Distribution And Digital Transformation: A Primer On NDC

Transcript

Mike Rock:Guten Tag, Damen und Herren. That's all of my German used up. Thank you for your time today. My name is Mike Rock, and I'm Head of Europe for Air at Travelport, and I'm going to spend the next 15 to 20 minutes talking, sharing some thoughts around NDC and the, the significance for low-cost carriers and the airline industry as a whole. So API distribution has afforded low-cost carriers several sources of competitive advantage in recent years when compared to full-service airlines using legacy technology. They've had the ability to identify customers at search, allowing the optimal combinations of product and price to be returned for each request. Full-service carriers, on the other hand, have not been able to identify customers, and instead they've returned the same generic fares irrespective of who's, who's making that request. And to clarify, when we talk about identifying customers, it's not always in the context of down to the individual. What we're also talking about are characteristics of the booking that might suggest it's a corporate traveler rather than a leisure traveler, or it's a family of 4 versus a couple versus a single traveler. They've had access to offer management systems, which has enabled continuous dynamic pricing and better yield optimization. This is a really big advantage. Full-service carriers for many years have been limited to 26 booking classes. Time-consuming fare filing processes. Low-cost carriers have massively outperformed full-service carriers when it comes to ancillary revenue. The, the latest Cartrawler report suggests that the best-performing low-cost carriers generate between 30% and 45% of their revenue through ancillary sales by dynamically pricing fares and offers. By contrast, the best-performing full-service carriers generate 10 to 15% of their revenue through ancillaries, and as much as 75% of that is through frequent flyer programs, which you could make a strong argument to say doesn't really count. And ancillary revenue is really important because this is high-margin revenue to, you know, there aren't many costs associated with seat allocation, for example. And finally, agility and speed to market. LCCs have been able to use retailing techniques to improve yield or volume on specific underperforming routes. Full-service carriers have— can take up to 48 hours to file a new fare, i.e., introduce a new price point, whereas LCCs have been far more dynamic and been able to respond to market conditions. principally supply and demand. So I think it's worth reminding ourselves from the outset that NDC is not a product or a capability. It's a set of programming standards that support the wider adoption of API distribution by airlines. So increasingly airlines are investing in merchandising engines which sit on top of their PSS and provide them with a range of improved sales capabilities. So let's take a look at some of those. The ability to identify the customer, as we've discussed, and return relevant contextualized content. There's the movement away from generic fares to more dynamic offers and ancillaries. And we also have dynamic pricing, which is a really important one. This is moving away from a finite number of predetermined static price points It's such an important one that I think we should take a, a closer look. So today, many full-service carriers still operate using stepped price points. That is to say, booking classes that are matched to filed fares, and when one booking class is sold out, the price suddenly jumps. This is not efficient. It's not competitive. And often results in outcomes where the price is not matched to the customer's willingness to pay. So you can see this little extract of the graph in the top left-hand corner, and you can see that in some instances the price is too high and the customer is lost to a competitor or an alternative. In other instances, the customer would have actually paid more money for the ticket and the airlines fail to optimize the revenue. Now, low-cost carriers have had these capabilities for some time, dynamic continuous pricing, you may have heard it referred as. Now, full-service carriers are starting to explore this through NDC, and as you heard Harry Hoemeister talking a little bit about that. To give you an example, British Airways have introduced what are called SHAP fares, or Short Haul Additional Price Points. So it's not really true continuous pricing, but it's some extra price points. And PROSE, their technology partner, suggests that that's seen a yield uplift of between 7% and 10%. So even that small action has significant implications. And this yield goes straight to the bottom line, and that can be the difference, as we've seen and as we're seeing at the moment, between profit and loss. Mike, So as we've seen, a number of these capabilities being introduced through NDC have been utilized by low-cost carriers for, for some time. And in some regards, the full-service carriers are playing catch-up. But that said, there are other capabilities that I would strongly argue are not being utilized no airlines have fully explored. And I think personalization is a really good example of that. We've only really just begun to scratch the surface. And, you know, I think some might call it an evolutionary step in airline distribution, but I think others might, might even describe it as a revolutionary step. So we've spoken a little bit today about how, you know, how do you define a low-cost carrier? Many are hybrid models these days, but I think you could probably put that— say that there are divergent models emerging, at least from a distribution perspective. You've got the likes of Ryanair and Wizz Air who are really remaining true to their low-cost roots, laser-focused on cost and delivering low prices for their customers. On the other hand, you've got low-cost carriers like easyJet or Eurowings or Southwest who are bringing new offerings to market and employing new distribution strategies to target what they see as growth opportunities. So you've got Southwest who have introduced recently more content to TMCs, or travel management companies, via the GDS, and they estimate that that will deliver in, in the region of $10 to $20 million of incremental revenue in the second half of 2020. So decent money. You've got Eurowings Dynamic Flex and EasyJet Plus, further examples of low-cost carriers trying to tap into lucrative corporate and frequent flyer markets with, with additional benefits. We've also heard today that some of these low-cost carriers are exploring network opportunities. So up here we've got Worldwide by EasyJet. Through which they're partnering with the, the likes of Singapore Airlines, Virgin Atlantic, Norwegian. And I think as more and more full-service carriers adopt API distribution, you'll see more and more of these partnership opportunities emerging. But it's nowhere near enough. We are in the midst of a retail revolution and Airlines really have to move away, you know, a true retailer thinks about the customer and what does the customer need. I think airlines really have to move away from this mentality of trying to sell what they've got. And frequent flyer programs are a brilliant example of that. I'm a member of 3, and I don't think I've ever received any form of communication from any of them that gives me any sense that they know me, my habits, or what I'm likely to buy. And that's a, you know, that's pretty damning indictment in 2019, I think. We're moving, you know, into a dynamic world— dynamically sourced, dynamically bundled, dynamically priced. Retailing is less of an art and becoming more of a science these days, underpinned with data. You know, I still see airline-branded fares where You've got brand A, which doesn't include a bag, brand B that does. Let's say a bag costs $50. The upgrade is $150. It makes absolutely no sense. And if that is art, it's hardly a Picasso, I would suggest. Technology is allowing products and services to be personalized down to the customer. And as we enter digital channels, customers expect a digitally native experience in the same way they do through Amazon or Netflix. But it's not all bad news. The airlines are moving some way towards merchandising and retailing. There is a definite move away from commoditization. You know, I think in terms of differentiation and segmentation, some of that is occurring through branded fares and ancillaries. We're going— moving away from a couple of products towards having dozens. But the industry is still a long way from, from personalization as such, and the trend is set to continue. In theory, every airline, every seat on the aircraft should have a different price point, and when combined with different products and services, that should create hundreds of options, if not thousands. So there is a lot of hype around personalization, and in some ways for good reason. Personalized content can improve brand loyalty, it can improve customer service, it can enhance the overall customer experience. In a, in a recent Travelport report, 23,000 travelers were surveyed 24,000 of them said that they valued branded fares, whereas 42,000 said that they— 42%, sorry— said that they would value a more personalized experience. So there's clearly an appetite from travelers for, for this kind of personalized experience, but it's not easy. You know, many leisure travelers are infrequent travelers. So it's not easy to know a lot about them, and even frequent flyers can inhabit different personas at different times. So, you know, in fairness, this is not— this is not an open goal. I think personalization will come about through technologies like artificial intelligence, machine learning, natural language processing, and advanced data analytics. Airlines must get better at harnessing data from different sources like social media, loyalty programs, and also combining different types of data. So whether that's personal data, transactional data, behavioral data, it doesn't always have to be about the individual. Continuous customer engagement before the trip, in trip, and after is creating far more customer touchpoints that can be converted into purchase points. A recent London School of Economics report suggests that the broadband-enabled ancillary revenue will grow to $67 billion by 2028, of which $16 billion will be generated by airlines themselves. That's the same exponential growth that we've seen in ancillaries over recent years. So it's, it's big business, and you already have the likes of Tony Fernandes saying by virtue of the fact that AirAsia fly long-haul, that will give them really good access to this ancillary revenue driven through e-commerce and Wi-Fi. So to wrap up, what do I think the future holds in the next, let's say, 1 to 3 years? And that's Steve— I can't remember whether it's Bill Gates or Steve Jobs saying that you always underestimate the, the next 10 years, but you overestimate the near term. But I think customers will increasingly expect the same frictionless personalized experience they receive on other platforms. So to give you a couple of examples that I like, you've got Spotify. So I've got a Spotify account, as I'm sure many of you guys do as well, and using my historical data every week, a personalized playlist is delivered to me. And in general, I like it, and it opens my eyes to all sorts of new music. The interesting thing is when I speak to friends of mine who like the same kind of music, often they've had the same playlist, or they've at least had some of the same music shared to them. But it doesn't really matter because to me it feels personalized, and that's the important thing. Actually, is it possible to get a glass of water? I think I'm going to— The other one is Moxie Hotels. So this is another recommendation from a friend of mine. It's a sub-brand of the Marriott Group. And I went to check in, went up to the hotel room, turned on the TV, and— thank you very much. That's better. Rather than being greeted with the obligatory 50 news channels, most of which are in languages I don't understand, I was presented with a really quick and easy 3-step process to log into my Netflix account. And I was able to continue watching whatever crap it was I was watching at home when I got to the hotel. That's fairly— it feels to me something that's fairly simple to achieve, and that's, that's where I think airlines in the very near term have to aspire to get to. So NDC will contribute towards leveling the playing field here. We saw previously that low-cost carriers have enjoyed a number of advantages for some time. Through NDC, more and more airlines are going to invest in merchandising platforms and upgrade their sales capabilities and, and ultimately erode some of those competitive advantages. Things like being able to identify the customer, return relevant content that's dynamically priced, will also start to become the norm and won't be quite as pioneering as it feels today. It won't be the the key point of differentiation in 2 to 3 years' time. In my view, that will be around personalization. And of course, low-cost carriers will, will fight back, and why shouldn't they? And I think actually the opportunities around personalization are, are model agnostic, if you like. I think it's incumbent on all airlines to look at how they use data analytics, new technology, continuous engagement to create new touchpoints and purchase points to personalize the experience. So I think LCs can do it, but they, they need to be quick about it. So with that, that's the end of my presentation.

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