Industry insiders discuss the continued evolution of air distribution: direct connectivity will become a priority for airlines
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For more than a decade, the International Air Transport Association's (IATA) New Distribution Capability (NDC) standard has been a topic of discussion and debate among airlines and travel sellers. While airlines are exploring how to implement the standard to unlock new revenue opportunities, they also don't want to completely abandon loyal sellers who use traditional distribution systems.
American Airlines was one of the first airlines to make a big push for NDC, moving 40% of its lowest fares to be offered only through its own channels and NDC channels in 2023. Previously, airline efforts tended more towards charging surcharges for GDS bookings, such as Lufthansa's practice in mid-2015.
But in May of this year, American Airlines' chief commercial officer Vasu Raja, the architect of this strategy, announced that he would leave the company, and American Airlines subsequently said it would abandon this strategy, which made some travel advisors happy, but also raised doubts about the future of NDC.
Cory Garner, a former American Airlines executive and now founder of airline distribution consultancy Garner, said in a keynote address at an industry conference in New York City on December 3 that while it is now clear that American's strategy was not successful, that does not mean the industry should stand still or retreat.
"We saw American Airlines launch a very bold distribution strategy, and now they are backpedaling, and we should say, this is all over, it will never happen again, right?" Garner said.
"Wrong, now is the time to adjust. Don't stand still, that's the lesson we should learn from American."
He noted that American's implementation should not be seen as a stagnation or slowdown in the trajectory of NDC development, but just another timestamp in the evolution of distribution.
Garner also said that the best way to predict airlines' future distribution strategies is to focus on their motivations.
Three eras of distribution change
According to Garner, there have been three eras of airline distribution change over the past three decades.
The first era was about finding a new way to interact with travel agencies and process bookings at lower prices. "The first decade of the millennium distribution revolution was all about cost," he said.
Airlines needed a less expensive way to interact with travel agencies than through GDSs. So airlines retained distribution of ancillary products directly with travel agencies.
Then, after the ancillary trend took off, the second era arrived.
"At this point, ancillaries started to account for 10% to 20% of total airline revenues," Garner said. "So, as we entered the second era, the second decade, the distribution strategy had to change, and that's why you saw airlines change their strategy. The strategy became not just about trying to move bookings from expensive channels to cheaper channels… The goal became how do we make all channels more productive from a revenue perspective, how do we generate as many upsells as possible, create more ancillaries?"
In the second era of distribution revolution, airlines began to "make friends" with GDSs again, he said. So, in the second era, more GDS-NDC agreements were signed to promote ancillary revenue growth.
Now the industry has entered the third era, which began after the COVID-19 pandemic, Garner said. At this point, airlines are beginning to prioritize their loyalty programs, including credit card rewards programs.
"If you look at the P&L of airlines today, especially the largest ones in the U.S., their 'other' revenue category is in some cases growing faster than passenger revenue, which is primarily from banks."
Garner said credit cards have become a big part of the airline business, so addressing loyalty, cost and ancillary products are all priorities.
How airline distribution will evolve next
Garner said that with the focus on driving loyalty, direct connectivity is bound to become a priority for airlines. "What is the best way for airlines to deepen their relationships with their customers? It's by communicating with them," he said.
"Does anyone have a friend who only communicates through third parties? I don't... So naturally, many airlines think that the best way to deepen their loyalty relationships with their customers is through direct interaction."
Garner believes that American's strategy is a preview of the next decade. He reminded the audience to act early when thinking about distribution.
"This is your opportunity to make adjustments," he said. "The time to act is now, don't wait for the next person. Don't wait for the person after the next person. Don't wait until it's too late. Don't wait until the only people you can ask are the ones who just want to maintain the status quo. Don't wait. Do your homework. Having time now is an advantage to you."