real terms-than 20 years ago.
In fact, when you think about it, the aviation industry is pretty amazing. Ironically, we have done such a good job that people have come to view it as part of the infrastructure of modern life, like the electric company or the water company. We all depend on clean water and electricity, but as long as the lights turn on and the water comes out of the tap, we don’t give them much thought. They are utilities, services.
That is why the theme of this year’s conference, “From Service to Value, A Customer-Driven Transformation,” is particularly appropriate. To transition from being thought of as a utility or a service we have to create new value for our customers. I know that we work hard...and what we do is amazing...but our customers expect more, and there are some things that we can do collectively to facilitate this transformation. We have a big opportunity, because our interests are aligning: we seek to empower our customers and customers see value in having choices and control. Whether it is choosing a new car or planning the trip of a lifetime, they want the ability to select those things that will add value to the product and allow them to personalize their experience.
Let me explain what that means in three areas:
- How we shop for air travel
- How we get through airports
- How we stay connected throughout our journey
Let’s begin with distribution. What does “transforming from service to value” mean for distribution? It means making sure customers are empowered with the knowledge and the ability to plan their trip, with access to all the relevant information and product options. Shopping for air travel is changing. A ticket has become a product with multiple attributes that may include in-flight Wi-Fi, extra legroom, or lounge access, as opposed to just a seat on an airplane. On airline websites you have access to these additional value-adds. But for the 60% of shoppers who visit a high street travel agent or travel website, distribution is more basic, because all you typically see is the fare and schedule. This is not a criticism of our agent partners, it is simply that the systems cannot support the value add airlines are creating. There is a long explanation for why this gap exists. But the short version is that distribution via travel agents is built on pre-Internet messaging standards. These don’t have the same capabilities as XML, the language of Internet-based commerce.
The 2013 IATA Global Passenger Survey of nearly 8,000 travelers, about which you will be hearing more this afternoon, confirms the existence of a value gap between airline websites and other shopping channels. For example:
- About 60% of air travelers find the process of purchasing tickets through an airline website easy but a third finds it difficult to compare offers from various airlines.
- Two-thirds of travelers usually choose to buy their ancillary services (such as seat upgrades and priority check-in) via airline websites, not from travel agents.
IATA is working with our travel agent and travel technology partners to close that gap through the New Distribution Capability (NDC). It’s true that global distribution system (GDS) companies are working to make it possible for airlines to merchandize their products in a manner more consistent with airlines’ own websites. But each is working on its own proprietary solution. NDC will be an open standard available to any and all who want to use it, including of course, the GDSs.
NDC will also permit customization and personalization that consumers expect. For example:
- Nearly half of all travelers are interested in sharing such things as travel preferences, age, interest/hobbies and frequent flyer status in order to receive special offers or products and services from airlines tailored to their needs; and a fifth would share their social media profile as well.
IATA’s raison d'être is to set global standards to enable harmonization and greater efficiency across the entire industry. Standards are pro-competitive and cost effective. By facilitating the adoption of new technology they create value. But standards are a hard thing to visualize, so I would like to show you a short video of the shopping experience that the NDC standard could enable.
I hope that you will agree with me that the potential for NDC is exciting and could deliver enormous value to consumers and create new opportunities across the travel chain. Creating the NDC standard will unleash innovation—and that will mean change. But, let me assure you of a few things. NDC will operate within the same privacy laws that govern every other business. That is no change from today. But, by giving travel agents more information, there will be greater transparency. As you saw in the video, the NDC standard will enable much richer comparison shopping for travel products, not just the base fare, but the entire spectrum of offerings.
I should also be clear that IATA’s role is to set the standard—which we are doing collaboratively with a broad cross-section of industry players. What you saw in the video is what could be developed when the standard is implemented.
Change also brings uncertainty and we understand that some are concerned about the implications for the existing business model. This is something that the market will have to sort out. What IATA can do is facilitate a dialogue. The bottom line is that whether or not NDC is adopted, airline distribution is changing to bring more value for customers. We are convinced a common open industry standard will support this transition.
We have made strong progress over the past year. Our application for approval of Resolution 787, which is the foundation document for NDC, is before the US Department of Transportation (DOT), and we are optimistic of a positive outcome in the fourth quarter. The NDC pilot program was launched in February 2013. Five pilots are underway and a number of others are in the process of getting started. You will hear more about these pilots this afternoon. We expect the pilot phase will last through 2014. In 2015, the initiative should move into a deployment phase, in which a number of airlines will have adopted the initial version of NDC. A global roll-out is expected to begin in 2016.
We are eager to expand the number of pilot programs and strongly encourage airlines, travel agents and technology providers to join with us as we move forward.
Adding value to distribution means ensuring that customers have all the information they need to choose the things that add value to their trip in an open transparent manner. A similar vision is driving our approach to bringing value to the airport experience. Working with our airport and technology partners, we want to deliver a smooth and hassle-free journey by 2020.
Join me in imagining what a trip will be like in five or six years:
- You selected your travel package through an NDC-enabled travel provider. One of the options you chose was to be checked in automatically for your flight by the airline, with your travel document sent to your smart phone. A third of travelers surveyed tell us they would prefer this option
- You also chose the option to have your bags picked up at home for delivery to your hotel
- Your Near Field Communications (NFC) enabled mobile device means no more searching through emails and texts for the e-boarding pass at a kiosk or checkpoint. Just tap and go. NFC also gives you a direct link with your airline to receive trip updates, gate changes, even special offers
- As a participant in a known-traveler program, you move quickly through the security zone while advanced X-ray machines make it unnecessary to unpack your laptop, or remove your shoes
- You have the ability to interact with your travel providers anytime and anywhere. In the event of a disruption, everyone is automatically notified in real time, so that alternative arrangements are waiting for you on your mobile device. Your bags, which feature unique permanent luggage tags, are automatically reprogrammed with the new information.
This vision of travel in the year 2020 is not science fiction. Working with our airport and technology partners, we already have a number of pieces in place to facilitate the transition. We are in the mass implementation phase of the Fast Travel program, which gives customers more control over processes such as check-in, bag-check, self-boarding and document check. By the end of 2015, we expect Fast Travel penetration will cover airports serving 45% of eligible passengers. Fast Travel is an excellent example of airlines and airports working together to reduce costs, improve efficiency and give passengers a more valuable experience.
The value of a hassle-free trip is supported by the Checkpoint of the Future that will improve security while creating a smoother and less stressful checkpoint experience. We know that many passengers are unhappy with the current security experience. Long queuing times and removing shoes and belts were listed most frequently as the biggest hassles associated with security. The way to address that is by transitioning to a risk-based model that will use information that airlines already provide to governments to help make assessments about travelers.
A majority of travelers would be willing to provide additional information in order to speed up the process of checks required by many governments, and a similar number would be comfortable using biometrics for airport processes. When combined with advance screening and detection equipment, we can provide a better and more relaxing experience.
We are already seeing an example of a risk-based system in the deployment of Pre-Check in the United States. We need to see more progress in other countries and we need to work towards global standards to enable interoperability and reciprocal recognition of risk-based security programs so that passengers who participate in known traveler programs can enjoy the benefits when traveling outside their own country.
Trials of important Checkpoint of the Future components with airport partners began in 2012 and are continuing this year. Next year we expect to deploy first generation checkpoints in at least two airports. We are looking for more airports that would like to participate in the deployment. I am excited about the progress of Checkpoint of the Future and you will be hearing more about it over the next few days.
Growing the Pie
At the beginning of my remarks I noted that demand for aviation remains strong, with a 33% percent increase in passengers expected by the end of 2017 compared to today. Meeting that demand will require new investment, and that will not be easy, because airlines face a paradox. We are creating enormous value for our customers and the wider economy. However, transforming that value into a sustainable business model has proven extremely challenging. The industry’s net profit in 2012 was just $7.4 billion, for a 1.1% net profit margin or around $2.50 profit per passenger. For 2013, we see that rising to closer to $3.75 per passenger and around $5 in 2014. Although this is an improvement, it will not generate the level of return to shareholders sufficient to attract the investment required to meet rising demand.
So it is vitally important that--as we deliver more value to customers--we reap the benefit of internal efficiencies, as we did with e-ticketing and bar-coded boarding passes. There are still some low hanging fruits to be plucked, because despite the technological and communications advances of the past 15 years or so, many back office financial procedures still rely on rules and processes designed in a highly labor-intensive environment.
Compared to other industries, the order to cash process is too complex, with a separate reservation (the Passenger Name Record) and ticketing (the sales record) that need to be synchronized to reflect a customer order. Transitioning to a single customer record of order and purchase would reduce complexity and costly reconciliation, enable better customer recognition and servicing, and greatly simplify the fulfillment of bundled product offers across different sales channels. These and other important opportunities are captured in the Simplifying the Business White Paper that you received as part of your registration pack.
The search for new and more efficient ways of doing business goes hand in hand with delivering greater value to our customers. As we improve baggage handling, for example, we reduce the enormous cost to the industry of lost and mishandled bags. We are an industry that relies on satisfying our customers. Of course sometimes things will go wrong. Commercial discipline incentivizes airlines to do the right thing….and governments have a role in setting simple guarantees. But as we have talked about, we are transitioning from service to value. And governments unfortunately are stuck in a service mindset—writing new passenger rights regulations that impose prescriptive solutions.
Are these regulations adding value for passengers? Not really--and sometimes they may have unintended consequences that make life more difficult. Already some 60 countries have passenger rights requirements and several more are considering imposing them, creating a crazy quilt of confusing and conflicting regulations that limit airline flexibility in addressing disruptions. Value comes from global standards that foster coordination and consistency.
International Civil Aviation Organization Member States recognized that the glut of passenger rights regimes is not creating value at the 38th Assembly just a few weeks ago. States agreed there is a need for high-level, non-prescriptive principles that are consistent with international agreements and that strike a balance between protecting passengers and maintaining industry competitiveness. IATA supports those conclusions and agrees with the need for greater convergence and compatibility. In fact, the industry core principles on consumer protection – unanimously adopted by IATA’s membership in June – will serve as an input into this important discussion.
We are working with our partners to re-invent the passenger experience. To be forced into a regulatory box of inflexible prescriptive regulatory solutions would be a huge setback to these efforts.
We have always thought of ourselves as a service industry and we have done a superb job of it, supported by harmonized processes and global standards. But we need to remember that our passengers are focused on value. We must continuously examine our processes, modernize, and evolve to ensure that what we see as ‘service’ means ‘value’ to our customers.
I am passionate about aviation. I believe it is a force for good in the world. It reunites friends and families, and creates opportunities for greater cultural understanding. Over the next few years, we have the opportunity to transform the passenger business. We will be able to provide customers with a more comprehensive and transparent shopping experience and a more pleasant and predictable trip. Industry stakeholders will benefit from simpler and more efficient processes that strip away redundancy and costs. But we will only get there by working together and focusing on creating new value streams for all.
As I leave the podium, I would like to share with you a video that provides a vision of what the end-to-end air travel experience can look like in just a few years’ time. My challenge to everyone in this room is to work together to make it a reality and help keep alive the magic of aviation in the second century of commercial flight.