The Importance of, and Path to, Airline Distribution and Technology Freedom
Part 2: Uprooting Traditional OTA Relationships
Commercial relationships with online travel agencies can be a double-edged sword. On one hand, they can provide airlines with a significant number of bookings to help fill their economy cabins. On the other hand, they can become such a substantial contributor to an airline’s load factor that it can be difficult to consider any commercial strategies which may upset them. The smaller and more leisure-oriented the airline, the more relevant the dichotomy.
As online travel agencies grow their influence over an airline, distribution costs can drift higher, hopes for higher fare upsell and ancillary attachment can fade, and control over other elements of the airline’s business – especially holiday packaging on its website – can erode, further deteriorating margins. It is a difficult business problem that can be very intimidating to solve.
How can an airline achieve distribution freedom despite seemingly long odds? And what rewards might wait for those willing to invest the effort?
The Barriers to Freedom
The sheer size of the major online travel agencies is the key barrier, and nobody knows that better than the online travel agencies themselves. They have built very large global businesses over a long time, spent billions on search engine marketing, and invested in their own loyalty programs to ensure customers keep coming back. It is not uncommon for a large online travel agency to threaten delisting a small to mid-sized airline to protect their commercial interests.
The typical online travel agencies’ main commercial interest is maximizing hotel commissions. Many of these agencies source 80-90 percent of their revenue from hotels. Why, then, would they be so forceful with airlines? Retaining access to the broadest airline content with the least effort (i.e., via existing GDS connections) helps online travel agencies draw more organic traffic to their websites, thereby mitigating search engine marketing costs and increasing their opportunity to attach lucrative hotel reservations to their air bookings.
And, yes, if online travel agencies can also extract high commissions from the airline, then that is the icing on the cake! Airlines that crumble at the threat of delisting may continue to face rising online travel agency commissions, even as overall airline commission rates from these agencies have decreased over the years.
While the direct cost of commissions can be quite high, the opportunity costs resulting from the negotiating leverage of online travel agencies can be even higher:
It can cause an airline to miss opportunities to increase direct channel bookings and/or deploy advanced distribution technology like NDC. Because the primary goal of online travel agencies is to maximize access to airline content with minimal effort, they often request a full content commitment through the GDS of their choice. Once given, it becomes more difficult for the airline to differentiate fares in favour of its own website or insist that the online travel agency use NDC instead of a GDS. This has serious implications on both distribution costs and missed upsell and ancillary revenue due to the use of legacy technology.
It can cause an airline to miss the opportunity to modernise its GDS relationships. To be fair, any airline which hesitates to upset its online travel agency partners is unlikely to press forward with difficult GDS conversations anyway. Nevertheless, once a full content commitment via GDSs has been made to one or more online travel agency partners – the agencies best suited to connect directly to airlines using NDC – the business case for escaping full content deals with GDSs is undermined. The airline’s GDS deals become just one more barrier to distribution freedom which must be tackled later if the airline’s appetite for strategic change increases.
It can result in the airline losing control of its holiday packaging business on its own website. Online travel agencies thirst for hotel bookings, so why not take the airline’s too? The initial appeal of white-labelling online travel agency technology for holiday packaging can be attractive, particularly for airlines with minimal prior experience in this area. However, as we will explain, it can come at the opportunity cost of lesser attachment rates, margins, and customer experience. As airlines find out later, it also makes the online travel agency that much more difficult to disentangle technologically, operationally, and politically as upending the commercial relationship becomes a multi-department endeavour within the airline.
The barrier of the online travel agencies’ sheer size can therefore beget more barriers in the form of additional content commitments, inertia to continue using legacy distribution technology, and entanglements within the airline’s own website, operational processes, and organisation. What does it look like when an airline escapes these entanglements?
The Business Case for Freedom
Over the past decade, the competitive gap has widened between airlines that have achieved online distribution freedom and those that have not. We spoke with airline distribution expert Cory Garner of Garner to outline the key benefits airlines can achieve by taking control of their distribution strategy. Here is what he had to say:
Reduced distribution costs: Total online travel agency distribution costs including commissions and GDS fees can be less – sometimes substantially – than 2 percent of the total fare and ancillary revenue generated.
High NDC adoption: NDC adoption by participating online travel agencies can exceed 85 percent of bookings in steady-state, provided that the airline has robust technology and sufficient content differentiation in favour of its direct and NDC-powered channels.
New NDC-inclusive agreements with GDSs: Provide the type of content differentiation above, leading to more NDC bookings via the GDSs themselves, the ability to recoup some GDS costs via surcharges, and higher direct channel penetration.
Enhanced upsell and ancillary revenue: Maximum fare upsell and ancillary attachment benefits for the bookings shifted to direct channels, plus greatly improved upsell and attachment for any NDC-powered bookings.
In addition, an airline which disentangles itself from the influence of online travel agencies can reconsider using a fully integrated technology platform for its own holiday packaging business. As we have outlined before (https://www.openjawtech.com/insights/the-surprising-financial-upside-of-hotel-attachment), using a fully integrated technology platform enables a seamless end-to-end customer experience, allowing airlines to leverage their core website traffic to drive demand for package holidays and employ techniques like "switch sell" during the booking flow. This integration allows airlines to combine content from multiple hotel suppliers and dynamically create packages with superior margins by negotiating lower rates. In doing so, airlines can potentially capture their fair share of USD $12.6B of hotel marketing expense, translating to about USD $4.70 per passenger boarded booked via an airline website.
The benefits of online distribution freedom can therefore be undeniably large for airlines, but the path between point A and point B can be intimidating due to the mismatch in power between the largest online travel agencies and small- to mid-sized airlines.
The Path to Freedom
An airline’s most powerful tool to motivate change is the thing which online travel agencies most need: content. Remember, online travel agencies make the vast majority of their money from hotels, not airlines. Airlines are a source of revenue as well, but airline content attracts bookings, bookings attract hotel attachment, and hotel attachment attracts hotel commissions. Given a choice between an airline’s money and its content, an online travel agency would choose the content every time!
This principle applies whether the airline is big or small. What matters most is irreplaceability. Irreplaceability refers to the online travel agencies’ inability to replace lost bookings from one airline with an equivalent number of bookings from other airlines. Every airline has a subset of its content which is difficult for an online travel agency to replace. This can be one or more geographic markets where the airline has a significant presence (e.g., Finnair’s domestic routes, ANA’s strategic long-haul routes), fare products (e.g., Air Canada’s Basic fares), and/or price points (e.g., Singapore Airlines’ continuous pricing). The least replaceable content also tends to be the content for which the airline bears the least revenue risk because of withholding it from any channel, including online travel agencies. It is essential that an airline carefully consider which portion of its content is the least replaceable and secure the support of its leadership team to use it as a tool to motivate distribution change.
Armed with irreplaceable content and a tolerance for reasonable levels of revenue risk, an airline will need a few more things in their toolbox before they can press for the distribution change they desire:
An NDC API, ideally from a technology provider other than a GDS. Some airlines choose to emphasise their own websites as the centrepiece of their strategy, and that can be effective too. However, if an airline values bookings from third party channels, it is important to enable a non-GDS alternative for travel agencies to access the best content. Using an NDC API from a non-GDS technology provider can mitigate the conflicts of interest which can arise when the supplier of the airline’s API and agency’s GDS are the same company. Also, as we have explained before (https://www.openjawtech.com/insights/preparing-for-an-ndc-rollout), implementing an NDC API involves a lot more than just the technology.
Contractual flexibility to implement content differentiation. Irreplaceable content is not of much use if it cannot be used to motivate online travel agencies to connect with an airline directly via NDC. Airlines which have signed restrictive contracts with online travel agencies and/or GDSs will need to lean on experts and attorneys to understand the degrees of flexibility they already have, and which further degrees may be needed to bring their full strategy to fruition. Some types of irreplaceable content may be of use today, whereas others may need to wait until a future date.
Content differentiation already deployed, or to be deployed imminently. As they say, “Talk is cheap.” The threat of withholding content from an online travel agency carries little weight if there are no live examples of another channel with a content advantage. It is important to deploy the irreplaceable content on the airline’s website at a minimum, and ideally with a few early-adopting online travel agencies. Some online travel agencies are happy to be early adopters of robust NDC APIs once an airline makes it available, and these agencies can apply additional competitive pressure on larger online travel agencies which may be more difficult to convince.
Not to be overlooked, airlines should also coordinate their plans for holiday packaging with their distribution strategy timelines. Should an airline expect its online travel agency negotiations will be very difficult, it may be wise to re-bid its holiday packaging business ahead of the distribution strategy’s implementation. Alternatively, the airline could attempt to extend its holiday packaging agreement well beyond the expiry of its separate distribution agreement with the online travel agency. It is rarely to the airline’s benefit for the expiry of its holiday packaging agreement to coincide with the expiry of its distribution agreement with the online travel agency.
Conclusion
The pursuit of distribution and technology freedom from online travel agencies is a complex yet rewarding endeavour for airlines. While online travel agencies currently can hold significant sway, leading to increased distribution costs and limited control, the potential benefits of overcoming these challenges are substantial. By reducing dependency on online travel agencies, airlines can not only lower costs but also motivate the adoption of NDC, ultimately enhancing the overall customer experience. This journey towards greater autonomy and efficiency is essential for airline competitiveness in a world where so many airlines have already started down this path.