Emerging airline distribution strategies

Search and Airfare Only

Initially, there were large online travel agents (OTAs) such as Expedia, Orbitz, Priceline, and Travelocity, and smaller ones like BookIt.com, CheapOair, and OneTravel, and metasearch engines such as Cheapflights, Farelogix, Kayak, Momondo and Skyscanner. All were backed by solutions and/or data from the Global Distribution Systems (GDSs), who have continued to play a significant role in low fare search. These distributors displayed the basic product reasonably well given that the content - schedules, prices, and availability - was basically a commodity. Consumers could rank the offerings from airlines by duration of the trip, time of departure, and price, and the metasearch engines directed the traffic to the selling airlines. However, questions were still raised, for example, when a distributor provided information on a schedule that had an exceptionally long layover and combined the airline seat with other travel products. An airline may have wished that information to be pointed that out to the purchaser and options suggested even if they involved a higher price. There were also concerns about the compliance of fare rules, local fares vs O&D fares, for example.

Airlines tried different approaches to dealing with distributors. Sometime back, for example, American removed its contents from a major OTA and Delta removed it from a group of smaller agencies and metasearch engines for brief periods. The idea was not so much to reduce distribution costs but the desire to gain control the shopping and booking experience. At the time, Delta provided a realistic example. A person in the US can buy an Apple product from a general store like Best Buy or from an Apple store. However, while the product is the same, the experience is very different.

The Unbundling Movement

Subsequently, airlines unbundled their products and began to sell ancillary products and services adding complexity to the displays. Furthermore, some airlines began to make investments in their brands and offered branded products. This needed information on the individual making the search and the relevant conditions at the point of sale so as to optimise revenue per customer (not seat) and customer retention. Think about airlines that invested in their products such as high-quality lie-flat beds and direct aisle access seating configurations. The challenge became how to show this rich content and to display it effectively (not just with text but also with high-quality images and videos) through different channels to impact a customer's choice decision.

Then IATA launched the New Distribution Capability (NDC) initiative to address some of the limitations of the existing distribution system and to enable airlines to transform the way their products and services could be marketed. thus enabling airlines to display full and rich contents as well as a more transparent shopping experience. Although GDSs may have resisted at first, they are now on board to assist airlines with ancillary distribution, using the NDC XML standard. Two large North American airlines are now enabled to sell ancillary seats via a GDS using NDC XML.

Changes in Search Mobile

Then there is the shift that began to take place from the use of desktops and laptops to mobile smartphones, to an increasing number of and more sophisticated apps, to mobile merchandising, and to the delivery of personalised products and services.

Consumers

A shift also started to take place in the manner people conduct search for their travel products. Not only do they want to spend a lot less time conducting the search but, increasingly, search appears to be done in spurts and spread over a longer period of time. And consumers expect the "system" to have memory relating to the search conducted over time and in brief moments. And while searching for travel, people want the results fast and with limited and customised offers, not with dozens of flights listed with detailed schedules and hotel options but rather just a few that are relevant to the user.

Distributors

Around the same time, whereas the metasearch engines previously directed the traffic to airlines' websites (even though the fulfilment may have taken place on the metasearch engine's website), some metasearch engines began to think about making the booking themselves.
And, while new distributors began to show interest in the travel space (for example, Amazon.com that started with the hotel sector as an extension of the Amazon Local app), it is Google's entry, the powerhouse in the search space that has caught the attention of airlines and existing distributors. Even though Google had acquired ITA Software some time back and developed products such as Google Flights and Google Hotel Finder, it now has come out with a specific system - Book on Google - a comprehensive destination-related search tool with a booking capability.

The Airlines' Challenge

The challenge for airlines will now be to capitalise on these trends while not losing control of distribution costs, relationship with customers, and customers' loyalty. Admittedly, anywhere between 25%-40% of air travel is corporate travel, the most loyal sector and due to various corporate travel policies, some of the trends are more difficult to apply. However, consider the shift to mobile. It has significant implications. The screen on smartphones is small to begin with and it is clumsy to have multiple screens open at the same time. Users are reluctant to visit multiple sites let alone make bookings on multiple sites that require users to remember multiple passwords and the use of the credit card multiple times. Since people want to spend less time on the search, they find the use of apps to be more valuable. This point explains the popularity of Uber's transportation product. A couple of taps and the transaction is complete! On the flip side, some consumers do not trust airline prices, that is, they do not know if they are getting a good deal.

Enter Google

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Google saw an opportunity to capitalise on these trends, especially if the NDC would allow it to get the rich content directly from the airline. Seeing that about 60% of customers begin their trip planning by searching for information on Google anyway and given that Google had in its portfolio most components for destination-trip planning and booking it was just a matter of integration of its available resources. Besides the capabilities of the ITA Software, Google Flights, and Google Hotel Finder, there were Google Maps, Google+, and the Zagat Survey - adding to the functionality and comprehensive features for planning trips, especially on smartphones. Through its integrated platform Google began to offer comprehensive information on airlines, hotels, restaurants, and sites. Google can combine data it has from various sources such as searches made on its site on content, locations, the related products and points of interest. Google had even acquired Frommer's branded travel guidebooks but recently it has been reported that Google may sell that product back.

Although existing OTAs can also offer comprehensive packages, the feature promoted by Google is the ability to offer context-based travel searches to a customer using a sophisticated set of preferences that are relevant at the time of the search. Google can use, for example, the data on itineraries from Gmail and GPS destination-related information to make recommendations based on the knowledge of customer's interests and preferences. Next, it is the quality of the information provided, relating, for example, to inventory such as the promotional price of the airline ticket and hotel room at the specific time and their availability. Then there is the ability to make the booking on the spot and pay for the entire package using the Google payment capability.

Airlines recognise that for search relating to travel there is clearly a difference between desktop and mobile sites and, furthermore, a difference between mobile websites and apps on mobile phones. The experience varies among the three, even on the mobile phone, for example, between the use of a mobile web and a mobile app. The conversion rate is higher for a person using an app on a mobile phone compared to the one using a website on a mobile phone. And Google can capitalise on the importance of this experience and conversion rate for its segmented customer base whose needs are, presumably, not met by airlines' mobile sites and apps for shopping and booking easily and seamlessly. As such, the Book on Google channel will appeal to the segment looking for on-the-go experience and within this segment the sub-segment that is focused on "micro-moments" - short bursts of travel planning. These searches reflect questions raised with respect to destinations or events for very short periods of time, for example, a minute or two as well as over a short period itself, for example, the past few weeks or couple of months.
Some hotels within the US have already begun to partner with Google, as have some European airlines. Lufthansa, for example, has become a partner given that the user is being directed to the airline's website when it is time to book the flight and, presumably, the airline pays for these leads. So, the identities of the actual seller and the service provider are made clear. Presumably, Google suggests an airline based on the interest and intent of the user. As such, Google is not acting as an agent for the seller but is a provider of information and enabler of transactions.
Many Questions Remain

Some airlines are raising questions in two areas. Is the decision to direct traffic to a particular airline's website based on the results of organic search or paid search? Who owns the CRM? Will the seller feel that its product has been displayed in the right context? Although the partnership could lead to a win-win situation the outcome depends on the answers as to who owns the customer's relationship and how the search engine and the transaction facilitator is compensated and whose brand is being promoted, the airline, the hotel, or the distributor and the strength and awareness of an airline's brand vs the distributor, particularly Google? Some OTAs are also evaluating the competitiveness of the new powerful entrant. But, then, why would Google compete with an OTA, if the OTA provides advertising revenue and say, a hotel is willing to discuss different methods of commission payments - percent commissions or pay-per-click charges.

The Airlines' Options

So, what are the options and the decisions facing airlines? These decisions go much further than simply direct vs indirect and whether or not to partner with distributors.

First is the need to make investments so that an airline can market its rich branded content effectively, protect the content it owns, control it, and market to an emerging segment that wants to make an instant booking - the moment-to-moment segment. This includes the need for not just new "shopping centres" (given that airlines represent the front door to travel) but also to establish proactive mobile platforms leveraging the NDC with the ability to interact and achieve higher conversion rates and not be overly concerned about thinking of ways to bypass some channels.

Second is the need to achieve greater flexibility to vary the product offering, for example, with respect to price, not just within the 26 booking classes but also within various aspects of the ancillary products and services - in other words, the ability to introduce modular fare options. This need leads to two other requirements - digital thinking and upgraded revenue management systems. Digital thinking calls for investments in customer-centric dynamic retailing, pushing the relevant content to the relevant customer at the right time at the right price. A distributor might push for the lowest available fare without identifying all the features related to this fare whereas an airline may wish to push branded fares. The second requirement calls for the availability of a new revenue management system that leverages real-time pricing capabilities.

Third, there is the need to recognise the person or organisation making the inquiry and tailor the offers accordingly. This need also calls for the availability of a recommendation engine dealing with what product to offer to a specific customer at a specific time.

Fourth, as for partnerships, while there is value in forming partnerships, the question is how an airline can create and control its product content and its distribution and manage not just engagement with the customer but also the pricing aspects.

Fifth, there is the decision relating to short term vs long term relationships. In the short term, getting the reservations directed to the airline and even making some payments is reasonable, but what about the longer term potential concern when a distributor begins to mine its enormous database and exercise some control on the referrals? This leads to the need for an airline to establish KPIs to measure the success relating to the fulfilment of its strategic intent and the financial aspects, both in the short and long terms, of distributing through different channels. The KPIs are well established for travel agencies using the GDSs, however, these and new entrant channels will all require some tuning in order for airlines to make the most efficient use of the expanding travel marketplace.

And, finally, while the probability is low, could the fragmentation taking place in the hospitality sector - the emergence of the peer-to-peer entities like Airbnb - also spread in the airline sector?