The Impact of Commodity Airline Seats

Article Published in Travel Weekly, September 4, 1997

To follow the logic about to be presented, one must accept the premise that an airline seat has become, in recent years, a commodity item. If you are not accepting of that statement - pretend. The airline seat is almost as much a commodity as soap or the tire on your car.

Tires are a good example. Like the airline seat, the modern tire is largely a product of the Industrial Age. Both provide transportation - both are "consumed" largely by individual users - both are mass marketed to consumers - there is little significant distinguishing differences between one brand or another - and both offer "upgraded" versions of the same product. Yet, the distribution of each is quite different.

The modern tire reaches the ultimate user through multiple channels. The car manufacturer buys tires directly from the tire manufacturer - at generally very favorable prices. The wholesaler buys tires from the tire manufacturer - also at bulk purchase prices, but not generally as good as those obtained by the car manufacturer. The wholesaler, in turn, resells to the retailer. But, as everybody knows, some retailers (Sears, Montgomery Wards, etc.) have sufficient leverage to enable them to buy directly - to be effectively, wholesalers. And of course, there are those branded tire "manufacturers" that really don't manufactures tires - but simply have the real manufacturer put their brand name on the tire.

Such distribution structures are not limited to tires - but run throughout most industries ... Gasoline, washing machines, records, computers, food goods, television sets, brooms, wines, homes, automobiles and automotive parts, hardware goods, clothing, restaurants, etc. And with this distribution structure comes, increasingly, varied forms of electronic data interchange settlement processes.

The airline industry is one of the few that still controls the distribution function of the product it manufactures ... and one of the few still tied to a paper-driven settlement process. While many aspects of the ARC and BSP settlement have been automated, the process remains tied to the paper audit coupon of a ticket.

There was a time when travel was a "prestige" product - like tailored cloths and fancy restaurants. But the high costs of labor are forcing alternative solutions. As was noted in the Wall Street Journal, in an article that discusses the diminishing labor pool, "the most obvious solution is to boost wages or benefits. But with consumers pushing for lower prices and competitors anxious to steal market share, employers take those steps reluctantly." Airlines and the related travel distribution structure are faced with the same functional disintermediation.

As the airline seat becomes a commodity, consumers are demanding lower prices - and competitors with alternative solutions are successfully penetrating the air travel markets. Airline manufactures are bringing to market 30 and 50 seat jet aircraft. These small jet airplanes will replace the turbo prop craft that currently serve short haul markets. These same small jets will serve with high cost efficiency, the moderate density and moderate distance point-to-point markets as well. To an even greater extent, the airplane seat will become a commodity.

With the Commoditization of seats, the distribution structures used in other industries that market commodity products will evolve in the airline industry as well. Certainly, distribution will become increasingly automated. Unlike today's centralized "airline focused" systems, future travel product distribution will become highly decentralized. Each travel product manufacturer, and "packager" alike, will offer product electronically. As decentralized distribution of airline services evolves, so too, will decentralized payment or settlement solutions. Such solutions are likely to implement those already in use by other industries - since financial transactions are remarkably similar when separated from the distribution process - and are already in high volume use within the existing banking industry. These transaction settlement and auditing costs represent about 1/5th the current airline settlement costs.

Decentralized distribution suggests local, consumer, and corporate based "packagers" and "niche providers" in mass markets. Such a marketing structure forces a refocus of selling strategies from "market share" to those being advocated by man as "share of consumer". The emphasis will move from one-way communication of mass marketing to information driven customer specific services. Such "data mining" functions will be offer at all levels of the travel distribution chain ... from airlines with their frequent flier programs for high volume travelers to local travel consultants serving the specific needs of their network of targeted customers.

Concurrently, such a structure implies increased risk taking on the part of those local packagers, the niche providers, and to some extent, even the local service centers. The "consolidators" of the future will consolidate, not on behalf of the manufacturing airlines - but on behalf of collective groups of buyers; and the buyers (through the consolidator) will share in the risk of the seats purchased (or guaranteed for purchase).

Corporations, particularly the very large ones, will lead the initiative. Organizations, not unlike what the Business Travel Contractors Corporation (BTCC) purports to be, will follow. "Share of market", long the major driver in airline and CRS marketing strategies, will become subservient to controlled, longer term, market pair viability - or, "share of consumer" marketing. The effect of the marketing paradigm brought about by commodity air seats will be multi-tiered distribution channels - somewhat similar to those that now exist in the tire industry (and many other commodities based industries).

The airlines will continue to focus on the top 2% of their fliers, the frequent flier -- just as the tire manufactures focus their sales on automobile manufactures. A second tier will evolve ... those who consolidate buying from the airlines on behalf of corporations. In the tire business, they are the large wholesaler and the private label manufacturer. A third tier ... that of the tour operators and large "niche" market providers may buy directly from the manufacturers in some markets ... but will "consolidate" their purchases in others markets. In the tire industry, these might be akin to the regional tire chain stores. Small "niche" providers will buy from the second and third tier levels - and make their profits in market up and added fees for their specialty services just as a many service stations buy and install tires today.

The overflow from these different risk-taking buyers will become the "distressed" product of "low fare" searches. In turn, the airline manufacturers will stabilize their public prices because the volume of seats necessary to "break even" on any given market pair will have already been sold to the risk taking buyers at other levels in distribution tier.

As with many or most commodity products, prices will tend to stabilize at the consumer demanded lowest possible levels ... the minute demand drives prices up, there will be another low cost "manufacturer" ready to enter the market with the new more efficient 30 to 50 aircraft seat aircraft - or equipment appropriate to the demand.

The important aspect of this transition is to recognize that the role of today's travel agent will become virtually reversed as airlines evolve out of the distribution business and into seat manufacturing. At greatest risk are today's highly centralized and structured CRS systems. Their one-way distribution solution of available inventory precludes interactive two-way "discussion" of product and price availability - and they do not link easily to lower tier levels likely to evolve in the distribution channel. While it is apparent that SABRE (in particular), Amadeus (in certain markets), and Worldspan (through teaming) have each begun to take new strategic paths - each a different strategic path - the inherent structure of the core systems will mandate a significant and costly restructuring of the core architectures. It may be a case of "too little, too late" in many markets.

While the CRSs are not likely to disappear within the immediate future, travel agencies and corporations need to closely align themselves with those CRSs that offer the best alternatives to match the agency or corporation's own business goals. The ongoing evolution of air travel as a commodity, accompanied with new aircraft to more effectively manufacture those seats - and driven by the ongoing search by consumer(s) for better services tied to lower prices - is mandating a changed travel distribution structure.