The 2010 Airline Business/UATP Airline Distribution event showed that ways of selling seats are changing, but not necessarily getting cheaper or less complicated, writes Mark Pilling in Rio de Janeiro
The global financial malaise felt like a faint discordant echo to the delegates at this year's Airline Distribution conference in late April. Sampling a few days of Brazil's buoyant economy from the event venue on Rio de Janeiro's bustling Copacabana beach strip, visitors could see for themselves just why Latin America has become such a vibrant travel market with airlines to match.
The facts back up the feeling: traffic for Latin carriers grew by 3% in 2009 when almost everywhere else nosedived, said Alex de Gunten, executive director of the region's airline association ALTA. Moreover, the Latin boom is back, with traffic up by 15% for the first two months of this year.
Latin consumers are increasingly using the internet to book their air travel, but in a significant difference to other regions, they are less likely to pay with credit cards. The first part is good news for airlines like Pluna, which is focusing strongly on web sales as its new private equity owners seek to revive the brand, said Guillermo Roche, commercial systems & distribution manager at the Uruguayan airline.
"Internet penetration [in Latin America] has grown to 32% in 2010," said Roche. "It is only in payments where we find some difficulties. There is low credit card penetration and many are local or regional and cannot be used through global payment platforms. In addition, many users are apprehensive about making internet payments."
This helps explain why sales made via travel agents still represent half of Pluna's revenues. But the carrier's mission is to promote its direct channel, a must for cost reduction, said Roche. Pluna has gone from zero sales on its website to 25% in just three years.
Especially in their home markets, carriers like Pluna and Brazil's Gol have been working hard to get people booking via their dot.coms. But in the fragmented Latin market, with its 20 countries and 10 dependencies, travel agents remain a very important sales channel.
This means that global distribution system fees will represent a big portion of airline distribution costs in the region. But they are disproportionately high compared with the prices others pay for similar services, says de Gunten. "Indirect distribution charges are 80% higher than in the USA," he says. This means ALTA members are penalised to the tune of about $300 million extra in GDS fees each year.
The reason for the higher GDS fees is not down to any one reason, but includes factors like market fragmentation, lack of airline negotiating power and inconsistent regulation. Latin carriers have talked in ALTA meetings about setting up their own GDS, but the idea has not taken off. "Right now the industry is going through consolidation so priorities have changed," says de Gunten.
One way to get GDS costs down is more competition. This is just what is happening with the return of Travelport to the Latin market. The GDS is quickly moving back into Latin countries over the next year or so, offering an alternative to Amadeus and Sabre, says Julio Bruno, vice-president Latin America & Caribbean.
This will give carriers some negotiating leverage as Travelport's re-entry will push prices down. Another way for carriers to secure lower fees is to give the GDSs all of their fares and content. But airlines like Pluna are reluctant. "We might do it in the future but once you have 50-60% [distribution] in your direct channel, why would you?" asks Roche.
Gol is a perfect example of a large low-cost player adopting elements of traditional network carrier behaviour: for example it has codeshares, a frequent flyer plan and sells via travel agents. "In order for us to keep on growing, we needed to change our business fundamentals to cater for new segments and this has a lot to do with distribution," explains Marcelo Bento Ribeiro, who is director of yield and alliances at Gol.
Gol has a sophisticated distribution model that uses multiple channels to sell its seats depending on whether the sale is in Brazil, other Latin countries or elsewhere. "Gol is not religious about distribution models and tools. We believe in serving market segments in the most effective and cost-savvy way," says Bento.
In Brazil Gol's big target market is the fast-growing middle class, which now represents nearly 52% of the country's 90 million-plus population. Today they make up 47% of Gol's customers with 5-10% of them flying for the first time, says Bento.
Going after this leisure market, with travellers often being wooed away from gruelling bus rides by Gol's low fares, offers new challenges. "This imposes restrictions on our ability to pass on distribution costs to prices and creates incentives for unbundling offers and lowering fares to catch the much more price-sensitive new customers," says Bento.
It was a lack of pricing power that forced US carrier Frontier Airlines to begin charging for checked bags, explains Tom Bacon, the former Frontier vice-president. This so-called unbundling of the product has become widespread in the USA and Europe and created huge ancillary revenue streams. Gol has limited opportunities for unbundling, as it cannot charge bag fees by law. Nor are local airports geared up for things like priority boarding, says Bento. However, it is pressing on with a successful buy on-board food programme.
Once an airline has unbundled its product, then it has the opportunity to "rebundle" them to appeal to specific market segments like business travellers, says Bacon. "[At Frontier] we found a third of passengers who were offered a bundled fare took it. We made $25-75 more as an increment to their base fare," he says.
But rebundling needs high web sales penetration to drive additional revenues, as it is generally limited to being offered on the airline website, like at Frontier, says Bacon.
The major drawback to either bundling or unbundling is the difficulty of offering it on the GDSs, leaving potential revenue on the table at this stage of the booking process. It has been a technical barrier, with the GDSs able to create workaround solutions for specific carriers, such as those Sabre did for United Airlines for its Economy Plus extra legroom seats, but not able to offer an industry-wide solution.
Just two weeks after the Rio event, the three GDSs, the main online travel agents and the largest travel management companies announced their support for plans to develop "industry-wide technology standards which enable shopping, booking, payment, and reporting of ancillary services". The GDSs plan to make this available by year end.
The next step for carriers will be to revenue manage their ancillary products, says Jim Barlow, senior vice-president SabreSonic Solutions at Sabre. "There is a big opportunity to squeeze out a little bit more revenue out of this model," he says.
Source: Airline Business
