The Importance of, and Path to, Airline Distribution and Technology Freedom
Part 1: Uprooting Traditional Reservations System & GDS Relationships
With freedom comes choice, with choice comes competition, with competition comes innovation, and with innovation come improved financial results and a superior customer experience. Which airline would not want to unleash this virtuous cycle as its technology and distribution strategies unfurl?
An airline which is free to choose from ever more modular technology providers can benefit from either a best of breed approach or a modern, fully integrated platform. Market dynamics will ensure that both options improve steadily over time. Likewise, an airline which is free to choose the channels which receive its most attractive content can benefit from superior technology, lower costs, and higher revenue. This is the natural outcome when channels compete for content.
As airlines gain more freedom to choose from a set of technology providers and distribution channels that are more motivated to compete, the biggest winner is the customer. Travelers will enjoy greater choice, improved options, and a smoother end-to-end experience.
Many consider this line of thinking too idealistic, given the barriers to freedom currently in the market. While real-world challenges can indeed seem daunting, we believe that any airline can begin to dismantle these barriers by first understanding them and then systematically mitigating their impact over time.
This topic is multi-faceted and cuts across many aspects of an airline’s technology and distribution choices. In this piece, we will focus on an airline’s choices as it relates to reservations system and GDS providers.
The Barriers to Freedom
The reservation system and GDS industries are burdened by their historical roots, which yielded sticky, incumbent providers that simultaneously constrain airlines’ technology and distribution choices. The barriers erected by the incumbents manifest themselves differently in the case of technology versus distribution.
On the technology side, the primary barrier is switching cost. The two largest global providers of reservations systems were originally developed in-house by an airline or airline-controlled entity. At their inception, there were no electronic reservations systems. The airlines needed a complete end-to-end solution, and consequently these systems were designed to be monolithic, one-stop shops for all an airline’s technology needs. While the underlying technology itself has moved on over time, most airlines are still operating under commercial arrangements with reservations systems providers which presume the airline intends to use a monolithic or near-monolithic system. When these commercial arrangements come up for expiry, airlines are faced with a very difficult choice: continue with the status quo or pursue innovation at the expense of the short-term costs and distractions caused by migrating to one or more successor systems.
Airline CCOs and CIOs often reach opposite conclusions on this decision! More on that in a moment.
On the distribution side, the primary barriers are the commercial terms imposed by the incumbent GDSs on airlines, travel agencies, and third-party technology companies. Airlines are generally required to provide their best content to the GDSs despite their high costs. Travel agencies are often locked into long term GDS deals which promise high financial incentives and threaten significant penalties for failing to meet booking commitments. Third party technology companies like corporate booking tools can be penalised for placing some bookings in competing systems if it could have otherwise been booked in the GDS instead. Faced with these seemingly insurmountable barriers, many airlines feel they have no choice but to commit to complex and costly GDS NDC integrations to provide their best content, even if it delays their NDC progress in other channels as their GDS integrations trudge forward.
The desire to upend the status quo can cause divisions within an airline’s organisation. Airline CCOs can become frustrated by the functionality constraints of their monolithic, slow-moving internal systems. Airline CIOs feel pressure to adapt but warn that migrating to new systems can be a long and risky endeavour that delays innovation in the short term. Even when a systems migration is not on the table, CIOs can also take issue with a CCO’s plans to disrupt the airline’s GDS relationships because of potential unintended consequences in their separate technology relationship with the GDS provider. The barriers imposed by these external technology and distribution providers can thus have the secondary effect of erecting internal barriers to change.
The internal parties’ positions can become so heavily entrenched that only the CEO can intervene. From the perspective of the CCO, it helps if the CEO came from a Commercial background and has a particular passion for distribution change. In all cases, though, deciding in favour of freedom must be supported by a sound business case and realistic path from Point A to Point B which mitigates the risks.
The Case for Freedom
We have written extensively about the strategic rationale for moving toward a new, modular IATA ONE Order-based systems architecture (Why Airline CCOs Should Champion the Transition to Orders | LinkedIn, The Coming Era of Modular and Innovative Delivery) and a distribution strategy aimed at modernising commercial terms and technology (Exploring the Evolution of Airline Distribution – Trends, Opportunities, and Challenges). Any airline can study those pieces closely and find important building blocks for its own business case. In addition to the standalone business case benefits, there are some exogenous factors which are making it easier to say “yes” to technology and distribution freedom:
Many airlines already admit they will eventually need to adopt a ONE Order-based system to adequately interoperate with their closest airline partners. In many ways, the hard work of convincing airline leadership teams to take on the short-term pain of a major systems migration is already done. The only question is timing.
Some of the largest airlines like Lufthansa, British Airways, United Airlines, and Air Canada are very public about the plans and progress toward technology and distribution freedom. Airlines like these are taking an early competitive lead in areas like continuous pricing and the ability to differentiate content for their preferred channels. The more airlines go down the path to freedom, the more overlapping airlines will find themselves at a competitive disadvantage in an increasing number of markets. Shareholders frown on airlines which subject themselves to structural disadvantages which are difficult to reverse quickly.
Unlike the largest airlines, small- to mid-sized airlines generally do not have a “buy or build” choice for future platforms. They must be bought. The key is to find the right technology partner which has done high quality foundational work and can be trusted to deliver the remainder of the solution. “Trust” not only includes the quality of the partner’s management, product, and delivery teams, but also that the partner’s business interests are not in conflict with yours in any respect.
We do not pretend that the path to achieving these benefits and responding to these industry trends will be easy. Airlines will need to gather internal support, often to the CEO level, to pursue the long-term strategic benefits and withstand the short-term costs of technology transition and/or temporary distribution channel disruptions.
The Path to Freedom
While the specific goals and steps may look different for each airline, we believe there are some technology freedom principles which will serve as a common thread across all airlines:
New platforms will be designed with modular components. The goal will be to construct a new platform made of self-contained components with points of integration which are as standardised as possible. This will give airlines the flexibility to procure each component individually or in combination with one another, maximising their negotiating position and minimising the risk of again being constrained by contractual conditions and/or switching costs.
Many airlines will source at least some components from technology providers who are not also distributors. As mentioned earlier, trust is key. It will serve as an insurance policy and strong negotiation lever to have at least one “independent” technology provider in the tech stack which (1) provides at least one significant component and (2) has a broad enough technology portfolio to supply other significant components if it becomes necessary later. Such a provider can help an airline keep distributors honest.
Fewer technology and distribution deals will be done together. At their heart, these types of deals have historically involved the appearance of short-term financial benefits for airlines in exchange for constraints on their choices in technology and/or distribution. More airlines recognise that constrained choices come with an ever-higher cost of lost opportunity to innovate and keep up with their competitors. Distribution deals with incumbent technology providers will become more challenging and expensive in the short term as airlines trade economics for more channel choice.
These common principles will help airlines disentangle themselves from the constraints imposed by their technology-distribution providers. No longer will these airlines depend upon a single, monolithic system for most of their technology. The technology they source will be more modular and interchangeable, thereby reducing switching costs and increasing choice.
As airlines gain technology freedom, they will have more latitude to push for distribution freedom. This well-worn path has historically proceeded in layers. The first layer is often using small degrees of content freedom to motivate online travel agencies to compete for content by switching to modern distribution technology at more reasonable economics. As airlines become less dependent on GDSs, they can seek greater distribution freedom, encouraging brick-and-mortar leisure agencies to operate either outside of, or in collaboration with, GDSs. The jury is out as to whether the final layer – i.e., corporate travel agencies – will be able to adopt modern distribution technology at scale anytime soon. On the bright side, though, many small-to-mid-sized airlines are less dependent upon corporate volume to drive their business and thus are more interested in moving forward with online and brick and mortar travel agencies only.
Conclusion
Achieving technology and distribution freedom is a challenging yet essential journey for airlines. By embracing modular technology platforms and fostering competition among distribution channels, airlines can unlock innovation, reduce costs, and enhance the customer experience. While the path to freedom may be fraught with barriers, both internal and external, a strategic and methodical approach can help airlines overcome these obstacles. Ultimately, the pursuit of freedom in technology and distribution will position airlines to thrive in an increasingly competitive and dynamic industry landscape.