The rise of the Internet and low-cost carriers has caused a revolution in the travel distribution chain, with carriers, travel agencies and GDS providers all jostling for position
As Charles Darwin notably concluded, it is not necessarily the strongest or most intelligent species that wins in the battle for survival, but rather the most adaptable. A salutary lesson for those now competing to secure their place in a travel distribution chain, which finds itself facing an extraordinary burst of evolution. And there is still all to play for as airlines, agencies and Global Distribution Systems (GDSs) seek to adapt and survive.
About time then, that players from across the air travel businesses opened a robust debate on exactly what happens next. That is what Airline Business aimed to provoke as it launched the Future of Air Travel conference on 10-11 November. Held during the opening days of World Travel Market, a global exhibition held in London's Docklands, some 200 delegates from along the travel chain came together to open the debate on the revolution now taking place in Europe and beyond.
The message that came out loud and clear over the two days is the fact that no part of the travel business, low-cost carriers included, are immune to the pressure to adapt. Also clear is the extent to which the future of all the businesses along the chain are intimately linked.
As airlines slash away at distribution costs, so that puts pressure on the GDSs and travel agencies alike. Agencies in turn have learned to live without commissions, switching from the loyal agents of airlines to become travel consultants to fee-paying corporate clients. That switch brings calls to access a full range of airline products, including low-cost fares. That puts pressure on the GDS providers to come up with a solution, or risk becoming sidelined as others step in. The low-cost carriers, creating the pressure on mainline costs, are themselves in need of new solutions if they are to extend their reach into the corporate market. And so the chain goes on, not to mention the role being played by hotels, car rental and other travel services.
Even those most modern of players, the online agencies, are earmarked for some heavy consolidation ahead and could yet run into competition from the GDS solutions if and when they emerge.
To use an image from Richard Lovell, who heads the European region for Carlson Wagonlit Travel, the travel chain is like a game of billiards: whichever ball is played has a knock-on effect on everyone else. "In the past everyone knew where they stood and what piece of the cake they could expect," he says. "Now I don't know if anyone knows exactly where they stand. No one in this industry can make a move without it having an impact on everyone else."
There is no doubt that the apparently irresistible rise of the low-cost carriers and the online sales channels that they have pioneered, have together set the sector firmly in play.
This year some 42 million European passengers are due to fly on the new breed of low-cost carriers on a fleet that has risen above 200 aircraft, says Ray Webster, chief executive of the largest of these at easyJet. With North America's low-fare sector already climbing towards the 100 million passenger mark, the die would seem to be cast for a western short-haul market dominated by low-fare entrants. For his part, Webster still argues that it is only a matter of time before traditional carriers on short-haul point-to-point services and consumers switch wholesale to the web. "The Internet enables constant product comparison - agents can no longer hide behind a GDS screen - it is the consumer that has the tools," he says.
Traditional carriers too have taken up the challenge in the race for survival. Aer Lingus has gone just about further than anyone in transforming its loss-making short-haul network into what now resembles a low-fares carrier with frills. Over the past two years it has hacked 35% from unit costs and slashed fares, matching low-cost prices in its economy cabin and cutting business fares by up to 60%.
Question of survival
It was quite simply a matter of survival says Willie Walsh, the carrier's chief executive, who arrived at the Irish flag-carrier in October 2001 as it flew close to collapse in the wake of the 11 September attacks. "If we did nothing then we were going out of business. We had to become relevant and by that we mean reducing our fares," he says. "Aer Lingus is now a low-fares carrier. There is no return to the old model, it was bankrupt." The diet of low-fares and online sales appears to have suited the carrier, which is on course this year to post the highest-ever profit margin in its history.
A key part of this fundamental shift was to turn to the web, not only yielding serious cost savings in distribution but also allowing Aer Lingus to reach out to a new audience of travellers as it overhauled the European network. Early on the carrier benchmarked its passenger processing costs against low-fares compatriot Ryanair, only to find itself adrift by €20 ($24) per customer. "The Internet represented the solution," says Walsh. Sales via the airline's own website have since been stepped up from 2% to more than 45% of all tickets sold and, with the site now handling 100,000 visitors a day, the target is to push that share above 70% next year. Some 60% of home sales are already via the airline's own website with 40% in markets outside Ireland, adds Walsh.
He warns that the harsh reality is that all parts of the travel chain must, like his own carrier, adapt or die. "There can be no entrenched vested interest and the world owes nobody a living. You must be relevant. Each part of the chain must be relevant and that will be decided by the customer," he says. "There is the same pressure on each part of the industry."
Others carriers, too, are making the change. Flybe chief executive Jim French has steered his carrier from its former incarnation as British European to pioneer the experiment of a low-fare regional. He too talks of a huge increase in sales from the airline's website, up from 6% to 80% over just 12 months.
Elsewhere, the traditional charter carriers have also begun to enter the game, albeit late in the day, concedes Tim Jeans, now charged with making sense of the tangle of airline operations inherited by the UK's MyTravel group. "The lack of synergy was screaming out to me from every part of the business," he says. Jeans is an old hand in the low-cost game, having been brought in to start up the MyTravel Lite unit from his former role heading sales at Ryanair. He argues that in Europe, at least, there is still plenty of white space that the burgeoning low-cost sector has yet to fill, including traditional holiday markets such as Turkey and Tunisia.
Yet while low-cost continues to grab the headlines, the other parts of the chain may not be quite as endangered as advertised. Mike Platt, managing director of the BTI travel management giant in the UK, argues that if all the hype were to be believed then everything from full-service airlines through to travel agents and the GDS would soon be swept away on a tide of low-cost carriers and online sales. On more sober reflection, he argues, that scenario seems less than likely, which begs the question of how the market will take shape.
Andrew Buckley, vice-president global business partnerships at American Express Services in Europe, highlights the experience of the hotel sector. With the advent of new "no-frills" hotels, the market was initially split between budget and traditional offerings. Yet the market has since filled out all the market niches in between. Buckley expects the same to be true of air transport. As an aside, he notes that although the hotel business was late on to the Internet, it is now among the most lucrative and fastest- growing segments of the online travel offer, rising in volume terms as fast as, if not faster than, airlines.
While most travel agents concede that much leisure and small business booking has effectively been lost to the web, the sector aims to keep tight hold of the large corporate accounts. "The travel manager is becoming a change manager", understanding and exploiting market opportunities on behalf of fee-paying clients, argues BTI's Mike Platt.
Lovell, too, is adamant that the low-cost rhetoric about slashing commissions is a dead letter in the corporate world. The emerging travel management giants, such as his own Carlson Wagonlit, have not relied on tickets for the best part of a decade, he says, having long-since made the transition from mere ticket issuers en route to becoming truly global end-to-end travel managers. It is the added-value of the advisory side of the business that has taken centre stage, says Lovell, with the day-to-day transaction business simply now a matter of routine volume processing.
In this environment, agents complain that searching out and booking lowest fares via the web rather than the GDS simply builds in additional time and cost. "Taking 15 minutes to make a booking online is not a good use of time," says Lovell, adding that Carlson Wagonlit is among those developing software to allow all fares and carriers to be seen together on a single screen.
Buckley at Amex argues that only a tiny percentage of business travel is currently flown on low-cost carriers, at least within the major multinationals, and even then the deciding factor is likely to rest on the convenience of a local airport. He adds that, taking into account end-to-end travel costs and corporate deals that can virtually halve standard mainline fares, it is "very unlikely to find a corporate customer that would pay less on a low-fares carrier than on a full service airline".
Managed travel
Lovell argues that the real distinction lies not in the type of carrier, size of the corporation or purpose of travel, but between unmanaged travel, which is paid for directly by the traveller, and managed travel, which is about moving people efficiently around the globe using corporate money. Where travel is managed, says Lovell, the trend is, if anything, towards more rather than less reliance on travel managers for advice, technology and processing. He wonders out loud whether large corporations may one day hand travel management to their procurement departments to treat as just another outsource contract.
"Travel agents will play a continuing and possibly increasing role in the industry," agrees Adrian Parkes, commercial director at bmi. That is despite the dramatic shift in channels that he charts in bmi's own business over the past five years. Back in 1998, bmi, then still under the British Midland banner, sold close to 80% of tickets through the travel trade, with the remainder largely through call centres. Today the traditional channels are down to little over half, thanks to a surge in direct online bookings, which have climbed to 25%. Looking on another five years, Parkes believes that the online volume will climb steeply, with a target of 45% of sales via its own website and another 15% from online agencies. Expedia is already among bmi's top five volume agencies in the UK, he adds.
Yet amidst this online shift, Parkes reckons that the travel agency multiples will keep their place relatively steady over the next five years, continuing to handle around 30% of the airline's business.
Less certain, however, is the outlook for the GDS. While Parkes favours a continued GDS solution and even believes that the low-cost carriers will eventually "overcome their cultural issues" and sign up too, he is not alone in warning that there needs to be "a step change "in the GDS in terms of cost and technology.
"The GDS environment is good for bmi and for competition, but if current GDSs fail to play the game, then someone else will," he warns, pointing to big IT guns such as IBM or even Microsoft waiting in the wings. "If they can't find a way to change then it is extinction and not a slow and lingering extinction either."
Amadeus, which partnered Airline Business in hosting the conference, accepts that the historic relationship between airline and GDS has left carriers lamenting their lack of pricing power and that change is urgently required. David Jones, executive vice-president commercial at Amadeus, concedes that a new model is needed which can help airlines feel "less captive" and distributes the cost burden more evenly between carriers and agencies.
In North America Jones points to what he describes as a "three-year truce" between GDS and airline. That was led by Sabre with a pledge to sign up carriers to a three-year deal at discounted prices (somewhere around 15%), that gives full access to all content, including web fares. Galileo and now Worldspan have followed suit and Jones believes that Amadeus may yet have to join the trend in North America.
But Jones feels this will give no more than breathing space, with the real need for a sustainable new model. Thus the decision by Amadeus to roll out its "value pricing" initiative, designed to set GDS fees in accordance with their value to the airline customer. This starts in 2004 with fees that vary by itinerary, reflecting the value of the booking to the airline, and point-of-sale, reflecting the value brought by Amadeus. As Jones points out, there is a hard cost attached to the GDS in easing the sale of tickets through the travel trade. He acknowledges that this represents "a modest first step in a new direction", but with the promise of more sophistication to come. That includes charging separately for a itemised service and control features as required. "We also need to find models by which agents can contribute to GDS cost in return for access to low-fare content," he adds.
An interesting perspective comes from Tim Claydon, who heads sales and distribution at US low-fares phenomenon jetBlue. Although the carrier pulled its inventory from all the GDSs, except Sabre, and shuns the online agencies, the decision was one of strategy rather than of cost or philosophy. What jetBlue would like from the GDS, says Claydon, is ability to use GDS listing for targeted campaigns in key cities as "incremental or tactical opportunities", rather than to spray its inventory across every agent in the USA. "Its not just about cost or technology but about the actual business model. We don't want to be distributed to all travel agencies," he says.
Claydon also adds that sales through the jetBlue website, which are a US industry best at over 70%, have begun to level off. "Until we can add new functionality to our website we're going to continue to see that slow," he says.
Online agency growth
If and when the GDS providers do resolve their model, there is a looming question of how they will eventually relate to the growing online agencies. David Scowsill, chief executive of Europe's Opodo, notes that relationships are being formed. Travelocity is a key element of the Sabre business, Galileo is alongside CheapTickets within the Cendant group, while Amadeus has just taken 20% in Opodo. Scowsill adds that consolidation among the online agencies, at least in Europe, looks inevitable. The three top players, led by lastminute.com, Ebookers and Expedia hold only 12-13%share each in a market which was still only worth a relatively modest €3.6 billion last year. By contrast, in the $15 billion US market, Expedia Travelocity and Orbitz hold nearly 80%.
Richard Clarke, who heads travel and transportation for the META Group IT consultancy, reckons that on a best guess, world online travel sales will stand at around $35 billion this year rising to above $55 billion in the next couple of years. That leaves plenty of growth still to come in a total travel business that is conservatively reckoned to turn annual revenues of $740 billion.
"The online agencies are going to be some big beasts in the future that need to be addressed," he says.
Source: Airline Business
