The next 10 years of airline distribution
A decade from now, revenue passenger miles are forecasted to grow by 30% by 2027, the number of aircraft in operation is likely to grow by the same factor, and airlines will have to become sophisticated retailers.
The coming decade will herald a tectonic shift in the mechanics of airline distribution, breaking the shackles of outmoded inventory and reservation management and embracing new retailing technologies acting in service of the consumer throughout the journey.
Over the next two to five years, we’ll continue to see a gradual erosion of the dominance of the GDSes, as more airlines embrace the IATA New Distribution Capability (NDC) standard, with favourable incentives for those distributors embracing it, or punitive fees for those choosing not to.
As these standards develop and introduce new sales flexibility enabling airlines to own a greater share of the customer journey, innovation will be driven from outside of the airline itself, as a new start-up ecosystem marries these distribution protocols to rich media and vastly improves user experiences.
The increasingly indistinguishable OTA and Metasearch landscape faces disruption through the advent of standardised distribution and the potential emergence of marketplace platforms matching buyers with sellers and mirroring Amazon’s business model of infrastructure as a service.
During this period of proliferation, Google will be the biggest benefactor as GDS distribution fees become dwarfed by top-of-funnel search acquisition costs.
Direct distribution through Airline.com will continue to grow but for legacy carriers it will remain responsible for a minority share of bookings.
In meeting customer demand for broader choice, expect co-opetition as competing carriers offer each other’s inventory to showcase a broader choice to the savvy shopper.
With more than a billion active daily users across WhatsApp, WeChat and Facebook Messenger, chatbots will evolve beyond their ability to answer FAQs with full ‘conversational commerce’ emerging as the third pillar of e-commerce, alongside web and mobile. Amazon Echo, Google Home and similar devices combine this natural language processing AI interface with voice recognition, creating a fully interactive verbal shopping experience.
These developments will, in turn, place increasing pressure on airlines to innovate and differentiate their offerings - from simple tiered fare structures and a-la-carte ancillary offers bundled into branded fares - to more unique, tailored offers personalised for the individual traveller.
Traditional pricing methods through fare filing - by contract, O&D, market and RBD - will steadily give way to personalisation through artificial intelligence and machine learning, which will learn from the online and transactional behaviour of millions of people, mine data, and meet the needs of each traveller at every moment through all channels, signalling a new era of revenue management.
As the next iterations of blockchain and related technologies evolve to accommodate offers and transactions at scale, distributed ledger technologies will underpin billing and settlement, removing the costly process of accreditation for participation in a BSP.
The PSS will evolve into a full retailing platform for multi-channel distribution, with data ingestion, modelling and processing capabilities and a rules engine capable of structuring and yielding product per channel, per request.
A decade from now we’ll see the global population surpass 8 billion people. The percentage of the population deemed “middle class” will rise from 30% to over 50%.
Revenue passenger miles (the benchmark for measuring aviation growth - one revenue passenger traveling one mile) are forecasted to grow by 30% by 2027, and the number of aircraft in operation is likely to grow by the same factor.
This growing passenger base will become increasingly geographically diverse, driven by the emergence of second and third tier cities becoming ‘aviation mega-cities’.
Although the bulk of these gains will be made in the Asia-Pacific Region, the long-term growth outlook for global aviation remains positive.
While oil prices remain high, aircraft will become increasingly efficient, with narrow-body aircraft flying further, becoming cheaper and cementing the now established business model of long-haul low-cost carriers.
This trend will drive down the cost of long-haul travel, but low-cost business models will drive commoditisation, increasing the need for airlines to differentiate through customer service and personalised offers.
This will in turn put pressure on OTAs, which typically sell airfares as a commodity, with price the only point of differentiation. Tailored offers through prescriptive analytics and propensity modelling will mean customers will find the most relevant offers through direct channels or marketplaces that are able to assist the airline with third party customer data.
As the OTAs decline, so airline category advertising revenues dwindle for Google. With the emergence of marketplace solutions for travel, the balance will tip and intermediation will become more lucrative for Google than advertising.
During this period, airlines will have to become sophisticated retailers, able to garner higher commissions from ancillary sales than margins from fares. It is likely that in certain bundles the fare will be marketed for ‘free’ as a loss leader for a bigger share of the travel wallet.
Spurred by the airline industry, hotel, car rental, ferry and other ground or transport providers will adopt similar standards for open distribution, bypassing aggregators.
The ultimate benefactor from these changes will be an empowered traveller, who will have more choice, variety, relevance and tailored pricing than ever before.