The economic need for change behind the (hoped for) NDC revolution

07 7, 2014

In part one of this two-part series on the progress of IATA's New Distribution Capability we looked at technology, process and enablement.

In part two let-s address the economics.

Distribution to intermediaries needs to change. Recent numbers on the value of merchandising and the cost of distribution show how reducing cost and raising revenue are critical to the health of the airline industry.

While obvious it seems that only recently airlines have started bringing ROCI (Return on Capital Invested) into their Lexicon. Let-s look at the macro numbers.

According to IATA the average profit per airline seat this year (barring catastrophe, probably the best ever) is less than $6.

The average amount of gross revenue from ancillaries is similar - a positive value of $7.50 per passenger trip. Without the revenue hike from ancillaries, (unpopular as they are) the airlines would lapse back into the abyss of loss.

Yet the airline industry is still paying the GDSs an average of around $6 per passenger journey for most, if not all, travel agency-generated passenger segments. The economics therefore are a compelling reason for implementing the distribution reformation that NDC exemplifies.

Airline commerce is based currently on a model of legacy homogenous technology. The GDS model (few-to-many via a portal or gateway), whilst fine in economics of yesterday, has not kept up with the fundamental change of the internet (many open-to-many world) that we now inhabit.

Both the commercial terms and the legacy technology (and of course the airlines- dependence) allowed the gateways to become gatekeepers.

Contractual Gordian Knots

I personally have inspected many contracts for airlines and travel agencies. For individuals who enter the world of travel technology from other commercial sectors such as banking or insurance (i.e. other highly functional always-on service industries), the terms of the technology agreements - upstream and downstream - appear to be out of character to the open world that travel aspires to be.

I still spend many hours each month reviewing technology contracts from commercial software companies. These conventional software contracts rarely, if ever, constrain what the trading partner can commercially do other than keep to the fitness for purpose intended.

Contracts always seem to contain clauses peppered throughout that constrain what a trading partner can commercially do.

The justification? The technology is too fragile and too sensitive and needs to be protected from bad user technology on the remote end and bad processes that enable trading partners- abuse of the system.

In reality the technology powering the airlines and travel distribution in general, whilst quite arcane and old, is very robust. So the question remains - why don't the providers of this software invest more to make their products stronger, more efficient?

There should be no constraints on the use of the technology by the distribution community on either supply side or distribution (agency) side. But that appears to be a very big ask.

The GDS commercial contracts for airline-based distribution are designed to protect the status quo, and not necessarily to enable the business of the airlines and their business partners. I would challenge anyone to demonstrate in public that the contracts have no restraint of business clauses in them.

These clauses harm not just the airline community and are damaging for consumers, but I would add have no real value for the companies that sign them.

By locking themselves and trading partners into a set of strait-jacket commercial terms, they are missing out on the very benefits that the open community can provide, and denying themselves the very opportunity they spend so much time promoting in their public personas i.e. that adoption of open technology enhances the user and consumer experience.

There is a clear contrast between the benefits gained from collaborative development in the open source community and the disadvantages of the highly singular and proprietary development efforts of the GDS.

The need for ownership and control by the GDS providers is not a war of technology development but a daily battle of minimalist delivery. The resulting frustration of the user community and the actual customers can be heard loud and clear.

What needs to be done to enable a true and open world?

NDC is just a component of an open airline distribution community. No one should have to be persuaded alone that new is better than old. Smart minds are not as concerned with new as they are with value.

For NDC to be a success we need a new commercial framework, one that provides value to all stakeholders. The adoption of an open-source like environment and collaboration across the industry will have two distinct benefits to the evolution of technology.

Outcome #1

It will enable collaboration. Today within the app stores provided by the GDSs, the contractual terms sound to me like they are from the dark ages. The ability of developers (let alone users) to collaborate and share is contractually restricted. I would encourage all the users of technology and providers in the app movement to subscribe to open source rather than the very closed current commercial models.

Outcome #2

It will reduce resource waste and increase efficiency of coding. By freeing the developer from a single host environment restriction the resulting applications will be the best and most efficient code bases.

And the benefits?

As in other industries the benefits will accrue fast. The whole industry will be able to take advantage both within the industry segment but also cross industry. Ultimately the consumer and the stakeholders in travel will be able to appreciate a significantly faster deployment of consumer and B2B services.

The cost of time needs finally to be included in the equation. In one recent case study, a major US airline was able to reduce the implementation time for new product offers from the typical 24 months to a matter of months or, in some cases, weeks using the existing merchandising capability of NDC 1.0.

Changes to existing offers-modifying the price of seats, or the contents of a service bundle- can now be easily accomplished by airline personnel within minutes, without lengthy change requests or costly Statements of Work. In my view the benefits of NDC extend beyond just pure distribution.

The conundrum being faced by many airlines as to whether they replace their PSS with a slightly newer but no less monolithic PSS hosted system needs to be addressed. Implementing IATA's bold plan INSIDE THE AIRLINE provides for further enhancements and decoupling. In turn this will lead to greater flexibility and less cost.

Final thought

NDC is in reality just a set of schemas. It is not a new platform of software code. In of itself NDC does nothing without commercial adoption and utilization. We must recognize that airlines take a long time to adopt new technologies.

The key to success would normally reside in the GDS companies accepting Resolution 787 just like they have done in other instances such as eticket.

However, NDC is bigger and far more wide reaching. The industry must stop looking inward and focus on the outward threat and opportunity. We need to remove the barriers to an open market system. NDC is the way to go.

It is but one of many tools that have to be employed to take advantage of a business model that has shown itself to be profitable.

In this case, the external threat is far more serious than any the industry has ever faced. Failure and slow speed are not an option because the consequences of both are clear. The airlines and their business partners will be paying a tax/toll far higher than they pay to the GDS companies today.

And Google and company will be laughing all the way to the bank.

NB:-Make money-image via Shutterstock.

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