From The Beat

GUEST: Eastman On United Move


The Beat ~ a travel business newsletter

New York City

6/26/09 12:44 PM


The Eastman Group's Richard Eastman authored this guest column in response to United Airlines' move with an unknown number of travel agencies to require them as of July 20 to process all credit card transactions using their own merchant accounts. Affected agencies, United said, "will need to process any transactions with those cards under your own merchant agreement(s), if any, and settle in cash with United" using ARC's cash settlement process.


This may be the beginning of the end; the end result of many years of commoditizing the airline seat.


Basically, what is an airline seat? It's transportation from Point A to Point B. Virtually everything thing else appended to that seat is some sort of "value-add."


When airlines first came into existence, an airline seat represented an experience. It was not unlike going to Disneyland--or like we might soon experience with Virgin Galactic--and was priced accordingly.


As the industry evolved, air transport became more of a value-add service; mostly for the wealthy and for business executives that needed to get across the country rapidly. Service products typically involve a lot of human intervention and "packaging" in order to become reliable; with those human services come the value-add that attracts buyers.


By the late 1980s, an airline seat had become a "good" not unlike an automobile or a washing machine or a hammer. A goods product offers many choices to a buyer, and the brand that best fits your need is often the product chosen. Brand marketing becomes the dominant driver in swaying buyers to perceived needs. This was the industry's heyday!


With the turn of the century, airline seats begin to become a commodity. The elements most commonly found in commodity products are many commodities are perishable; the value-add offered by multiple providers is almost identical and thus, price becomes a primary (but not the sole) driver; and buyers tend to buy the core commodity and then package their own value-add to whatever they have purchased.


Most products start as commodities and evolve along various paths into goods, into services and into experiences. A strawberry starts in the field as a commodity fruit. Some people buy from the local farmer at lowest cost. Some people buy from their grocery store where they pay the value-added costs of getting that strawberry to the store. Some people buy the strawberry as part of the desert parfait at their local McDonald's, where the packaging and serving of the parfait becomes part of the value-add price charged by McDonald's. Some people go to a high-end restaurant to enjoy the total experience of a meal, where waiters serve the strawberry parfait as part of an elegant dessert entree experience. The value-add is not in the strawberry but in the experience provided.


The airline industry evolved in reverse. Their products were experiences first, then became service-based products and subsequently became goods--and are now becoming a commodity. Today's airlines are shedding themselves of all the value-add accruements that were once considered a part of the whole product. United's actions make it very clear that its product is solely the seat moving from Point A to Point B, and any cost not attributed to "manufacturing" that seat is a value-add that somebody else should be paying for.


This is not an unrealistic approach--how ever apprehensible it may seem to those of us that have been in the travel industry for years and years. In point of fact, what service does a travel agent perform? Travel agents are no longer agents of the airlines as in the past. Travel agents are, most typically, packagers of value-add services--of which the airline seat is just one element. In today's digitally driven world, travel agents are little different than the tour operator of the past except that the agent packages the travel product on-the-fly from digitally offered solutions to meet the buyer's need, whereas the tour operator negotiates deals and pre-packages the travel package in bulk prior to sale. In a digital society where buyers expect sellers to be responsive to the buyer's "right now" needs--and virtually all travel product is offered via digital channels in one form or another--what else is a travel agent than a "packager"?


United's action is the beginning of the end--the end of the long-established relationship between airlines and the dependency they once had on agents.  United is simply saying, "The airline seat is a commodity." and "Others need to package that seat with whatever the buyer wants it packaged with." If a buyer goes to the strawberry field to buy from the farmer or to the airline's Web site to buy from the airline, the buyer is simply buying the commodity offering. Why is there an incumbency on behalf of either the farmer or the airline to fund the added costs of distributing the product to be packaged and/or purchased through some other outlet? Or asked differently, if strawberry farmers don't pay the credit card charges absorbed by your local grocery store as a cost of brining the strawberry to the buyer; why should airlines pay those charges?


Digital technology is changing the way all products are distributed. By the very nature of digitally distributed information, knowledge can no longer be channeled to ensure value-add to the production of a product. This is as true of airline seats as it is of news reports via Internet versus newspapers; printed books versus digital books; automobile manufacturing labor versus manufacturing technology ... and virtually every other aspect of our lives.


One pendant suggested that the costs will be passed on to the consumer. Ultimately, that is always the case. All value-add contribution to any commodity is added, in one form or another, to the price paid by the consumer! What is really happening is that the pricing structure is transforming or being re-distributed to better reflect what the digital world has brought on all of society. In fact, the price of the commodity product will become more transparent ... and the value-add's that are added to the commodity by the various packagers will also become more transparent. Whether travel packagers elect to absorb these re-allocated costs or pass them to the consumer is not the concern of the commodity producer (i.e. the airline, in this case)--but rather, the buyer. Buyers will pay for real value-add that meets their need; and it will be up to the packager to decide whether to absorb that cost in order to attract buyers or pass it along as a surcharge just like the airlines are surcharging for their added value services.


~ Richard Eastman is president and CEO of The Eastman Group


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