The way airlines manage their merchandising through the current global distribution system (GDS) model has been causing quite a stir in the industry over the last year or so.
Certain carriers have been very vocal in their demands for GDS companies to evolve their technologies to support products by bundling or unbundling certain airline offerings, as individual carriers work to devise their individual merchandising strategies and to grow ancillary revenues. Most outspoken among these carriers have been American Airlines and US Airways, who have railed against the GDSs for lacking the technology to handle ancillary sales.
But Holger Taubmann, vice president for distribution at the IT Group division of Amadeus, says that ancillary revenue is "quite an old story" for the GDS company. "When we think about the revenues that airlines make from selling perks, Amadeus has had a technical set-up called System User for more than 15 years, which gives an airline office access to the same content and reservation functionality as a travel agency."
The ancillary revenue issue has been dragged into the whole "direct connect" versus GDS debate, and Taubmann admits that GDSs are viewed by some airline executives as a cost rather than a benefit. "But we see ourselves as a window to the world and if we can prove to the airline that apart from the fact we can bring them ticket sales, we can also bring them a very nice profit contribution, they will look at us differently because they understand that the GDS is not just a telephone line. But we have to create more complex relationships with the airlines."
Amadeus's US-based rival travel services company Sabre Holdings is working with Virgin America and several other carriers on their merchandising strategies and stresses that it has being saying "for more than a year that we will not charge airlines any additional fees to help them market and sell their ancillary products in the GDS. Providing this technology is part of the overall value we deliver to the airlines".
Demand for the ancillary services and the required greater functionality of booking systems has increased rapidly in recent years in parallel with the growth in e-commerce and internet sales, broadening the revenue-generating opportunities. "For newer ancillary revenue requirements like bag fees, extra legroom etc, we've had to do more development, which has required really significant investment, and we're pretty much advanced on this," says Taubmann.
Amadeus estimates that revenue generated by airlines from ancillary revenues grew more than 40% in 2011 to $32.5 billion. The US major airlines, which are the market leaders in this strategy, saw the greatest growth, with revenue almost doubling from $6.7 billion to $12.5 billion. Frequent flyer revenue and bag fees have been the main drivers behind this growth.
"Today, between 14% and 15% of the all the major US carriers' revenues comes from ancillaries - in some cases it is more than 100% of the profit," says David Doctor, director of distribution marketing at Amadeus. "[US low-fare airline] Allegiant is the leader, which makes something like 35% of its total revenue from ancillaries."
Amadeus, which has its corporate headquarters in Madrid - close to one of its founder shareholders, Iberia - has 18 airline customers for its Airline Ancillary Services (AAS) product, which it describes as an "end-to-end solution" enabling customers to distribute (display, book, price and pay) across all channels. Customers can choose either to take just a direct sales channel or also include a channel for travel agencies. Amadeus says half these airlines are using AAS for multichannel distribution and the rest to distribute ancillaries in one channel only.
"If something is booked via an agent, there is a cost per transaction [to the airline], or it's bundled up into the booking and segment fee so you can go to a higher level of booking fee and get the ancillary revenues bundled in," says Taubmann.
"When the airline makes an ancillary sale, we charge a small transaction fee, which is in proportion to the amount they are making," adds Doctor. "We're always trying to hit the same amount of revenue on average - around 2-2.5% of the revenue generated."
Sabre believes airlines may be encountering some challenges in developing merchandising strategies as they work to maximise ancillary revenue. The Texas-based company, which has a GDS division, helped now-defunct Midwest Airlines launch its premium seating option and has since worked with United Airlines, WestJet, Aeromexico, Qantas and Air New Zealand on various merchandising strategies.
Even as some of those carriers push forward with plans to merchandise aspects of the flight journey, Sabre Holdings president Tom Klein concludes some carriers are struggling "to create products that draw customers in and make them want to buy them".
Klein says he thinks the term "merchandising" suggests that "you're potentially bundling products in a way or creating offers in a way that makes customers want to buy them and I think airlines are struggling to figure out what that looks like".
Klein believes the airlines "that are savvy marketers" will discover a set of services they can "sell up" to their customers. "The winners will do things that enhance their brand and make customers more loyal and make customers want to come back."
Commenting on Sabre's role as a technology provider in helping airlines develop their merchandising role, Klein states that technology appears ahead of business processes, and "it is much harder to operationalise these services and present them in a consistent way than it is to provide the technology".
Klein says Sabre can handle merchandising and ancillary sales from a technology standpoint if "you use standards" and that the easiest way to distribute ancillary offerings is through industry clearing house APTCO or to use the IATA electronic miscellaneous document (EMD) system.
"The nice thing about standards is it allows you to test ideas," Klein says, "which is what good merchandisers do, as opposed to building products and hope that customers like them, and then spend a long time to market to create something that is totally non-standard and get it into the market to find customers are not responsive to it."
EMD SYSTEM "CRUCIAL"
Amadeus's Taubmann says that the EMD system is "crucial" to allow the charges to be incorporated into something that travel management companies (TMCs) can process like a normal ticket. "This enables the charges to be passed by the TMCs in a normal invoice to the corporate," he says. "This is one of the hassles if the processes are not completely integrated, because you create work at both ends. We need to build the technical framework to make sure this is not a hassle."
Klein concludes that working within a set framework allows companies to test different schemes to determine what works and what fails "without having to spend the money to rebuild every time you go to market with something". While some airlines could be concerned over adopting standards, Klein believes those carriers wishing to maximise revenue quickly will embrace uniform practices for merchandising or ancillary sales.
"The industry needs to make some decisions about what is most important," he says. "If they [airlines] do want broad revenue access, I do think standards will get adopted. The industry needs to get on a path where they can actually operationalise things from end to end. The easiest way to do that is going to be through the use of standards."
While the European carriers are expected to follow the lead of their US counterparts and see similar growth in ancillary revenues, Amadeus's Doctor points to some fundamental differences in philosophy that exist either side of the Atlantic. "European carriers have a different way of operating," he says. "For example, it was very easy for US carriers to implement bag charges because you could already buy a ticket at the check-in desk so there was an existing selling capability. In Europe that doesn't happen so it's harder as they don't have that capability and would have to send you to another counter - so what was easy for the US carriers is a nightmare for European ones."
However, Doctor says that the fundamentals of ancillary revenues - that is, to be able to "tailor your product to your customer" - is a clear industry trend that the European carriers are going to follow, despite the technical challenges. "The European airlines are seeing the selling challenge earlier; that's why they've had to engage very quickly with all the technology partners."