Airlines in Transition: Ancillaries come to the GDS, but websites still hold retail advantage
The immense complexity of air transport means getting air fares to passengers is an exhaustive task, and once revenue management has set a price, most airlines call it a day. Not enough time goes into developing websites that approach user-friendly status; the bad examples outnumber the good. Yet ironically this is the start of a passenger's interaction with the airline, aside from past experience or marketing exposure. There is no opportunity to taste the celebrity chef cuisine your airline boasts, or feel your wool duvet to a competitor's cotton offering. Price reigns, and a seat, as the industry laments, becomes a commodity.
For all their lacking, airline websites still hold a retail advantage over GDS, although the latter has a market share advantage, accounting for some 60% of bookings by value. A number of groups are trying to close the gap by having ancillaries hosted, or hosted better, on GDS. IATA is working on its New Distribution Capability, Amadeus is able to sell United's economy plus seats while Travelport, on the eve of CAPA's Airlines in Transition conference in Dublin in Apr-2013, announced its merchandising platform.
Considerable and worthy effort is going into these initiatives, but once they eventuate a new series of questions crop up. Will travel agents be incentivised to sell ancillaries if they do not receive a commission? Can the GDS environment support critical retail psychology techniques airlines are only slowly waking up to? Is there a conflict between GDS wanting transparency and airlines seeking revenue?
Airlines want travel agents to sell ancillaries - but agents need to be incentivised
Airlines want travel agents now more than ever before to sell ancillaries. Many - but not all - low-cost and hybrid airlines recognise they can gain a yield premium by distributing on a GDS; easyJet is a large recent example. But ancillaries are a critical component of their business, as the Amadeus/IdeaWorks Yearbook of Ancillary Revenue attests to.
Top 10 Airlines Total Ancillary Revenue (euros): 2010-2011
Source: Amadeus/IdeaWorks
There is a constant push and pull between airlines saying the GDS cannot support ancillaries and GDSs saying they can. A more accurate judgment may be that GDSs generally do accommodate ancillaries but in a clunky and limited fashion.
Full-service airlines are increasingly adopting LCC elements, with demands for GDSs to support ancillaries. Even the most steadfast of full-service carriers have some ancillaries, mainly charging for exit row seats (Singapore Airlines) or a seat assignment unless the passenger holds elite status (British Airways, Qantas International). No doubt airlines, everywhere between full-service and low-cost, are not creating ancillaries as they feel limited by the GDS.
But travel agents may not hold the same vigour as airlines to sell ancillaries. They find using Special Service Requests (SSRs) difficult, and even when a more welcoming platform comes along like Travelport's merchandising solution, they may not have a monetary incentive to sell ancillaries since they typically do not receive a commission on them. That not only gives them no reward for their time, but no incentive to learn about the ancillaries and then sell them the way they may pursue a customer to book a flight that will give them a higher commission.
Commissions are in decline and some agents will turn away from making short-haul bookings: the time it takes is not worth the small commission they receive, and perhaps they can even get a sense of altruism by telling the passenger to book the ticket on the airline's website and save the proportionally large booking fee the agency would charge.
"This is why we have to push direct sales," Lufthansa CIO Christoph Klingenberg told attendees at Airlines in Transition.
Other agents see ancillaries not as a profit centre but rather a service they must offer if they wish to remain in business. This view will likely grow as airlines tilt their focus on ancillaries.
Where they once relied on what might be termed "naughty" ancillaries - charging for what used to be free (meals, luggage) - they are now focusing on "nice" ancillaries that create brand new, service-improving opportunities (premium economy when it is not its own booking class, enhanced meals, WiFi voucher, lounge pass/expedited queues to non-status holders). These will grow as GDSs continue to support ancillaries, but airlines should not ignore the commission model.
A lawsuit filed by the agency community in Australia against airlines for not paying a commission on fuel surcharges dragged out, and by most accounts agents fared better in the case. Publications like the Yearbook of Ancillary Revenue gives a taste of what agencies are potentially missing out on.
Travelport is better at accommodating ancillaries with its new Merchandising Platform. Already live is the ability for travel agents to sell ancillaries within their screen as well as aggregate on a single screen fares connected via ATPCO as well as an API connection. Due to launch later in 2013 is the ability for airlines to let agents see photos and details of their product.
easyJet connects to Travelport via an API, allowing fares to be shown alongside full-service carriers, and for the carrier's ancillaries to be shown as well (even if connected via an API, an airline can change the offering or pricing of ancillaries on the GDS). "We can't change our model," easyJet Group Commercial Director Cath Lynn told the conference. "We don't fare file, go for ATPCO…we can't stick with old technology." The API lets GDS customers have an approximate view of what they would see on EasyJet's website. Ms Lynn remarked EasyJet and GDSs have "made good progress but there's a long way to go."
It is not just LCCs/hybrids using the platform. Air Canada uses the platform for ancillaries and fare bundles, Delta and KLM allow the selling of premium economy seats while British Airways offers pre-paid seating.
Airlines need to be better retailers, and their own websites offer best opportunity
Even when GDSs can accommodate ancillaries, there is a loss of opportunity as the airline cannot communicate directly with the prospective passenger. The existence of the middleman (travel agent) is becoming more problematic as airlines slowly grasp the importance of retail psychology: what you sell is as important as how you sell it.
British Airways re-vamped its booking engine in 2011 to promote up-selling to other cabins. Previously, searching for a ticket in one class of service only showed that class.
British Airways old booking system: 2011
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Source: British Airways
BA now shows additional classes: searching for economy shows premium economy and business, searching for premium economy show business and first, etc.
British Airways new booking system: 2011
Source: British Airways
BA made this change after reviewing retail studies that found that when consumers have a choice, they more often select the middle option. BA helps this along by vertically listing the benefits of each class, so premium economy is taller than economy, making a bigger impression to passengers.
Of course not every passenger will upgrade, but BA reckons that only a fraction need to in order for it to gain "tens of millions" of additional revenue. The one-off implementation cost of this is low, and BA has not touched a single aircraft to add a perk (and cost) or bought another aircraft, as airlines mainly do to grow revenue.
This cannot be imparted on a passenger via a travel agency. Nor can other examples, like Air New Zealand offering additional checked luggage or the Skycouch as soon as a fare is selected.
Air New Zealand booking system: 2013
Source: Air New Zealand
Airlines are increasingly relying on fare bundles, a concept that started with Air Canada early last decade. Bundles allow airlines to have a stripped-down offering that entices the market with a low fare but then move upwards as perks are added. There are debates as to whether bundles or adding ancillaries from a single fare are the best option, and each have their advantages.
The GDS environment can support bundles by making each its own booking class (as Air New Zealand has done on the trans-Tasman, and Peach Aviation does as well in agency-heavy Japan), but this requires significant training of agents. It can be challenging in a local market, let alone globally. A website environment, however, is easy to understand, especially if a carrier like Scoot makes the bundles easy to understand: FlyBag is a seat with checked luggage while FlyBagEat adds a meal. This is far easier to understand than the numerous airlines that pick random product names that do not allude to what is included, adding confusion (without any cost savings).
Scoot booking system: 2013
Source: Scoot
And this, of course, barely goes into the ability for airlines to quickly display the best available fare on the day or across a week with one look, rather than having to pull up fares flight-by-flight in a GDS environment.
For trends in this area, one might watch small but impactful Air New Zealand. Christopher Luxon became CEO on 01-Jan-2013 after mainly a retail career at Unilever, which sells perishable commodities - just like an airline.
See related report: New Air New Zealand CEO Christopher Luxon values alliances as airline eyes Asia and US growth
There are some small hybrid options. airBaltic told the Airline Retail Conference in Hong Kong that travel agencies account for about 50% of bookings, and of those 10% go to the carrier's website to purchase ancillaries, the latest of which is the ability to customise what dishes are served on a meal tray.
Being retailers may mean having opt-out features - GDSs aim for transparency
Part of retail psychology may mean having opt-out scenarios when it comes to ancillaries. AirAsia, amongst other carriers, automatically adds insurance, and does so in a light gray text against a gray background at the bottom of the page. No doubt catching travellers who unwittingly purchase the service.
AirAsia insurance add-on: 2013
Source: AirAsia
Jetstar, amongst other carriers, automatically adds a luggage allowance. This is not at the cheapest 15kg option but rather the more expensive 20kg option.
Jetstar luggage services: 2013
Source: Jetstar
The clash is that while such tactics understandably appeal to airlines, GDS want to promote transparency and so far favour opt-in services. This does not erase the benefit for airlines distributing on GDS, but does lessen the potential.
For more sustainable growth, airlines need to look past buying aircraft
As GDSs better accommodate ancillaries, they are targeting LCCs, which have traditionally shunned them. Indeed, Travelport has a report entitled "How Low-Cost Carriers can achieve world-wide reach", which focuses on how the GDS accommodates LCCs. Some see this as a contradiction that GDSs are targeting new customers with an ancillary platform that will be to the detriment of a GDS' existing and mainly full-service carriers.
But it is high time for airlines of all models to pursue ancillaries. Airlines are rustbelt industry in need of new revenue sources that are smart and have high margins. Buying aircraft is capital-intensive and typically offers low single-digit margins. Besides smarter retailing, airlines can look at big data and loyalty programmes.
As CAPA previously wrote:
The world of data has changed radically in the past decade. Facebook has altered the way people communicate, simultaneously delivering a mountain of data to its owners; Google and Apple are rapidly building the biggest data factories ever assembled; Amazon knows all about our reading and consumer habits and is expert at exploiting them; and a host of online travel agents and others are taking advantage of their youthful IT profiles to accumulate data mines that are potentially worth tens of billions of dollars.
Meanwhile most airline managements are, delinquently - for there can be no other word for a vividly available resource which is being so clearly squandered - sitting idly by while the host of data they accumulate (or waste) simply runs like water through the sand.
...
Through a combination of silo thinking and antique technology, legacy airlines are looking in the other direction, still entirely focused on what is repeatedly described as "an unsustainable business model", buying large amounts of expensive boys' toys, constantly in conflict with their legacy unions, regulators, suppliers and airports, burning billions of dollars of fuel - and drastically underperforming financially.
The proposition of this report is simple: until now, this profligacy with data has not mattered, except in wasting valuable potential resources. But now, unless airlines wake up to the vast goldmine they are overlooking, the pace of change in data mining guarantees that one or more of the large miners (current or future) will intervene to grab these riches.
See related report: Airlines in Transition - A rust belt industry in need of revenues
IF YOU'RE RUNNING AN AIRLINE, YOU'RE PROBABLY IN THE WRONG BUSINESS. Not just for the obvious reasons. You should be marketing your brand, not selling tickets. One is unique and valuable, the other is a commodity. One can be monetised, the other mostly creates jobs for others. And the truly remarkable feature with the brand business - leveraged through a frequent flyer programme (FFP) - is that while someone else willingly collects the money for you (and pays for the privilege of doing so), your customers will love you more for it, just as your partners bring along their own customers for you as well.
See related report: The airline frequent flyer programme: for love and money
Better accommodating ancillaries on the GDS is a welcome move. While it is difficult for many airlines to think of a day when their website will take more bookings than GDSs, that does not preclude making website improvements, let alone the many new sources of revenue that are out there.