ANALYSIS: Airlines eye Amazon-style retail experience

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Amazon has trailblazed global retail’s e-commerce path since the mid-1990s. Its ability to profile consumers, personalise offers and merchandise goods is the envy of every business with a website. And this year the Seattle-based conglomerate is pushing the boundary even further.

Shopping algorithms have become so advanced that goods will soon be delivered to customers before orders have even been placed. The anticipatory shipping system – patented in the USA – predicts what shoppers will buy based on previous orders, page views, wish lists and even cursor activity. The Huffington Post described the development as both “creepy” and “awesome”.

Commercial aviation bosses can only dream of such sophisticated sales technology, but many do already recognise the need for more dynamic and direct relationships with customers. Traditional sales and marketing strategies are, therefore, being torn up, and carriers of all sizes and models are investing in new ways distribute their wares.

Until 2007, the airfare distribution model was relatively simple to define. At one end of the spectrum, low-cost carriers used their websites to target price-sensitive consumers with cheap fares. Revenue was supplemented by the sale of ancillary products and services, such as baggage, food and drink or early-boarding privileges. Conversely, legacy carriers used their websites to target premium customers with all-inclusive fares, but also commanded the lion’s share of high-value business travel bookings made via global distribution systems. The GDSs – Amadeus, Sabre and Travelport – are reservation platforms used by agencies that manage travel arrangements on behalf of corporations – the airlines’ most valuable customers.

Since then, a number of factors have combined to fragment the model. Some LCCs, for example, realised that attracting high-yield business passengers was necessary to keep business growing. It meant a break with the model’s core principles and the introduction of distribution costs, paid to the GDSs. EasyJet has perhaps been the most successful in this endeavour. Ryanair chief executive Michael O’Leary, who used to refer to travel agents as “parasites”, is also moving towards third-party distribution. The Irish low-cost giant has confirmed it is in talks with several GDS providers including Sabre, Amadeus and Travelport’s Galileo, with a view to securing a partnership with “at least” one of them by May.

Large network carriers, on the other hand, were increasingly envious of the massive ancillary revenues generated by LCCs. Many began “unbundling” fares, giving customers the option to purchase additional services like extra legroom or access to private airport lounges. Two unstoppable external forces drove the change: the proliferation of mobile technology and the “Amazon effect”. Armed with smartphones and tablets loaded with the latest apps, and connected to the internet with high-speed wi-fi and 4G connections, consumers can shop from wherever they are at any time of day or night. And there is an expectation that retailers will only present relevant products.

“Personalisation has become an increasingly important part of the air travel experience,” says Gianni Pisanello, director of airline distribution marketing at Amadeus. “Whereas many passengers used to prioritise low-priced fares above other aspects of their journeys, they now also want their travel itinerary to reflect their needs and tastes more closely. As a result, there is a growing demand for airlines to offer inspiring, tailored travel options.” While carriers have been working individually on addressing consumerisation trends, the international aviation community has also been working towards a common solution.

Late last year, the first live booking was made using IATA’s New Distribution Capability (NDC) – an open XML-based data standard enabling any business that sells airfares to tailor offers to customers. The ticket, for a seat on a Hainan Airlines flight, was bought through a travel agency using Chinese GDS TravelSky. It was a landmark moment in the history of airfare distribution, but was not widely reported. Until January, the NDC project had been clouded in confusion and controversy.

Travel agencies complained they had not been consulted on the technology and its implications. The GDSs saw NDC as an assault on fare transparency – limiting comparison shopping and compromising data privacy rights. IATA eventually conceded it had failed to communicate adequately with travel industry stakeholders.

And though scepticism remains in some quarters, a breakthrough was made in the USA in January. The Open Allies for Airfare Transparency alliance (which includes the GDSs and a number of major travel agencies) and IATA finally agreed on the founding principles of the project in a Resolution 787 presented to the US Department of Transportation. Open Allies executive director Andrew Weinstein says it is important the resolution ensures NDC is only a data transmission standard and not a new distribution business model.

IATA said: “Implementation of the NDC standard gives customers access to a broader range of products and services. The NDC standard will enable a-la-carte services to be presented to customers, ensuring the best extras have been included in order to enhance the traveller’s experience.” Five NDC pilot schemes are currently in progress, although IATA does not envisage a global roll out before 2016.

Edward Millington-Jones, sales strategy implementation manager at British Airways, says traditional airline distribution in the indirect channels (GDSs and agencies) has led to a commoditisation of airline products based only on price and availability, leaving consumers without all the information required to make informed decisions. He says the ability to distribute richer content – so leisure and business travellers see the difference between airlines’ hard products and services – is a key driver behind NDC. “It’s particularly important to airlines that have invested heavily in products and services to enhance the customer proposition,” he says.

“The introduction of the NDC standard will enable travellers to make more informed decisions at point of purchase by comparing products and services that airlines provide. And it will enable third-party developers and start-ups to develop innovative new end-to-end travel solutions that meet the mobile and online demands of travellers,” he adds.

Millington-Jones predicts an “explosion” of travel products will be brought to the marketplace as a result of the NDC standard.

Ken McLeod, corporate director of the Advantage Travel Partnership – a consortium of independent UK travel agencies – chairs one of IATA’s NDC steering committees. With more than four decades’ experience in the travel trade and aviation sectors, he has seen a number of new technologies brought to the marketplace. Some succeed, others fail, but only time will tell if NDC is the game-changer some are predicting, he says. “The technology standard is already a reality. What remains unclear is how it will fit into existing processes,” he adds. “The airlines all want NDC, but it will be years until they all have it.

“That means there will be a lot of inconsistency in the eyes of the consumer. And once they have all adopted the standard, will there be enough difference between products offered to give customers a choice? There is a lot of uncertainly. That’s why I think the GDSs are still going to be central. Those who can aggregate data and analyse it will have the upper hand.”

In spite of the inherent uncertainties involved with a project of this size, McLeod does acknowledge new selling opportunities for airlines. While hotels and car rental are about location, price and value, he says airlines are now in the business of selling commodities. “It’s no longer a question of how much you can get for the base ticket price; it’s about how much an airline can extrapolate from the person sitting in the seat,” he says. “NDC provides opportunities to try different things, upselling and cross-selling.

“If half the business class cabin is empty can you make an upgrade offer direct to passenger’s mobile when they arrive at the airport? A number of services and amenities could be offered in this way.”

McLeod says the ability for airlines to make these offers will depend upon the quality of their passenger data, as understanding purchasing history, preferences and reasons for travelling will enable tailored offers to be more accurate.

EasyJet, which started life as a call-centre operation, launched online booking in 1998. Its website remains central to the business, and is where the majority of its seats are sold, but the carrier has successfully evolved its distribution strategy in the last six years. James Millett, the airline’s head of digital, says customers drove the evolution, and that airlines are now living in a multichannel world. “A household used to have one PC, usually in the study. Now everyone in the house is using different devices. They want to engage in different ways, and airlines must focus on that behaviour.

“We have our standalone fare and the a-la-carte menu, but we also realise some people want a bundled offering. On the legacy side the core market wants to buy on a bundled basis. I think we both recognise there are different needs out there in the market.”

The London Luton-based carrier was one of the first airlines to invest in the mobile channel. The EasyJet app, for example, has now been downloaded 7.5 million times, while 5% of all bookings are made on smartphones and tablets. Andy Hodges, the airline’s director of sales, distribution and business, says EasyJet opened up to other channels, including the GDSs, because it realised people wanted to shop and book in different ways. “We’ve been in the GDSs for six years, and seen some strong growth. A lot of work has been undertaken with the GDSs to standardise the way flights can be shopped, searched and booked and the way inventory is displayed,” he says.

Hodges says EasyJet has pressed ahead of cumbersome EDIFACT (United Nations rules for Elec­tronic Data Interchange for Administration, Commerce and Transport) connectivity, and instead uses dynamic pricing connections that show real-time pricing in the GDS. Fergal Kelly, Travelport’s vice-president of travel merchandising solution and distribution, says LCCs are hard-wired to application programming interface (API)-based connectivity through their websites: “The idea of getting into EDIFACT and the cost it would imply means it wasn’t previously attractive to work with GDSs.”

Amadeus’s Pisanello agrees, saying he has seen an increase in the number of LCCs choosing to sell their fares and ancillaries via offline and online travel agencies, travel management companies and meta-search sites: “This is particularly noticeable in Europe and North America, where the low-fare leisure market is relatively mature, but is also a feature of emerging markets. LCCs in Asia, for example, are increasingly entering the GDS. Many value-based carriers are re-evaluating their distribution strategies in order to attract business travellers.”

Airlines are spending vast amounts of time and money shaping their business models and distribution strategies for the future. If the experts are right, embracing the multichannel, multidevice world is the only way they will be able to survive, never mind grow their businesses. The GDSs, however, will remain pivotal for the foreseeable future.

As long as airline profit margins remain thin, the debate about the value of the GDS will rage on. The cost-per-segment is too high, say some carriers. The GDSs insist it’s a tiny percentage of the revenue they generate. While IATA presses ahead with NDC, GDSs Amadeus, Sabre and Travelport have all launched products to help airlines improve merchandising capabilities and tailor offers to customers.

Most recently, Amadeus released Airline Fare Families, which gives carriers the ability to package their booking classes, fares and ancillaries into branded products for travel agency customers. Pisanello says: “By providing a range of options, airlines can significantly differentiate their offering from their competitors.”

Travelport’s Merchandising Platform and Sabre’s Custom Offers have subtle differences, but largely offer the same benefits to airlines. All three are also keen to encourage wider adoption of electronic miscellaneous documents – an existing IATA technology standard that enables the sale of ancillary services through the GDSs.

Technology is evolving fast, and the industry is striving to keep up.

Is it far behind Amazon? Probably. It may still be some time before even the most advanced carrier is issuing tickets to customers before they book a trip.