Peace with honour – an idea to bring harmony to the world of airline distribution?
Détente, meeting of minds? I am going to hypothesize how the industry as a whole can get behind the ideas surrounding IATA’s NDC and find some common ground for moving forward.
From the first part of this treatise, I have put four major topics into the frame as the important elements that define the issues of NDC.
So, let’s deal with the issues one by one.
Okay, reality check – the current IATA-controlled, airline-specific standards have a wide range of issues to contend with. Years of compromise have resulted in band-aids being put on band-aids.
Don’t get me wrong, these are smart and expeditious decisions made by a concerned group of people. The lack of functionality is not really anyone’s individual problem nor can people be blamed as individuals.
However the capability to add a flexible product set is clearly required. We need to get past this issue and have all stakeholders involved – but, please do not design a camel to be a racehorse. We will end up with this year’s mule.
Capability must be increased both at the level of the new products, services and functionality, etc. Incremental change is not an option. Indeed, the industry should think pro-actively and address some long-running problems.
Don’t just try to re-engineer the past.
One of the hardest problems to address is changing the agent user interface. The green/blue screen has served the industry well BUT it’s just clunky and awful. Even years ago, when I was a mere pup in the business, I thought it was horrid. Then I started to use it, and I realized how powerful it was.
The standard results from the core mainframe based solutions rarely gave the answers you needed – but with a good deal of knowledge and practice the system was like a treasure trove as it would eventually deliver the results an agent wanted.
Rather than trying to fix the problems, agents (oh, yes, I used to be one) got really good at circumventing the system and manipulating it to do their bidding.
Now its day has passed (and there are real things you cannot do with it) and we need to retire the structure and restrictions of the command line system.
That will not be easy and the changes must show an improvement in functionality and capability and, most importantly, agent productivity in order to get buy in from the user community.
Good luck on this issue. It will haunt us for years.
The changes in the competitive marketplace, which regulators in various jurisdictions have allowed, has changed the control over distribution. The marketplace has moved from a demands side business to a supply dominated one.
In my opinion, the guy who owns the inventory and the guy with the most economic power wins. As far as I can see, the airlines have already won this battle.
The GDSs are fighting a concerted rearguard action, but they have to accept declining market share of airline segments. Bottom line – control of inventory rests with the airlines and they run the show. They can do anything they like.
So where does this leave us? Economics. The core of the entire argument is the conflicted and convoluted economic model that exists today. Frankly the airlines have to take responsibility for starting the war.
Once the airlines stopped paying agencies, they lost the right to tell the agents what to do. Deftly they handed an opportunity to the GDSs, an unintended consequence for sure. While this is a facile assessment of the results, it hides a great deal of complexity.
The airlines are now starting to see that they can make money from their operations. Airlines have stopped talking about the dire consequences of their imminent collapse and instead talk about Return On Capital Invested.
The LCC model showed how it can be possible to make consistently good profits. Largely driven by re-casting the product and controlling costs, LCC airlines have been able to show they can achieve success.
Humor me, and let’s look at the relative values of doing business.
A case in point is Google. The search giant’s gross revenues from air-related businesses (it’s complicated but having spoken to several analysts this is what I’ve come up with) are about $4 billion to $6 billion.
That’s getting close to the $7 billion figure often quoted by IATA as an industry cost figure for using the GDS.
These two financials measurements are getting closer and should easily pass one another within the next 12 months.
But as one industry colleague put it to me:
“So, it [Google] may not be pulling in more than the GDSs, but it is doing a heck of a lot better than the GDSs in selling contextually relevant advertising.”
Thus my assessment is the spend by the airlines in Google is returning to them measurable results that appears better than GDS spend. Now couple this with the large amount of money the airlines are making from ancillaries, and I am sure there is a germ of an issue in here somewhere.
I believe that the airlines over the next two to three years will have about 25-30% gross revenue boost possible from selling ancillaries via intermediaries. This obviously translates to a lot of money.
The latest report from Ideaworks shows that airline ancillary revenues have increased from a first tracked figure of $2.4 billion (2007) to $13.5 billion in 2009 to $22.6 billion in 2010, and in 2012 to $28 billion. http://en.wikipedia.org/wiki/Ancillary_revenue.
It also showed some pretty interesting total figures, with Qantas coming out on top by collecting $56 per passenger in ancillary revenues. In reality this only scratches the surface of the opportunity.
My estimate of the amount of ancillary revenue possible in the next few years via the intermediary channel comes in at about $7 billion or even higher. Wait, isn’t that the same number that IATA says the GDSs charge?
So, here is my idea. Let’s let the airlines compensate the distribution channels through ancillaries rather than a passive booking fee.
Starting with a 10-20% fee of a variety of different permutations, attached to an airline’s bottom line, I believe will generate good will and revenue for the airlines via the intermediary channel.
Given that the GDSs will have significant work to implement this plan, they (on a merit basis) should be entitled to tap into that stream. The result will be a revenue-based incentive program tied to the fortunes of their ability to generate the extra revenue, rather than just sitting back and collecting the cash from a simple passive transaction fee (aka the segment fee).
This creates a win all round. Airlines win because they have a distribution system that is incentivized based on their performance; agents will win because the airlines will recommence compensating them.
On the fare side,” he said, “any time we think that there is potential for incremental revenue from a travel agency, there is an opportunity to share that value.”
Garner said the same principle would apply to travel agencies generating incremental revenue for optional services.
“There is an opportunity to share the pie,” he said.
There is much work to do and, of course, there will be many challenges along the way.
Success even with this revolutionary approach is not assured. But one thing I know is that unless we can all move beyond the current battle, then the industry will suffer.
Of course, there are other stakeholders who need to be added to the mix. I strongly believe that there should be a lot of cross-industry collaboration – after all, the consumer doesn’t care about the individual elements – he or she cares about the trip, overall journey, the mission: a holiday or business meeting.
In the end I believe the whole Industry wins, simply because the distribution channel is more agile and focused on selling products the supply owners’ want to them to sell AND that consumers want to buy rather than a limited set that are constrained by the technology and structure of the current system.
I believe then we can adopt solutions from other market sectors.
So there you have it – Kumbaya, peace in our time (as ex-president Richard Nixon said to the describe the end of the US’s involvement in Vietnam).
As was the theme for that SITA IT Summit in Brussels two weeks ago, genuine cross-industry collaboration should not only a thought, but a reality.
I’m sure others alongside me would be very happy to see this happen on a fair and equitable basis, where the gatekeepers unlock the barriers and the market opens up to new entrants and new models.
The GDSs then become a real friend to the industry. A so-called GDS Spring perhaps?
NB: Disclosure – author was a guest of SITA, which supplied travel/accommodation during the event.
NB2: Disclosure – author is acting CTO of Lute Technologies, a partner of Farelogix and member of the OpenAXIS standards group adopted by IATA for NDC.
NB3: Happy pilots image via Shutterstock.
Timothy O'Neil-Dunne is a contributing Node to Tnooz and managing partner at travel consultancy firm, T2Impact. He serves as the lead for the airline, aviation and airport practice. He is also a Co-founder of VaultPAD an accelerator devoted exclusively to travel and travel-related startup businesses.
Timothy was a founding management team member of the Expedia team where he headed the ground transportation and international portfolios, before founding T2Impact in 1998.
He has worked in aviation and travel distribution for more than 30 years, including time with Worldspan as head of technology where he managed international technology services from product to infrastructure.
He is also CTO and deputy CEO of Lute Technologies, a permanent advisor to the World Economic Forum and writes on the T2Impact Blog.