Amazon in the Sky - Airline Distribution Disruption
I see it in the water.
I feel it in the Earth.
I smell it in the air.
Much that once was is lost,
For none now live who remember it.
J. R. R. Tolkien
British scholar & fantasy novelist (1892 - 1973)
Aviation is the kind of industry you don’t see to be changing a lot. Although many industries have been disrupted in the past years, aviation is still moving on evolutionary rather than revolutionary. However, there is one thing that can change everything in distribution.
Hamburg Aviation Conference is a great event happening every February. Organized and guided by extraordinary professionals and enthusiasts, it is a perfect place for airlines, airports, IT providers, and many other related companies to come together to talk and think of the future, find new and modern approaches and share their thoughts. This year, the air at the conference was vibrant with a thrilling speculation: “What if Amazon buys the capacity on the flights, to distribute and sell them the same way as goods? Will other airlines be able to compete?” Seems weird? Not really. Most topics and discussions at the conference could be described with the slogan “Airlines are new retailers.” Frankly speaking, it is not the case yet. However, it shows where all the looks are now directed.
The industry is indeed in desperate search of better and more efficient ways of distribution. For decades the model has been built around passengers flying O&D (from Origin to Destination). The passengers now demand more ancillaries. They want to have comprehensive and detailed information about travel options to compare and make proper decision. It is so easy to find and buy desired goods on Amazon. It is possible to properly compare all the options and choose the most suitable. Why it is still a problem with air tickets?
Many of the aviation professionals say that this is a consequence of aviation conservatism – “We have always done this way” paradigm. To shift this paradigm and become a pioneer, airlines need to have great courage and willingness to take risks. But, these are not the only ingredients of success. Technology must follow. And here we face the longtime struggle of airlines for new distribution. A textbook example is Air New Zealand SkyCouch case. It took two years to fill the gap in necessities - to sell three seats at the price of two - and Global Distribution Systems' (GDS) capabilities to perform such transaction. Excruciatingly enormous time-to-market, isn’t it?
Although the situation may seem desperate, the first signs of “something big is coming” have already been spotted. And GDS fee is one the brightest of them.
What is GDS Fee Anyway
GDS fee is a recent practice of the airlines to distinctly charge passengers for usage of GDS as a channel of ticket booking and purchase. Of course, these costs have always been included in the ticket, but now they are explicitly presented to the customer.
The distribution costs incurred by the airlines are indeed quite high. For a low fare ticket, it can be up to 20% of the fare. Quite a decision maker for a passenger. There is no surprise that airlines are trying to reduce these costs for the sake of competitiveness.
Like it was with the fuel surcharges 10 years ago (the age of permanently rising fuel prices), airlines are starting to introduce a similar practice. In contrast to the fuel case, GDS fee aims not only to cover the distribution costs, but also to achieve other goals. One of them is to make a direct connection to airline inventory more attractive for Online Travel Agents (OTAs) and passengers. For that, of course, the airline should have an available and reliable API with at least the same capabilities for bookings as the ones GDS has, or even better. At the same time, integrational process with OTAs and associated costs for them should be as low as possible. In any other case it will be hard, almost impossible, to convince OTAs to switch to the direct connection.
What Lufthansa Group did in September 2015 by introducing a GDS fee was met with frustration by GDSs and with curiosity by other airlines. The former were concerned with creation of a precedent, the latter were anxious to see the results of such a bold and rebellious move.
Despite all the pressure from the market, GDS fee is still in place. Moreover, bags fees for GDS bookings came this June. The market has got used to the new rules and – as GDSs were afraid of – it really has instilled the idea into the heads of other carriers.
A year and a half later – in April 2017 – Ukraine International Airlines has made the same move. And, as it was with Lufthansa Group, they faced the same struggle.
More turbulence is coming with the British Airways and Iberia announcements of GDS fees for non-NDC channels since November 2017. The most noticeable part here is that it was met with less irritation and negativity by the market. Are we witnessing a new paradigm emerging? Has the market got used to an approach like that? The answer is “yes.”
Successful (in a certain sense), or at least not disastrous, examples are already inspiring airlines, and we will see more airlines joining the rebellion.
Something Big Coming
So, what is this “something big” that is coming? The name is New Distribution Capability. NDC – New Distribution Capability – is an XML-based API Standard developed by IATA and aimed to struggle with the archaic heritage of the older days. A game-changer for airlines distribution, IATA did not choose the name randomly. It really is a new way to distribute airline inventory.
The initiative was met with coldness and caution by all GDSs in 2013. The reason was the two words IATA put beside GDS – “New Entrants.” In spite of the initial skepticism over the standard, GDSs’ names started appearing in IATA NDC Registry right after airlines started establishing successful pilots with OTAs. One can say that this is a sign of accepting NDC as a widely distributed standard of the future.
No doubt that NDC will have the same impact on aviation industry as the Universal Serial Bus (USB) did for hardware back in the 90s. In fact, the purpose of the development is practically the same – to improve connectivity and reduce costs of all the stakeholders. NDC is not only a set of XSD schemas. Although it can be used only as a type of messages, the architecture is built in a way that allows an airline to have full control over Offer and Order Management activities. It opens practically unlimited possibilities for the airline to improve sales. Dynamic pricing, any type of ancillaries, sales personalization/segmentation, rich content, and even more – all that becomes available for the airline at an arm’s length. It is an open door to Amazon-like e-commerce systems.
Another less obvious capability of NDC is an open door for in-depth analytics of all requests.
It is hidden underneath the NDC Standard itself, but the idea of having the offer and order management control within the airline is tremendous. Now airlines can see all requests (even from indirect channels) and analyze what customers are looking for and what it will be better to offer them. The analysis can be as sophisticated as the airline decides. It could even be a mini-Google under the hood. Just imagine how much value can be gained from this data.
For instance, if a customer is constantly looking for a cheap trip for vacation, but hasn’t bought anything yet, well, they are a perfect target for the next promo campaign.
Machine Learning technique will allow addressing millions of customers directly without excessive overheads. Predictive analytics will allow the airline to foresee customers’ behavior.
In fact, NDC makes it easier for an airline to establish a simple, yet fully-fledged, e-commerce platform for offerings of almost any complexity and sophistication. The market is in need of such solutions, but it is a bold and risky move to disrupt the classical way of doing business. But, as they say, “No pain, no gain”. Valuable addition to boost this process would be a software vendor experienced in developing state-of-the-art e-commerce solutions not only for aviation but for other industries as well. Anyway, the key success factor is the airline management’s mindset to make things different.
So, the final question is which airline will demonstrate enough courage to become the first Amazon in the sky. Or, Amazon itself will indeed make its next purchase in the aviation, right after groceries.
NB: During the work on this article, it was quite exciting to reveal another point of view on NDC influence on airline distribution. This article was written in January 2013 and is great in its analysis and forecast of the future. Although not all predictions have come true, the general idea has turned to be quite right. Highly recommended to read.