What happens when airlines, distributors and agencies come together to talk about merchandising?

In Dublin last week it was good conversation, some agreement, some disagreement, but not a lot of clarity on how to execute or fulfill merchandising of ancillary products across multiple sales channels.

Datalex hosted its annual conference for its customers and partners, with a focus on merchandising and travel retail.

In attendance were more than a dozen airlines, a few large distribution channels, travel agencies, and other players in the airline distribution supply chain.

The conference spanned two days, and included sessions on channel discrimination, commissionable ancillaries, social media and mobile, loyalty programs, standards, and the never-ending discussion about Google and ITA.

Several points came up over and over again, buoyed by equal parts passion and anxiety so I’ve distilled them down to the following:

1. Merchandising ancillary airline services is a proven business model

Similar to the CASMA conference in March, no one argued against merchandising. Checked bags, seat upgrades, lounge access and other services are being offered and sold to the tune of billions of dollars/euros worldwide by airlines, and while customers grumble about it on blogs/tweets/posts, they continue to purchase the services.

2. But airlines must do a better job at articulating the value proposition to customers

Lots of references were made to retailers – Amazon, Target, Tesco – as models for airlines considering how to market and present these services to their customers.  After all, if billions are being made AND customers don’t understand the value proposition, imagine the turnover if customers did value these ancillary services.

This means airlines have to develop some sophistication in presenting offers so all options associated with a flight are available, bundled (as special offers) and fully unbundled.  There’s nothing sacrosanct about the current booking path – disruption in the buying process can be useful.  Test presentations of offers and if it doesn’t work, do something else and do it fast.

3. To do that, the airlines have to become marketers

Some airlines have done a great job with their frequent flyer programs (Air Canada and Delta were given as examples), and several speakers suggested that these programs could be the starting point for extended marketing efforts.  Successful marketing depends on understanding the customer, and airlines have compiled extensive information about members in their frequent flyer programs.   Why not use it?

4. What’s in it for me?

It’s one thing to present and sell ancillary services on brand.com; it’s another to distribute those services and products to other channels.  Airlines are going to have to figure out how to give incentives to their distribution partners to sell these services, or decide that not all services or products are appropriate to be sold on every channel.  It takes infrastructure to present, sell and report on sold services, and intermediaries don’t have money just lying around to build that infrastructure.

4. By the way, a multi-channel strategy is the ONLY strategy

As one speaker pointed out, the GDSs are not going away. American Airlines’ direct connect initiative is “noble” in the words of another speaker in their desire to better serve their customers’ needs, but a single-channel strategy will fail every time.  Airlines must be prepared to identify multiple appropriate channels and utilize them.

Some of those channels will be direct-connect and some will be through the GDS, so build products that are flexible and can be adapted to various types of connectivity and sales channels.

5. So what could possibly get in the way of this merchandising nirvana?

Operations was cited over and over again as a sticking point, especially around the complexity of code-sharing and interlining. There are no operational standards around the reporting, fulfillment and revenue reconciliation of selling ancillary services and products of a partner airline, which puts the delivery of services sold at risk, undermining their value proposition and ultimately customer loyalty.  It may be that this level of complexity doesn’t need to be addressed first, but it will have to be addressed at some point, especially if airlines are required to offer all services through all channels.

Which brings us to regulation, also cited as potential issue (although it’s difficult to understand if politicians in the US are just posturing).  The prevailing (and predictable) sentiment in the room was that airlines and their partners should be able to offer relevant services in the appropriate channels and let markets, not governments, dictate what services and products are offered on what channel.

Overhead aplenty

As an aside, I am so sick of hearing about Google and ITA, but it was a hot topic of discussion, so I’ll dive in. There was a pretty sharp disagreement between attendees about the level of threat presented by Google.

One on side were the airlines, who said no matter what information was presented where, they still controlled and sold the inventory. On the other side were those who said Google would undermine metasearch, the OTAs and perhaps the GDSs.

No one believed Google is interested in actually distributing inventory, but as with all things Google, who can tell?

Another industry conference, another discussion about merchandising, but the conversations at this event were focused not on the concept but on the execution, even if no one is exactly sure how to get it done.

If Sarah Palin and John McCain were mavericks, what kind of team will Al Lenza and Jim Davidson make?

With airline clashes with global distribution systems in the offing, Farelogix has recruited distribution maverick Al Lenza to its board for “both guidance and a provocative perspective on the changing role of distribution in the travel industry.”

Lenza has always been known for his independent and sometimes ahead-of-the-curve thinking on distribution matters and Davidson, the Farelogix CEO, pulls no punches, either.

Lenza, who headed distribution for Northwest before Delta acquired it and currently consults for United Airlines, says Farelogix’s technology is “real” and will give airlines the ability to offer ancillary services and to control whom the content is displayed to and at what price.

“This is not just a PowerPoint presentation,” says Lenza, taking a swipe at former alternative-distribution platform G2 SwitchWorks. “They [Farelogix] have stuff that works.”

Lenza made lots of headlines in 2004 while at Northwest for his ill-fated attempt to charge travel agents a shared-GDS fee if they didn’t book on the airline’s website.

Although the plan was withdrawn, Lenza says it set the stage for U.S. airlines when they reduced their GDS fees in the 2007 round of negotiations.

Controversy is in the air again as American Airlines plans to merchandise away from the GDSs using Farelogix and other outlets, and the Business Travel Coalition and ASTA allege that the airline has a “user-pay” model up its sleeves.

“The last thing you want to do is have your ancillary product be rendered into commodities,” Lenza says.

He argues that the GDSs would do just that with airlines’ merchandising efforts “and that is not going to work.”

Farelogix’s direction “is much more in sync with what most airlines want,” Lenza says.

Sandler Capital owns a majority stake in Farelogix.

Lenza joins the following other recently appointed Farelogix board members: Michael Marocco, head of private equity at Sandler Capital; Ellen Keszler, past president of Travelocity Business; and Bonnie Reitz, retired senior vice president of marketing at Continental Airlines.

Other board members include Bert Amato, a technology professional and investor; William Bianco, managing director at Sandler Capital; and Rick Gossage, Farelogix founder.

Lenza says he is not an investor in Farelogix.

It’s official – the debate around merchandising has switched from the conceptual to the practical, meaning that it is finally being taken very seriously.

At the CASMA conference in Montreal last month, one of the most interesting sessions was on airline merchandising and ancillary revenue (can’t swing a cat at a conference these days without hitting a merchandising panel).

The arguments for and against (although no one ever actually goes on the record anymore as against) merchandising have been covered extensively, but what was interesting about this session was the audience response.

The session itself was straightforward: Jim Davidson of Farelogix, Tony D’Astolfo from Rearden Commerce, Paul Rose from PR Revenue Management and Stefan Frank from ITA Software presenting their views on merchandising and ancillary revenue.

This part of the session was about 45 minutes, and was a fairly standard company-by-company presentation of each participant’s take on the topic.

The next hour-plus was audience and panelist interaction. The most striking aspect was the tone of the questions, comments and discussion.

Unlike at past discussions at CASMA and other conferences, no one seemed to question the validity of merchandising or ancillary fees; what airline attendees and technology providers were asking were questions starting with “How do I”:

1. If I charge for baggage, what’s my liability when it’s lost?
2. Should I use the frequent flyer number as the basis of all personalization efforts?
3. How do I change our workflow to support new services?
4. What new inventory controls will we have to implement to guarantee availability of pre-sold items (blankets, meals, etc.)?
5. How can we convince consumers this is a good thing?

Tony D’Astolfo had a great response to the last point: “It’s not a fee, it’s a value-add!”. Airlines, he says, need to get over their fear of customer backlash and just deliver value.

It was obvious from the discussion that best practices need to be developed by the airlines to support merchandising; based on the questions asked, they seem to be just at the beginning of that process.

As one airline employee tells me: “It takes a lot of effort to turn a battleship but once under steam – it takes more effort to stop a battleship.”

Nevertheless, the biggest question (number six, if you like) still remains:

• When will the technology catch up so merchandising can take place across all sales channels, and in such a way that these services won’t be commoditized?

Given that several GDSs have publicly stated it will be 12+ months before they deliver functionality that can support ancillary revenues, it won’t catch up, at least on the legacy side, this year.

There’s a lot of movement in the technology space outside the GDSs, but given that most travel agents still swear by their GDS desktops, those agents (and other sites that are powered by the GDSs) will not get convenient access to the merchandising data for some time to come.

Two U.S. airlines are testing mobile apps that would deliver seat upgrades, lounge passes, check-ins and/or priority boarding through a new partnership between Farelogix and Mobiata, officials say.

The two as yet unidentified airlines — both Farelogix customers — would be able to tailor location-based merchanising offers, sometime based on travelers’ frequent flyer status, because Mobiata has integrated Farelogix FMS2 (Flight Merchandising Solution 2)  into Mobiata’s existing FlightTrack and TripDeck travel apps.

The Farelogix client list includes: American, United, Lufthansa, Singapore, Emirates, Virgin America, Northwest, Continental, AirTran  and Air Canada. An African airline also is believed to be in the mix.

Jim Davidson, Farelogix president and CEO, says the two airlines are working on “customer recovery” features for the mobile apps, where they might be able to send passengers free Wi-Fi service if there is a delay or extend them club passes if the airline lounge isn’t very full.

One of the two airlines, Davidson says, plans to launch merchandising services in limited release within three months.

So, how do these apps know the customers’ loyalty status and preferences?

Davidson says “Mobiata passes traveler information to the FMS2 engine, which validates with the airline and then creates the offer, which is then sent back to Mobiata for the presentation experience and transaction interface.”

FMS2 consists of a pricing engine and a rules engine, with hundreds of criteria, connects to airline CRM, frequent flyer program and properietary databases for inventory, validation and scoring, Davidson says.

Asked if the airlines are actively working on implementing features like free Wi-Fi during delays or airport lounge passes, Davidson says: “This isn’t PowerPoint. This is real.”

The service is available to Farelogix customers using its XML direct-connect adaptor or FMS2. FlightTrack and TripDeck are available on the iPhone and Android platforms and Blackberry availability is in the works, the companies say.

So why did Farelogix turn to Mobiata to further its airline-merchandising business?

Davidson says “we are good at somethings like airline-distribution engines, but have no mobile experience.”

Jack Loop, vice president of business development at Mobiata, says the company, founded a little more than a year ago, specializes in travel apps, which are consistently top downloads at the iTunes Store.

Loops says Mobiata seeks to be the back-end to airlines’ travel apps and will also make them features in Mobiata’s self-published apps.