There is all to play for in airline distribution as new technology and new business models reshape the way that air tickets are sold
AIRLINE DISTRIBUTION IS SHAPING UP AS A textbook example of just how fast and furiously change can come when a sector is faced with new online sales channels and pressure from a new low-cost business model. But the textbooks will have to wait, for this is a revolution that is far from over. There is still all to play for as airlines, the travel trade, Global Distribution Systems (GDS), online players and new payment systems manoeuvre to stake out their territory in the new world order.
Such was the backdrop to the Airline Distribution 2005 conference, jointly hosted in Bangkok in April by Airline Business and UATP, the industry-owned payment system, alongside its annual meeting. Centre stage still rests the question of the GDSs and how they will reinvent themselves for an internet age. As Horst Findeisen, vice-president commercial at the Star Alliance, says, for airlines, the question is fundamentally one of cost. He estimates that the 16 members in the Star Alliance together pay out around $2 billion a year to the GDSs. He points out that of an average $13 booking fee only $5 pays for the cost of transaction, with the remainder split between inducements to travel agencies and the GDS provider's profit margin. That pricing model, he argues, is simply no longer acceptable to cash-strapped airlines. "Dramatic reduction in the GDS spend is a top priority in the Star Alliance," he says, adding that the "value-price" disconnect in some markets is viewed as a "global issue" for the alliance to address.
The presence of GDS new entrants, dubbed GNEs, with the promise of handling bookings for as little as $1, are forcing the pace. Star is in the process of assembling a workshop for members to hear presentations from the GNEs and see how they might handle implementation. "We intend to move quickly. We have no choice but to look at opportunities and this is one we see very high on our radars," he says. Benchmarking work already carried out in Star has generated GNE price quotes in the region of $1 to $3 per ticket and Findeisen adds that Star intends to "lead the industry to realise this opportunity".
Michael Randall, who heads business development at ITA Software, one of the ambitious technology companies leading the GNE push, quotes fees as low as 40¢ per booking and set-up costs for a reservation system for one US domestic client of only $6 million. The trick, he argues, is simply that the GNEs are starting with a clean sheet without the complexity that gave birth to the GDS.
The emergence of new pricing benchmarks from the likes of ITA has been an "enormous catalyst" to tackle GDS cost says John Slater, managing director distribution at Continental Airlines, one of the US majors actively working with the GNEs. "We applaud the fact that GDSs are reinventing themselves, but the fact is that their model is broke. What they're not doing is telling us what they're doing about it."
Darren Peisley, distribution general manager at Qantas, agrees that 40¢ segment fees are "difficult to ignore", although he stresses that it is about "getting the right price for the right channel". He also posts up the issues of "functionality and control" that stand alongside price as a major challenge.
The message is apparently being received. David Doctor, director of airline marketing at Amadeus, acknowledges the need to move further in better understanding the value that a GDS offers in different channels. He promises that next year will see "major strides in proposition and pricing " from Amadeus as it "seriously addresses" business model issues.
That itself marks progress comments Oliver King, who was general manager for distribution at British Airways as the UK major underwent tough renegotiations with its GDS providers. He has since moved on to head its Latin American business. "A few years ago the GDS would have asked: what problem?" says King. "Now at least they recognise there is a problem. We're having the right conversation."
Low-cost pressure
If the conversation has improved then it has been in part driven by the demonstration of what low-cost carriers have been able to achieve through online booking. "They've become a real force in our industry and as a result we've all had to become low-fares carriers and we're going to take some of the complexity out," says Slater at Continental.
And as low-cost makes its way around the world they have taken their direct sales philosophy with them. Tiger Airways, the low-cost unit launched last September by Singapore Airlines, makes 60% of bookings over the web and has a target of 80%, says chief executive Tony Davis, who arrived as chief executive fresh from leading UK low-cost unit bmibaby. He plays down any lingering doubts about internet usage rates in Asia. "People in Asia can see a bargain. If the price is low enough people will find a way to access it," he says, quoting examples of Vietnamese passengers who called US relatives to make their bookings.
"We have a sales force of zero, because I use the internet as my sales force," he says. "We are taking on a retailer mentality. We don't need the wholesaler anymore." That is just as true of the online agencies adds Davis: "Drawing people to our website is the single most important thing, not driving them to somebody else's."
Southwest Airlines, the grandfather of all low-cost, also shuns the online agencies, despite its presence on the Sabre GDS. "We don't display on the online sites so that puts the higher burn on us to get the message out to our customers. But it works for us," says Kevin Krone, vice-president of interactive marketing. Among the tools to help get that message across out is Ding! – a download that sends latest fare sales to your desktop. It appears to be working. Some 59% of the airline's sales, worth around $3.7 billion, are currently going through the Southwest website, giving it around 16% of all online sales.
Majors online
Majors too are joining the trend. Following its Simplifares initiative that slashed domestic prices, Delta Air Lines saw bookings via its website soar from 18% to 28% and that appears to be holding. Peisley at Qantas reports that around 45% of domestic bookings are now direct and 30% over the website. "The question is where does this stop: how far will point-to-point and shorthaul migrate to online?" he asks, adding that on some international routes the web numbers are up close to domestic levels. "Online is low yield but the mix is improving," he says. "The reality was that when the low-cost carriers hit us we couldn't afford to compete with them pushing fares through the traditional channels."
Slater quotes similar direct booking levels for Continental but as both he and Peisley concede, attracting domestic customers online has been the easy part. Beyond the home market and the lower-yield passengers, penetration falls away. Slater notes that despite the number of online tickets sold the "lion's share" of revenues still comes through traditional channels. He acknowledges that there is still a place for the travel agency in pulling together information for its customers but adds: "Who pays for that value is what we're asking right now."
Hidden costs
Richard Clarke, among Europe's leading analysts who has now set up his own consulting firm Travel Technology Research, argues that it is too soon to write off the GDSs. Although he concedes that they have been "slow to adapt", they remain giant players with "sustainable business models". They still handle around 65% of the world's air bookings.
"GDSs are here to stay. We must work with them," says Clarke, warning that despite the attractions of online channels they come with their own price. As well as driving down cost, web sales have also tended to impact yields and to create powerful new distributors in the shape of the online agencies. He also points out that there is a risk that the online push could add to complexity, with more channels to manage and more IT investments to make.
Worldwide the GDSs reach some 230,000 points of sale, says Doctor at Amadeus, and not all regions are moving as fast as North America or Europe. Don Birch, chief executive of Asian GDS Abacus, points out that there are still more than 20,000 travel agents in Asia – a region where 90% of air is still reserved by travel agents. "The internet has become just another important channel," he says. "I think the travel agent is here to stay. The question is how big will they be?" He adds, however, that those who survive will have to shift their culture from simply making bookings to providing real value-added services.
The view is echoed by Berthold Trenkel, chief operating officer at travel giant Carlson Wagonlit in the Asia-Pacific. He doubts that the region with its high-touch service culture will shift quickly towards online booking, at least for corporate travel: "There are seven to nine calls in Asia per transaction and that's not going to go away."
However, Trenkel agrees that the race is on to bring down transaction costs through increased automation, exactly as it is for the online agencies now pushing into the corporate space. "In future we're all going to start to look more alike because we have to offer what the customer wants. It's not a case of offline or online, but because the customer wants it," he says.
Corporate bookings are clearly a prize that is attracting the existing online agencies such as Expedia, Travelocity and Orbitz. Business travel is not far behind leisure in terms of scale, representing 40-45% of a global travel business worth in the region of $900 billion a year. Ellen Keszler, president of corporate solutions with Sabre Holdings, points out that all the internet travel companies are now in the business arena and expects 2005 to be the year when they start to sign up corporate accounts in earnest.
She traces the development of online business bookings back to the late 1990s, when large US corporations began to go online, albeit with the challenge of getting adoption rates above 20%. Since then the rates have increased to 80-90% in some cases. Today, she says, the challenge has moved on to automation and the goal of touchless transactions. "Corporate travel is all about scale and driving cost down," she says, adding that the next challenge is to capture content. That was in part why Sabre bought GetThere, a multi-GDS online booking engine with access to a wide spread of content including low-cost carriers. Crucially it also claims a 50% fee saving against agency service fees. The other side of Sabre's offering is Travelocity Business, the group's full-service agency, which she describes as "the low-cost carrier of the distribution business" with its simple $5 online and $20 offline pricing.
As yet, Travelocity Business is sold only in Sabre's US heartland and Keszler concedes that corporate online booking is still patchy outside of North America and Europe, although multinationals are taking the technology further afield. "Asia is a little bit more of a challenge", she admits, but it will happen.
Payment alternatives
While the drive to reduce booking fees has taken the spotlight, another cost area is looming on the horizon in the form of credit card payment charges. "Airlines need to engage quickly," warns Clarke, arguing that the industry needs alternatives such as UATP "to apply pressure" to major issuers.
Pascal Burg, director with US consultancy Edgar Dunn, describes payment-related costs, including a range of merchanting rates, fraud and back-office expenses, as the "next frontier for airlines". Such costs currently average around $12.50 per ticket for the US industry, running to $1.5 billion annually. Burg reckons that it should be possible to shave 20% off the bill by a mix of initiatives, including promoting forms of payment other than the traditional credit giants. Such alternatives range from lower-rate bank debit cards, as the likes of British Airways has already done, through to offering gift vouchers, which America West, for example, has on sale in high-street stores.
New names too are emerging from the web, such as PayPal, the eBay online payment system, or Bill Me Later, offering credit at point of sale. Roy Vella, director of merchant services, says that PayPal now has 72 million user accounts around the world and $18 billion in transactions last year. There is also around $750 billion in balances stored in PayPal accounts at any one time, ready to use for the online vendor who offers this "cool" payment method. Corporate payment is still "a little way off" but in the meantime Vella suggests there is an "interesting opportunity" in the shape of UATP, which itself handles around $8 billion a year, to help keep the other card issuers honest.
Burg points out an interesting piece of airline history, that as the first credit card ever issued UATP still holds the code numbers 01 and 02 leaving Amex, Visa and MasterCard to take the next three, as a quick glimpse in your wallet will confirm. As with the GDS, perhaps credit cards are an opportunity for the airline industry to reclaim control of what they helped to create.
REPORT BY KEVIN O'TOOLE AND NICHOLAS IONIDES IN BANGKOK
Source: Airline Business
