Exploring the Evolution of Airline Distribution – Trends, Opportunities, and Challenges

The airline industry is undergoing a significant shift in its distribution strategy. Historically, airlines have made content commitments to Global Distribution Systems (GDSs) like Amadeus, Sabre, Travelport, and other third-party distribution channels. These commitments required airlines to effectively distribute all their fares, ancillary products, and frequent flyer benefits equally across all channels. However, this model is gradually eroding as airlines seek to differentiate their offerings and foster deeper relationships with customers.

Channel Differentiation Strategies of Global Airlines

Airlines worldwide are implementing various strategies to differentiate their fares, or frequent flyer benefits, across their preferred channels. Here are some examples:

1. Implementation of Surcharges Added to Fares in Airlines’ Most Expensive Channels

The first significant shift in airline differentiation occurred when surcharges were introduced to fares in the airlines' most expensive channels. Lufthansa was a pioneer in this area, announcing this change in 2015. This move was a strategic attempt to steer customers towards direct booking channels, thereby reducing distribution costs and increasing control over its offers and customer interactions. This strategy was a game-changer, prompting other airlines to reconsider their distribution strategies.

2. Removal of Some Content from Channels Using Legacy Technology (EDIFACT)

The next wave of differentiation came when airlines began removing some content from channels that use legacy distribution technology, known as EDIFACT. Airlines like United Airlines, Avianca, and Air Canada have removed their lowest fare categories. Others, like Hawaiian Airlines, have removed portions of their flight networks. Airlines with the boldest strategy, like American Airlines and Finnair, have removed over half of their fares from EDIFACT so far on their journey towards fully sunsetting the EDIFACT channel. These moves represented a significant shift away from traditional distribution methods, allowing these airlines to provide a more personalised and efficient service to their customers.

3. Introduction of Value-Added Content Like Bundles, Ancillaries, and Continuous Pricing to Direct and NDC-Powered Channels

Airline direct and NDC-powered channels use modern technology that can help airlines sell much more than just static prices for travel between point A and point B. These channels enable rich product displays that provide customers with more choice to tailor their journey, which positively impacts both airline revenue and customer satisfaction. Importantly, these channels also unlock the ability for an airline to price its flights more granularly in real time using continuous pricing. Airlines like Lufthansa, British Airways, and United Airlines have publicly shared the significant progress they have made in rolling out their continuous pricing capabilities broadly across modernized channels.  The migration toward more advanced selling infrastructure has unleashed airlines’ creativity and new customer benefits.

4. Use of Frequent Flyer Benefits as a Differentiator

The most recent trend in airline differentiation is the use of frequent flyer benefits. Airlines are beginning to leverage these programs to attract customers to their direct channels and/or NDC-powered intermediaries. Loyalty programs have become an extremely important source of new revenue in recent years, and many airlines believe strong customer relationships can only be formed through direct, personalised customer interactions. A prime example of this is a strategy announced by American Airlines in February 2024, which provides the ability for travellers to earn frequent flyer miles and status exclusively through the airline’s direct and NDC-powered channels. This new trend is likely to deepen airlines’ customer relationships further, thereby unlocking new revenue opportunities and customer experience benefits.

Each of these categories represents a significant evolution in how airlines are differentiating their products and pricing between channels. As the industry continues to evolve, we can expect to see further innovations in these areas.

While the shift towards differentiated offerings between channels and offer-order technology presents opportunities for airlines, it also comes with challenges.

Opportunities

  • Better Upsell and Ancillary Attachment: Modern channels do a better job of displaying the full range of airline products, making it more likely that customers may be enticed to purchase a higher fare or select an ancillary product. Also, the presence of more customers in the airline direct channels provides more opportunities to attach non-air ancillary products such as hotels, cars, and destination activities, which can be very lucrative.
  • Cost Savings: Airlines’ more modern channels tend to be the least expensive. Direct channels attract no travel agency commissions or booking fees, and even the form of payment mix can be favourable to airlines. Many airlines also roll out new, more efficient third-party channel economic models in connection with their NDC rollouts.
  • Deeper Customer Loyalty: By encouraging customers to adopt modern channels which offer greater personalisation and choice, the customer experience is elevated overall. It also creates more opportunities for direct customer interaction. Both facets inevitably position the airline to draw customers into a closer relationship.
  • Operational Efficiency: The use of modern technology such as NDC can improve operational efficiency by automating processes and reducing costs for both airlines and third-party channels. This can lead to significant cost savings and faster, more convenient servicing for customers.

Challenges

  • Managing Differentiated Product Offerings Across Channels: Managing differentiated product offerings across channels can be complicated. This requires sophisticated offer technology and organizational design/processes. Striking a balance between differentiation and consistency across channels can be difficult, especially for airlines that attempt to use two separate technology infrastructures for their direct channels versus indirect channels.
  • Servicing Bookings Across Channels: It is becoming more common for customers to book through one channel and have their bookings serviced by other channels, including third-party indirect channels. For example, corporate customers might find a lower fare or better frequent flyer offering on their favourite airline’s website but need their travel agency to help make changes to both their airline itinerary as well as other related elements of their journey and then bring all that data back to the company for expense reporting.  Interoperability between channels is becoming more important and will become a central part of NDC technology’s mission going forward.
  • Customer Expectations and Satisfaction: As airlines differentiate their offerings, they must ensure that they continue to meet and exceed customer expectations. Customers who are used to a certain level of service or benefits may be disappointed if these are reduced or eliminated in certain channels.
  • Regulatory Compliance: Airlines operate in a highly regulated environment, and any changes to their distribution strategies must comply with all relevant laws and regulations. This includes regulations related to fare transparency, consumer protection, and competition. Navigating these regulatory requirements jurisdiction by jurisdiction can be challenging, especially considering that these regulations are in constant flux with lobbyists on all sides!

Conclusion

The airline industry is at a crossroads, with the traditional model of content commitments to GDSs gradually eroding. As airlines break free from these historical commitments, they can make their best fare, ancillary, and frequent flyer offerings available through their least expensive and most capable channels. However, this shift also presents challenges that airlines must navigate. The industry’s future will likely involve a gradual transition toward offer-order technology, enabling airlines to better manage differentiated product offerings across channels. As we look to the future, it’s clear that the airline industry is on the cusp of a new era, one that promises to reshape the landscape and redefine the customer experience.