The real NDC: Decoding the planned (r)evolution in airline distribution by IATA and airlines
A proposed dramatic overhaul of the technological standards for how airlines provide airfare content to end users probably won’t lift carriers out of the grasp of middlemen.
But that doesn’t mean the effort is useless.
Last autumn, the International Air Transport Association (IATA) announced its plans for revised standards, called the New Distribution Capability (NDC), to reform how airline content, such as airfares, routes, and seat availability, reaches passengers through websites and travel agencies.
IATA aims to kick off the first industry trial for the NDC by this March.
During the pilot tests, airlines will load fares and test messaging with end-users, who will be able to pull some information directly from airlines and ignore the GDSs. The first pilot tests won’t include code shares and other complex itineraries, say committee sources.
Results will be presented in October 2013. So business adoption won’t begin until 2014 at the earliest.
The story of the NDC is the story of a battle between suppliers and distributors over fees and IT investment at a time when digital technologies appear to be causing the airline distribution industry to fragment.
It’s a call for revolution. But is evolution more likely instead?
The official goal of the NDC
The industry routinely updates its universal standards, which spare airlines from developing unique interfaces for each distributor. The NDC is a much bigger-than-usual re-thinking of how information flows.
If the NDC succeeds, it will signal a multi-billion-dollar shift in the distribution balance of power from intermediaries to suppliers.
According to IATA’s official goals, the NDC will first focus on creating standards that impact the business of every company and organization that’s involved in airfare shopping and search comparison.
Airlines will build a platform where airfares and availability are combined with personalization tools, to allow airlines to tempt passengeres with custom offers and ancillary services that are personalized because airlines will, at last, collect passenger histories and profiles.
Winners and losers
One prediction by Henry Harteveldt, who at the time was working for Atmosphere Research Group, says that, by 2017, the GDS share of worldwide airline reservation volume could drop to 7%, down from today’s roughly 60% share.
The NDC could lead to supplementary work for IT companies, such as Farelogix, HP, Concur, OpenJaw Technologies, Switchfly, Everbread, ITA Software by Google, and Datalex. Some of those companies, itching for revenue, are goading IATA to move quickly.
Many of the world’s travel agents—who process $300 billion a year in tickets globally—think they “own” their customers. They may feel threatened if airlines try to bypass them to obtain passengers’ personal information, affinities and purchase histories.
The NDC is a bid for relevance by IATA. Some airlines, such as Easyjet, try to ignore it, and some of IATA’s current members bridle at its membership fees. If IATA can play a role in helping airlines get a larger cut of fast-growing sales of ancillary products, it could become vital again.
Online travel agencies like Expedia will need to adjust as well. Under United’s vision, customers would see the same seat maps and same personalization and ancillary options whether they shopped for fares on United.com or Expedia.com.
NDC cheat sheet
Throughout the debate, Tnooz has heard provocative statements from all sides. Some of the assertions strike us as oversimplified or, in a few cases, downright misleading.
Here’s our cheat sheet to the debate.
Alas, no. To coin a hashtag, #GDSfail.
Today, many argue that GDSs simply cannot handle the merchandising of airline content.
This is not a technical issue. The GDSs are quite capable of selling complex ancillary products by building supplemental or doing what the airlines want for distribution with modern languages, like XML. Sabre, for one, touts its 2012 ranking of No. 26 on the InformationWeek 500 – a list of the top US technology innovators. A third of its transactions are processed using XML, say company sources.
No, it’s a commercial issue. The GDSs have lacked the vision, interest, or execution, according to the airlines.
Exhibit A: Air New Zealand’s Economy Skycouch, a product that is sold in a way that GDSs haven’t been prepared for: essentially, buy two seats and get a third one free. The airline debuted Skycouch in spring 2011.
As of today, none of the GDSs sell it. Agents have to go direct to Air New Zealand if they want to purchase the product.
True, we don’t know if Air New Zealand was non-cooperative in fulfilling its share of responsibilities in making that product available in the GDSs. But let’s assume that the airline did its share of the work fully.
For 20 months now, none of the GDSs have been willing to handle the innovation of three-for-two pricing.
One example doesn’t make an argument, of course. But airlines cite other similar examples.
“GDSs have stifled ancillary sales.”
This perception appears to be the biggest lightning rod.
A key impetus for the NDC is the billowing of ancillary revenue products. Jay Sorensen, an analyst at Ideaworks, thinks that this year’s $32.5 billion revenue in global ancillary sales could rise to $100 billion in the future, as additional airlines get in on the act.
The real issue is whether the airlines are getting value for money from the GDSs. On that score, the airlines inevitably say no, but is their case more compelling?
GDSs say they’re happy to process all airline ancillaries. More than 200 ancillary types have been defined as programming standards.
Yet airlines accuse the GDSs of not training agents on how to use the ancillaries for upselling passengers.
For instance, KLM Economy Comfort has been available via GDS since 2009 but agents cannot sell it in the US, Asia, South America or Africa because of a lack of GDS investment and agency training, according to a senior vice president at Air France/KLM.
Another example: Fare families from Air Canada.
Back in 2002, Air Canada began trying to compete with its low-cost rivals by offering its services in two packages: unbundled (with passengers able to pay for only what they want such as a bare bones seat and no meals, lie-back seats, or free checked luggage) and bundled (a full service plane ticket, with one big fat ticket price and great value).
Air Canada struggled to get its ala carte products displayed in the GDSs. GDSs weren’t very interested in doing the investment to get the product out.
It wasn’t until 2010 that GDSs began to display so-called fare families for Air Canada and other carriers, where search results could be grouped in buckets according to similar characteristics such as cabin, refundability, and booking class.
It’s true that the supplier must be willing to make the product available in a way the GDSs can use and pay their share of the cost. It takes two to tango, and we don’t know what Air Canada brought to the table.
Ironically, Travelport now regularly touts its merchandising of Air Canada fare products as a model of GDS/airline collaboration.
Still, eight years is an awfully long time for GDSs to fail to create the infrastructure for selling a product that would be profitable to themselves and their allies, the agents.
Here’s another example of how GDSs have been slow to handle ancillaries:
To quote from a presentation given in December by Eric Leopold, director-passenger for IATA:
GDSs have often said that the reason they are not providing more information is because airlines do not share this data with the GDSs.
But if we look at the example of baggage data, GDSs have access to the data through ATPCO since 2009.
However, as [visiting a major OTA today shows], the consumer is unable to access the baggage data specific to their flight, and instead is presented with generic information.
When it comes to failure to merchandising ancillaries, GDSs need to take the bulk of the blame, though they’ve made some catch-up progress in the past two years.
Airlines are ready and able to pay for the huge IT project of building a dynamic distribution platform.
It’s not encouraging that no dollar or euro figure has been offered by anyone for the cost of moving to “value creation hubs” by 2017. We’re guessing the bill will be somewhere between the cost of American Airlines building Direct Connect and the cost of Sabre’s annual operatons. That’s a big range.
Until now, airlines have borne distribution costs by paying GDS fees and related third-party expenses, such as agent commissions. Yet airlines want to place the burden of distribution costs on the third-parties selling their airfares.
Case in point: revenue sharing. The airlines say the GDSs need to build out to support the NDC, but there has been no conversation about how the GDS’ get paid for that. Most airlines state that ancillary products and services sold through a third party are not commissionable.
Some skeptics even question if the airlines will be willing to invest in their own IT systems to prepare for next-generation distribution.
Advocates of the NDC counter that the major airlines are prepared to sink money into this IT project because they are 1) so furious about GDS fees and complacency and 2) financially stabilized after a decade of mergers.
Plus, NDC advocates say the new distribution infrastructure is an investment airlines can afford to make. If the investment enable the airlines to sell profitable ancillaries more effectively and more often, the airlines may be able to quickly recoup its costs.
“Airlines have thought seriously about the role travel agents play in all of this.”
For instance, there has been little talk of how airlines will pay for the costs of getting many of the world’s 60,000 travel agents to adopt the technology. Beyond the price tag of building the interfaces, there’s the cost of day-to-day operations: Will airlines help pay agents to adopt their technology?
For decades, the GDSs have given technology free to agents to encourage them use it, and sometimes even paid them incentives to use the machines.
Will the airlines pay for the agent’s technology costs and any training they may need to access an NDC-based fare feed?
How will the costs be borne? Within IATA’s membership fee? By volume? Per transaction?
One thing is clear about next-generation airline distribution: It means different things to different people, and everyone expects someone else to pay for it.
“By 2017, traditional GDS bookings will account for just 7% of worldwide airline reservation volume, down from about 50% to 60% today.”
A bold prediction!
This prediction comes from Henry Harteveldt’s report, commissioned by IATA. It’s echoed by Delta’s goal of 60% direct connections, stated by Chris Phillips at October’s WorldConnect conference in Monaco.
It is connected to a related prediction that the airlines will make a series of initiatives to de-emphasize their partnerships with GDSs and supplement them with what the report calls “value creation hubs” (VCHs).
Once upon a time, roughly 80% of airline tickets flowed through travel agencies and the GDSs they used, while only 20% were sold directly by airlines. Now in the US that balance is closer to 50/50 and internationally it is 60/40 GDS to direct. The trend is moving away from GDSs worldwide, except possibly in the newly deregulated market of China.
Harteveldt’s report is worth quoting at length:
Value creation hubs will use the new-generation airline commerce technology infrastructure used to power airline CRS/PSS host systems, ecommerce solutions, and more, thus reducing the need for lengthy, costly disruption in a conversion…
Unlike GDSs, which work with individual airlines, VCHs will be developed for each major alliance — Oneworld, SkyTeam, and Star Alliance.…
Because the VCHs will operate at a “group” rather than single airline level, the VCHs will house a “community link”, similar to Amadeus.Net, which will function as the “hub of the hub”.
This hub will connect to various airline CRS and PSS hosts, virtual hosts, and other systems, and serve as the gateway from and between the airlines that participate in a given VCH.
As long as an airline has the appropriate business agreements with the VCH operator, it will be able to connect to their partner through the appropriate VCH’s community link.
To create itineraries, the community link will extract and integrate airlines’ schedules, inventory, product content, prices, customer data, and more, using industry XML standards developed by groups such as IATA, OpenTravel Alliance, and Open Axis Group, conceptual frameworks such as IATA’s NDC, and EMDs for ancillary product sales.…
To reach the airlines that participate within each VCH, agencies and other intermediaries will subscribe to and connect with the VCH, rather than a GDS.
That’s a very broadly painted view. The devil is in the details.
Let’s say airlines build a “pipe,” or an open Application Program Interface (API), in which they pour their airfare content “wholesale” in a standardized format that any large distributor—even Amazon, Facebok, Google Flights, or other company—could tap into and sell, as Harteveldt’s report and a United presentation suggest.
Fares could be marked-up by these distributors, but their customer experience would be the same on a brand.com (i.e., united.com) site and on a co-branded or partner OTA site, according to a presentation on new distribution tools in practice made in October by Chris Amenechi, VP of merchandising & distribution at United.
Yet if any third party can tap into wholesale inventory and price it, how will airlines be able to assert “ownership” over the customer’s personal data?
“It’s all about the fees, stupid.”
A new survey lends support to this view.
“GDS cost/business model” were the top “concern” of 15 airline marketing, sales, and distribution executives in a December 2012 report by Atmosphere Research Group — a report that IATA commissioned about third-party distribution. (See chart.)
“Airlines spend $7 billion per year on GDS fees…which is greater than industry profits this year.”
That statistic is less solid than it first appears.
IATA chief Tony Tyler quoted the $7 billion figure when he introduced the NDC in October. It comes from a back-of-the-envelope calculation by Monty Brewer, the former CEO of Air Canada.
Mr. Brewer declined to provide Tnooz with the math for his calculation. But he says he it is based on his deep immersion in industry data. He emphasizes that no one has challenged the figure, which implies that it must be reasonable.
Actually, the figure has been challenged by one of the GDSs, but only off the record. (Sigh.) It says that $6 billion in booking fee revenue is a more plausible estimate, but the GDS-that-doth-n0t-speak-its-name wouldn’t provide its math to Tnooz, either.
In short: be skeptical of all these numbers.
“GDS fees are extortionate.”
The GDSs insist that their booking fees amount to around 2% of the average ticket value in the US.
That 2% compares favourably to much higher commission rates in other travel segments. It also compares favorably with the cut taken by distributors in other, comparable marketplace businesses.
Pressures have kept a lid on legacy airline profits. But GDSs claim that their booking fees for legacy airlines have declined by a multiple of rate drop in profitability of those airlines.
“Airlines can easily take away the corporate travel business from the GDSs.”
If the airlines slash their expenditure on GDSs, how much of that money would they pocket? Not much. They would likely have to spend the same amount of money on their own and other third-party distribution systems.
After all, true personalization in shopping and selling requires lots of hardware, lots of software and expensive analysts to ensure the right offer is indeed going to the right consumer, none of which are in place at airlines now.
Yes, airlines already sell tickets directly to consumers through their own websites, many times with personalized offers and ancillary sales. But most of the tickets sold through direct channels are uncomplicated, low-value, leisure travel tickets.
In contrast, GDSs tend to process the bulk of transactions from corporate travel agents and luxury travel agents, which handle the bulk of high-value, complicated-itinerary tickets. The per-ticket IT processing cost of transactions handled by GDSs is much higher. Airlines will have to pay much more than they have had to in the past to serve these corporate customers directly.
“The NDC was drafted by a cabal, with a handful of airlines excluding other stakeholders.”
IATA’s process has been relatively orderly and transparent, though critics disagree.
Like drafting legislation in parliament, drafting a major overhaul in distribution is a project best suited to committees that build outward, gradually incorporating more and more feedback from more and more stakeholders as the project takes shape. It has published its timeline of all of its outreach efforts.
IATA hurt itself when its initial informal presentation was couched in language that only the airlines saw the GDSs as obstacles. They got so much blowback that they opened it up to other groups.
One reason: When they criticized GDSs, they by extension criticized travel agents, who the airlines need to woo to make the NDC happen.
“The NDC lets airlines learn about customers directly, to better personalize product offers.”
But personalized offers are a long way off—years beyond 2017—except for airlines’ direct sales via their own websites.
It’s technologically complicated. Transparency, regulation, and competitive fairness form huge roadblocks. There’s also a legal minefield around information-sharing, especially given strict EU laws.
Though IATA insists that:
“It is not true that profiling is mandatory or opt-out, that customer data will be stolen and that customers will not see all the offer.”
“If the NDC initiative fails, we can go back to the status quo.”
Let’s take a deep breath, and think about the big picture.
Over time, the balance of power between suppliers (airlines) and distributors (GDSs) has swung back and forth.
Today, the world’s largest airlines think they have the upper hand. Airline profitability is stabilizing, while GDS margins are under pressure. So the major airlines have invented the NDC as a way to strengthen their negotiating position with the GDSs when it comes to fees and IT investment.
Yet the airlines may be overplaying their hand. While they have enormous power today, they can’t stir up an industry revolt on their own.
For the airlines to win, they will need the support of travel agents, OTAs, and corporate travel managers. But those groups may be satisfied with the GDS-dominated model as it is.
Our hunch is that agents, OTAs, and corporate travel managers may be happier with patchwork evolution instead of revolution. See Flybe’s recent effort to work with distribution partners to incorporate complicated, bundled fare products. See American Airlines’ latest version of its Direct Connect.
So the NDC may fail because the airlines fail to persuade agents, OTAs, and corporate travel managers that it’s in their immediate financial interest to invest in learning a new distribution model.
If the NDC fails, don’t expect the airlines to respond with a “Diet NDC”, a scaled-down version of an alternative distribution channel that the airlines control directly. The airlines see their project as all-or-nothing. The odds of a RoomKey for airlines are zero-to-none.
Yet if the project collapses, expect it to mean something important has definitely changed. The industry balance of power will no longer swing extremely between suppliers (airlines) and distributors (GDSs). In the future, power will be dispersed, and the market will be fragmented.
There’s a macro trend toward fragmentation that is noticeable in other, similar “content distribution” industries. Digital technologies have undercut the ability of a few giant suppliers or a few giant distributors from dominating marketplaces.
See what’s happened to music (from Columbia Records to iTunes, Spotify, and BitTorrent); broadcasting (from BBC to cable networks, YouTube, telecom companies); and corporate email (from Novell and Lotus to a wide range of multi-source, multi-platform tools players like Outlook and Google Mail).
On a related point, customers are developing expectations from their purchases in these other content industries to their purchase of travel, such asf choice (for products beyond a bare bones economy class seat), personalization (tailored product offers based on past purchase history) and transparency (a consistent product offering across platforms).
The airline distribution industry has to decide how to respond to this meta trend toward fragmentation because of digital technology. Does it want revolution, or evolution? Does it want to overthrow the GDSs by 2017 with the NDC, or make a series of patchwork fixes?
We’ll learn the answer soon.
Get broader context on the NDC:
Tnooz has presented:
- the GDS view and the views of GDS allies
- the view of GDS supporters
- the anti-GDS power view
- the airlines’ view on the related issue of GDS power
- a technologist’s view
- the view of some lawyers
- a view defending consumers
- a view on the related issue of data quality
- the view of people pleading for simplicity
- what Google is up to while the debate is unfolding.
NB2: Microscope code image via Shutterstock.
Sean O’Neill had roles as a reporter and editor-in-chief at Tnooz between July 2012 and January 2017.