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NDC-Low Cost in for the Long Haul

NDC-Low Cost in for the Long Haul

The Economist recently tackled the question of whether the Low Cost Carrier (LCC) model will be able to disrupt the long haul air travel market in the way they have successfully disrupted the short haul market. “Making Laker’s dream come true” asks whether the time and conditions are finally right for a low cost carrier like Norwegian to be the first to succeed in developing a profitable transatlantic low-frills route.

To succeed where earlier attempts spectacularly failed. This summer, Norwegian finally got regulatory approval to launch three new point-to-point routes from Gatwick to three of the most popular US destinations: New York, Los Angeles and Fort Lauderdale. Prices starting from as low as £199 each way (before the add-on option bundle). The first time in 30 years that prices have been that low. The spectre of Laker’s SkyTrain or the US low cost PeopleExpress may be coming back to haunt the full service carriers. With the low cost model potentially threatening the oligarchy of their long haul routes, traditional carriers have a sense of urgency in tackling their distribution inefficiencies. IATA’s New Distribution Capability (NDC), designed to help airline merchandising cannot be coming soon enough – literally.

Low-cost long-haul history

If you’re old enough to remember Freddie Laker’s SkyTrain, then you may remember its revolutionary launch in September 1977 flying between Gatwick and New York for a one-way fare of £59.00, half the price of the legacy airlines. It was effectively the beginning of the no-frills revolution, creating a business now dominated by the likes of EasyJet and Ryanair. But for Laker’s pioneering SkyTrain, the heyday was relatively short lived between 1977 and 1982, while PeopleExpress, a US carrier, kept the low cost transatlantic option going between 1983 and 1987 when over expansion saw its demise. Interestingly enough PeopleExpress is the first airline to decouple seat from baggage by charging extra for checking in bags as well as offering meal-free flights and putting snacks and drinks on sale. In other words ancillaries were invented a long time ago. GDSs take note.

To put this air revolution into its context, Henry Ford from an earlier era offers a useful analogy. What Ford did for the emerging automotive industry, Laker wanted to do for the air travel industry, namely make it accessible to the mass market. Ford began his disruption of car manufacturing by cutting the cost of production using new assembly line techniques. In doing so he was able to offer an inexpensive, standardised car and make it available to millions, out pacing all his competitors. Previously the auto market had been restricted to the more privileged buyers. Similarly, Laker successfully reduced ticket prices, which opened up the transatlantic route to many more people

Ford, had a distinct advantage, he controlled his distribution. But the age of Internet shopping had not arrived making it difficult for Laker to by-pass the more costly travel agents that were often tied to carriers. He did however, build up a reputation for selling cheaper tickets on the day of departure at the airport. Much has been written elsewhere about Laker Airway’s demise but suffice to say he pioneered the low cost concept for others like Ryanair and EasyJet to pick up and make their own. Indeed Liberalisation and the growth of the low cost sector have transformed international aviation over the last 20 years.

Ancillary ambitions

Today’s nascent revolution in the airline industry is all about using ancillaries and the customer experience as a means to improve profitability and differentiation. Again the LCCs have stolen a march in this area showing the legacy carriers just how it is done, and the profits that can be made. Their business model in the early days focused on direct sales only (No GDSs) and all services apart from the seat itself have an extra price tag. Traditional carriers for a while believed this model to be unsustainable. But the growth in low-cost travel has been stunning, powered by deregulation and the rise in passenger numbers. In 2001 Ryanair flew 9.4 million passengers while EasyJet had 7.7m. Today Ryanair transports 81m and EasyJet. 62m. Indeed Michael O’Leary the long standing and outspoken chief at Ryanair famously described “air transport as just a glorified bus operation”. When travelling low-cost one can probably quibble with the word ‘glorified’.

IATA’s New Distribution Capability (NDC) is all about leveling the competitive playing field and giving legacy airlines the framework, based on XML standards, to be able to adopt the LCC approach to ancillary sales to travel agencies locked into booking through the GDS. As much as 50% of ticket sales by volume (mainly business travellers) is still sold through the GDSs, making NDC adoption compelling and urgent.

Made even more compelling by the signs that LCC growth is slowing down, forcing them to look at other growth areas including the possibility of establishing long-haul low-cost operations and accessing business travellers via GDSs. Both Ryanair and EasyJet today have signed up to distribution through GDS to attract more business travellers. Meanwhile legacy airlines are scrambling to adopt the low cost model for their short haul operations (or exit it altogether), while retaining their long haul supremacy. The hybrid model is emerging with fare unbundling at its centre.

Impact on today’s systems

To play the ancillary game, some serious technology re-engineering is required, on two fronts i) the processes to handle ancillary selling and ii) the Passenger Services Systems (PSS). Traditionally, air travel revolved around the passenger buying ‘bundled’ ticket to fly from A to B with seat, baggage and appropriate meals included, and was not geared up to selling optional extras. But low cost airlines have become notorious for raising ancillary revenue by unbundling every possible component and then adding it back as optional extras at a price. Legacy technology responsible for handling the increasing volume of passengers simply was not designed for that kind of flexible merchandising world. The e-tickets cannot carry such additional details, leaving airlines selling inventory through GDSs unable to charge for ancillaries in this way. Only passengers making contact with the airline directly, via the web or at an airport check-in counter could be offered a range of ancillaries as part of travel experiences and choices.

IATA has stepped in with a standard for electronically documenting ancillary revenue, i.e. the sales transactions between airlines and passengers that are generated alongside the e-ticket. The IATA Electronic Miscellaneous Document (EMD) is the standard key ingredient that is helping traditional airlines today make ancillary sales happen for their bottom lines. It is the electronic pipe that enables the fulfilment, payment and tracking of usage of the services booked through travel agencies (using global distribution systems) or through the airline’s direct distribution channels (via the airline’s Central Reservation System (CRS) in a seamless process.

For years the Passenger Services System (PSS) has been the backbone of airline operations encompassing an airline reservation systems, inventory system and departure control system. These core systems are what enables an airline to service passengers, namely sell seats, make money and handle passenger movement. While the product itself is being commoditised, airlines are seeking competitive differentiation through unbundled ancillary offerings, and consumers expect greater levels of personalisation in those offerings. Airlines recognise that they badly need systems that can respond to individual situations, to enable them to fully exploit customer opportunities happening in real time. So, can existing PSSs based on legacy designs handle this new world of merchandising? The simple answer is no. The airline PSS providers have worked wonders in recent years by building around the legacy core, but these stop gap solutions add complexity and cost without delivering that much needed level of flexibility. Today’s merchandising practices are forcing many airlines to re-think their long term PSS strategies, and indeed providers. Being able to understand the customer journey and individual profiles will be a key element for the future.

Competitive Pressures

With tough industry competition, not least from the LCC model, and the relentless pressure to reduce costs, airlines are forced to totally re-think efficiencies and cost structures. Making distribution more efficient and flexible with NDC is just one of the measures being looked at. The acquisition of new and cheaper to run aircraft, the outsourcing of non-core functions and the scrutiny of payrolls and conditions of employment are the other levers for improving airline profitability. In all these areas the low cost carriers already excel since they were able to avoid getting saddled with the baggage that weighs down the legacy carriers. Employment conditions and pensions rights is a particular cause of industrial tensions afflicting the legacies at the moment. The wave of strikes across European airlines is sure to have helped the low cost coffers.

Norwegian ambitions

Given that fuel typically accounts for about a third of an airline’s costs, flying a wide-body plane for 13 hours on the cheap is challenging. History has shown that for Norwegian to succeed it will probably need to benefit from a fair wind of good fortune as well as business acumen. It needs to build up feeder routes that can supply the transatlantic crossing with an abundance of passengers and therefore high load factors. The appetite for transatlantic flights remains healthy, although the airline is not likely to win too many business travellers while it is not able to offer the flexibility of daily services.

So with Norwegian off the starting block and other LCCs such as Ryanair waiting in the wings with their business plans, the traditional airlines have been put on notice that the more lucrative long haul routes are under threat (again) from low cost fare disruption. To compete they will need more flexibility in distribution and to let go of legacy technology.

NDC – the suit of armour for Legacy airlines

When developing and growing ancillary revenue, full service airlines are hampered by back-end systems that evolved historically to focus on the flight itself rather than the customers buying the journey experience. This presents full service carriers with a particular challenge in getting their products to market across multiple channels including third party travel management companies.

NDC being pushed by IATA and being piloted by a number of airlines will offer to those airlines that embrace it a lifeline with which to get their distribution houses in order before long-haul low cost competition becomes a serious threat. NDC will help resolve many of the issues carriers face in selling ancillaries across multiple channels, by creating a technical standard that defines a format for how airline products and services should be displayed. At its basic level, NDC enables airlines to describe their products and the options available which enables them to innovate offerings that best meets the needs of travellers.

XML is that standard. It’s about giving the ability to airlines to know who is requesting tickets at the time of purchase. Analysing XML travel search requests and bookings in real time offers a powerful granular insight into customer needs and how they are being met. Embracing NDC as part of a new merchandising platform and using the tools available to better understand customer buying intent can contribute to meeting long haul low cost competition head on. That’s always assuming that the different dynamics that dominate the long haul travel market don’t lead to another long haul low cost demise. The value concept of getting from A to B as cheaply as possible may not apply in large enough numbers when the time spent travelling increases.

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