Hidden "Drivers" in Travel Distribution

Article Published in Aviation Informatics, April, 1996

Ignoring for the moment, the opportunities of Internet/Intranet to an airlines' internal operations and functional requirements, virtually every airline marketer is "hard focused" on trying to understand the importance of Internet/Intranet today, and the role these tools may play in the new Information Age era of travel distribution.

Almost as high on the minds of each airline marketing organization is the effort going into understanding investments in ATB2 ticket functionality in the face of the rapid acceptance of "electronic tickets" (or "ticketless"). Mixed into the confusion are the issues of increasingly higher GDS and/or CRS costs -- and attempts to offer a growing "computer literate" market user friendly direct booking tools via Internet, direct dial access, or corporate linked EDI/EDIFACT transactions.

Most of the confusion can be attributed to "loss of control". For the first time in over 20 years (perhaps since its origins), the airline industry is being impacted by culture issues outside of its control or known experience. The airline industry was born and evolved as a "child" of the Industrial Age. Increasing manufacturing efficiency was the core of success in the Industrial Age -- and the airlines were preemptive and contributing leader in that process. The airlines have fairly successfully "manufactured" airline seat with increased efficiency. Concurrently, airlines have improved the intertwined distribution process to those who needed the seats, but primarily as a function of improving the "manufacture" of seats process! However, this latter emphasis led to the first and what remains the largest computerized inventory -- the Computer Reservation Systems (CRSs) and their resultant Global Distribution Systems (GDSs). Truly, "children" of the Industrial Age.

Still, as the airlines continued to "manufacture" with increasing fervor, the world's consumer societies begin a transition to the Information Age. The airline community remained largely tied to its Industrial Age "manufacturing" values, and has been among the slowest to recognize the need to adapt. While the rest of the world was and is effecting settlement of payment for delivered consumer goods and services (particularly, large purchases) electronically -- the airline community remains largely tied to the Industrial Age mode of physical paper audit trails (tickets and audit coupons). Even the increasing acceptance of electronic distribution of product, automated or direct booking tools, and the "e-ticket" remain "containerized" within the traditional BSP paper audit coupon (albeit automated) settlement solution.

Changing expectations of the consumer in the "settlement" of financial transactions -- increasingly recognized, offered, and used by other industries and service groups are probably the biggest "hidden force" acting on the airline community. Yet the "manufacturing" viewpoint that prevails within the traditional airline community seems to go unrecognized as industry vendors and airlines alike continue down the ATB2 and traditional travel financial settlement paths.

Another somewhat hidden "driver" is the impact of the technology being derived from the Information Age on the airline product itself. The airline "seat", once a prized display of wealth or stature, is increasingly a commodity. Aviation crews, prized for their skill and training, are increasingly employees of a "manufacturing plant" ... one that "manufactures" seats. Technology and the rapid applications of electronic information management, although not yet a thing of the past, are increasingly supplanting the skills and training.

As airline management's master increasingly use information technology in the "production" of seats, airline seat costs goes down. As the cost of the seat goes down (particularly apparent between urban areas), seats become "commodity" items not unlike a train or bus seat; at costs that approximate closely those of a "bundled" train or automobile trip to similar destinations (by "bundled", it is meant the inclusion of gas, meals, lodging, etc. necessary to replicate a similar trip). The transition of a high-value "seat" to a commodity "item" is forcing changes not just in the airline route structures and co-marketing (code share, etc.) efforts -- but cost controls are changing the methods of product marketing and related distributions. Many of the most effective airline "interlopers" have abandoned traditional airline distribution channels in favor of direct sales. Now those direct sales are taking on expanded roles -- via alternative electronic mediums, corporate direct pricing, and new "niche" targeted services.

Whether by "conscious awareness" or not, airlines are being forced out of the "manufacturing control" mode and into the Information Age where distribution costs become the major cost/profit opportunity. The "traditional" airlines with their distribution costs ranging between 20% to 24% of their total cost per sold seat are being effectively "out commoditized" by a new air product whose carriers are able to keep their distribution costs in the 12% to 17% range -- by largely abandoning traditional air distribution channels.

Perhaps the least obvious "driver" impacting on the distribution process are the "business rules" pertaining to capital asset recovery. Airlines have used for many years, the basic rule of "optimum yield per seat" on their primary asset -- the airplane. This "business rule" was transferred to the airline owned and managed CRSs in the early years (and subsequently, to the GDSs). Converted to CRS/GDS "terminology", the rule becomes "optimum yield per booking transaction" -- primarily obtained from the "manufacture" of the seat.

The "optimum yield per booking" rule worked fairly well when distribution was a part of the manufacturing cost. However, the increasing demand for information in recent years has severely strapped the CRS/GDSs in their ability to fund the growth needed to respond to increased demand for information, let alone, to pass dividends to their airline owners. The capital asset recovery rule is, in fact, putting further stress on the CRS/GDS traditional distribution channels. Airlines can no longer bear the burden of the cost of automated information gathering -- as exampled by the increasing "public expressions" of aversion to the rising CRS/GDS segment or related transaction costs by airlines.

As a part of the "manufacturing" process, the airline industry tied "settlement" to the distribution process via its paper ticket/audit coupon system. The physical ticket document requirement became a block to alternative distribution or alternative settlement solutions that begin to emerge in other business structures with the transition to the Information Age over ten years ago. In the ensuing period, the banking industry (banking industry is used herein to refer to the part of the bank systems that enable tracking, audit, and management of financial transactions electronically) evolved around different "business rules" of capital asset recovery.

The banking community seeks capital asset recovery on the basis of "optimum yield per time slice" -- with time (hour, minute, second) on the computer as the base negotiable "service" offered. Further, the banking system generates revenue from both sides of the transaction. Generally, the buyer, the seller, and/or the manufacturer share in cost of a given transaction. Setting aside the basic fundamental capital asset recovery rule for a moment, the banking industry also diversified its transactions across a much broader base. It is not limited to airlines, or even travel vendors.

At this point, the distribution process has come "full circle". The banking industry has trained consumers that it is not necessary to tie the distribution of a product directly to its settlement. It is possible to buy almost anything with a credit card, debit card, or an EDI/EDIFACT contract -- with no direct physical transfer of the goods (or even services). Thus, product distribution and settlement have become two disparate functions in society -- and generally, an expectation of consumers.

Yet the airline community is still trying to link seat distribution to the settlement process via convoluted BSP (and/or ARC) rules and processes that date historically to the origins of the Industrial Age -- not the Information Age. The CRS/GDS and BSP/ARC system cannot long withstand the Information Age in its present form -- if at all. With only 25 to 30 (excepting SITA) airline owners of the CRS/GDSs ... the other 1000 plus airlines will quickly seek lower cost banking community settlement solutions to better meet consumer expectations and more effectively control costs in the face of the "commoditization" of airline seats.

While there are individuals within each airline that are advocating change based on these "drivers", all three remain largely overlooked by the "community" of airline management. It remains easier to deal with the structure that exists than to recognize and adapt to the increasing expectations of the consumer. Yet, even in the face of general airline cultural resistance, the change is happening as the innovative smaller airlines offer products that reflect consumer needs.

Still, the greatest impact on the airline industry will occur with the functional separation of product distribution from the settlement process. As more airlines respond to the traditional technology solution for tracking electronic tickets, they are building the structure necessary to separate settlement from distribution. That separation is already taking place quietly with selected corporate and large volume buyers, and will become a viable alternative for vendors and buyers alike in the next two to three years.

The separation of distribution from settlement will enable new "product" by airlines, new packaging structures for non-manufacturing distribution channels, and an increased presence of the travel product within the consuming society.