(air·line \ -līn \ re·tail·ing \ rē-tā-liŋ )
The process of pricing and packaging air and non-air products and selling those products across all channels. This ensures the right offers are targeted appropriately to travelers at the right time in their purchase process.
Today, many airlines are still limited in their ability to influence travelers and successfully retail across the entire customer journey. Siloed data, a lack of customer insights and disparate distribution strategies have left airlines blind to the information and resources necessary to excel as world-class retailers.
In 2017, Amazon’s revenue topped US$175 billion and Alibaba reported 61% revenue growth year over year, and yet, airlines are still struggling to capture their full share of the retailing pie. What do the world’s most successful retailers – companies like Amazon and Alibaba – know that airlines don’t?
In this first chapter of our NDC eBook, we look back at the genesis of airline retailing and explore the next frontier – new tools and standards, emerging technologies and inspired approaches to put airlines and their distribution partners ahead in the retailing game.
Dynamic 1: Thinking Beyond the Seat
Most would agree that airline retailing lags behind other industries, but few actually know why. Historically, airline retailing revolved around the selling of a single aircraft seat (often viewed by travelers as a commodity). Merchandising of this single seat was simple and straightforward – as long as a seat was available on a particular route, at a specific time, an airline made it available for sale.
The process of making the seat available for sale (referred to as “availability”) was relatively easy, too. Airlines chose to distribute their product (the seat) via two primary retail channels, either directly to the customer through their own websites and/or indirectly via third parties such as travel agents, online travel agencies and travel management companies. Often, this third-party distribution is managed via a global distribution system, or GDS.
This two-pronged approach did not fully address the need to personalize offers, and airlines required a more sophisticated approach to how they made products available for sale. The expansion of the product catalog, driven by the growing importance of ancillaries as a revenue stream, further complicated this. Airlines now have more to sell and need to display and distribute that content in various combinations.
Dynamic 2: Low-Cost Model Challenges More Than Just Price
The impact of low-cost carriers further prompted airlines to broaden the range of products and services offered, unbundling them from the sale of the seat. The impact low-cost carriers have had on the airline industry is well portrayed in the “Ancillary Revenue Yearbook” produced annually by IdeaWorks. In the latest edition, it was stated that “the prevalence of ancillary revenue continues to move forward with an ever-larger footprint on airline financial statements and the products offered to consumers.”
The top 10 airlines, for which ancillary revenue makes up the largest percent of their overall revenue, is unsurprisingly dominated by low-cost carriers. During the past seven years, seat revenue per passenger (CAGR) has declined by 2 percent, whereas ancillary revenue per passenger (CAGR) has grown by 41 percent. However, airline ancillary revenue alone will not make up the 2 percent decrease in seat revenue per passenger. For this, a different and more dynamic approach to retailing is required.
Dynamic 3: Personalization – The Holy Grail
As a result of the two dynamics mentioned above, personalization has emerged as the holy grail for successful airline retailing. Understanding why someone is traveling and being able to infer the types of products and experiences they care about increases opportunity for conversion. As consumers, we have become accustomed to a highly personalized retail experience at an alarmingly fast pace. To gain traction in personalized airline retailing, we need to look to outside industries and investigate how the impact of digital retailing has allowed them to thrive despite a challenging economic landscape. For example, U.S.-based cosmetic retailer Sephora offers a unique in-store experience and merchandises its products based on exactly what its customers want to see. Sephora customers who spend US$20 in store receive email recommendations based on their specific purchases.
Compare this to an airline. A traveler could spend US$20,000 annually without the airline knowing so much as his or her meal preferences or activities the consumer might enjoy at his or her destination. Just as modern Sephora customers do not want to buy beauty products the way that their mothers did, savvy travelers do not want to buy airfares using outdated methods once used by their parents.
To align with today’s travelers, airlines and travel agencies must think and behave like true retailers. They need to analyze consumer behavior and market data to better target future offers. They need to understand the customer journey fully and determine how they can fulfill as many customers’ needs as possible. Equally important, they need to determine what they can offer that their customers don’t even know they want or need. None of this can be managed on intuition alone. Airlines need intelligent systems to create these smart offers.
“We are operating in a traveler-centric market, and we are competing with the experience delivered by leisure travel technology every day. Our travelers are time-poor people, often distracted by the purpose of their trip. They need content presented to them in a way that is easy to consume and tailored to the right point in their journey. The display of content in our mobile app plays a critical part in the overall user experience.” – Fred Stratford, CEO, Reed & Mackay Travel Limited
The Opportunity: Making the Shift
At the heart of delivering personalized offers to customers is an intelligent offer-management platform, which
centralizes offer creation, channel control and display. Unlike older systems that account for seat, fare and availability, airline offer-management platforms take inputs from market and customer data and decision-support tools to power persona-based and ultra-fast shopping responses.
For those unaware of how the airline offer-management process works today, they may be surprised to know that an airline offer is typically made up of three parts:
Fares are mainly constructed with no visibility into who is making the request, meaning that the ability to offer the right person the right fare at the right time is nonexistent. Past shopping behavior, consumer preferences and the possibility to sell additional products and services are unavailable to the airline, and the airline seat once again becomes a commodity. Furthermore, the only real differentiator a traveler sees is price and schedule. If we compare this to other retail experiences, we start to see a widening gap.
“We, the travel industry, have trained our consumers only to buy on price and schedule,” Caroline Strachan, managing partner of Festive Road, stated during a recent Tnooz webinar. “This has been the agreed-upon status quo for years; we should all be looking beyond price and schedule.”
Airlines are ready to present the same content and brand differentiation available via their brand.com website across all channels. And they are ready to adopt new technology to do so. How can airlines and agencies make the shift to better diversify and upsell, giving air travelers the true retailing experience they expect?
“There is a clear distinction between NDC and a broader distribution strategy. NDC is a technical standard. Distribution strategy is a technical capability, which may be enabled by NDC, plus a commercial model to drive new value.” – Caroline Strachan, Managing Partner, Festive Road
Seizing the Future: New Distribution Capability and the Future of Airline Retailing
IATA’s New Distribution Capability (NDC) is a technical standard that is part of a much larger initiative. There are many misconceptions about NDC, so it’s important to have a clear understanding of what it is and what it is not.
Therefore, we would like to begin by revealing some NDC myths:
- NDC is not a technical product or solution.
- NDC is not a direct-connect sales channel – it can work either via a travel technology platform or directly with the airline.
- NDC strategy does not automatically link to an airline’s commercial strategy.
New Distribution Capability is a set of agreed-upon communications protocols – a standard that makes the next generation of airline retailing possible and provides a basis on which new technology may be built.
NDC is an enabler; however, the acronym has taken on something of a political association in the travel industry, synonymous with (sometimes negative) change. The airline industry is highly dependent on technical standards. Without them, there would be no agreed-upon guidance around how pilots and air traffic controllers land aircraft safely. NDC impacts the way travel agencies and air travelers talk to airlines.
NDC enhances the customer experience
If we return to the complexities of airline retailing, one of the key challenges is the lack of information that airlines have about the person requesting the travel. NDC would allow the static process of schedule, fare and availability to move to a question-and-answer-based process.
Based on who is asking for the fare and how much information the shopper is prepared to provide during the search process, the airline can answer with a contextually appropriate result. It can also, based on traveler preferences, as well as historical and real-time data, offer a range of other products and services designed to enhance the customer journey.
For example, an airline would be able to see that a customer purchased Wi-Fi and a seat with extra leg room on his or her last two flights. The next time the customer searches for flights, the same airline may bundle these ancillaries as part of the seat cost, creating a personalized experience where the traveler feels like the airline truly understands his or her needs.
“Early on, NDC was perceived as a GDS killer, but now, it is quite the opposite. In any industry, and certainly in travel, the more fragmented the content becomes, the harder it is for customers to find what they want and, in that world, aggregation actually becomes much more valuable. The function of a GDS has always been to aggregate content from a variety of sources, applying additional sophistication from a retailing perspective to be able to ensure that we are getting the right offer at the right time to the right customer,” said Kathy Morgan, Vice President of NDC for Sabre Travel Solutions.
“NDC allows the airline to have an interactive conversation with the shopper – a live dialogue. This allows airlines to better understand both the customers’ expressed and inferred needs.” – Xavier Lagardere, Head of Distribution, Lufthansa Group
NDC: The “Be-All” and “End-All” of Airline Retailing?
Not quite. NDC is an important part of airline retailing and will take the conversation to the next level. However, NDC remains a very new standard in the world of airline technology. There is a lot of work to be completed around proof points, and we need use cases to demonstrate how NDC will handle partnership agreements, irregular operations, schedule changes and the list goes on. For at least the next few years, it’s not NDC OR traditional distribution – it’s NDC AND traditional distribution – that’s where the hybrid world sits. Content will flow through both “pipes” at least for the foreseeable future, which creates additional complexity and even greater need for technology that supports both worlds.
Though it is not just about supporting traditional and NDC offers, it’s also about thinking beyond the NDC standard. “NDC is a component; however, it doesn’t define our vision,” said Rodrigo Celis, vice president of product management for Sabre. “NDC is an industry standard, not actual innovation. Our vision is much broader – and we think airlines should think bigger, too. With our revenue management history, there is opportunity using decision support to make our offer-management platform a lot smarter, a key differentiator. We are uniquely positioned to deliver retailing solutions across the end-to-end customer journey from offer creation all the way to fulfillment.”
With retailing defined, the next NDC eBook chapter will dive deeper into the travel ecosystem and explore the win-win-win opportunity for all constituents.
“Our vision is much broader than NDC. We are uniquely positioned to deliver retailing solutions across the end-to-end customer journey from offer creation all the way to fulfillment.” – Rodrigo Celis, Vice President, Product Management, Sabre