«A Special Report Commissioned by IATA Although commissioned by IATA, the analysis in this report is that of Atmosphere Research Group LLC, and ...»
The Future Of Airline Distribution
A Look Ahead To 2017
5 December, 2012
A Special Report Commissioned by IATA
Although commissioned by IATA, the analysis in this report is that of Atmosphere Research Group LLC,
and reﬂects Atmosphere’s assessments. Analysis is based on best available information at the time of
© Copyright 2012 Atmosphere Research Group LLC, 245 First Street, Suite 1800, Cambridge, MA 02142. All rights
reserved. The ownership of this Report shall remain with Atmosphere Research Group LLC. This Report is based on an independent analysis conducted by Atmosphere Research Group LLC. The contents of this Report reﬂect Atmosphere’s independent assessments of the airline distribution segment. Every effort has been made by Atmosphere to provide the most current and accurate information at the time of publication, and is subject to change. All trademarks are the property of their respective owners. To buy report reprints, please email firstname.lastname@example.org.
About The Author!
From The Industry That Created eCommerce!
Planning And Buying ﬂights Is A Complex Experience!
Digital Travellers Have Control -- And Want More!
Your Future Generations Of Passengers Are Very Different Consumers
Distribution Cost, Merchandising Frustrate Airlines The Most!
Seat 27A Is No Longer Just Another Seat!
Evolving Business Strategies Impact Distribution!
The Technology Landscape
By 2017, “Distribution” Will Morph Into “Commerce”!
Direct Channels Will Emerge As Airlines’ Largest Commerce Gateways
“Big Data” Will Make Data-Based Commerce Possible And Practical
Direct And Alternative Distribution Yes, “Direct Connect” No
Pay Attention To “CAFGA”: Concur, Apple, Facebook, Google, And Amazon!
new business models will enable Intermediaries to Pay For Distribution!
From Global Distribution Systems To Value Creation Hubs!
Intelligent Content Aggregators Allow Third-Party Intermediaries To Consolidate, View Supplier Content!
BSPs Will Come Under Pressure!
" Co-Founder, Airline & Travel Industry Analyst, Atmosphere Research Group
Travel Weekly in the United States named Henry one of the 33 most inﬂuential people in the travel industry. In 2008, Henry was honored by HEDNA, the Hotel Electronic Distribution Network Association, with its Award of Excellence. In 2011, Henry was elected Chair of the Board of Directors of the Association of Travel Marketing Executives (ATME), a volunteer-based, not-for-proﬁt professional development organization serving travel industry marketing professionals.
Henry is a graduate of the Tulane University School of Business in New Orleans, Louisiana, and lives in San Francisco, California.
In preparing this report, Atmosphere beneﬁtted from the participation of many airline industry executives in both online research and telephone interviews. Following research best practices, these participants participated on an anonymous, conﬁdential basis. We also spoke with managers and executives at various airline, travel, and general technology ﬁrms. Though they and their companies were promised anonymity, Atmosphere is grateful for their participation and insights.
Finally, Atmosphere would like to extend its special appreciation to Timothy O’Neill-Dunne, Managing Partner, T2 Impact Ltd., for sharing his insights with us.
The story of the 1950s conversation between American Airlines’ founder, CR Smith, and an IBM salesman is legendary. Fast forward to 1962 and American’s launch of its Sabre system, and the world saw the birth of eCommerce -- it’s just that no one realized it at the time. Fast forward a few more years to the psychedelic 1970s, and airlines pioneered another form of eCommerce -desktop shopping and booking, achieved by placing “dumb” terminals on travel agents’ desks.
In the 50 years since the airline industry began to teach the rest of the world how to conduct business electronically, much has changed within and across airline distribution. Although airlines don’t ﬂy the same planes in 2012 that they did in the 1950s, 1960s, or 1970s, parts of the industry’s business processes, business models, and technology infrastructure date back to those eras -- and, in some cases, even earlier. It’s okay to be nostalgic for airline memorabilia, but nostalgia has no place in contemporary airline distribution, let alone positioning the industry to be successful during the next ﬁve years.
On a typical day in 2012, more than 8.1 million people worldwide will board a commercial airline ﬂight.1 To market and sell their services, airlines conduct business in a fragmented, complex distribution environment. The growing use of the Internet by travellers who shop, plan, and buy airline ﬂights online shines a glaring light on the challenges airlines face in distributing their content.
shop on 22 websites booking.2 In researching ﬂights, a brandagnostic, price-focused traveller shopping before booking third-party online intermediaries such as metasearch sites (e.g., Kayak and Bing Flight Search), online travel agencies such as Lastminute.com and eLong, and consolidators like Vayama, and receive different fare quotes for the same itinerary. Travellers relying solely on thirdparty websites would not receive all the information needed to make a fully informed purchase decision. For example, online intermediaries may not educate travellers on journeys involving multiple carriers that better fares may be available by ﬂying airlines within an alliance, advice when extra-legroom economy class seats or premium economy cabins are available, or let them know if amenities such as in-ﬂight Wi-Fi, in-seat power, or on-demand audio/video are available.
Consider a business traveller lacking “elite” airline loyalty program status making a complex trip from Burlington, Vermont-Miami, Florida-Lima, Peru-London, England-Madrid, Spain-Burlington.
This traveller isn’t allowed to ﬂy ﬁrst or business class, but can book premium economy or !
" economy seats with extra legroom. She values amenities like in-seat power, Wi-Fi, and on-demand audio/video entertainment.
Traditional travel agencies, including corporate travel management companies (TMCs) would know about the beneﬁts of consolidating ﬂights within an alliance, and can generally book premium economy -- but can’t always book extra-legroom seats. Not all travel agents may know about checked baggage policies or service or product offerings for the airlines they don’t regularly book.
In our example, Burlington-Miami is booked on American Airlines through JFK, with the BurlingtonJFK segment booked using an AA code-share on a ﬂight operated by JetBlue. Miami-Lima is booked on LAN, Lima-London on Iberia (via Madrid), London-Madrid on British Airways, and Madrid-Burlington booked by way of JFK on AA code-share ﬂights -- Madrid-JFK on Iberia and JFK-Burlington again on JetBlue.
Consider these various differences in the passenger experience that the traveller would beneﬁt
knowing about when planning and booking this trip:
• JetBlue offers one free checked bag, but American does not for its domestic economy travellers who lack “elite” status. Thus, the passenger will have to pay a checked-bag fee for Burlington-Miami.
• JetBlue offers an extra-legroom section on every ﬂight, but only sells these seats in its website and kiosks. American doesn’t yet offer extra-legroom seats on every ﬂight. AA code-share passengers on JetBlue can only buy extra-legroom seats at airport check-in.
• JetBlue offers free snacks and satellite TV on its ﬂights, but American does not.
• American has Wi-Fi on some of its mainline ﬂeet; JetBlue won’t offer this until early 2013.
Most metasearch, OTA, and consolidator sites do not tell travellers when Wi-Fi is offered.
Airline websites, mobile apps, and online check-in processes generally communicate this.
• Both LAN and Iberia offer premium economy cabins on their long-haul ﬂights. Third-party online intermediaries generally don’t alert their users about premium economy.
• Long-haul LAN and Iberia ﬂights feature in-seat, on-demand audio/video entertainment, an amenity not communicated in most metasearch sites, OTAs, and consolidators.
• Iberia, which shares a common corporate parent with British Airways, charges for all beverages and food in economy on intra-European ﬂights; British Airways does not.
These differences are not communicated on metasearch, OTA, or consolidator sites.
• Iberia and British Airways charge fees to reserve seats ahead of ﬂight check-in; JetBlue, American, and LAN do not. American charges non-elite and discount economy passengers a fee to select a “preferred” seat at the front of the economy cabin.
One traveller. One journey. One alliance. Multiple airlines, with vast differences in the passenger experience, and just as many ancillary product cross-selling and up-selling options -- few of which are satisfactorily addressed in the content provided to travellers in third-party distribution channels.
The world in 2012 is a digital one. More than one billion people have Facebook accounts. There are more than 200 million tweets per day on Twitter.3 Apple sold 2 million iPhone 5 smartphones in the ﬁrst 24 hours the devices were available to pre-order.4 Every day, more iPhones are sold worldwide than babies are born.5 Nine in 10 UK online leisure airline passengers have high-speed Internet access in their homes, as do 94% of the online leisure passengers in France, Germany, and China, 95% of Brazilian passengers, and 98% of US online leisure airline passengers.6 The world’s airline passengers are online citizens, empowered through their extensive adoption of various consumer technology devices (see Figure 1). Passengers spend noticeably more time on the Internet each week than they do watching TV, meaning they will increasingly turn to the web for their travel planning, booking, and servicing -- and expect airlines and their authorized intermediaries to be able to take care of them in their digital channels. 7
" Spurring future growth of the Internet as a travel planning, booking, and service channel is mobile, namely smartphones and tablet devices. Mobile is the most important, and most interesting, contributor to eCommerce’s upward spiral. Passengers are more likely than the general population to own smartphones and tablet devices, with substantial growth expected due to these devices’ growing capabilities (see Figure 2-1 and Figure 2-2). Passengers show strong interest in using mobile devices to plan and book ﬂights, illustrating their comfort with these devices (see Figure 3).
Airline executives expect mobile to generate 7% of online direct sales in 2012. By 2017, Atmosphere expects 50% of online direct bookings will be made on mobile devices -- with even more ancillary purchases made through mobile, given the devices’ portability and ease of use.8 Worldwide eCommerce sales will reach US$1.4 trillion in 2013, with double-digit CAGR expected.9 Travel is the largest eCommerce category, led by airline ticket sales. In the US, it’s estimated that business and leisure travellers will spend $85.7 billion online for airline in 2012 -- nearly 58% of total online spending -- increasing to $110.2 billion (56% of total) in 2016.10 Upwards of 4 in 5 passengers are Bookers, and they book most -- though far from all -- of their ﬂights online.11 To continue to capture the online bookings they get now, and to earn even more, will require more than just the use of new gateways like mobile. It’s essential that all players involved in airline
distribution understand online passengers’ mindsets. Consider how:
• Among US passengers who buy travel online, 82% say it’s easy to plan and book trips online -- so easy that they buy 84% of their ﬂights online.12 The 18% who don’t ﬁnd online travel planning and booking easy book 21% less of their ﬂights online -- and are 15% more likely to buy from an ofﬂine travel agency compared to passengers who ﬁnd booking easy.13 Passengers want simple, straightforward planning and booking processes -- though these processes can’t omit choice and relevant ﬂight details.
passengers by merchandising offers that appear at the proper point during the shopping, planning, and booking processes -- and which are made more useful though the use of well-written copy and good-quality visual content. Importantly, back-end data software must exist to help airlines and authorized distribution partners identify the passengers -or their travel agencies -- who are, and who are not, most likely to be interested in these to improve conversion and sales.
As the world’s airlines evaluate their distribution strategies, it’s essential to understand the mindset of your future base of customers, especially passengers between the ages of 22 and 35, or Generation Y (“Gen Y”). Passengers in this age group are more likely to have completed their university studies and entered the workforce, which helps provide them with the disposable income they need to travel.
This is a sizable audience, though not consistently so. Fifty-eight percent of China’s online leisure passengers belong to Gen Y, as do 38% of Brazil’s. Although smaller than China and Brazil, !
" developed countries have plenty of passengers who belong to this group: 34% in the UK are Gen Y passengers, as are 29% in the US and 26% in both Germany and France. Airlines can’t focus on “Baby Boomers” without considering Gen Y’s needs -- and the substantial business opportunity they represent. Gen Y passengers have a lifetime of buying airline tickets ahead of them. They will eventually become more important than Boomers, as Boomers begin to retire and travel less.