Everything for sale has a price. Low demand generally leads to low prices and high demand generally pushes prices up. When it comes to airline tickets, the price versus demand relationship can get quite complicated behind the scenes. Purchasers are often perplexed by the variation in prices than can occur between searching and buying. The pricing of this perishable product is driven by complex algorithms in pursuit of the highest price possible for every ticket balanced by likelihood of sale. This level of yield management is about to undergo a long overdue transformation as the industry moves from ‘fare buckets’ to ‘fare personalisation’.
The price for the seat is being increasingly unbundled from a whole suite of allied ancillary services that have their own individual prices and benefits. Airline customers are becoming empowered to choose those ‘extras’ that they value or need the most. It means if you just take a cabin bag on board for a short trip, you can avoid hold bag charges that were previously embedded in the price for everyone. It also means airlines can get more sophisticated in their offerings to turn a journey into a personal experience. Ryanair, as an example, is one airlines that has consistently done well from ancillary sales which contribute over 20% of total revenues. The company recorded $1.64bn from ancillaries alone in 2014.
The Low Cost Carriers (LCCs) have made buying ancillaries separately an acceptable practice and their success demonstrates that this is the sure route to sustained profitability. IATA’s New Distribution Capability (NDC) is all about helping airlines to enrich their ancillary selling capability to third party distribution channels and aggregators in the same way that they already do on their own websites. NDC is the enabling standard based on extensible mark-up language (XML) rather than the legacy EDIFACT. It’s the established method adopted by other players in the travel ecosystem to present to customers information about different fare alternatives, ancillary services available such as on-board amenities, baggage fees, upgrades etc. — along with graphics such as pictures or seat maps.
This article, the second of a four part series, puts into context the data needs for the emerging NDC model that will help airlines get back control of the selling process and better understand their customers wants and wishes.
The Customer Search Journey
When selling an air ticket to travel from A to B either direct or via a hub, or when putting complex itineraries together there is the information the traveller offers up as part of his search and there is the complex fare structuring as part of the offer prior to the sale or conversion. The customer journey from search to conversion often comprises several steps, with much looking before booking.
Minimum data forthcoming from the consumer at the various stages of course covers the trip details, personal details and payment details. The first chunk is their travel intentions in terms of starting city, destination(s), required travel dates, preferred times of day, journey type (eg. single, return, openjaw), how many fellow travellers (e.g. family members). Personal details include name that is supplied at the time of booking (Passenger Name Record (PNR) creation), but will often later extend to full passport details prior to departure. Tickets, i.e. the e-ticket that is created out of the PNR, is and can of course are only issued when payment details have been successfully accepted.
When single trip details are added to a historic travel picture using records of past flight purchases together with selected preferences, the airline can begin to build a powerful picture of their customer (regardless of loyalty club membership) in much the same way that retailers can build a profile of their customers. In other words when airlines can connect the customer with information that comes with an identity such as previous flying history (frequency, destinations), ancillary preferences such as seat or meal choices – then offers and prices can become more personalised. Clearly not yet a reality, and obviously above and beyond the capabilities of search data alone, but definitely a longer-term airline ambition.
Even in the stages before customer identification takes place, anonymous data can be used to segment customers (i.e. leisure / business) and then add other attributes such as destination popularity, family or group travelling, time and value of purchase, etc., into the mix. The key is take a re-iterative approach to analysing the search and booking data and using it to close the loop with continuous improvement. And this capability is part of shopping analytics today, and not dependent on the integration of the customer and frequent flyer databases referenced above.
Today the price a traveller pays for an airline ticket is largely determined by when it is purchased coupled with other attributes such as time of day and destination. As NDC takes off, and it is currently being piloted in some shape or form by 24 leading airlines, the price the passenger pays or the ancillaries he is offered can become more personalised based on the information the traveller is prepared to share.
To thrive in the NDC enabled merchandising world, airlines have the opportunity to focus beyond price, schedules and availability and actually use customer intent and shopping data to map their customer buying journeys using search context. This will help them discover opportunities to increase conversions and provide a better customer experience. Long term it will also help them keep the customer’s needs and intentions at the centre of their product design, fare bundling and marketing decisions. In other words working with all customers and not just those affiliated with Loyalty Clubs to improve brand loyalty and repeat business.
This is a must for airlines that want to transition from being flight-centric to being customer-centric. Such an approach means gathering relevant data across the customer journey and applying it for valuable customer relationship building and upsell opportunities. At the time of booking people are not always ready to commit to ancillaries, but nearer departure or even during the journey – paying for ‘extras’ may happily be entertained. It is also essential as competition among airlines gets more intense, especially on popular routes and to manage the empowered traveller who enjoys increasing access to product and price comparison data via metasearch engines. Being able to analyse XML-based search and booking data at a granular level can help airlines in this critical transition process.
There are basically two different types of travellers: the leisure traveller and the business traveller. They both want to fly between two or more destinations but their buying habits are likely to be very different and airlines use these differences to determine their fare structures.
The leisure traveller is (generally) more flexible with dates and purchases in advance. They know that’s when the cheaper seats are available. Of course time of day and seasonal factors also impact prices considerably. While there are many people who travel alone, leisure travellers often come in the shape of couples, families or groups of friends, teams, etc. More couples fly to Las Vegas than singles or families. Business travellers on the other hand tend to like to travel on a certain day and often at a certain time and are not so good at booking ahead. Traditionally they are willing to pay more for a ticket in order to make it to their meeting. Even in the LCC model, the closer the departure date, the more expensive the ticket becomes. Airlines have figured out that it is more lucrative to sell 20% of the remaining tickets at a much higher price, than 50% tickets at the earlier lower price.
Once the airline has determined the number of seats on a plane, and the travel classes to be accommodated (i.e. First, Premium, Economy), then the booking classes kick into play, determined by those algorithms. Currently each booking class is basically a fare bucket governed by different rules and restrictions, including advance booking periods, cancellation restrictions, length of stay, sale promotions, etc. Airlines know that at any given time there will be a mixed bag of people looking for flights from destination A to destination B. There will be the business travellers and the ‘emergency travellers’ (must travel to a sick relative or funeral for example) – known to the airline revenue managers as ‘buy at any price’ group. Then there are the flexible, price-conscious leisure travellers or business travellers with longer term travel or commuting plans known as the ‘buy if the price is right’ group.
The airlines’ dilemma is to strike the right balance for maximised profit in serving up fares to both groups. They do this by introducing price points for the various buckets as the plane fills up. But they also add restrictions to the cheaper fares and limit the quantity available. At the same time computers monitor availability and can close down or open up price points depending on bookings for that flight at any given time. This entire process is extremely dynamic as at any given time there are hundreds of thousands of shoppers looking for flights and making reservations — and each reservation may have repercussions on the fares paid by subsequent travellers on the same flights.
The Airline Offer – The Fare
The airline industry’s early adoption of yield management means that current practices in constructing fares are complex. We all know that when we sit on an aircraft nearly everyone on the plane will have paid a different price for the same journey, bought at different times and with different conditions or incentives. Even the people sitting in the same section of a flight are likely to have paid very different prices for their tickets. The reason: airlines seek to maximise the profits made by each flight as a whole rather than each seat or each customer. They and have created an ingenious system of ‘bucket’ fares determining which price is applicable and when according to strict rules. They would rather not sell a few seats if need be in order to keep the prices high.
The Airline Offer (Today and Changing)
The existing system still much in use, like the underlying system infrastructure, although innovative in the early years hasn’t changed much in decades. Airlines lodge their fares with a third party such as ATPCO and their schedules with another third party such as OAG. Travel agents and Travel Management Companies (TMC) then place their customer air travel searches with the GDSs. These giant distribution platforms morphed out of earlier airline central reservation systems. The GDSs get the fare and schedule information from these databases (not updated in real-time) and then send a real-time request to the airline availability ‘bucket’ system. Available seats in the various fare ‘buckets’ are then sold. Essentially the GDS brings together the three critical information points – fare, schedule and availability at a certain price – packages the offer back to the agent accordingly. Although the airline maintains natural control of price versus availability, it has effectively outsourced to the GDS the packaging of the offer back to the agent, who in turn delivers it back to the client, who makes the decision whether to buy or not to buy.
At this point in the current system the airlines don’t have any real influence over the sale process. The GDSs, originally set-up by the airlines then floated off, charge their airline partners hefty commission for every ticket sold. A fixed price per ticket sold, depending on type and distance, ,etc. The aggregate commission amounts paid out by the airlines to the GDSs, whose legacy architecture has held airlines back in selling ancillaries to travel agents has led to many major airlines wanting to win back control of the ‘airline offer’ as well as insight into the ‘airline customer. Enter IATA’s industry led initiative – NDC – designed to make it happen. There are also numerous example of legacy airlines trying to break the GDS stranglehold with 60% of tickets sold via that route. The Lufthansa DCC is just the latest example.
The Airline Offer – Tomorrow’s NDC enabled vision
Airline set fare rules and restrictions tend to operate across the universe of sales channels, be it direct airline websites or online travel agencies and Global Distribution Systems (GDSs). However, airline websites are getting increasingly sophisticated in their fare bundles and ancillary offerings which are currently not reflected by OTAs or TMCs. This means that airlines struggle to offer versatile ancillaries or use upsell opportunities to their passengers that buy tickets via these routes. It also means they can’t begin the process of personalising the offer since they only know the traveller’s details at the time of booking.
For example, if a traveller buys a ticket using an online travel agency (which many do, because of the price comparisons available), then they are served up with prices for the requested destination across a number of airlines flying that route (with or without stopovers and duration being clearly visible). Although baggage fees are explained, there is currently no provision for other ancillary information. In other words the ability to compare quality and price across offers from different airlines is not currently there and something NDC addresses to change.
This makes it a price centric rather than value centric approach as the inherent differences included or excluded from those prices are not clearly visible. In a simplified example this means that a traveller can buy a Ryanair flight in preference to a legacy airline, only to find out after the purchase that seating, luggage and food and drink are all extras costing more than the slightly higher price originally on display from a legacy airline which still opts to include these in the quoted fare. Without putting the effort into searching individual airline web sites it is difficult today to compare the true value of different offers.
NDC is the IATA led innovation (you could even call it disruption) that will overcome such third party channel discrepancies. Set out in DOT approved Resolution 787, NDC envisions that “requests shall be sent using industry standard messages from the distribution channel provider (e.g. online travel agent) to the airline’s dynamic shopping engine via an API. Airlines will determine what product offer to return in the response based on attributes that have been sent in the request”. In future IATA airlines want offers to be “provided directly by and owned by the airline.” This spells a total reversal of how the third party channel is engaged today. Instead of pushing data out to third parties, airlines will receive data in the form of the actual requests that customers are making to the agents in much the same way as they do on their websites.
This IATA hopes will open the door to true dynamic and even personalised pricing, based on customer segmentation, or what the customer himself is willing to share about his status.
To leverage all potential advantages of NDC, airlines will have to improve their capacity of monitoring and handling important customer data and the criteria that these prospective customers use in their searches. The ability to differentiate products and services will come from the ability to analyse this data – big data style.
The next blog will look specifically at the new NDC Shopping module and how shopping analytics and the booking funnel work with the new emerging merchandising platforms such as the one from Farelogix. The final part in this series takes a closer look at ancillary merchandising and how EMDs help the shopping and order process in an NDC enabled world.