HOW TO CHANGE AIRLINE DISTRIBUTION AND SALES

I wrote this white paper 4 years ago and with a few exceptions it is still very valid. In my view a total overhaul and new beginning the airline industry only need a Elon Musk to corner the market. I am quite sure that the old suppliers are thinking about it, but also believe they are embedded in their financial success and shareholders wish to maintain status que.

BACKGROUND
There is no doubt that the development of the Global Distribution Systems (GDS) was a huge leap at the time. Most airlines used PSS but with a fast growing global travel something had to happen thus the GDS. Whether we talk about the US or European developed systems the fact that it could cover multiple countries, currencies, and rules were second to none at the time. However, like any other system, the explosive development of technology tools, the Internet, social media, cloud structures, and search engines have changed the rules.
While all the GDS`s originally were controlled by the owner airlines, the decisions to sell to third parties changed everything. The original pricing was established to create funding for the large investment needed in hard (mainframe)- and software. That plus the fact that the pricing at that time was “small” per segment or ticket due to extremely high and monopolized airfares.

The huge decrease in airfares over the last decades has changed that situation and now the pricing is much higher as a percentage of the income from segments or tickets. Today the 5€ distribution cost per segment stands out compared to the 1€ cost for the internal airline system.
The financial results from the GDS confirm this and that it is almost an Oligopoly situation for airlines. Other third-party areas cashing in are the cost of using airports, credit cards, and the IATA structure.
Other legacy structures are Bank Settlement Plan (BSP) (ARC in the US), SITA, ATPCO were established to settle ticketing coupons, payments, pricing information, and distribution in a global world and they all exist today and are being used.

The world has changed and here are some key elements:
• The airline industry went from a monopoly structure with the government controlling everything including pricing to open skies and free pricing.
• The new entrants like Low-Cost Carriers with different business models and distribution models increase competition and put pressure on airfares.
• With airports, GDS, and credit cards as virtual monopolies in the industry and impossible to avoid, social media and tools like blockchain open up to challenge some of these.
• The rise of the Internet, online booking models, and going from opaque pricing to transparency.
• Intermediaries experiencing going from being paid by the suppliers to find the payment from end-users like consumers and company travelers.
• The huge decrease in the cost of technology and an increase in capacity by i.e., the cloud.
• The change in customer segment from relying on business travelers to consumer and holiday traffic.
• The change from real global ticketing income from a large number of countries to become dependent on the home market and much simpler structures.
All these elements will be keys to a successful future for the whole industry and to increase the value and growth it brings to a large number of countries by increasing their Growth Domestic Product (GDP) substantially.

Existing structure
The individual airline uses the same infrastructure described above to allocate, price, control, and distribute their capacity. This includes data transfer to and from airports, check-in, gate, luggage, flights, GDS, and data warehouse. At the same time, most legacy airlines gave up control of the distribution to their then GDS and stopped hiring or employing people with the insight and knowledge to create alternatives to the existing structure. This means that people able to work in this environment are employed by the GDS`s and not the airlines.

While IATA does try creating new products for its members, it is too late and too little. New Distribution Capacity (NDC) is a serious investment and at least a way to establish uniformed structures. However, other industries show the way forward and with 3 or more class structures and only 26 different pricing levels (English alphabet) and dynamics for planes with up to 500 passengers, new products are needed.
Many airline executives are aware of this but are hampered by the impression that they need to start all over with the whole platform with multiple products integrated. The unholy alliance created by the GDS and the intermediaries (i.e. Travel Management Companies (TMS)) sharing the segment fee income paid by the airlines needs to be reviewed. Yes, the parties have invested heavily in various products streamlining the process, but it is still far too complex and costly through the whole food-chain.

The key AND ONLY argument: IT WORKS.

One new way forward
The alliances created a structure we believe can work. Most legacy airlines have one or more codeshare partners. They allocate pricing and receive allotment from each other. This is mostly shown in the GDS, where they all are present.
2 airlines (SAS & LH) had a large codeshare infrastructure. When a customer books a Lufthansa seat and price on a SAS flight in the LH environment, the data are sent to SAS and processed in their infrastructure. Normally SAS can show and sell up to 9 tickets at one time in their inventory control system and codeshare partners only 4.
However, it has worked for decades.
Originally it was a tedious process with high-level executives negotiating to avoid cartel charges, but once the administration was set, the process with allocating seats, load fares, and receive your “own” booking for the rest of the process worked fine.

Create a virtual ghost airline distribution system.
Looking at one of the legacy airline Scandinavian Airlines System (SAS). They use mostly the GDS Amadeus for both distribution and data transfer systems to airports, various public bodies, and ticketing. The way forward is to create new pricing, capacity utilization, and distribution structure.
The best would probably be creating a connection builder, but if too complex a product should include:
• A mirrored copy of the airline inventory including flights, number of seats, and times.
• Be able to price the individual seat dynamically at the point of sale without any upfront filled fares.
• Include a large range of auxiliary services and products from luggage to food.
• Distributing structure making the airline free to structure selling including allotment, control home market, name change rules, reuse, corporate rates, excess capacity, etc.

It could also target the mobile world and be exclusively bookable via smartphones. This could include tickets being offered at the airport, upgrades done, early boarding, products onboard, usage of bonus points.

This means an airline like SAS simply design an airline called: SAS1 and treat this as an alliance partner. Space control offers SAS1 i.e. 50 seats (or 1-2 seats per row) and the new pricing system will price each seat with an individual price. This will mean middle seats will be cheaper than aisle and windows and row 1 more expensive than row 29. Booking 2 seats can be priced differently than 1 seat and if auxiliary products are bought yet another pricing. Everything based on the airline SAS1 inventory and pricing product.
Once the customer book a seat, the reservation data are exported into SAS normal system and reported as any other codeshare partner`s data. Passenger data will end up at the airports and aircraft, accounting, financial records, and data into the yield and content management.

What are the advantages?
• Using next-gen. tools (i.e. Blockchain), bypassing the GDS will enable substantial savings.
• Bypass or avoid Intermediaries like BSP, ATPCO, and clearinghouses, or change the usage of these bodies.
• Select own distribution partners, conditions, and rules.
• Control the point of sale of online structure and user-friendliness.
• Better selection of communities and create special rules.
• Design industry and customer-specific corporate fares.

Obstacles
The one major obstacle is the fact that most airlines have signed exclusive agreements with Global Distribution Systems (GDS). Another is the fact that airlines, in general, do not have the right technology and specialist people.

Next step.
Find partners already knowing such systems like Travelsky from China, Hagon from Germany (specialists for distribution system for trains), or IT companies willing to support development. It could also be private IT companies Capital funds wishing to enter travel.
We know from Travelsky that a fee of 1€ for distributing and selling a seat is profitable and with a small lean organization behind a system, it can become a profitable business quite fast.

Project description
Create a booking (and perhaps payment) system flexible enough to be used by small as large airlines. The system should have the following functions:
A profile loading facility.
This includes entering new information if a first-time traveler. The data should be GDPR secure. Once entered, offer being a member of the airline loyalty program in case available. The system must offer to reenter with user and password. If an airline already has its designated CRM system, it should be integrated. 

PRODUCT DESIGN
Most large airplanes are made by Boing and Airbus with companies like Bombardier and Embraer making smaller aircraft. This means the system should be able to adjust to the precise version the individual airline uses.
Each seat should be possible to price individually so a business traveler lays more to be at the front of the plane and a middle seat cheaper than an aisle. The rules needed for the individual price should be simple and easy to understand by the consumer. Buying a seat should have the possibility for added sale of services or products like Wi-Fi, special food and drinks, the latest movies or even tax-free offers like the charter companies do. Auxiliary services like baggage, lounge access, and preboarding is a given.
Yield management must be possible, group offer, special segments i.e. handicap, injured people with a doctor, easily designed offering structure to sell last seat available.
Some airlines might choose to use the system for mobile sales only.
To utilize the flexibility special net fares for corporate travelers so being able to recognize special rules conditions. This could include flexibility, fast track, guaranteed seating per profile, preordered food, upgrade facilities, and much more.
Once the seat is sold
The seat with the number and sold price, luggage, and profile is transferred to the basic airline admin system and goes through the normal process with sent to airports, etc.
The data should go into the data warehouse where big data software will create the necessary information structure needed to maximize the load factor.

Ticketing system
I see 3 ways forward:
If not conflicting with the GDS contract an airline can choose to use the existing IATA/BSP ticketing structure. I still see that as quite expensive.
Using ticketing systems like Hahn Air or World Ticket. I believe them somewhat expensive too.
Take up a neutral ticketing system as they already exist in many forms from the train, theatre to events and adjust them to the airline world. I believe this is the most inexpensive way in the long run.
Financial systems
Systems like PayPal, credit cards, DIBS, should be available, but it could also be an opportunity to use new mobile payment products and transfer funds directly between customer account and airline account, thus minimizing the payment cost.
Marketing and packaging
With the planning and thinking on the whole food chain with a distribution system, I believe it also is an opportunity to rethink marketing and sales. In a world where any value coupon, spot advertising, and personalization are just bits, bundling targeted products (i.e. Starbucks at the airport), books to read, movies to watch, and items to buy and get delivered home or pick up on the way home brings a world of earning opportunities.

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