New Distribution Capability: From distribution to airline retailing
How do you purchase your flights? By going directly to your favorite airline and booking the first flights you see for the dates you need? Or do you search for the best deals on platforms like Skyscanner or other aggregators to compare prices and secure the most cost-effective flight options for your preferred travel dates?
All airlines have two fundamental needs in common: revenue and passenger satisfaction. To satisfy customers, airlines seek ways to learn more about their customers and provide a set of additional services like baggage insurance or onboard food. Those services, also called ancillaries, are offered for additional fees. To be able to sell ancillaries to the passengers and be more profitable, airlines struggle to deliver personalized content to their travelers.
A new standard - New Distribution Capability (NDC) - emerged to resolve the issue. What is this new standard about and why does this help the airlines in their service offering? And to what extent are airlines already benefiting from it?
Let’s explore.
Collecting memories - where did it all start?
Back in the 60s, making a flight reservation took multiple people and a mainframe computer to process. American Airlines and IBM pioneered automated flight distribution using the IBM 7090 computer, situated in New York, containing all flight reservation data. That computer was connected to 1500 American Airlines remote terminals across the country. To make a reservation, you contacted a travel agent who then reached the airline by phone to reserve a seat.
That system could process up to eighty-four thousand telephone transactions per day. Its full name Semi-automatic Business Research Environment was simplified to Sabre. Later, similar computers were adopted by most carriers, and Sabre became the leading flight distribution provider in the world. In the 70s, terminals were extended to travel agents’ offices to free up manpower at airlines. This was the beginning of the era of global distribution systems – known as GDSs. [1]
Collecting to connect
Today, GDSs, large flight aggregators, collect flights from about 400 airlines and distribute them across travel agencies using their own application programming interfaces – so-called APIs – which are the main connectivity channels used for linking different software systems.
There are three major GDSs: Sabre, which became an independent business in 2000, Amadeus, established in 1987 by four European airlines, and Travelport, a UK-based GDS formed through a merger of smaller providers. [1]
Besides air travel, GDSs now support hotel room distribution and a number of different transportation options: think train travel, cruises, car rentals, and even airport transfers. So, how exactly does GDS-centered distribution work? GDSs are normally connected directly to the heart of airline sales technologies – central reservation systems or CRSs. A CRS is a software program that manages seat reservations on the airline side once a GDS requests a seat.
But this connection channel doesn't cover scheduling information and pricing. To set timetables and prices, airlines must connect with two additional third parties. Airlines publish their prices on ATPCo, or airline tariff publishing company. It's the main global source of fare information that further distributes prices across GDSs, online travel agencies or OTAs and price aggregators like Skyscanner.
On top of that, airlines connect to scheduling providers such as a Innovata and OAG. These technology companies supply the travel market with flight schedules, routing connections, and flight code information. GDSs have become close to a monopoly on the air travel distribution market. For many years they've been the main point of contact for both airlines and agents, including online travel agencies. Most travelers today research availability and prices at OTAs, with about a third of travelers worldwide purchasing tickets there.
Customer-centric content
What is seen as lacking with GDSs however, is valuable customer data. As GDSs process bookings, most of the information remains in their hands, meaning airlines are unable to track their customers and potentially adapt to their preferences.
Second, there is limited ancillary support. Airlines receive very thin margins from the sale of their core services: carrying people from point A to point B. The main source of profit for many airlines is allowing you to choose seats, upgrade a class, take more luggage, get priority boarding, or order a better meal.
While global distribution systems' APIs transmit key booking information to online travel agencies, ancillary support is usually limited. And perhaps the main challenge is that airlines don't have full control over their inventory.
Connecting the dots
In 2015, IATA, or International Air Transport Association, introduced a new API standard for Airlines called NDC, or New Distribution Capability.
NDC is essentially an XML standard that allows airline service providers to deliver rich content and ancillaries to their customers. Rich content is one of the factors with which airlines can market themselves and make their brand distinguishable. With access to customer data via NDC, it enables better control of pricing strategies. An example of this is dynamic pricing, which involves the consideration of various criteria in real time to deliver a truly personalized pricing.
Lufthansa, British Airways, American Airlines, and Iberia were the first to adopt NDC. And the technology continues to make its way in airline distribution, as well as other means of improving airline operations. Currently, representatives from nearly all airline distribution organizations have embarked on the NDC initiative in one way or another. In turn, IATA recommended a lot of resources to support decision making on NDC.
Constructing a common understanding
Although NDC has made significant progress over the last few years, it’s clear this isn’t done overnight. There will be a multi-year period of transition where both the traditional and newer distribution methods co-exist. If the industry is to accelerate the journey through the industrialization phase and towards ‘critical mass’, it’s helpful to understand and discuss the barriers that remain.
First of all, while NDC itself is a ‘standard’, it is still being applied by airlines in subtly different ways. From speaking to stakeholders across the travel value chain, there is a growing desire for airlines to focus on a single version or interpretation of the NDC standard to limit downstream complexity. Overall, there are still different interpretations of the NDC standard in the ecosystem.[2]
The commercial models to support this new world of travel retailing represent another major stumbling block to progress and this has, for some time now, been the ‘elephant in the room’ when speaking about NDC and distribution more broadly.
In addition, some travel sellers highlighted that NDC is not a ‘one size fits all’ switch to a new system — it’s far more complicated than that. Individual airlines have different distribution strategies based on their relative strength within a given market, and each airline has its own objectives with NDC. For some, the primary goal may be on merchandising and revenue uplift, while others are focused on gaining greater control over the distribution of their product. Objectives can also vary for the different markets a single airline serves.
Adding to this are the logistics of achieving an alignment across the industry. For NDC to be viable, commercial agreements are needed between airlines and technology partners; airlines and travel sellers/corporations; technology partners and travel sellers/corporations. Given that there are thousands of stakeholders across this industry, a huge number of commercial agreements need to be concluded to set the terms for NDC bookings.[2]
Counting connections
So much time has been devoted to talking about NDC, IATA’s distribution standard, since it was first unveiled. The standard hit turbulence even in the immediate aftermath of the launch with some elements of the distribution chain, such as travel intermediaries, questioning its real motives. There was a lengthy period of defining what the standard meant and for whom.
Now, there’s every reason to be excited about NDC making a tangible impact. Airlines offer new differentiated product bundles and price points, increasingly based on richer contextual information; travel sellers across the world are now beginning to make live NDC bookings with tools that provide easier access to airline offers; and technology partners like Amadeus are offering scalable solutions that will contribute to the industrialization of NDC, incorporating important features like post-booking servicing.
Conclusion
Even though airlines, hotels, and other local service providers strive to avoid third parties and distribute their products directly, each year's growing number of travelers will be looking for reliable, comprehensive travel booking platforms and services that allow you to plan your entire trip, from flights and accommodations to snacking at local eateries. Therefore, the customer journey will show the path the industry should choose, accessible for all stakeholders to walk on together.
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[1] New Distribution Capability (NDC) in Air Travel and Its Industry Impact | Altexsoft.com
[2] Amadeus paper: NDC 2021 and the Path to Industrialization
