Online travel distribution – Airlines wise up to the web

The Internet is heralding a return to the ‘golden age’ when carriers had almost total control over distribution. Tricia Holly Davis reports


It may not always be profitable at first for businesses to be online, but it is certainly going to be unprofitable not to be online,” Internet guru Esther Dyson once said.


Such was the thinking also at British Airways when it launched BA.com a decade ago.


“Back then, BA.com was just an information tool. We knew the Internet would have a major effect on business but were just in the pioneering stage,” says Carsten Willert, the new head of the airline’s online division.


Looking back, the world then seemed a lot simpler – and rosier. Yields were on the rise; BA’s business efficiency programme had padded its savings to the tune of £250 million; and investors cooed over robust employee profit-sharing schemes and record bonuses.


Then, the concept of BA.com as a global sales giant was non-existent. In fact, the airline’s e-business strategy barely warranted a footnote in financial statements until 2000, when BA joined the first European multi-airline travel portal Opodo, and hired a web consulting firm to ramp up its online presence.


Still, such was the early momentum of the Internet that by 2003, even without an aggressive online strategy, BA.com was tallying 10,000 bookings daily.


“A year ago, BA.com was taking 20% of our bookings. That has now jumped to 41%, taking share away from the trade and our telephone sales unit,” said then-chief technology officer John Mornement, during a 2003 investors’ conference.


That statement telegraphed the devastating impact of the Internet on bricks-and-mortar business units. Indeed, what has happened to the travel agent industry over the past few years, and the change in business model to respond to such a fundamental shift in consumers’ behaviour, is likely to be followed in other parts of the industry in the coming years, observes J P Morgan aviation analyst Chris Avery.


By strengthening their own websites, the airlines are preparing to give the established online agency brands a run for their money, and, perhaps once and for all, seal the fate of the global distribution systems. The network airlines are also poised to claw back some of the volume lost to low-cost carriers over the past few years.


A lot is at stake. A recent PhoCusWright study found that the US is actually reaching saturation point in terms of Internet usage, resulting in a larger focus on the European market. According to PhoCusWright, the European online market, including leisure and unmanaged business travel, is worth €41.6 billion. SITA, an air industry infrastructure provider and consultancy, estimates European online sales account for about a quarter of all tickets issued (compared with 63% in North America), leaving plenty of room for growth.


“Today, we’re moving into a new era, where the website is about servicing as much as selling,” says Willert.


In this next phase, the airlines’ own websites will serve as a tool to boost profits as well as to cut costs. Until recently, the carriers had mainly viewed the Internet as a dumping ground for cheap fares and a way to compete with the no-frills carriers.


But legacy systems, an expansive infrastructure, and a ridiculous number of fares made it impossible to compete with low-cost carriers such as EasyJet and Ryanair. By dumping fares online – be it via their own site or a third-party – the network carriers were simply selling the same product at a cheaper price, which killed yields.


Now, the airlines have become cleverer. They realise it’s not just about selling online – it’s about selling the right kinds of products through the right online channels. It’s not just about competing with the low-costs – it’s about smart merchandising and convincing the price-driven customer to upgrade to a flexible ticket, and book a hotel, car hire or holiday. In this way, the airlines can actually offer better service, thereby cementing customer loyalty, as well as increase online revenue.


Amadeus e-Travel director for suppliers and agencies Philippe Der Arslanian says: “As airlines are exposed to more online players on a global level they need to compete more effectively, beyond price. The airlines have done very well in terms of bookings, and converting visitors into buyers, but now they need to merchandise inventory so they can compete more effectively against the no-frills and online agencies. Three years ago, the big focus around a website was attraction rate; two years ago it was conversion rate; and today it’s about loyalty.”


Some airlines, particularly BA, are well on their way to online domination. SITA calculates that of the 24% of tickets issued online, 85% are bought directly via the airlines’ own sites.


BA wants 50% of its distribution booked through BA.com by 2008, up from 30% today. The plan includes making a number of improvements to the site, including a new design, which will include new self-service check-in tools, more consumer-friendly terminology and fewer screens to make navigation easier.


The site will also give customers with flexible travel dates the option to search for the best price on multiple-leg journeys originating outside of the UK with the same ease that is currently available on point-to-point trips.


BA will also make enhancements to the Executive Club booking functionality and target non-member business travellers, namely those that fall into the SME category.


 “We’ve invested a lot to show product differentiation online so we can up-sell and distinguish ourselves from being a commodity simply sold on price, to a product which may justify a premium,” says Willert. “The goal is that we are perceived as good value for money rather than just cheap.”


Willert notes that the more volume BA shifts to its website, the better placed it will be to put more pressure on the GDSs to lower their fees when the current contracts expire next March. GDS costs represent 12% of BA’s spend.


Willert adds that BA has not ruled out the possibility of moving to a web fare strategy, where BA.com reserves the right to undercut fares listed through the GDSs and other channels.


“When we signed these deals a few years ago we needed to treat our web channel the same as the GDSs. However, when those contracts expire it could well be that we have more competitive pricing on our own website, in the same way the major hotels offer a best fare guarantee on their sites. In this way, I think the hotels are a step ahead,” says Willert.


Star Alliance, which counts Air Zealand, United Airlines and Singapore Airlines among its members, notes that its carriers pay an average per net segment of $4.27, or $2 billion annually in GDS fees. As part of a major campaign to cut those costs, Star Alliance partnered with GDS alternatives ITA Software and G2 SwitchWorks in the US, and selected Lufthansa Systems to design a GDS alternative platform in Europe. The new platform will be available in Europe during the course of this year and eventually will be expanded globally.


Founding alliance member Lufthansa has set a target to reduce its GDS costs by 50% by 2008, largely by moving more sales online. Lufthansa has forecasted online volume will represent a quarter of the airline’s sales by the end of the year, up from 14% in 2004.


Air Canada is also shouldering its way into the online world. Taking a leaf from the no-frills carriers, the airline earlier this year simplified its fare structure available on flights to Canada departing from Heathrow (available from Manchester this summer).


Air Canada general manager for passenger sales in the UK and Ireland, Robert Atkinson, says: “Airlines are in the best position to push online distribution because we can offer a full range of products. The trick is to offer the right kind of product. The carriers made a mistake a few years ago by focusing on price. Now the focus is offering different prices on different products.”


Emirates, considered one of the chief competitors in the UK/European market, breathed new life into its website about six months ago, but still views online distribution with a degree of trepidation. “We still think of the Internet as a place for distressed inventory,” says Vic Sheppard, vice-president for UK and Ireland. “The web is a remarkable tool but it utterly destroyed yields. We’ve been a bit slow to adopt an online strategy in the UK, but I think it’s paid off.”


However, with the bulk of Emirates’ sales still coming through traditional channels via the GDSs and a substantial boost in capacity planned over the next few years, Sheppard says slashing GDS costs is a top priority.


“You can’t get any leaner on price than selling direct so I think this is an option carriers are considering.”


For its part, Sheppard says Emirates is in discussions with the major online agency channels, as well as large-volume high-street agencies to understand the technical and financial implications of building a direct link.


Sabre senior vice-president Rich Adams says one way to placate airline relations is to offer more flexible pricing – including a mixed-pricing strategy, which would allow airlines to leverage sales/bookings from all sides of the Sabre chain (eg Sabre the GDS and Lastminute.com). “Airlines are looking for more imaginative ways to do business and we can offer them a holistic view,” says Adams.


Carlson Wagonlit Travel executive vice-president Mike Koetting says agencies’ priority is to maintain access to inventory, regardless of the channel. CWT has partnered with G2 SwitchWorks in the US in order to ensure content access.


“Third-party distribution costs are so much higher than direct distribution costs – so airlines want to move as much traffic direct as possible,” says Ellen Lee, vice-president and co-founder of G2 SwitchWorks.


Europe’s leading online agencies – Expedia, Lastminute.com and Opodo – believe it’s only a matter of time before the airlines begin to compete more aggressively for online customers, offering a wider range of products and services, and eventually moving into the dynamic packaging space.


Lastminute.com chief executive Brent Hoberman explains the dynamic between online agencies and airlines is two-fold. On one hand they are competing for the same client but, on the other, online sites can be a profitable distribution source for airlines. “Remember, the customer wants choice, so not everyone is going to want to book on an airline website all the time,” says Hoberman. 


Opodo UK country manager Neil Mark adds: “The online sites are a solution for when the airlines get their yield management wrong,” noting that a rising percentage of Opodo’s business is driven by distressed inventory.


At the same time, Opodo is also ramping up its product line and will introduce a new dynamic packaging tool in the second quarter of this year.


Expedia, too, is enhancing its site with such features as a Weekender tool, which allows customers to compare up to three weekend breaks.


New European president Dermot Halpin says: “We were the first to introduce dynamic packaging and it’s no surprise to us that it is being widely adopted across the travel market. But the online agency segment is not the only one to feel the pressure from carriers. The more services airlines add to their sites, the more pressure search engines will be under to adjust their capabilities in order to continue to accurately compare airlines.


“If these sites only compare on price then they won’t really be telling the full story to the consumer,” says BA’s Willert.


Keith Melnick, vice-president for business development at the Kayak search engine, notes the technology is there to allow more sophisticated searches. However, he says 90% of searches are still price-driven.


But Chris Nixon, general manager and head of sales for Travelsupermarket.com, observes that consumers are getting savvier and doing more research, so buying decisions are more often based on a number of factors, not just price.


As the airlines expand their web presence, online competition will only get tougher.


“Having a good website is not enough,” he says. “Although travel arrangements are often dominated by the flight, the rest of the experience cannot be ignored and there will continue to be a need for accommodation, car rental, airport parking etc and so it is likely that we will see airlines attempting to further branch out into these areas.”


In many ways, the future seems to hark back to the airlines’ golden age, when carriers had total command over their distribution and the traveller.


Through sophisticated yield management systems, smarter technology and more robust inventory, the airlines will once again control where their products are sold and at what price, and will own the entire customer transaction.


Deregulation will only further strengthen the airlines’ position. The online and bricks-and-mortar agencies will have to aggressively compete for airline inventory, while the GDSs may be relegated to a purely back-office function, where their primary role is to serve the airlines’ revenue management needs.


Of course, if history does repeat itself, there will ultimately be a backlash to an airline-dominated industry, and calls for re-regulation in the name of consumer choice will resound.


How ever the next few years play out, one thing is for certain: the distribution landscape will look vastly different to what it does today.



Tomorrow’s world


In the future, the web-savvy teeny boppers of today will have grown up into even savvier adults and will expect technology to escort them through every portion of their journey.


The airlines are positioning themselves to greet this new generation of traveller and gain control over the entire customer purchase.


Through new technologies, the airlines will lure passengers to their websites with lower, more flexible fares, dynamic packaging options, and the ability to electronically escort passengers from the point of booking to the point of boarding.


Certain airport security functions could even be circumvented by booking direct through an airline’s website, as carriers form exclusive agreements with, or possibly acquire, mobile technology which can identify passengers and speed airport security in the same way retina scanning is used today.


“The airlines have a great opportunity to win back more control over their business, as more [transactions] are dealt with on the airline’s website” says JP Morgan analyst Chris Avery.


In the future, consumers may well start to use one-stop-shop concepts, and buy other parts of their trip via the main site that ‘hooked’ their business in the first place.


Avery adds: “The airlines have a significant opportunity to win the growth of the aviation industry back on to their own websites.


“However, they need to be fresh, fast-moving and relevant in order to capitalise on their ‘consumer-inertia’ and brand advantages over independents, and stay ahead of developments.”



Will online agents cope with increased direct sales from airlines?


While airlines are selling through their own websites, there is room for online travel agents that add value. The online channel continues to expand, the needs of airline suppliers vary, and there is an inter-dependant relationship between suppliers and distributors.


How will online agents continue to add value? Beyond the obvious answer that ‘scale matters’, larger online retailers are pursuing three strategies:


Global Reach: Airlines may lead the way in their home countries, but they may not be first choice in key foreign markets. Leading global online travel retailers offer airlines support in countries where they most need it. Lastminute.com Europe is part of Travelocity, which also owns ZUJI in the Asia-Pacific region.


Targeted Brand Portfolios: Carriers need support in different channels at different times. Many leading online retailers now have brands that target not only online consumers, but also the corporate, wholesale, student, long-haul, last-minute and packaged segments.


Vertical Integration: Our parent company, Sabre Holdings, owns businesses that host airline reservation and operating systems; build airline technology products for everything from yield management to crew scheduling; provide marketing and sales tools for airlines, connect airlines to tens of thousands of agents around the world and – through companies such as Lastminute – sell directly to the consumer.


These are all strategies that deliver significant value to airlines and which ensure that the online travel agent will remain an important part of most airlines’ marketing, sales and distribution strategy.


Ned Booth is managing director for Travelocity.co.uk and director for group flights at Lastminute.com

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