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Airline Distribution: The Changing Dynamics

The ever-evolving technology advancements are changing everything in its path and airline distribution mediums are no different. TBMEs Charmaine Fernz delves into the big world of distribution, through this cover story that analyses current changes and what impact does it hold for the industry….

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‘Change is the only constant’ that best describes airline distribution evolution. However, for many years rather decades, the distribution medium has been consistent. It was only in the last few years that the fast-moving world of technology has brought about a metamorphosis in not just the thinking and behavior patterns of a consumer in everyday life but their overall business mentality.

“There was no existence of anything like a BSP (Billing Settlement Plan) or even a GDS (Global Distribution System) in the market 15 years ago. This was the pure form of distribution” Nasir Khan, CEO of Al Naboodah Travel

As Nasir Khan, CEO of Al Naboodah Travel reminisces, “If we quickly rewind 15 years ago, one will see there was no existence of anything like a BSP (Billing Settlement Plan) or even a GDS (Global Distribution System) in the market. There was a direct channel between the airline and a GSA (General Sales Agent) or a travel agent (TA). This was the pure form of distribution, where the GSA became the distributor of ticket stock, while also being fully responsible for sales and collection. This, in turn, was reported back to the airlines. Subsequently, agents used to make bookings over the phone while manually looking for connections and flights.”

The manual processes had their own challenges but were soon done away with to give way for more automated and seamless systems. The growing technology made life a bit easy but brought with it, its own challenges.

Matthew Powell, managing director – Middle East and South Asia for Travelport has a different take. He says: “In my view, the change has not been much across the travel commerce platform. The model has not really changed but companies have and the process of percolating it down to agents has changed. Subsequently, travel agents have also changed. However, the core distribution model had remained the same up until two years ago.”

“Today, people want real experiences and more personalized approach. Rich content and branding is all about giving the traveler the real experience”
Matthew Powell, managing director – Middle East and South Asia for Travelport

In his opinion, a lot of working aspects of the industry changed with the rise of low-cost carriers in Europe and the world over. “They changed the way the industry functioned by offering unbundling solutions and going direct. This was coupled with the online boom. The impact of which had its bearing on the GDS-airline partnership, with the introduction of merchandising. It was the GDS that gave the airlines options of really putting a value to their ancillary products. This was primarily done through rich content, branding as well as advertising, which was a major change,” adds Powell.

While the change was evident, the impact it had on relevant players – both travel agents and GDS companies – associated with the airline industry was critical.

The ever-evolving role of a travel agent

The impact of the change has had constant ramifications on travel agents in some form or other. This is surprising considering that industry veterans are of the view that the travel agent fraternity lacks qualified professionals. However, it is the very-same non-professional industry that had to and still continues to innovate or even diversifies their business for survival.

The survival for the fittest best suits a travel agent who has had to work around reducing commissions, regular ADMs, rising fees or even dramatic changes and come out fighters. As Khan explains, “Unfortunately, agents need to realize that it is the need of an airline. Airlines are not working for travel agents but for themselves be it directly or indirectly. It is the agent who is the middleman between the airline and client so inadvertently they have to bear the brunt. In the past, there used to be a heavy dependence by airlines on travel agents but things have changed today. They have learned to diversify their business and look for alternative revenue mediums, one of which is the profitable direct medium.”

“The retail travel business will go down while corporate travel will continue to grow. Nonetheless, travel agents will continue to survive and outsourcing will be key”
V Jayaram, managing director of Sharaf Travel

The direct medium undertaken by airlines has undergone a sea change in terms of statistics. The numbers have moved from single digits of three to five percent to double-digit now. This is a result of the change in distribution methods with more lucrative revenue streams. As V Jayaram, managing director of Sharaf Travel says, “The TA is being squeezed from both ends – an airline and the client – which is a catch 22 situation. Neither party wants to pay any extra costs. This leaves the agent with no alternative but to charge a service fee, making it more expensive to buy from them. This indirectly pushes the customer to go directly to an airline which is turn raises the direct booking numbers. As per statistics, current direct sales to airlines stand at 18-22% in the UAE alone. This percentage should ideally have come from a travel agent. However, the airline is looking at their own benefit and this works fine as they do not have to pay any distribution costs. So, revenue goes straight into profit margins. Looking ahead five years from now, these numbers are bound to go up to even 50%.”

While airlines have looked for alternative mediums, the travel agent fraternity has been very fragmented in their approach. A unified stand for business improvement has failed several times due to competitive individualism. However, the change in business models has made travel agents sit up and rethink their business. A result of which is either diversification or emergence of the new segment such as sub-agents. These set of agents were happy to be mere middlemen servicing clients without taking on any responsibility for bank guarantees or BSP payments. They were happy buying from the bigger aggregators.

Jayaram makes a valid statement saying: “The objective of a sub-agent is clear – they want to make a decent retention on their business and keep clients. It was all about the price and convenience. Corporates were happy dealing with sub-agents as they got the attention and price. So in the bargain, the bigger travel agents had to expand their business or look for alternative options. You then had the emergence of Online Travel Agents (OTAs) who were in a league of their own.”

“There is an ever increasing demand from consumers for more bespoke experiences and effective personalization. This demand is answered by airlines and other travel suppliers with new distribution and merchandising strategies and offerings”
Ramzi Al Qassab, commercial director for GCC and Global Partners at Sabre

Agents had to also deal with changing consumer demands and behaviors with the rise of social media. Customers were now looking for more personalized options. This made the travel agent get up and smell the coffee. They had to evolve in their role and become consultants rather than just remain mere order takers.

Ramzi Al Qassab, commercial director for GCC and Global Partners at Sabre clarifies saying: “Today, there is an ever-increasing demand from consumers for more bespoke experiences and effective personalization. This demand is answered by airlines and other travel suppliers with new distribution and merchandising strategies, which are being offered through direct channels such as an airline’s website, and also indirectly via travel agents. For agencies, they need to master personalization and position themselves as expert advisors and consultants who deliver tangible benefits to their customers.  While this increases pressure on individual agents and needs for powerful technology, this market dynamic towards more personalized experiences presents significant revenue opportunities for all players in the tourism ecosystem.”

The GDS-Airline relationship

Moving away from the travel agent – airline relationship, the next important association was the airline – GDS relationship which has had its fair share of changes and has also been in a questionable position. Interestingly, though impossible to predict, industry opines that the airline-GDS relationship will continue to exist with innovations.

Powell clearly explains, “We do not call ourselves GDS anymore as we are redefining travel technology. We are more of a travel commerce platform. This is critical, cause it shows how we have evolved as a segment. We have diversified and innovated through several mediums; a simple example is rich content which assists agents to showcase their offerings in real-time.”

Innovations have been the only way GDS companies have kept travel agents ahead of the game. This in turn obviously benefits airlines who in turn profit from the sales. Powell firmly believes that gone are the days of booking a two week holiday for January in summer or even advance bookings. Today, people want everything at a touch of button; real experiences and more personalized approach are the game changers. So, undoubtedly, rich content and branding are all about giving the traveler the real experience.

However, despite constant innovation, the role of GDS companies be it with the airline or agent is still being questioned. So would it mean that the integration of the much-talked-about IATA NDC (New Distribution Capability) would mean redundancy of the GDS?

What is the IATA NDC?

The NDC (New Distribution Capability) standard as explained on the IATA website is a travel industry-supported program (NDC Program) launched by IATA for development and market adoption of a new, XML-based data transmission standard (NDC Standard). The NDC standard enhances the capability of communications between airlines and travel agents. The standard is open to any third party, intermediary, IT provider or non-IATA member, to implement and use. It also enables the travel industry to transform the way air products are retailed to corporations, leisure, and business travelers, by addressing the industry’s current distribution limitations: Product differentiation and time-to-market, Access to full and rich air content and transparent shopping experience.

Impact on the industry 

“NDC is nothing more than a vehicle to the next wave and how distribution is will really change. Travel overall is a very personal thing. So, it is important to understand how are we making it personal? The days of just walking into a travel agents office and them being order-takers have changed”
Dean Wicks, chief flights officer at Wego

The implementation of NDC and its implications are yet to be gauged. There are several opinions either for or against it but one common sentiment that resonates with the industry – The NDC will bring about change.

Dean Wicks, chief flights officer at Wego.com clearly describes NDC as just the beginning, it is just about setting a standard. He further explains: “It is nothing more than a vehicle to the next wave and how distribution is really going to change. Travel overall is a very personal thing. So, it is important to understand how are we making it personal? The days of just walking into a TAs office and being an order taker has changed. TAs have to add value to their offering to remain in the business chain. The key is clearly evolution coupled with innovation.”

A further understanding is provided by Rajendran Vellapalath, CEO of TPConnects who says, “The industry is still unclear about NDC, its functionality, benefits, and challenges.  There are concerns from travel agents on the impact of NDC and loss of segment fees provided by GDS. We, as a company, in order to address the NDC issue have set up two separate departments – one caters for airline IT services and the other – travel agent support. Travel agent support is a travel aggregator platform wherein we have aggregated contents from all three GDS – Amadeus, Sabre, and Travelport. In addition, we also have direct connections with Ukraine International Airlines, American Airlines, and Lufthansa among the many, who are NDC compliant.”

So, how does a travel aggregator platform benefit a travel agent? Rajendran clarifies that the aggregator platform will offer agents a combined feed from all NDC compliant carriers as well as the GDS. This gives them the ability to choose the best option for their benefit. The only area of concern is how agents will settle the GDS commissions and incentives? “This is a question which has to be addressed between the airlines and agents,” affirms Rajendran.

“The industry is still unclear about NDC, its functionality, benefits, and challenges”
Rajendran Vellapalath, CEO of TPConnects

Wicks subsequently highlights other topics such as Big Data, artificial intelligence or even bots. However, he explains that one needs to understand, it is ultimately all about being able to mash all of this together. NDC is all about a standard making it easy for companies to communicate with clients. Now travel agents though NDC will be able to offer more personalised services to their clients, which makes them more engaging. The challenge now is to keep up with innovation while adapting to more technology driven products. There is also a whole new stream of companies that have emerged which are technology aggregators and are part of the new distribution system. These companies are able to deliver a unified product that can actually go out to masses of OTAs, traditional agencies, or people can even take those APIs and tweak it to their own needs.

Wicks further added: “To cite an example, a company like TPConnect becomes an API aggregator resulting in what one would call a Super API. This comes to the question, what is a Super API? Agents are currently able to procure rich content products from airlines such as flight options, seating, meals etc. However, add to this an understanding of a travelers pre, in and post journey details; coupled with additions of a concert ticket, ground transportation options or even hotels. If you have these current standard APIs which are IATA NDC standards and add in all the other ancillaries APIs, you create a super API. This is where airlines are looking for ancillary revenue.

The GDS impact

Having understood the impact on the overall travel business, what will be the impact of NDC on the GDS players? Al Qassab from Sabre asserts that the company fully supports NDC and all other modern API, XML and messaging protocols. “In fact, we see great value in this for branded fares and ancillaries, as well as dynamic pricing, dynamic packaging, and supplier-driven offers and marketing. We continue to be actively engaged with the NDC program and we are NDC Level 1 certified as an aggregator,” Al Qassab explains.

Elaborating further Powell states, “There was a lot of inaccuracy about the NDC program which still exists. One of the important questions – Would the NDC do away with the GDS?  In my opinion, the NDC was not launched with this goal. The idea was to get more standards on how to distribute ancillaries like rich content, branded fares, and fare families. There is also an opportunity for us to kind of go directly to the airline host systems and talk directly to them. Finally, it all comes down to the direction the industry is moving. It is also early days in these discussions and no one knows how this will work economically.”

Taking an optimistic approach, Wicks asserts saying: “The GDS is doing a really good job at aggregating the APIs, so then, all an NDC does is sets a standard. In addition, the GDS delivers data in mass and scale which is coupled with artificial intelligence. A simple example is loyalty programs. There are so many that it becomes difficult to keep track for a corporate. The ideal scenario would be to consolidate all of them into one big program. Just like the airline consolidation in the form of alliances.

However, Rajendran has a very different take. He is clear that the GDS will not become redundant. “If you see the NDC website all GDS companies want to be part in some way. Technically whether they will be able or not yet unanswered? One needs to understand that the GDS currently work on a 40-year-old technology which was pre-internet era. If they want to upgrade, they have to either scrap it all or build something new with an XML API. This is impossible because you cannot build a new technology over a 40-year old technology; it will be just patchwork. So, unless they scrap their current system, it is very difficult for a GDS company to get into the new era of distribution,” he adds.

The new era of distribution

The new era of distribution is all about technology. It is this very technology that is changing the way people live, function or even think. Today, it is all about being connected, being faster and being more personal.

As Powell explains, “The distribution model will continue to evolve. However, we are still in early days. Desktops and laptops are slowly disappearing and mobile will be the go-to device. There are new technologies replacing desktops such as Microsoft Surface or the Apple Pro. You then have a generation of children who are growing up very fast and do not have a life without a gadget or the Internet.”

The next generation and wave of change will see technological advancements manage everyday life which is the case with wearables. Nonetheless, technology is changing travel and traveling patterns. This change is not easy and particularly with the travel industry will come with a lot of resistance. As Wicks reiterates, “Change can be different in different markets, what may be relevant in one, may not be in another. So ultimately, it is all about getting your timing right.”

The distribution model will see many factors of change such as disintermediation and dynamic pricing come in with the implementation of NDC standards. This will also bring to light the role of metasearch companies and aggregators. Industry participants are of the view that travelers will have to pay for a service to be delivered, as there are no free lunches anywhere.

Finally, we can sum up in the words of Khan, who states: “If travel agents compete with each other, they do not stand to gain. They have already spoilt the market by giving customers the best product coupled with the best discount. Innovation is the way ahead and every player will exist if they innovate.”

NDC and the Need for Network Economics

“NDC is a set of standards. The term is used synonymously with new pricing and distribution methods, such as dynamic pricing, or airline-owned offers, but it is not the same. “

David Smith, Manager – Product Strategy, ATPCO

Emerging methods for airline distribution is a fascinating topic, with a wealth of recent publications and opinion pieces speculating on how the chips will fall.  One thing is clear in this complex, brave new world: new technologies and data standards, used together with a mix of capable system providers, industry organizations, and agile start-ups, will continue to drive innovation and serve airlines under the direction of the IATA New Distribution Capability (NDC). This will be a critical infrastructure to get travel-related products to the market in very creative ways.

Recently, I represented ATPCO at the Ancillary Merchandising Conference in Majorca, Spain, where I asked a few people I met how they would define NDC. I heard many opinions about what it constitutes, from a disruption tactic by airlines to dynamic pricing, to a move to direct channel selling. Very few people gave me the same answer.

NDC is a set of standards. The term is used synonymously with new pricing and distribution methods, such as dynamic pricing, or airline-owned offers, but it is not the same. NDC standards take XML and supply chain processes through IATA Resolutions and Recommended Practices to enable new ways of distributing airline products to the marketplace, fundamentally built around personalization, rich media, and the API economy. This set of standards achieves unprecedented levels of airline control of their own product on the shelf, what they choose to offer, and how they manage the order. In other words, the airline can get the right product to the right person, at the right time and in the right place, and the airline can control the content through a very flexible communication medium.

The fact that NDC incorporates the word “New” is also confusing because most airlines have at least some API capability today. The leaders in distribution innovation are trying all sorts of new ways to get their product to sellers, both through direct and indirect methods. They’re also widening the funnel to turn more shoppers’ attention to locked-in revenue bookings at the highest conversion rate, for the best revenue, and at the lowest cost. What was “New” has become current, or just “business as usual.”

But those few at the forefront are noticing a common problem.  Different API and messaging standards mean a long time to market (typically up to 6 months to build a single connection), a high price of implementation (in the tens of thousands of dollars to get a live seller up and running), and increasing maintenance costs to hold down several standards.  NDC brings a common XML standard, but even that evolves by two new versions each year. Stakeholders implement different “flavors” of each message to serve different business needs and interoperability requirements of non-NDC players.  More stakeholders, many connections, and many standards can all add up to a big headache.

Keep a careful eye on this one. The problem is not large yet (because most airlines have only just started creating one-to-one connections with sellers), but it is coming, and fast.  Over the next two or three years, as the API economy for travel and the number of stakeholders exponentially grow, the number of versions will quickly become unmanageable and our industry will uncover the need for an “exchange” or “hub” for messaging.

This is exactly the kind of issue that industry organizations are formed to solve, through the power of network economics.  Allowing the message translation issue to be solved once, centrally by an industry utility, frees all the stakeholders–airlines, their system providers, and sellers–to focus on what they do best: innovating to get the product to the market consistently, and quickly, generating revenue for everyone to sustain a healthy business.