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How Airlines Decide What You’ll Pay To Fly Is About To Change Dramatically

(Source: www.forbes.com)

How much does it cost to fly from here to there?

Choose any two cities in the United States, or heck, anywhere in the world, and if there’s even one flight a week to each of them you’ve been able for at least 20 years now to get an instant, simple answer to that basic question.

And, probably with a little help from a local travel agent, you’ve been able to get that answer relatively quickly for at least the last 50 years.

But by 2025 or so, getting an answer to the simple question, “How much is the fare,” could be a very different experience.

In fact, in time, that common question itself could become irrelevant.

A new ticket-selling technology, made possible by the ability to harness and analyze the unfathomably huge amounts of data airlines collect and retain about every traveler and every possible routing, will make it possible for airlines to provide every travel shopper a unique, customized price for any given trip about which they may inquire. Called NDC, for New Distribution Capability, the new ticket-selling approach uses airlines’ enormous Big Data capturing abilities in concert with new artificial intelligence or “machine learning” methods to present to each travel shopper a unique, all-in price that includes not only the basic cost a seat but also the cost of many (or even all) of the travel services the traveler will need or want. That includes the cost of basics like seat selection and checking a bag, services for which many travelers now are charged extra fees. Plus it includes — or soon could include — additional services like ground transportation and hotel rooms or, eventually, services like dinner reservations and concert tickets and retail goods ranging from travel accessories to clothing.

Veteran travel industry analyst Henry Harteveldt at Atmosphere Research says airlines in the coming years “will move away from terms like ‘fare’ and ‘ticket’ and toward terms like ‘price,’  ‘journey’ and ‘experience.”  That’s because the long-held notion of there being one ‘fare’ (or, more accurately, one set of fares priced at multiple levels) for a particular flight on a particular route quickly is eroding.

Whether that’ll be a good thing or a bad thing for air travel consumers is, well, very much up in the air.

A Big Change In How Travel Is Sold

Here’s how the new selling approach will differ from the way we’ve been buying tickets for going on 90 years now.

Currently you ask an online travel sales website, a travel agent, or an airline reservationist for a fare quote on a certain rout on a certain day. Then, when you get the simple answer to your question you also must quickly calculate – in your head or on a scratch pad – your actual travel cost including the extra fees you’ll have to pay to select your seat, to check two bags, to upgrade to a higher class of service, to purchase wifi service or a meal in advance, or even to buy extra frequent flier mileage points for your account with the airline.

But in the not-too-distant future – indeed it’s already narrowly available – you’ll simply inform one or more airlines, your favorite online travel sales site, or your travel agent where you want to go and then wait for a few seconds to receive a price quote generated specifically for you.

Your price quote will be based not only on the cost of flying from A to B but also on your freshly stated and/or your previously known travel preferences. Your frequent flier status also will likely have an impact on the price you’re quoted. And, if your travel is for business, and if you work for Company X, which has in place a sweet volume-of-travel discount deal with one or more airlines, that too will be factored into the price you’re quoted.

As a result, every price quote will be more than a simple “fare” quote. And every such quote will be, at least in theory, unique to the recipient.

So, if, for example, you like sitting in a right-hand aisle seat near the front of the coach cabin where there’s extra leg room, will want one cocktail and a meal featuring fish, plus will be checking two bags and will need a town car to pick you up at your destination airport and take you to your preferred hotel where you’ll require a concierge floor room for two nights, you will get one price quote including all of those services. And that price will take into consideration your company’s volume discount deals negotiated with both the airline and the hotel company, and the deal your company has with a local ground transportation company in your destination city. It won’t be a “fare quote,” per se, but rather a “travel experience” or “journey” price quote. Eventually it could include retail items, like a swimsuit if you’re headed to Cancun, or ski goggles if you’re Aspen bound.

And all of that will happen without you having to calculate the cost of “extras” in your head. Indeed, you’ll be blissfully unaware that any of those “dynamic pricing” calculations took place.

Harteveldt jokingly grouses that, “They should have called it “New Retailing Capabilities” instead of New Distribution Capabilities” because of all the new opportunities NDC technology will open up to the selling of a huge array of services and products, some of which will  have nothing to do with travel.

Clearly, airlines see the new approach to how they sell their seats and other services as a way of tapping into a new, rich vein of revenue and profits. And some travel consumer watchdogs are wary of that because NDC will, by definition, make the pricing of air travel somewhat more opaque than it is today.

But airlines, analysts and even some consumer watchdogs themselves see NDC as a way of providing many travelers, especially frequent fliers, with more accurate and understandable prices early in the travel purchasing process while allowing consumers to buy the services they truly value without today’s exasperating “nickel and dime” process of paying more for each additional service desired.

Also, proponents of NDC selling argue that those who don’t want or need those extra services won’t be hurt because they’ll still be able to see and buy low-priced fares through existing sales channels, which are expected to continue operating for many more years, perhaps even forever.

“Some will be concerned, and will be the right to be concerned, that consumers will struggle to understand what’s being offered,” Harteveldt says. ”So it will be essential for airlines to be clear and unambiguous about what’s included in each package offered so the consumer can make a fully-informed decision.”

Why The Change? And Why Now?

This change – some would call it a radical one – in how consumers will buy their air travel and related services has been in the works for years. But it is only now beginning to appear in the marketplace because it has required a massive effort on a global scale by airlines and related businesses to create the technological environment necessary.

IATA, the International Air Transport Association, is the global lobby group that represents airlines who combine to carry 83% of all passengers worldwide. Its experts, working with other experts in computer science from a handful of major carriers, spent several years developing the technical standards that will allow airlines and other travel sellers to process and share the vast amounts of additional data that will go into offering personalized packages of travel services to individual travelers.  New technology and new technological protocols are required because the conventional travel distribution systems long in use are based on technology developed in the 1950s and 1960s. They simply cannot be upgraded to handle the unfathomable amounts and kinds of data necessary to sell travel services in this new and very different way. Besides, the companies that own them have no real incentive to invest in distribution capabilities. In fact, they initially were reluctant to cooperate with the airlines in developing and bringing to the market NDC technology, but jumped on the band wagon more recently when it became evident the airlines would act without them if they didn’t.

Airlines also moved slowly, at least early on, in developing NDC technology. They feared spending huge sums of money on multiple different NDC technology platforms. So they cooperated through IATA in the creation of a single technology protocol that all travel selling companies can access using any of the name-brand travel selling platforms now in use. So far at least 113 airlines around the world have signed up to play in the NDC sandbox, and more are expected to join them.

At its heart, New Distribution Capability is a response by airlines, primarily, to their loss of control over how they sell their products or services to consumers. Historically they’ve sold most of their tickets through travel agencies or, in the case of big businesses, through Travel Management Companies, which essentially are consulting firms that advise big businesses on how to control their travel costs. TMC’s also provide various travel booking, expense reporting, travel policy enforcement, transaction clearing and auditing services to their corporate clients. And, most notably, TMCs negotiate discount travel deals with airlines on behalf of their client corporations.

Yet, in many cases, that left airlines with little or no direct contact with many of their very best and most preferred customers.

Then, about 15 years ago big carriers, especially in this country, began gradually unbundling their services to the point that by the early 2010s the quoted “fare” price that consumers received when they went travel shopping online or called their travel agent had become dramatically different from the real cost of travel, at least for most travelers.

Airlines did that to themselves. The whole unbundling approach began as an effort by conventional airlines to remain price-competitive with discount carriers. Unbundling “extra services” from the basic fare gave them a way of advertising prices that were the same as, or reasonably competitive with discount airlines’ fares. Only after purchasing such an unbundled ticket did consumers then have to pay for any extra services they wanted from conventional airlines.

Unbundled fares have been an unqualified hit with very price sensitive leisure travelers. Yet many other travelers, especially high mileage business travelers, quickly grew weary with, and resentful of being “nickeled and dimed” with additional fees for services beyond the basic fare.

Meanwhile airline executives quickly came to believe that they were missing opportunities to extract more money from business travelers for services that they willingly would have paid more to receive because those services would make their travels more pleasant and productive

But because airlines didn’t control the means of selling their seats to a huge percentage of such customers they could not provide those customers with immediate relief from such irritants. Nor could they properly offer their preferred customers the kind of value-added services such customers are believed to really want and are willing pay more to get.

NDC is the big airlines’ response to that problem.

Increasingly, business travelers and others who fly frequently enough to have very specific wishes for their travel accommodations will be able to get price quotes  not for a “fare,” in the classic sense of the word, but for a whole array of value-added travel services. And they themselves will be able to determine in advance which services they want to be included, or not included, in the package of services being priced for them as a package deal.

How Fast Will The Change Be?

Neil Geurin, director of distribution strategy at American Airlines, the world’s largest carrier, says his company has been working on NDC for 10 years, and always has been the most aggressive in pushing the NDC concept and developing NDC technology. It has done so, he says, not because American believes NDC distribution itself will lower its currently high costs of selling tickets but because consumers will rather quickly dome to prefer doing business in an NDC environment.

“Our feeling is that if we are the easiest airline to do business with then customers will choose to fly with us more often,” Geurin says.

Airlines are touting the new NDC protocol’s enhanced abilities to provide detailed information, including photos and videos of the passenger’s preferred seat or section of seating, hotel options and other requested services or products. But, at its core, NDC is best understood as a way for airlines once again to offer bundled services, but on a very specific and individualized basis. And the general belief is that consumers – especially business travelers and other frequent fliers – quickly will become big fans of the new selling channel.

Some big NDC boosters think the move from buying travel via conventional channels to buying through NDC channels will happen quite rapidly and thoroughly because the technology is so good. But airlines themselves are more reserved about their expectations. It’s not clear how long it will take NDC channels make it to even the 50% mark in terms of the percentage of passengers who buy their tickets via those channels vs. those who buy via conventional ticket-selling channels. Some doubt it’ll ever reach that high a share.

Still, there’s a lot of room for growth for NDC distribution because today, at best, only 1% of travel is being sold via the nascent NDC channels that are now open.

After resisting the change for a while, SABRE, the giant travel selling platform used by many U.S. travel agents has committed to providing NDC sales channels to agencies. The same is true for Amadeus, the world’s largest provider of ticket distribution services to travel agencies and TMCs. It has branded its NDC offering as “Amadeus Altea NDC.”

Travelport, a third major, global distribution system used by travel sellers, actually was the first such seller to get its NDC service certified by IATA.

“Look, it has taken time to do this,” Harteveldt says. “It’s very complex. A lot of software code had to be written, tested, revised and confirmed to make it work as intended. And it’s adoption by the public isn’t going to happen overnight either.  Even five years from now we’ll still be in the early year of adoption and acceptance of NDC.

“As with any new technology, once you get through the early teething pains, follow-on updates are going to be easier to add. Ten years from now it’ll be in widespread use,” he added. “There’ll be airlines around the world that choose not to use NDC; maybe smaller or midsize carriers, or those less likely to connect with other airlines or be in one of the big global alliances. Budget airlines may continue to get most of their customers through their own (private sales) channels.

“But those bigger, conventional airlines that choose not to embrace NDC will lose out,” Harteveldt predicts. “They won’t have the flexible selling platform that they will need to meet an ever-more sophisticated traveling public’s expectations.”

More Info: www.forbes.com

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