Beyond the Standard: A strategic approach to the new distribution (NDC) landscape
Beyond the standard
Over the past two-and-a-half decades, the nature of airline distribution has been fundamentally transformed by two massively disruptive forces.
The first of these forces has been the rise and proliferation of the low-cost carrier. Driven by the success and emulation of the Southwest model, broad global deregulation and more fuel-efficient aircraft, these airlines have bypassed intermediaries and pioneered direct selling of unbundled fares alongside a suite of a-la-carte ancillaries.
The second force has been the rise of the internet and the ubiquity of e-commerce. Whereas historically airlines have had to rely on a third party network of agents working within corporates, and on the high street to distribute content via the GDS, e-commerce has given the airlines a mass-market channel to distribute their product directly to the end consumer.
Yet despite these forces of change, most airlines have remained beset with legacy thinking, reined-in by the constraints of embedded systems and behaviours. While the concept of ‘Airlines as Retailers’ has been a common trope for the past several years, the industry is still dominated by the notion of “How do I sell more seats to more passengers”, rather than, “What customer need can I satisfy?”
The industry is still dominated by the notion of
“How do I sell more seats to more passengers”, rather than,
“What customer need can I satisfy?”
2020 and beyond – a new tipping point
Looking forward over the next few decades, we are at a new tipping point and poised for further disruption, as the technical standard for airline distribution known as the New Distribution Capability (NDC) approaches maturity and widespread adoption.
While in essence NDC is just a messaging standard, it represents a new mechanic for direct distribution, empowering airlines to become retailers across all channels. In order to fulfil the promise of NDC, new generation offer and order management systems are becoming available that are able to integrate with customer data platforms that take advantage of machine learning and artificial intelligence to provide the next best action to the customer across the entire customer journey. As illustrated by Figure 1 below, NDC enables airlines to use a single messaging standard to distribute their product to Global Distribution Systems (GDSes), Aggregators, Travel Agents, Online Travel Agencies (OTAs), Online Booking Tools (OBTs), Travel Management Companies (TMCs) and directly to the traveller.
From the airline’s perspective, the value proposition is divided into two clear areas – revenue and cost benefit:
Airline – Revenue Benefit:
- Control of the offer in all channels
- Differentiation through product attributes
- Upsell through bundling and fare families
- Ancillary upsell
- Rich content to inspire and drive conversion
- Dynamic Pricing and Personalisation
- Increase reach through new sales channels
As the airline is in control of the offer creation, it has control over which offer is presented in each channel, ensuring parity of offer. Offers can be differentiated from the competition or by channel by the product attributes inherent to such offers. Airlines have greater opportunity for revenue and customers benefit from greater choice through fare family options across all channels, as well as the ability to ‘buy up’ in terms of additional ancillary selection. Conversion can be enhanced through improved presentation, through photographs, videos and 360 degree tours. More sophistication in offer creation enables personalised offers based on context and customer preference, as well as dynamic pricing. Finally, the innovation driven through the emergence of new standards opens up new distribution opportunities from start-ups entering the distribution ecosystem.
Airline – Cost Benefit:
- Lower opportunity cost
- New technology at lower cost compared to legacy systems
- Cost savings across ticketing, payment, revenue accounting
- Back-office automation
- Improves Revenue integrity (removes cost of fare auditing)
- Control over payment
- Real-time settlement cuts cost of agency defaults etc.
Each product, opportunity or customer experience enhancement not acted on due to legacy system constraints adds up to significant opportunity cost. New standards enable a more modular, service-oriented architecture hosted in the cloud, bringing greater efficiencies and cost savings over time. As the offer, ticketing and settlement moves from the GDS to the airline, more control amounts to cost savings in back-office process built around the enforcement of product rules and settlement mechanics between the airline and its distribution partners.
There are natural benefits for the sellers too, as well as ‘manufactured’ benefits airlines are putting in place to drive adoption:
Seller – Natural Benefit:
- Better access to a broader set of offers
- Better accuracy and airline owning the offer results in fewer ADMs
- Standardisation drives better productivity
- Enhanced traveller experience through improved offers, dynamic pricing and personalisation
The New Distribution promise for the seller community delivers access to the types of offers that airlines heretofore have only been able to provide on their direct channels – their own websites or mobile apps. As the airline is responsible for the offer and ticketing, agents no longer fall foul of Agency Debit Memo’s (ADMs) – or charges for non-compliance with ticketing rules. ‘Direct connect’ mechanisms have been available for some time, but it hasn’t made sense for agencies to invest significantly due to the cost of integration with multiple proprietary airline connections. Standardisation lowers this cost significantly. Finally, a broader array of more relevant offers, with improved price controls and personalisation based on context and behaviour ensure agencies are able to better convert.
Seller – Manufactured Benefit :
- Incentives for NDC bookings
- Avoidance of surcharges for non-NDC bookings
- Access to unique content
- First-mover/competitive advantage
Airlines have taken the stick-and-carrot approach. Lufthansa introduced surcharges on traditional distribution channels, while American Airlines introduced an agency incentive program – both designed to drive NDC adoption amongst agents. IAG introduced unique content through its NDC channel, driving adoption through special fares only available to agents accessing its content via NDC. Those agents consuming this content are well positioned with a first-mover advantage in their respective markets.
But NDC is not the goal, Airline Retailing is
According to McKinsey & Company, there is huge potential in airline retailing utilising these new technologies. A recent study found that the industry might realise up to $40 billion in new value annually by 2030 (equivalent to 4% of current revenues). Put another way, modern retailing might be worth up to an additional $7 per passenger . This is promising news indeed for an industry with notoriously low margins. According to IATA, the continuing growth in costs ahead of revenues is squeezing net margins to 3.2% in 2019 (down from 3.7% in 2018), with profit per passenger declining to $6.12 in 2019 from $6.85 in 2018 .
Those airlines that manage to adopt a retail mindset will realise that, as most travel purchases start with the flight, the airline has the perfect opportunity to sell the full itinerary. And while the cost of the fare remains the largest single component of the itinerary, there is plenty of additional revenue to be gained through the sale of ground and flight ancillary products and services (See Figure 2).
But perhaps even more interesting is the quality of this revenue. While airline net profit remains under pressure, the available margin across the rest of itinerary represents an even bigger opportunity for the airline (see Figure 3).
In order to deliver against this opportunity, OpenJaw has invested in extending its core product, the t-Retail Offer and Order Management System, which integrates with the airline’s PSS, provides catalogue ancillary selling, as well as integrating with third-party providers such as hotels or hotel aggregators, event suppliers and car rental companies for ancillary cross-sell or dynamic packaging. t-Retail’s Digital Experience is fully-responsive web app optimised for mobile, while t-Retail NDC is Level 4 Certified by IATA. t-Data is OpenJaw’s Customer Data Platform, which combines data science with machine learning to resolve identities across large volumes of historic transaction data, provides business insight through a rich set of dashboards, as well as actionable insight through Propensity Scoring, Customer Lifetime Value Scoring, and Dynamic Clustering. OpenJaw’s t-Social platform combines an AI chatbot with a suite of integrated NDC functions, enabling selling and servicing in conversational channels like WhatsApp, WeChat and Facebook Messenger. Through these platforms, we aim to serve the customer based on their context and need across the entire customer journey as outlined in Figure 4.
But how do airlines get there? How do airlines adopt the mindset of retailers? Is it as simple as adopting these new technologies?
While next generation offer and order management systems, NDC, customer data platforms, machine learning and artificial intelligence clearly promise a sea change in airline distribution, our view is that the technology is merely an enabler. To truly succeed, airlines need to take a strategic approach to becoming retailers. This is more about business transformation than IT implementation. As such, airlines should consider the following:
- Is this initiative being led from board level?
- Is there a clear strategy and budget approval?
- Do we have an inter-departmental steering committee in place to help break down silos?
- Do we have Executive Sponsorship and clear ownership?
- Do we have the right subject matter champions, and are they empowered?
- Do we have a clear channel and market strategy?
- Do we have a phased roadmap?
- Do we have strong program management to pull it all together?
While a phased approach can ensure the delivery of some quick wins up front, it is important for airlines to realise that this transformation to retailing is a journey. In its guidance on the adoption of NDC, IATA recommends a phased approach (see Figure 5.)
The first phase involves rolling out the functionality to facilitate NDC distribution through the Offer and Order Management System, achieving the basic set of capabilities to facilitate NDC at scale. The second phase is focused on enhancing those capabilities and the airline’s content, with true benefit realisation in the third phase. In a world where we’re obsessed with short-term return on capital, it’s important that airlines realise that this requires an investment in future benefit realisation.
In working with our airline partners, we’ve found that the retailing capabilities map to an airline’s channel strategy. The most basic capabilities enable the simplest selling channels, with more complexity being introduced the more content differentiation, servicing, integration or automation required to satisfy the requirements of a specific seller or channel. What this means is that your highest value customers, those requiring a high level of touch, will likely require a full set of capabilities matching their current set-up before considering migrating to a new messaging standard.
By contrast, some of the easiest channels to enable – for instance the metasearch sellers – bring extremely high look-to-book ratios (according to some sources in excess of 10,000:1), while your higher-value sellers (TMCs for example) have much lower look-to-book ratios. What this means is that it is likely that your channel strategy will require up-front investment to provide an architecture and infrastructure capable of delivering offers at scale, but the true return will only be realised once the full capability set to serve your highest value sellers has been provided (as illustrated in Figure 6 below).
The right offer, at the right time, in the right place to the right customer
Much of the promise in the new era of airline retailing is the ability for the airline to dynamically shape the components of each offer, and price the offer based on contextual data. IATA has defined its dynamic offer maturity model as a combination of enhancements in product selection and bundling as the first dimension vs enhancements in pricing as the second dimension.
The blue area in Figure 7 indicates today’s typical airline capability in being able to offer static flights and ancillaries, priced at pre-defined price points with dynamic capability – the ability to create static product bundles or dynamically adjust pre-determined flight pricing. The transitional model is achieved when airlines are capable of dynamically adjusting the price of static bundles as well as dynamically determining pre-defined bundles and dynamically adjusting the price. The holy grail for dynamic offer creation under IATA’s Air Vision expands to dynamically creating content combined with fully dynamic price determination – without the need for creating static product bundles or pre-defined price points.
At OpenJaw Technologies, we are pioneering much of the transition state as indicated above through the combined architecture of our Offer Engine (t-Retail) with our Customer Data Platform for Travel (t-Data) – seen in Figure 8: in a simplified architecture:
Our first example demonstrates how this architecture facilitates the creation of dynamic offers. Meet Mary Clarke. Mary is travelling from LON to NYC on our Example Airline. By including her Frequent Flyer Number in the seller’s offer request message to the Offer Engine through NDC messaging, the Offer Engine can resolve Mary’s identity in the Customer Data Platform. Based on Mary’s historic search behaviour, and her Customer Lifetime Value Score (CLV) , we can see that Mary’s persona for this trip is “Budget Business” traveller.
A typical search for Mary’s Origin and Destination over the dates provided would return 10 outbound flights, each with 5 fare families across Economy and Premium Economy, and another 5 in Business and First for each leg. 10 x (5 + 5) x 10 x (5 + 5) = 10,000 possible route/fare options. But as we know that Mary is a “Budget Business” traveller, we can restrict the response to only return the most relevant fare options – in this instance the 5 earliest outbound and latest return flight options in the highest Premium Economy and the lowest Business fare families – thereby presenting the options that are most likely to convert for this traveller (See Figure 9).
In our second example, Ian Walton searches for flights to Madrid through his corporate booking tool. Once again, our Offer Engine is able to resolve Ian’s identify through our Customer Data Platform. Based on a combination of Ian’s historic purchase behaviour, and the application of machine learning, our CDP has assigned a propensity score for each ancillary product based on Ian’s likelihood to purchase. In this instance, Checked Baggage, Priority Boarding, Assigned Seating and Onboard Wi-fi have the highest propensity values, so our Offer Engine is able to dynamically bundle these for Ian in this seller channel (See Figure 10).
Our final example has customer Samantha Leigh searching for a flight to Barcelona. In the messaging received from the seller, and referencing our CDP we’re able to identify that this seller is one of our most valuable agencies through the aggregate Customer Lifetime Value (CLV), that Samantha has been dynamically clustered as “At Risk of Churn”, and that the flight she’s looking at has a load factor of less than 35%. Based on a combination of these data points, a rule is invoked in our Offer Engine to discount Samantha’s fare by 10% in this channel, to ‘win back’ her business and loyalty (See Figure 11).
As you’ve seen from the above examples, the power of combining a sophisticated Offer and Order Management System like t-Retail with a Customer Data Platform like t-Data that uses machine learning to provide insights about your customers to deliver next best actions gives your airline an edge in this new age of airline retailing.