eBook: the modern merchant model

Chapter 2: How digitalization is impacting the travel trade ecosystem

How digitalization is impacting the travel trade ecosystem

In this eBook, we focus on the heart of the travel trade ecosystem: Travel agencies and other retailers who act as 
intermediaries, purchasing from travel suppliers for resale and serving end customers or travelers. But before we zoom in on that, let’s take a bird’s eye view of the entire ecosystem and see who is positioned where.

The travel trade ecosystem is made up of multiple layers and players, as illustrated in the schematic overview below. Several options for intermediaries are available for arranging bookings for end customers, consumers, or business travelers.

Indirect travel distribution channel

Direct travel distribution channel

The increasing importance of digital presence in the B2B sector also affects the travel trade ecosystem, which encompasses buyers and vendors of travel services like travel agencies, online marketplaces, airlines, hotels, and other travel suppliers.

NDC

The technical standards of the International Air Transport Association’s (IATA) form the basis of the new offer and order infrastructure. NDC is essentially an XML standard that enables airline service providers to deliver rich content and additional or ancillary services to their customers. Rich content is one of the factors through which airlines can market themselves and differentiate their brand.

Access to customer data via NDC allows for better control of pricing strategies. An example of this is dynamic pricing, where various criteria are considered in real-time to enable truly personalized pricing.

Lufthansa, British Airways, American Airlines, and Iberia were the first to adopt NDC, and the technology continues to make its way into airline distribution, alongside other means to improve airline operations. Currently, representatives from almost all airline distribution organizations have become involved with the NDC initiative in one way or another.

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In a study5 by the European Technology and Travel Services Association (ETTSA*), 11 primary hotel distribution channels were identified. Airlines have similarly diverse options for selling inventory.

These options can be broadly divided into direct and indirect channels, with indirect channels such as offline and online agencies, travel management companies (TMCs) and tour operators using one or more intermediation layers between the end traveler and the supplier.

The trend toward direct retailing

Customer expectations continue to evolve, and leading consumer brands are now focused on providing optimized digital 
experiences. An example of this can be seen with Betterment, a financial advisory company that delivers investment advice  directly to users through its intuitive mobile app, and the global technology company Samsung, which uses artificial intelligence (AI) to improve online customer support.

The application of digitalization in airlines also serves as proof of how digital direct retailing has impacted the travel industry. We start with the fundamental understanding that all airlines, as providers of travel services, share two basic needs: revenue and passenger satisfaction.

For airlines to become modern (read: digitalized) and empower travel retailers to offer their customers the flexibility to optimize, personalize and monetize their products, the airline industry has introduced the ‘offers and orders’-based model.

The model focuses on transforming traditional systems and processes into a modular IT infrastructure that is better suited for retailing travel products. Future orders made through this system will be able to include multiple supplier and product records in one order instead of today’s fragmented booking and ticketing record system.

However, it goes without saying that the digitalization taking place in B2B e-commerce is also having a big influence on how these businesses interact with customers.

Indirect distribution: centered around travel retailing 

As airlines and travel service providers are an undeniable part of the travel ecosystem, the customer-centric focus of the NDC in this more personalized approach also has direct implications for intermediaries within the ecosystem.

To avoid being left out and truly reach and influence travelers and travel managers in how they shop, book and purchase travel, providers like online travel agencies (OTAs), travel management companies (TMCs) and leisure travel agencies must participate in this process. That said, with the future lying in retail, intermediaries – many of which 
are inherently travel sellers – already hold a key position in travel distribution.

 

Indirect travel distribution channel

Travel intermediaries can secure their position by leveraging a wide range of benefits for hotels, airlines and other travel providers.

These include:

Extended reach for travel suppliers into more geographic markets and segments than would normally be accessible to them. Travel intermediaries often have greater local brand awareness and the ability to serve customers in remote markets where they have a deep knowledge of local needs and regulations, such as consumer protection and refund obligations.

Helping to fill capacity and shift inventory for airlines and hotels by generating additional demand as travel intermediaries.

Providing an enhanced booking experience for customers by bundling trips, enabling multiple trip components, cross-selling and up-selling within  a single booking journey.

Providing efficient after-sales support to customers, such as handling changes to complex itineraries involving multiple travel suppliers or even just multiple flight segments. Mass rebookings and cancellations during the pandemic increased this need, as many airlines lack sufficient resources to manage this process alone.

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In addition, the largest online travel agencies (OTAs) in the travel distribution ecosystem have become so important that, pre-Covid, the top players each handled annual travel volume in the order of US$100 billion, surpassing the major airlines in revenue.6

It’s also worth noting that large OTAs have greater marketing budgets and reach than global hotel chains and major airline groups. The power of these marketing engines brings more demand and volume to travel suppliers who choose to work with these travel agencies.

After all, as mentioned above, travel intermediaries create value for their partners by extending reach, driving demand, and growing sales.

These benefits can be further enhanced through fraud reduction and improved payment management when travel intermediaries use the merchant model – a set-up in which they hold the lead in the  relationship with both their suppliers and customers.

Comparison of marketing and advertising spend

 

 

5 Hotel distribution costs, Infrata and EETSA, 2018

*ETTSA: The European Technology and Travel Services Association was established in 2009 to represent and promote the interests of global distribution systems (GDSs) and travel distributors to industry, policymakers, opinion leaders, consumer groups and all other relevant European stakeholders.

6 WEX 2022 Travel Retailing Merchant Model trends report

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