Earlier this year, Amadeus commissioned Travel Tech Consulting to conduct research on airlines mobile trends. The whitepaper “The Always-Connected Traveller: How Mobile Will Transform the Future of Air Travel” combines research from JD Power with interviews of nine airlines from around the world. Augmented with Travel Tech’s ongoing monitoring of mobile airline trends, the report provides a clear picture of the current state of airline mobile technology and what we can expect in the 1-2 year and 3-5 year time frame.

Most airlines have done the basics which include mobile check-in, 2D bar code boarding passes and itinerary management. Many airlines have mobile booking capability today and most will be adding it over the next 12 months. In developing markets such as Africa and India where the primary connection to the Internet is the mobile device, the entire travel booking process may take place on the mobile phone. Over the next two years airlines will be adding key functionality to their mobile offering to expand merchandising opportunities. Key among these efforts is the ability to book ancillary services on mobile devices. Ancillary services are an important revenue source for airlines, but also provide a way to allow the passenger to customise their travel experience.

Advanced airline mobile innovations we can expect in the 3-5 year time frame  fall into two  major categories(1) Functions related to the passenger experience and (2) Capabilities that take advantage of advanced mobile device or software features.   Passenger experience related functions include:

• Location based services – These are services that provide location sensitive advertisements promoting airport or local merchants as well as local information guides (e.g. airport, gates, baggage carousels, etc…)
• Advanced disruption management – This includes the pushing of alternate flights and the offer of personalised compensation and electronic vouchers for hotels when a flight is cancelled.
• Social media – Monitoring social media comments  and targeting the passenger’s physical location to  prioritise  assistance based on the nature of the issue. Also being considered is the integration of peer reviews during the mobile ticket purchasing process.
• Movement tracking – Depending on local cultural and legal restrictions, automatically identifying a passenger’s location in the airport.
• Advanced push notifications – This has two main purposes, providing the passenger with more information about their flight or baggage and selling ancillary services to monetise the mobile channel

The news this week that USAir has filled a suit against Sabre based on violations of the Sherman Anti-Trust Act comes on the heals of a similar lawsuit filled by AA against Travelport last week. These lawsuits may foretell serious disruption to the traditional travel distribution ecosystem. Most observers would agree that the GDS have been an oligopoly for some time and certainly a monopoly in specific geographic areas. This has been the case since the airlines divested of GDS ownership in the late 1990s and early 2000s. Then why now are USAir and AA suing the GDS over anti-competitive practices?  This is particularly ironic considering that USAir recently renewed their agreement with Sabre. There was clearly some tension in that agreement with an immediate dispute emerging around the nature of the technological innovation associated with the deal.

The issue has always been around costs. The airlines pay the GDS  (on average) close to $3 per segment from US point of sale and sometimes as high as $7 per segment for non-US originating point of sale bookings. With the average record having about 4 segments that adds up to $12- $28 per itinerary. The GDS then use a portion of these funds for financial assistance payments to the travel agency community.  The travel agents generally do not pay the GDS for their technology. These lawsuits are not only bringing to the surface the fact that GDS market power locks travel agents into agreements, it has brought to attention to the general public this revenue stream for travel agents clearly a target of the airlines for many years. A particular focus of the lawsuit is on the corporate travel industry, where TMCs are very GDS-dependent and where the financial assistance helped many TMCs remain profitable despite the economic recession.

I was hopeful we were seeing an era of emerging détente as more airlines signed agreements with the GDS. For some time I believed that the idea of a major airline pulling out of a GDS, or forcing distribution to pay a fee for acess was simply postoring by the airlines during the negotiation process.I now believe this is not just a negotiiation position, but a clear strategy to disrupt the money flow that has existed for years. Farelogix which provides the direct connection standards and platform for alternative distribution is gaining momentum with Delta now joining the other major US carriers with an agreement this week.  Farelogix does not really offer anything the GDS could not from a technological perspective, in other words the GDS are certainly capable of using XML versus EDIFACT for their direct connections to the airlines, it is really is about price and gaining greater control over customer insight and marketing efforts.

Despite all the vocal protests from various industry groups, the DOT has deferred the issue of forcing the airlines to provide the GDS the ancillary services they are offering customers. Some of the airlines are withholding ancillary fees from the GDS as part of their negotiation leverage to force lower distribution costs through the Farelogix platform.  As I mentioned in an earlier blog, a hybrid solution mixing GDS and Open Axis Group (Farelogix) information for ancillary may be one possible future, but given the seriousness of these lawsuits, I believe we will be entering a period beginning this Fall of 2011, where air content will become fragmented particularly causing problems for TMCs who are tied to the GDS as their main platform for distribution. Corporate self booking tool vendors such as Rearden Commerce are hooking into the Farelogix alternative distribution platform, so independent self-booking tools will likely survive this disruption. It is those TMCs that have resisted self-booking and still process the majority of transactions by ph0ne through the traditional GDS that will feel the most pain. This will come in the form of missing content, added fees and loss of financial incentives.

I do not believe the GDS are destined for extinction, but those who are truly abandoning the traditional TPF mainframe environment are better positioned to compete in this new distribution world, to lower their own internal operating costs, provide greater customer targeting and thus may be better positioned to survive this storm in the long term As Google implements ITA and general search becomes meta-search, we may see even greater presure on the traditional system especially if Google were to opt to connect into the Farelogix platform. The increased use of mobile technology as a marketing platform by the airlines will also act as a catalyst for more direct airline/corporate traveler offers. It should be an interesting next 8-12 months.

Since my December post, a number of developments have occurred on the evolving travel distribution front:

• Sabre and AA have called a temporary truce and are in negotiations to resolve their conflict
• Priceline has embraced the AA direct connect strategy clearly following an independent path from Expedia and Orbitz
• USAir has signed a multi-year agreement with Expedia which includes the sale of Choice Seats
• Travelport has announced a new agreement with Air Canada that apparently uses part of the new controversial Open Axis XML connectivity

What does this all mean to travel distribution in 2011?  To many these may seem like conflicting developments with certain distributors sidling with the airlines while others clearly opposing their efforts to reshape traditional distribution.  In reality the recent announcements actually signal a certain level of detente. The GDS are bending on their hard stance about accessing ancillary fees via the Open Axis XML connection while with the exception of AA, other mainline airlines are showing a willingness to work with both the GDS and OTAs.

It seems somewhat ironic for one Travelport executive Kurt Ekert, to negatively describe the AA direct connect strategy in this way” simply an attempt by AA to push a materially inferior version of the value provided to travel agencies, suppliers and others in the travel distribution chain by the highly evolved and efficient GDS channel,”, while at the same time Travis Christ also of Travelport calls the Air Canada deal “an industry-leading end-to-end solution, capable of merchandising Air Canada’s content along with the aggregation of the GDS content”.  This seems illogical as both the AA and Air Canada solutions are based on the Farelogix (Open Axis Group) XML schema.

Many might wonder why Priceline has embraced the new connectivity, but Expedia and Orbitz have not.  Part of the issue may be how the air booking engine was built. I have  no first hand knowledge of how Expedia created its booking engine, but it is possible that the booking tool was programmed directly against the GDS API.  Other booking alternatives use a neutral  platforms such as the Pass Consulting multi-source platform that creates a layer between the GDS and the booking tool. It is therefore likely that Priceline architecture is more multi-source which has allowed it to easily integrate the new AA XML schema.

One of the recurring themes of the anti-AA direct connect group is around the lack of  ability for consumers to accurately compare airfares. This argument is weak at best.  Fragmentation already exists in online travel where Low Cost Carriers such as Southwest Airlines refuse to participate in OTAs. Meta-search engines such as Kayak can provide the consumer a cross Web comparison shopping experience. In the age of the Web, comparative shopping happens at the point of sale.  That being said the GDS continue to control specific segments of the travel industry, especially corporate managed travel. This may change if Open Axis Group member Rearden Commerce or Concur another leading provider of online corporate booking tools where to embrace the AA direct connection.

No doubt that 2011 will continue to see confusing announcements and arguments from all camps, but at the end of the day detente will likely be reached whereby as in the USAir/Expedia or the Travelport/Air Canada agreements, ancillary fees are obtained through the Open Axis Group XML schema, powered by Farelogix.

During a briefing today with Amadeus they disclosed the fact that their launch customer for Amadeus One, their new Agent desktop platform is not currently an Amadeus GDS client. The Amadeus One application allows agents to use cryptic formats from any of the major GDS or a graphical user interface to create fare and availability queries. The fare and schedule information is returned in a “sandbox” allowing the agent to manipulate fare quoting in a variety of ways from a variety of sources. For years, Amadeus has been promoting the fact that they are an IT company, not simply a GDS transaction engine. By selling the Amadeus One platform to non Amadeus GDS customers, this does point to truly a change in posture in the market. Now one could speculate that this is simply a competitive necessity to compete with Travelport’s Universal Desktop and Sabre’s Red. The opportunity for the GDS as an IT provider to significantly change the market is more dramatic, but it depends solely on the TMCs willingness to embrace new channels.

An clear battlefield has emerged between the Axis Group of airlines who are promoting the Farelogix XML interface and the traditional distribution players. The corporate travel market represents the true pot of gold for all distributors with the highest yield and frequency of travel and this segment is still controlled by TMCs. Contrary to other industries the big four  TMCs – American Express, Carlson Wagonlit, BCD Travel and HRG do NOT control 80% of the corporate market, with a variety of regional TMCs still thriving despite these difficult times. The real corporate battle lines are with these 2nd and 3rd tier TMCs. When asked whether Amadeus One could connect into the Farelogix XML feed, Amadeus said it was capable of doing this, but it would require the TMC to request this enhancement. The real question is what is going on behind the scenes between the GDS and their TMC customers. In a traditional relationship, the GDS provides financial incentives to the TMC to book segments with that GDS. But in the case where the GDS is providing the front-end technology to a competitor GDS, this incentive does not seem to be a factor. It is then logical to assume that source content should not matter and thus the XML feed from Farelogix should be part of the mix. The value of adopting the Farelogix XML is immediate access to all participating airlines’ ancillary fees. American and recently Delta Airlines have stated that they want to control price and services on a one to one transaction level based on the value of the customer. This would be facilitated through the Farelogix XML. Time will tell whether this represents a change in positioning  for the GDS or a true opening up of distribution sources. TMCs the ball is in your court.

The media is filled with stories on airline ancillary fees especially with Spirit Airlines announcing a fee for carry-on baggage and Ryanair contemplating pay toilets.  These charges represent a much bigger change in travel distribution than simply paying for services that were previously free. From multiple industry sources it is clear to me that we are only at the very beginning of this merchandizing trend which likely expand to other services and other sectors such as hotels.  The trend will move to equating added services with value such as small fee for more leg room or a room away from the elevator.  The impact on distribution is significant.

In other industries consumers have become accustomed to buying products or services from a menu of choices.  Personalization of purchases is inherent in Web e-commerce.  The travel industry and especially the airline industry has been fighting commoditization for years, but with little success.   With each installation of a new video entertainment system a similar product is launched by a competitor.  No matter who you fly the planes were either manufactured by Boeing or Airbus, thus true product differentiation is difficult.

The current trend toward ancillary fees originated with the Low Cost Carriers. With the fuel crisis in 2008, these fees were embraced by all airlines, first for checked baggage and then to meals and other services.  A parallel effort pioneered by Air Canada and Frontier Airlines brought to the market branded or family fares with services bundled based on the price paid.  This was the first evidence of true airline merchandizing.  It is now clear that the concept of merchandizing is at the heart of the ancillary fee/unbundling trend.  Corey Garner, director of merchandizing at AA recently stated : “In the end, I believe customers will recognize that airlines had to first break apart their services before they could be reassembled in interesting, cost-effective ways to benefit both airlines and customers.”

But as my slide illustrates, there are a number of question unanswered by this trend:

1) Will merchandizing spread to all supplier sectors?

It can be said that hotels already charge for ancillary services such as parking, Internet Access and other amenities.  Further unbundling and simplification of hotel rates is likely with base rates stripped of many amenities and bundling directed at specific segments and channels.

2) How will intermediaries compare, analyze and track ancillary fees when combined in an infinite variety of packages?

The GDS all will be introducing ancillary revenue solutions later this year, but these only help bring the fees into the selling process.  All points of consumer contact including the OTAs, Meta-Search engines, and corporate booking tools need to revise their point of sale interface to accommodate these fees, but will continue to struggle with airline merchandizing efforts whee fees are bundled together for specific market segments.  Solution from ARC in the form of the Electronic Miscellaneous Document (EMD) or new fare categories from ATPCO are two industry efforts to better account for the fees, but each have been slow to market while merchandizing efforts have intensified.  Expense management and corporate charge card providers need to only track these fees but help corporations determine which fees are allowable under travel policy.

3) How do customer segments equate fees with the value of the service?

Clearly consumers do not like the “nickel-and-diming” aspect of these fees, but how do they feel about the bundling of services or the purchase of added value items (e.g. added leg room) is still not clear.   For frequent fliers who often have many of these fees waived, this may simply increase loyalty to one’s preferred airlines. Corporations continue to struggle with understanding the total cost of travel and keeping policy current with what is allowable verses non-reimbursable.  For example, I believe you would find few companies who have policy on whether the $8 charge for a pillow and blanket on AA is reimbursable, at least at the moment.  How these fees impact other segments such as groups, family travel, etc.. is still an unknown.

This is obviously a very fluid issue, but one that will likely increase in intensity as travel products continue to be unbundled and then repackaged or sold as added value services by the airlines and other industry segments.

Over the last few weeks I have given a number of keynote presentations to a variety of airline groups. These audiences covered the entire spectrum of airline types: legacy, LCCs , and 2nd & 3rd tier airlines with speeches in the US and Europe. The airline executives were a mix of e-commerce, revenue managers and IT executives dependent on the conference sponsor. I spoke about emerging technology trends including mobile, semantic search, personalization, social networking and meta-search.
I began each presentation with a discussion of ancillary revenue showing how the carriers have profited greatly by charging fees for baggage, meals, and other services. I used this cartoon to emphasis that from a customer viewpoint these are fees for formerly free services. I have no doubt that the airline executives are well aware of this fact, but with the fever pitch around the value of ancillary revenue particularly in this tough market, the perspective of the customer is often lost.
I received a more surprising reaction regarding the subject of fare families (branded fares). Online search whether through an OTA or Meta-search company, yields a logo and price worsening the move towards commoditization. Every airline is concerned that their product is perceived as a commodity, but few are embracing fare families.
I am old enough to remember earlier LCCs attempts at market dominance with carriers such as People’s Express and Texas Air disappearing after a few years of heavy fare matching by the legacy carriers. Of course today’s success of LCCs is powered by direct distribution through the Internet and thus is flourishing in every corner of the world. The simple fact is that LCCs are not going away and are actually increasing in numbers and market share. It is my opinion that fare families are the best means for traditional carriers as well as high value LCCs (e.g. JetBlue, Virgin America) to compete beyond price. As I pointed out in my presentation, every part of the distribution travel value chain will be impacted by the introduction of fare families, but despite these challenges, I am hopeful the concept will take hold. One important aspect of the shopping process that would need to change for both OTAs and Meta-search, is the ability through mouse-overs or other similar UI techniques, to provide the fare family advantage to the customer at the point of sale. See Frontierairlines.com as an example. What I envision is that a customer goes on an OTA or Meta-search site, gets back the same fare from both a LCC and a legacy or high value LCC and when the consumer mouses over that quote, the option of paying a bit more to include services such as baggage, seat assignments, access to on board entertainment systems, meals, on board Wi-Fi, and other emerging services at different family price points. It is my belief this will be the only way airlines can truly compete against the LCCs by promoting a differentiated product fighting the trend towards commoditization.

Last week I was in Dublin Ireland to participate in the Datalex Users Conference. Datalex is a long time client of Travel Tech Consulting. The conference has a small number of attendees (50-60) consisting of Datalex customers and prospects, but the quality of the attendees and depth of the sessions was very impressive. I had the pleasure of siting next to Jim Young who opened the conference with some provocative observations about industry trends. Jim, most recently of Frontier Airlines can truly be called an industry pioneer. At Frontier he was instrumental in implementing fare families, at IHG he was the executive that pulled inventory from Expedia and then renegotiated a new agreement which included a mix of content and advertising benefits and while at Continental he pioneered the direct distribution model during the turbulent 2005 period. Also in attendance was Mark Rosenberg who recently left Air Canada, where he redefined the distribution landscape with the idea of a fare family and pushed the GDS to accommodate this new model.
Day 1 was all about ancillary revenue. Jay Sorensen, President of IdeaWorks presented the results from a new Ancillary Revenue Guide that he just published. The discussion was lively with different airline executives from American, Continental and Frontier debating the various approaches to ancillary revenue. As an observer, I had to comment that all these ancillary revenue strategies often result in a single customer reaction, paying for services formally free (baggage, meals and in the case of Ryan Air on board toilets!). There is no question in my mind that this current focus on ancillary revenue represents a permanent change in the way all airlines market their product. Fare families (also known as branded fares) breaks the long held practice of yield management by associating services with different fare categories regardless of seat class availability. This will likely impact all sectors from distribution (how GDS and intermediaries display these fare groupings) to corporate travelers (will corporate travel negotiations now center around services as much as discounts?) and even meta-search as the Kayak and Fly.coms of the world struggle with showing airfare comparisons when branded fares associate price with service characteristics.
On Day 2 I gave a talk on mobile. By the response of the audience I realized that the airline executives still do not get the impact of mobile. The main response was about how difficult it would be to sell a mobile project to airline senior management. This was an odd discussion from my vantage point as the prior day’s focus on ancillary revenue ties directly in to the opportunity with mobile. It looks like the major carriers will have to catch up on the mobile revolution and risk the possibility that a new intermediary will emerge on the mobile platform adding additional distribution costs and separating the end traveler from the supplier once again.

This week I am London and I had the pleasure of presenting to and participating in the Datalex User Group meeting. Datalex who has been a Travel Tech client for many years, provides a distribution platform to airlines and travel agencies. The audience consisted of major carriers and travel distributors. One of the hottest topics we discussed is the concept of ancillary revenue. This can be defined in a number of ways. The traditional model was developed by low cost carrier RyanAir who essentially charges for all services (bags, refreshments, etc..) and in addition also sells merchandise on board. Due to the fuel crisis we’ve seen the legacy carriers follow suit with baggage charges and other fees. The airline term is ancillary revenue, but I believe the real opportunity is the Long Tail. At the conference, I had the pleasure of meeting Chase Cunningham most recently of the now defunct low cost carrier Skybus. Chase was in charge of ancillary revenue for SkyBus. Chase spoke about selling everything from in flight advertising to merchandise (a la RynanAir) . Due to his efforts Skybus even sold Ohio State football tickets on their Website.
I believe the coming wave in mobile and in-flight technology presents an interesting opportunity for airlines to expand the concept of ancillary revenue. By expanding the ancillary revenue definition beyond fees for formerly free services, to more of a Long Tail concept, airlines have a unique opportunity to help promote airport merchants, and destination services. The mobile platform in particular is an excellent way to provide more destination type of services. Rearden Commerce a major corporate booking tool supplier has released a Blackberry version of their product that allows ancillary services such as show tickets and restaurants reservations to be made on the smartphone. There is no reason airlines could not provide a similar service and profit from the referral. When onboard Internet arrives courtesy of suppliers such as AirCell, the airline can use the captive audience to sell a much more expanded version of SkyMall. Now a days when you go to the movies, all sorts of advertising is displayed while you wait for the previews to start. Airlines have an equally captive audience. Of course care needs to be taken to not overload the passenger with promotions as that could anger the traveler and hurt the brand. Providing the right balance of destination oriented content for the on board and mobile experience is in the near future and represents an important ancillary revenue opportunity for airlines.