Value Squeeze

In recent years, the global airline industry has reinvigorated its efforts to save its bottom line from the likes of rising fuel prices and economic travails, which have threatened to significantly weigh down travel demand. The opposing forces of controlling costs while also investing to drive top-line growth creates what Accenture refers to as the “value squeeze,” a convergence of circumstances that make it unusually difficult for companies with strong brand identity to remain profitable.

To address the value squeeze, these companies often look to implement a channel optimization program as part of their overall growth strategy. The concept of channel optimization is when a company seeks to improve how its products and services are applied across a broad customer base. By identifying highly profitable retailers and then leveraging supply chain core competencies to increase the productivity of those retailers, it is possible to generate incremental revenue.

The first step in a channel optimization program is to understand the needs and requirements of a particular channel and its customers. Many carriers today are taking this first step. However, to take the next step, they should consider how their actions affect the ability to deliver a consistent brand experience across all touchpoints as well as the role channel dynamics play in promoting and optimizing their product and service mix. These two elements are essential when considering an omni-channel approach (see related article in Ascend 2012 Issue No.2) that seeks to deliver a seamless passenger experience across various customer touchpoints.

Consistent Passenger Experience

Due to the complexities in air travel shopping, there are notable differences that occur in the passenger experience. With the growing use of online metasearch sites and online travel agencies, a typical brand-agnostic traveler will use multiple websites to research flights and initiate multiple shopping sessions before booking. While shopping, it is likely that this traveler would not consistently receive all the information available to make an informed purchase decision. Likewise, for the corporate traveler who values amenities like Wi-Fi and extra legroom, that traveler may also not be made aware of these ancillary services when booking through a corporate booking tool.

Connecting Buyers And Sellers Of Travel

Airlines Reach More Travel Buyers The Sabre® travel marketplace efficiently enables comparison shopping and buying of travel, giving airlines broader reach to travel buyers, thereby maximizing 

Consequently, to deliver a consistent passenger experience, many carriers have begun work to provide new ancillary and branded-fare offerings to the indirect channel — travel agencies, online travel agencies (OTA) and travel management companies (TMC). The shared objective to provide every traveler with the best service and consistent brand experience is highlighted by World Travel, Inc. President Liz Mandarino.

“Because airline ancillary services have become an important component in tailoring itineraries to the needs of travellers, it is vital for our agents to be able to access these services through our preferred booking environment,” said Mandarino. “Therefore, we were pleased when Sabre Travel Network® introduced its end-to-end process, allowing us to view the price, book and pay for services within our existing workflow. This definitely speeds up the whole process and enables us to offer a faster and more-streamlined service to our clients. We applaud their work and await the addition of other airline customers.”

Moreover, by utilizing ATPCO’s (Airline Tariff Publishing Company) fare filing and IATA’s electronic miscellaneous documents (EMD) payment/fulfillment capabilities, airlines are quickly able to introduce their ancillaries to the broadest travel industry buyers through both direct and indirect distribution channels. And for airlines that wish to distribute their ancillary data directly (non-ATPCO standard) to the travel marketplace, there are open common messaging standards for direct XML API solutions being used to support airline merchandising.

Regardless of the filing approach (ATPCO or direct filed), airlines would want to ensure the broadest distribution of their services to the indirect channel — including metasearch engines, corporate booking tools and third-party developers — enabling access to their ancillary and branded-fare product information. To expand reach by leveraging air content distribution services such as Sabre® AirCommerce Distribution & Merchandising, airlines are provided global and efficient access to the largest travel marketplace of consumers, corporations, travel management companies and global travel retailers.

The Channel Dynamics

Considering the increased complexity in the air travel industry, many travel agencies have improved and expanded their business practices by focusing on providing new comprehensive services to their customers. At the core of every agency’s value proposition is its ability to access a vast amount of inventory from multiple suppliers and accurately aggregate and present all supplier options to travelers in a simple, transparent and efficient manner.

As they recognize the added value they can provide to their customers, travel agencies have developed a strong desire to offer airline ancillary and branded-fares products. They are presented with new opportunities to provide consulting services and more products to their customers while serving as brand ambassadors for airlines. In addition, with the proliferation of choices available in the world of unbundled ancillary services, travelers appreciate and value the services provided by travel agencies. There are, however, unique requirements for travel agencies as it relates to content access, operational efficiency and servicing their customers.

Air Content Distribution Components

Opening The Door To Innovation And Comparative Shopping Systems and processes must work in concert to accommodate the distribution, sales and settlement of ancillary and bundled-fare products.

Although the tides are shifting, the majority of ancillary and branded-fares products are not yet being made available by airlines in the agency’s primary booking channel, the global distribution system (GDS). Travel agencies want to promote and sell the same range of airline ancillary services offered by airlines.

Ideally, airlines’ ancillary content would be integrated into agents’ standard end-to-end workflows to ensure that agencies maintain high productivity. For TMCs, this is essential as it helps keep costs down and there is often a key performance metric tied to their corporate customer service contract. Giving access to airline merchandising content through either ATPCO or direct filed methods and using EMD or direct settlement to process payment improves the agency’s ability to drive merchandising revenue for airlines.

As such, many European carriers recognize that fully enabling their indirect channels is essential to their merchandising strategy.

“Increasing revenue through the sale of ancillary products and services is a major part of our business plan, which is based on a distribution of Alitalia’s services through direct and indirect channels,” Aldo Ponticelli, Alitalia’s vice president of distribution said in a company press release. “Sabre Travel Network and Alitalia have been able to implement with timeliness this effective way to sell ancillaries in the indirect channel that will allow us to reach, satisfy and retain the broadest range of our market.”

Similarly, online travel agencies and third-party developers that do not use the traditional agency workflow functions want access to airline merchandising content. To support this growing demand, technology providers such as Sabre Travel Network continue to expand their portfolios of Web services to support the development and distribution of innovative solutions that can enhance an airline’s brand across all channels.

Impact To Corporate-Managed Travel

The corporate or managed travel market reaction to airline merchandising endeavors has been tepid. Experts in this market are taking cautionary steps until they sort out their overall strategy to address how best to assess and control the impact of these new services on their managed travel programs.

Initial estimates of corporate travel spend on ancillary services vary from 1 percent (source: TRX) to 2 percent to 3 percent of air spend (source: Concur) to as much as 15 percent of total travel spend (source: American Express). Until comprehensive automated processes are in place to help distinguish and control ancillary services (in the shopping/booking path) as well as the ability to track and report (post booking) on ancillary expenses, corporations are using travel policy to define allowable/reimbursable ancillary purchases in an effort to limit exposure to these types of expenditures.

Corporations are investing in technology solutions that offer visibility into what travelers spend on ancillary services. This insight can serve as a point of negotiating leverage with airlines. However, while corporations attempt to negotiate discounts or complementary ancillary services, it is quite probable that carriers will want to redesign contracts to drive both share and ancillary revenue (see related story “A ‘Fare’ Deal” in Ascend 2013 Issue No. 1).

By providing timely and comprehensive details on all ancillary and branded-fare products to the entire distribution chain, airlines help foster a healthy travel marketplace. Using this airline folio information, travel agencies have the ability to provide spend analysis and reporting on ancillary and branded-fare transactions to their corporate customers.

In addition, agencies are tracking the amount of ancillary revenue generated to aid in their own negotiations with airlines. Also, analyses of corporate travel spend on airline merchandising will aid airlines in creating corporate bundled offerings such as premium business packages. And by leveraging travel expense data provided by corporations, TMCs will be better equipped to help their customers manage their travel programs.

Operational Requirements

Every system and process in the distribution chain requires some modification to support airline-merchandising content. In the typical agency workflow, there are myriad system interactions that are also in play from sales through accounting.

Given those agencies that use disparate or manual processes to support their workflow, integration of merchandising content into the agency mid/back-office (QC automation) systems can be a difficult challenge. Additionally, if there is a change, such as a refund, to the simple “buy, pay, use” transaction flow, a complex data-management issue may arise.

Retooling of internally developed scripts and/or robotics may require substantial investments. Therefore, although there have been significant strides in making the necessary changes in the agency point of sale and connectivity, the lack of progress in mid/back office continues to be a concern for many agencies resulting in a slow adoption of new airline products and services until a strategy with a clear return on investment is in place.

Agent Training

An often overlooked yet fundamental requirement is the need to educate the indirect distribution channel. In particular, there is a need to familiarize frontline travel agents with the proliferation of new merchandising terms. There are diverse labels used to describe airline filings, including ancillary services, optional services, à la carte offerings, branded fares, unbundled and bundled fares, fare families, up-selling, cross-selling, etc., with some terms that have different meanings to different entities. Additionally, they need more familiarity with product and service categories airlines are selling and how they are defined and structured.

The good news is there are efforts under way by Sabre Travel Network and other technology providers to help educate and equip agents with the information and tools they need to succeed. Likewise, airlines that proactively engage with their indirect channels recognize the value of maintaining a well-educated force of agent retailers.

Technology Implication At Point Of Sale

It is critical that the agent points of sale contain all essential, updated information about the trip. This includes, for example, trip notification/schedule changes, ticket exchanges, corporate-client-specific information and special services (upgrade seats, meals, etc). As with any technology investment, the decision to integrate new content in the agent point of sale involves a tradeoff between speed, quality and cost.

Moreover, with the ever-changing nature of airline merchandising, customer points of sale (OTA, CBT and mobile) may require some development changes to render this new content. These points-of-sale displays and fare grids must be adapted to contain accurate and complete ancillary and branded-fare content. They also must simplify the shopping and booking process for the traveler. And no matter where the reservation begins, the point of sale must provide consistent service, which may include ensuring corporate compliance with travel policies.

The good news for the indirect channel is that there are inherent opportunities in these points of sale that should be considered when making the decision to participate in the world of airline merchandising. For example, some opportunities include using advertising media to encourage travelers to attach a hotel stay or mobile alerts to remind a traveler of corporate policies when abroad or to redeem a lounge voucher at the airport.

Another intriguing avenue of exploration is traveler self-declared preferences captured via mobile devices that can be used to enhance the entire trip experience. The ability to influence and/or enhance the traveler experience at the right point in the travel cycle is powerful, and with the trend toward true merchandising, the opportunities are limitless.

Bringing Channel Optimization To Life

As observed in the retail industry, companies that have enacted channel optimization programs know their value. Many have experienced enhanced sales growth and reduced operating costs. Making channel optimization happen in the airline industry can be tricky and time consuming: highly worthwhile but not at all geared to simplistic “how-to” recipes. Still, there are several common activities that should be addressed by any airline embarking on such a journey.

As previously mentioned, the first step in a channel optimization program is to understand the needs and requirements of the channel and its customers. This article provides a glimpse into the indirect channel — its unique requirements and customers’ requirements.

Subsequent steps in the program address customer segmentation, aligning service offerings to draw the high-yield customers and continuous review and refinement of the program to sustain a high-performance channel of distribution. With close collaboration and partnership with highly profitable indirect merchandising retailers, airlines improve their likelihood of profitable growth while delivering to their customers a seamless and rewarding travel experience.

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