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Part 1: “ A Brief History of How Airlines Sell Tickets ” http://crankyflier.com/2013/03/11/a

- brief

- history

- of

- how

- airlines

- sell

- tickets/ Posted: March 11, 2013

Welcome to “Distribution Week” here on The Cranky Flier. Today I’m looking at a brief history of how airlines sell their tickets, aka distribution. Tomorrow I’ll look at how the airlines want to sell tickets in the future . Then on Thursday I’ll wrap it up with a look at the hurdles the airlines face in making this a reality

. 

### A couple weeks ago I wrote about the new Farelogix interface and promised I’d follow up soon with why you can’t use that today. But as I started digging in, I found that this issue was far more complex than even I thought it would be and I’ve been looking into this for quite some time. I’ve talked to airlines, Globa l Distribution Systems (GDSes), corporate travel managers, and more, and now I’m wrestling with the tough task of trying to boil this down into something coherent. As Cory Garner at American Airlines said, this is the kind of stuff a grad student will writ e a thesis on.
The problem is that there are a lot of different players in airline distribution and there are some very old, goofy business models that have created incentives to stifle innovation. Let’s start with this basic snapshot of how airlines sell tickets today.

The funny thing is that this model doesn’t have to actually change much for the airlines to do what they want to do. It’s the responsibility of each player that needs some tweaking to support the kind of innovation airlines would like to see. One thing is clear: you can’t stop innovation if it’s good for the end

### user. That’s the beauty of disruption. But when you’re a big player with a lot of clout, y ou can slow it

down. In the end, you lose if you play that game, and I think that all players involved are going to realize that sooner or later. But we aren’t there yet, so it’s quite the slog.
Naturally, it’s hard to predict the future, but there are air lines out there that have a strong vision of how they’d like to sell tickets someday. And that’s where I’m going to take this tale tomorrow. But first, we need to look at how we got to where we are today.
A Brief History of Airline Distribution A long, lon g time ago in a galaxy far, far away, airlines did everything by hand. You would call the airline or a travel agent for a reservation. They might not have been able to confirm immediately because they had to go to find the file where that flight availabili ty was written down and then check off a seat for you. Pricing was fixed by the government, so it was never an issue of what the price would be

– just if there were seats available.
As things got more complex, the airlines began working on a computerized r eservation system (CRS). The first was American’s Sabre system and that was a huge leap forward because the airline could instantly look up availability from throughout its network. But soon American realized that if it could roll out its computers in a ne twork to travel agents, then it could make millions. American knew that it would have to display all airline flights or it wouldn’t be compelling enough for agents to bother, but it could put its flights at the top of the list (using what today they call “ bias”) and sell more seats, stealing share from other airlines. United did the same with its Apollo system and the race was on. Eventually bias was outlawed, though today it is legal in the US even though it’s banned in many other places around the world.
When deregulation occurred in 1978, airfares became much more complex and the CRS became necessary not just for availability but for performing these complicated calculations. The system that was in place back then is effectively the same that’s in place t oday. Fares were filed with a third party group called ATPCO while schedules were filed elsewhere. These fares were filed in specific “buckets” of availability. If there was a seat made available by the airline in the required bucket, that fare could be

so ld.
So the CRS (which morphed into a Global Distribution System

– GDS), took the schedules and fare information from those relatively static sources and then sent a real

- time request to the airline for bucket availability. Bringing those three pieces toget her, the GDS could calculate and push out all offers. The travel agent could make a decision and then book a flight with the GDS. When that happened, the GDS would send the booking back to the airline electronically. It’s quite an impressive system conside ring it was built before the internet.
Originally, regular travel agents were the only GDS users outside of the airlines. Travelers either had to call airlines or travel agents to book a flight. But then the internet magically appeared (or something like
t hat). And online travel agents (OTAs) were set up to show the results from the GDS directly to travelers online. People could book directly, or so they thought. In reality, the same GDS processing was still happening behind the scenes

– it just removed the human intermediary. For the GDSes, this was like a

### cash register. Every time anything was booked, the GDSes collected several dollars per flight segment

from the airlines. It plowed some of that back into the OTAs to make sure they didn’t think about jump ing ship to another system. They were able to mint money.
Of course, the airlines themselves built their own websites early, and have now succeeded in pushing a big chunk of their sales to those sites. These allow the airlines to bypass the GDSes and sell direct, and that has given the airlines some leverage at getting fees reduced. Throughout the 2000s, as airlines started changing the way they sold tickets from just “price and schedule” to include ancillary options, the websites became the only vehicles t hat could adequately support that. But it’s not just about having ancillary options displayed. It’s now about being able to know more about the traveler so airlines can tailor the offers they provide. If this sounds scary, it’s not a surprise. But it reall y is a good thing, and I say this as someone who certainly has concerns about privacy.
Tomorrow, I’m going to get into the details of how airlines wou ld like to sell tickets and why it’s good.



# Part 2 : “ A Vision of How Some Airlines Want to Sell Your Tickets ” http://crankyflier.com/2013/03/12/a

- vision

- of

- how

- some
- airlines

- want

- to

- sell

- you
- tickets/ Posted: March 1 2 , 2013

It’s Distribution Week here on The Cranky Flier. Yesterday I wrote a brief history of how airlines sell tickets . Today it’s time to talk about how they’d like to sell them. Then Thursday we’ll look at why this is so slow to take shape

. Airline tickets have been sold pretty much the same way for years, bu t with changes in both the way tickets are sold (fees) and the technology out there, you’d think it would change more quickly. But really the last big innovation was the price matrix showing stops and prices by airline that came out more than a decade ago, and that’s not even that helpful anymore. I spoke with Cory Garner at American about the airline’s future strategy, but American is not alone here. Airlines have all been trying to come up with better ways to sell tickets. This particular vision would imp act people who buy directly from the airline or through a travel agent (corporate/retail/online), but the way it would be presented could vary from channel to channel. Today we’ll focus on what it might look like if you bought through an online travel agen t (OTA) just to make it easier to explain.

When you buy tickets today through an OTA, you get a one

- size

- fits

- all price that is based on the basic ticket price and the schedule at hand. Oh sure, you can sort but you can’t really compare the true value of w hat you’re getting with one airline to that of another without some serious manual legwork. Here is the kind of view you probably expect today:Considering how fees play into the equation today, that is an obsolete way of looking at things. What’s

more, each person has different preferences and those aren’t part of this comparison process at all. This is why when I asked fee

- king Spirit Airlines C EO Ben Baldanza about his sales through online travel agents (OTA), he said that the airline had about 25 percent of sales and 100 percent of complaints through OTAs. That’s because when you buy on Spirit’s website, you know that there are carry on fees, s eat fees, etc, before you give your credit card. You don’t know that through online travel agents today.

This becomes even more complex because depending upon the status you have with the airline, you might be entitled to different things. And today that i sn’t incorporated into third party systems so travelers lose out. The same thing happens with traditional and corporate travel agents. Some think the answer is to have the government force the airlines to file all their fee data through the central fare fi ling clearinghouse so the Global Distribution Systems (GDSes) that power the OTAs can have everything available. That doesn’t make sense to me since it should be up to the airlines to decide how much information to provide to each partner that sells travel . And besides, the airlines are working on something different anyway that would make this less important.
Today when you go to an OTA, it’s the GDS that’s doing the heavy lifting. As described in yesterday’s post, the GDSes take the fare and schedule info rmation and then compare it to availability to push out offers to you directly or to your travel agent. But what some airlines like American would rather do is change where that processing occurs. They want to get the request from the GDS or even directly from the travel agent using something usually called “direct connect.” Regardless of where the request comes from, it would come in and the airline would do the processing, sending back options.

The airline likes this for a few reasons. If the frequent fli er information is provided, then the airline can use the preferences in the account to tailor results or make a special offer to you, the traveler. Ifwhat’s presented is more attractive than what you see today, you’re more likely to go with that airline.

Second, it also allows the airline to offer prices that are hopefully matched better to the demand that’s out there. In the long run, airlines could make small incremental pricing changes instead of using the “bucket” system they use today. And as a final, and large, benefit, this would reduce costs for the airline.

Let’s take a walk through this so you can see what I mean.

Sam, Sam, the Businessman Meet Sam. Sam is a Chicago

- based small business traveler who books his own travel. He flies enough to have Go ld status on United and American. Sam likes to book his travel through an OTA because he can store all his personal information there. Let’s say that both United and American have successfully implemented their direct connect options either with this OTA o r with the GDS that the OTA uses. The upshot is that the OTA can show fares and options on all airlines, some via the direct connect and some through traditional channels.

So, Sam wants to take one of his usual trips to LA and he goes to his OTA to check o n options. If Sam doesn’t log in, then it will just spit out the generic pricing that is made available for everyone. This pricing will be current at the time its offered and it will come directly from the airline. Sam will still see a bunch of flight opti ons in front of him. Then when Sam clicks on each option, he’ll be able to see a menu of which ancillary services are being offered and he can pick and choose the ones he wants. He’ll just pay once when he checks out.

But where it gets more interesting is when Sam logs in. This OTA stores his frequent flier information for him, at his request, so when it sends out for pricing information, it will provide that frequent flier number to United and American. They will see that and return the offers that apply t o him. So if he pulls up the flight on American, it will show he gets a free bag because of his status with the airline. There’s no more guessing about what applies and what doesn’t.

The airline can do more than that as well. If it wants, it can offer Sam a discount because it knows that he’s been loyal in the past but hasn’t flown lately. The airline might have him flagged as someone who may be at risk of moving more of his flying to United, so American could sweeten the deal with an offer. Maybe they’ll o ffer him a free lounge pass. It could be anything that the marketing group dreams up that the OTA is willing to display, but only if Sam logs in first and decides to share this information before searching. It might look something like this:Naturally, there are a lot of objections to this kind of process. I heard an earful of them from a GDS

itself, Sabre, when we had a call about this subject. Clearly Sabre isn’t a fan of this plan, but we’ll talk about that tomorrow. So let’s go though some of the more common objections.

What’s Bad About This?

1) It’s creepy if airlines know too much about me

– In general, I agree with that statement. I hate when websites use cookies to collect data without my permission and then use it to market to me. But in this case, it would only come from information that you provide directly to the airline. You might not even be using the airline website, so they would only be able to use the information that you’re allowing the OTA to share. If they can use that information to get me what they know I want, it’ll save time and it could save money.

2) The airline will make me log in to get fares

– I heard this objection from none other than Sabre itself in a recent call. I simply can’t imagine this happening. An airline would be suicidal if it required people to log in before giving any fares. People will flee quickly. Inst ead, the airline really just needs to have base pricing and then it can adjust if people log in. Which brings us to...

3) If an airline knows I’m loyal, they’ll just charge me more if I log in

– This is a scary thought, I agree. But it would again be suicide for an airline to play this way. Why? Because people aren’t stupid and they’ll find out very quickly if an airline is penalizing people who log in. ( Remember when it was thought Delta was playing that game ?) When that happens, nobody will log in anymore and the airline will have screwed itself. I’m not saying it can’t happen, but if it does, it will end in disaster for the airline.

4) Fares already change quickly enough, this will be worse

– That’s another of my concerns, and the one that I’m least confident will be addressed. Buying a plane ticket is a big investment, and so it’s not something that you’ll just jump on right when you see the price. Today, travel agents can hold reservations, though fares are never guaranteed until purchase. Still, the expectation is that it usually won’t change in an hour if you have the seats on hold. (That’s not always the case, but usually.) So in this new system, if the airlines are free from any sort of constraints limiting fare changes, then you could never pin anything down until you finally purchased. That is extremely unfriendly for travelers. I would hope that airlines would allow you to lock a fare for a short time, just so you can confirm things. B ut that’s a business decision that will have to be made if this ever goes into effect.

Personally, as long as an adequate solution can be found for number 4, I’d love to see a system like this, even if I don’t think this kind of dynamic pricing will be rea dy anytime in the near future. But much of the rest of it is ready today. This system, however, can’t exist in a vacuum. And that’s why it takes so long for it to happen. The plan is to discuss why it’s not happening more quickly on Thursday.

# Part 3 : “ Why Changes in Airline Distribution Take So Long

– A Look at What the

Players Stand to Gain and Lose ” http://crankyflier.com/2013/03/14/why

- changes

- in

- airline

- distribution

- take

- so
- long

- a
- look

- at

- what

- the

players

- stand

- to

- gain

- and

- lose/ Posted: March 1 4 , 2013

Welcome back to the last post of Distribution Week here o n The Cranky Flier. I know I’m getting really wonky here, and I apologize for that to my casual traveler readers. But this is something that really interests me, and I wanted to dig in deep. This post was the most difficult to write because trying to untan gle the web of relationships is not easy. It got even more difficult when American and Travelport announced that some of these things will be implemented. If you missed the first two, see Part 1 which talks about the history of airline distribution followed by Part 2 which focuses on how some airlines want to sell tickets

. You’ve now seen the vision for how some airlines would like to sell tickets, but why hasn’t it happened yet? That’s the million dollar question. Ultimately, the relationships between all the different players are incredibly complex thanks to goofy business models and years of entwined history. It’s not easy for those things to change, but the shift is happening. Just yesterday, America n and Travelport announced they had come to an agreement that will start them on the path to making this a reality. That’s a big deal, but it was just a matter of time before someone made the move. The potential benefit is there.

The funny thing is that it doesn’t seem like much has to change. The diagram I showed on Monday just needs a couple more lines (below), but it’s the nature of the connections that are so difficult to alter.I thought the most effective way to do this post would be to go through each group that has a stake in

this thing to explain what this would mean for th em and why they would or wouldn’t like it. This might help explain why we find ourselves still selling tickets the same old way. Let’s naturally start at the top, with the airlines.... (Grab some popcorn, we’ll be here for awhile.)

Airlines The airlines have a huge reason for trying to change the way things work today; they want to sell more at a lower cost. An airline’s website does this quite well, and those channels are moving full steam ahead, but there’s no way full

- service airlines will ever get everyone to buy directly from the website. So they need to find a way to do what they do on their website with third parties.

Could they file all their ancillary rules through the central fare clearinghouse and then let all the third parties use that data? Maybe, but I really doubt it. Each airline will create ancillary options differently and a very structured way of formatting this wouldn’t necessarily be a good plan. Even if it was, the process would still rely heavily on the Global Distributio n Systems (GDSes) to do all the processing. That would not only give the GDSes more leverage in continuing to maintain their position, but it would prevent the airlines from personalizing offers as they’d like because they wouldn’t control what the custome r was given.
That’s why airlines like this new way of selling, because it would let them handle the processing themselves. Effectively, what they present on their websites could be delivered to any third party channel that wanted to sell travel. It’s in XM L format so it’s pliable and can be used in all kinds of ways by third parties. That would help reduce distribution costs by reducing the importance of the GDS (but not eliminating its relevance, as we’ll discuss below). It would also give much more contro l to the airline.

But how can they do this? Well, the plan that’s moving forward would have a standard set up by the International Air Transport Association (IATA) unimaginatively called “ New Distribution Capability ” (NDC). Despite all the scare tactics I’ve seen put out by opponents, I’ve yet to see anything that suggests NDC will be anything but a standard for allowing airlines to communicate their offers to th ird parties and then take bookings. It doesn’t say anything about the content itself

– just provides a way for it to be sent back and forth. IATA just filed this with the Department of Transportation for approval, so you can read all 87 pages with the background and details if you’d like.

How would this reduce costs? Well, development work could be focused on one channel so that improvements would impact the website, travel agencies, and third parties. It would also give the airlines more bargaining power with the GDSes. Why? Because it’s really hard to create a GDS today, but if the GDS becomes more of an aggregator of various feeds from different airlines, then it would reduce some barriers to entry f or competition and put price pressure on the GDSes. The airlines like that, but of course, the GDSes don’t. And that brings us to...Global Distribution Systems

Outside of the airlines, the GDSes have the most at stake with these changes, and different GDSes have taken different approaches. Today, the GDS revenue model is kind of backwards, and that’s a quirk of history. Let’s compare it to an ice cream company called, say, Mr Whippy. Mr Whippy has several suppliers from which it buys the ingredients that go into making its ice cream. Once it has made the ice cream, it sells to third parties (supermarkets, etc) for a profit. Those third parties then sell to the end consumer. It’s pretty simple to understand.

Now think about the GDSes. They are in the business of selling airline tickets (and hotels, etc, but we’ll just focus on airlines). They don’t have seats to sell themselves, but instead they have suppliers, the airlines. But instead of paying the suppliers for the inventory, they make the airlines pay them for the right to be sold in the system. Airlines pay booking fees that can range from a couple bucks to a lot more for each flight segment. (Recently, it was revealed that American was paying Sabre $2.73 a segment , but when they got into a business dispute, Sabre jacked that up to an incredible $7.31 a segment.) For a typical roundtrip with 4 segments, that’s a lot of money.

What do they do with that money? They go and pay t he third parties (travel agents) that sell their products. Goofy, right? But it’s because way back in the day, the airlines owned the GDSes. And as we know from the history on Monday, the airlines could get an upper hand by getting their systems into agenc ies. They could bias the results in their favor. And of course, they wouldn’t want to charge those agencies. Instead, since they had the agencies captive, they could charge the other airlines to play. They were making money even if the agent booked another airline. Brilliant!

But things are different today because the airlines no longer own the GDSes. Though the business has changed, the model never has. For airlines, that means they pay a lot of money for something that they don’t think is providing enough value now that technology is starting to open up new ways of selling.

The GDSes, however, realize that they still currently control a huge piece of the market. Airlines make a large percentage of their money on business travelers, and big businesses use G DSes (we’ll talk more about that later). Though it varies by geography, in the US, Sabre is the big boy with over half the market. Travelport is next with something in the 30 to 35 percent range. Amadeus has the rest of the market (less than 10 percent), t hough Amadeus is huge in other parts of the world.

Sabre seems to have taken a stance that its role is to, as described to me by Shelly Terry, VP of Airline Merchandising for Sabre, “ensure we’re meeting the needs of the agencies and corporate customers th at utilize our system.” It’s not just that. There was talk about balance between the supplier and customer needs, but Sabre seems to think that this new plan by the airlines would tip the balance too far in favor of airlines and would harm agencies.

From w hat I can tell, that means Sabre wants to keep doing the processing itself instead of letting the airlines handle it, because the company thinks that will make it easier to compare offerings across airlines. It paints a picture of airlines withholding fare s from travelers unless they fork over their personal information. As discussed Tuesday, that idea seems silly to me.But for Sabre, it has a lot to gain by maintaining its position. As the market leader, it wants to keep

what it has, but it realizes it ca n’t sit completely still. Sabre has moved to allow for merchandising in small steps, even using connections that have an XML feed and allow the airline to process the sale. But those are built as one

- offs for specific ancillary services instead of addressi ng the entire merchandising/selling strategy for the airline. Those one

- off connections can be very slow to set up (over a year to sell US Airways Choice Seats alone

– just imagine the labor costs), and this method forces those ancillary fees to be separat e from the fares themselves in the shopping experience, by design.

Sabre wants to keep fares sold the way they are today because it thinks that’s a better way to compare across airlines. As it suggests, this new proposal from the airlines is about “changin g the way fares and pricing information is made available to consumers and travel agencies.” The disagreement is on whether that’s a good thing or a bad thing. And Sabre clearly thinks it’s bad.

Not all GDSes feel the way Sabre does. Travelport, for exampl e, has introduced Agencia in Canada, and then just yesterday announced it would do something similar with American here in the US.