Low-cost carriers are increasingly turning to the once-scorned Global Distribution Systems as their business models change and mature
For years low-fares airlines clung to their vows of internet-only fidelity, spurning the Global Distribution Systems and saying they would not change because the GDSs would not change. Now, both have.
The two have moved toward a convergence, forging deeper relationships than the low-cost, low-fare model had envisioned. And as evolving discount carriers realign with distribution systems, their relationship is helping shape a hybrid type of low-cost carrier one that reflects deep changes in the way the flying public perceives the low-fare sector, and the way in which low-fares carriers pursue segments of the flying public.
Both the GDSs and the low-cost carriers "had to change", says Richard Clarke of UK-based consultancy Travel Technology Research. "It's because the carriers had invested so little in their IT while the GDSs were in fact investing." And the GDSs had a major incentive to maintain their long-held position as the single most valuable source of travel data. If travel buyers turn to multiple sources, it is "fragmentation", allowing business to be diverted says Clarke. And "the GDSs couldn't allow fragmentation, so they had to chase down the low-cost carriers".
But the low-cost carriers were changing as well, adding a frill or two. To be sure, the low-cost model and basic concept sprang from thinking that incorporated flexibility. But the degree to which the fundamentals have morphed suggests that the next stage of its evolution will have space for more changes as all carriers, low-cost included, strive to understand their customers more clearly. "It's a natural evolution," says Clarke.
Even the lowest cost of low-cost carriers wants and needs the higher-yielding business. These carriers realised that the distinction between briefcases and backpacks no longer had validity and that a low-fare airline could no longer rely on just one of these demographic groups.
Kevin Healy, senior vice-president of planning and marketing at AirTran Airways, says: "We changed the old model. We have business class on every flight, and wanted to sell to higher-yielding business travellers." The airline, based in Orlando, Florida, had to reach those passengers, and recently agreed with Sabre on a new system that will expand its reach and allow for such untraditional features as ancillary sales, and other shopping offers. "We didn't really want to be in the GDSs, but we have to be realistic. We could try to go down our own path or make a middle ground. For growth carriers like us, that's important. The Southwest business model makes simplicity important but their brand is known, and is very much in the minds of travellers, while we or someone like a JetBlue may not be known everywhere."
"We're looking at ways to prepare for the next round of GDS negotiations"
executive vice-president commercial distribution, WestJet
Indeed, starting up against a well-known brand name forced one new carrier, Canada's WestJet, to blend the GDS and the internet early on. Hugh Dunleavy, executive vice-president commercial distribution, says: "We have had the GDSs since early on. We had to because we were up against Air Canada, which has so many years of strong relationships with the travel agents and the corporate accounts." The carrier, based in Calgary, has also adopted other variations on the low-cost model, such as a call centre that customers can use without paying a surcharge. US network carriers have begun imposing an extra fee for tickets booked over the phone.
Clarke says the average fare sold by traditional travel agents through their GDSs is more than twice the average fare sold through online channels. Clarke's research has found that 47% of the world's low-cost carriers now use GDSs, a figure that rises to 65% when weighted by passengers carried. He says this shows that larger low-cost carriers are increasingly turning to GDS to tap into the corporate market.
Ivan Bekkers, chief executive of Agentware, an Atlanta-based provider of booking tools, says that the GDSs were the way to win the corporate agencies because they meshed with their back-office accounting, reporting, expense-tracking and company travel-rules requirements. They saw an opening, says Bekkers, when it became clear that big carriers like United were going to abandon the new entrant so-called GNEs or GDS New Entrants that some network carriers had seen as a more efficient link into corporate agencies.
Targeting the low-cost market
So the GDSs have been going after this segment even more intently. In a way, economics are on their side, given that the internet tends to produce lower yielding bookings at a constant cost, while the GDS not only brings in higher paying customers but also offers economies of scale. Clarke adds that in some deals "the GDSs are buying the low-cost carrier business", meaning that "a lot of money is changing hands".
It was the managed corporate travel accounts, above all, which drove the carriers. Southwest, for example, moved last year to expand its use of a modified, minimal level of the Sabre GDS by adding the Galileo GDS. The carrier's senior director of marketing communications, Anne Murray, says some major corporations have a preferred GDS and adding Galileo allows Southwest to reach more of this high-yield segment. "It has to do with trying to reach more corporate travellers," says Murray. Southwest, which is revising its fares structure to capture more business travellers, now sees as much as 10% of its revenues coming through the GDS channel. she adds.
Some in the low-fares sector have suggested that the GDSs were not interested in them, but Amadeus executive vice-president commercial David Jones insists that "it is not true that we did not want the business. But as we realised how very different the low-cost business was, we had to make some technological changes. They are often ticketless, and that means more than an e-ticket, and that means a wholly different approach to the BSP (the Bank Settlement Plan payments systems and its related technology). The low-cost, low-fares airlines are a different business, and we had to learn it."
GDSs such as Amadeus and Galileo have learned the low-cost airline business well enough to score a major coup. Their recent deals with easyJet demonstrate this. The UK carrier had planned to develop its own special links to a large travel management company through an API (Application Programming Interface), but Amadeus and Galileo were able to offer easyJet both the technology and the deal it wanted instead.
"The systems low-cost carriers used couldn't communicate with GDSs"
vice-president marketing, Sabre
The two GDSs separately delivered new technology that links into its inventory and meets the needs of Europe's $90 billion corporate travel market, according to easyJet chief executive Andy Harrison. Galileo notes that its easyJet connection will allow corporate travel management agencies to book twice as quickly as "screen-scraping" solutions, and four times faster than the airline's own website.
There is a cost, and easyJet's decision to pass this cost on as a point of sale fee to the travel agents evoked howls of anger. Rival discounter Ryanair mocked easyJet as "a closet high-fares airline", and UK travel agent groups protested, threatening a boycott.
But others in Europe are watching closely. Monarch e-commerce manager Ian Chambers says the airline is reviewing its use of GDSs, which now account for 5% of bookings at its scheduled unit. He says other carriers may well demand the same deal that easyJet wrested from Amadeus and Galileo.
Chambers believes the GDS is a "big question mark because of the high cost involved", but adds: "I think they had to do something. They were becoming dinosauric. If they didn't do anything, airlines would just turn them off."
Other European carriers will doubtless look across the Atlantic to examine the recent experience of those carriers that have changed their distribution philosophies. At JetBlue, an airline that started out with internet monogamy and in fact left one GDS after trying it, the return "has been successful", says chief executive Dave Barger. Although the GDS channel that JetBlue re-entered last year generates only about 6% of its revenue, the average fare booked through the GDS is between $30 and $40 higher. "Overall we find it creative and are finding a new base of customers," says Barger. He adds that JetBlue is also morphing, going into the online travel agencies in a big way as it "rounds out its distribution". JetBlue will change the model further when it increases legroom at the front of its cabin later this year. It just introduced fully refundable fares as a further lure to business travellers.
New airline models
This is part of the global hybridisation of low-fare airlines. As an executive at a Sydney-based travel distribution firm, who wishes to remain anonymous, puts it: "In Asia and Australasia, we see some airlines that cut and pasted the Ryanair model and will never change. That's the hard core, like Tiger and to a degree AirAsia. But then there's the new core of easyJet, Virgin Blue and JetBlue. It's clear that the view of low-cost carriers doing it for themselves is no longer universally true. We're seeing a move toward a hybrid that calls itself a 'new world carrier.'"
This can be seen in Virgin Blue, which started as pure-bred low-cost carrier but has changed, adding such legacy features as airport lounges, and even moving deeper into the GDSs. The carrier has added Amadeus to its Galileo and Sabre relationships as it moves to create a middle ground between full-service Qantas above it and bare no-frills Jetstar below it.
The low-cost evolution in Asia may be one of rapid growth, but as the Centre for Asia Pacific Aviation says in a recent study, the low-cost carriers only have 10% share of the market and may hit 20% by 2010. This growth has attracted Asian GDS Abacus which has signed Air Deccan and Oasis Hong Kong as well as (to a limited degree) AirAsia.
In addition, the regional cultural preference for high levels of personal service should also play out to the advantage of the GDS channel in Asia, says Jones of Amadeus. While the GDS may have plenty of room to grow in Asia, Richard Noon, chief executive of Australian online travel agency webjet.com, argues that the high regional levels of internet acceptance mean that "the 20-something on the web now is actually a 30-something who is your future customer".
"We didn't really want to be in the GDSs, but we have to be realistic"
Senior vice-president,marketing and planning, airTran
That certainly suggests that hybridisation is the future. Some carriers start out as hybrids. One new US carrier, Virgin America, which began flying in summer of 2007, sprang full born as a hybrid, explains its vice-president for planning, Brian Clark. He says: "We had the advantage of starting from a clean sheet and we chose a hybrid approach precisely because we are a hybrid airline we're not strictly a low-fare carrier. We have a first-class section. We have extensive on-board entertainment and service. We have ancillary sales. And from the very first, we chose to distribute through the GDS as well as the website."
Although early returns show the GDSs have been a boon for most low cost-carriers that have tried them, the relationship is not necessarily a permanent one. Henry Harteveldt, the Forrester Research senior analyst, says: "None of the low-cost carrier executives is disappointed with the GDSs as a channel. But it is now just another channel and I certainly have the sense that they're evaluating the GDSs for real, quantifiable results for when the GDS contract renewal times come up."
Or as Westjet's Dunleavy puts it: "We may have to revisit the relationship and we keep looking at ways to prepare for the next round of GDS negotiations and ask the GDSs what value they really bring."
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A new language
The Global Distribution Systems made important breakthroughs in the last year. The most significant of these may be the introduction of computer languages that can communicate directly with the systems that low-cost carriers have built upon. Kyle Moore, Sabre's vice-president of marketing, says this XML or eXtensible Markup Language, is "the doorway into the systems on which a low-cost carrier such as AirTran Airways has built itself. In the past, some of the systems that low-cost carriers used just could not communicate with the GDS." XML lets agencies using the Sabre GDS view real-time seat maps and flight information from low-cost airlines.
It lets the agency comply fully with a low-cost carrier's individual rules, which were often developed internally. Navitaire, which provides the platform on which AirTran is based, worked to enable this new Sabre-provided capacity. Amadeus has also worked extensively on developing XML, which it first applied to bookings systems for hotels. XML also allows agents to see various attributes of hotels, so they can "sell up".