Connecting with
the customer
How airlines
must adapt their
distribution
business model
2 Strategy&
Strategy&
Chicago
Andrew Tipping
Principal, PwC US
+1-312-346-1900
andrew.tipping
@strategyand.us.pwc.com
Dallas
Jim Bohlman
Managing Director, PwC US
+1-214-746-6500
jim.bohlman
@strategyand.us.pwc.com
Dubai
Alessandro Borgogna
Partner
+971-4-436-3000
alessandro.borgogna
@strategyand.ae.pwc.com
Aditya Agarwalla
Manager
+971-4-436-3000
aditya.agarwalla
@strategyand.ae.pwc.com
Frankfurt
Stefan Stroh
Partner
+49-69-97167-0
stefan.stroh
@strategyand.de.pwc.com
Kuala Lumpur
Edward Clayton
Partner
+60-3-2173-1188
edward.clayton
@strategyand.my.pwc.com
Sydney
Andreas Hilz
Partner
+61-2-8266-0000
andreas.hilz
@strategyand.au.pwc.com
Google
Dubai
Ivan Jakovljevic
Head of Travel, Finance, and
Government, MENA
+971-50-10-40-797
ijakov@google.com
Alessandro Borgogna is an advisor to executives in the aviation, travel, and aerospace industries with Strategy&,
part of the PwC network. He is a partner based in Dubai and leads the aviation, travel, and aerospace practice in the
Middle East. He has more than 20 years of experience across Europe and the Middle East, focusing on strategy and
business planning, performance improvement, organization design, nancial planning, and technology innovation.
Stefan Stroh is an advisor to executives in the travel, transport, logistics, and high-tech industries for Strategy&,
PwC’s strategy consulting business. He is a partner with PwC Germany, based in Frankfurt. He specializes in strategy
development, organizational transformation, and digital strategy and capability-building work for clients in Europe
and globally. He leads the travel and transport practice in Europe, the Middle East, and Africa.
Andreas Hilz is a leading practitioner on airlines, aviation, tourism, and public transport for Strategy&, PwC’s
strategy consulting business. He is a partner with PwC Australia based in Sydney, and leads PwC’s aviation practice
there. He has nearly two decades of experience in the airline and travel industry across all continents.
Aditya Agarwalla is a thought leader in the aviation, travel, and public transport industries with Strategy&. He
is based in Dubai and specializes in aviation. He has worked extensively with leading carriers in the Middle East,
Europe, South East Asia, and Australia, focusing on strategy and business planning, performance improvement, and
organizational design.
Google
Ivan Jakovljevic is the lead for travel, nance, and government for Google in the Middle East and North Africa
region. He works with leading travel organizations, nancial institutions, and government entities to create
innovative, impactful digital marketing and advertising solutions. Before joining Google, Ivan was one of the leaders
of the transport practice at Booz & Company.
About the authors
Contacts
3Strategy&
Three global trends are reshaping travel distribution business
models and threaten to weaken the connection between airlines and
their customers. These trends are: shifting customer behavior on both
retail and business sides, changing dynamics within direct and
indirect sales channels, and the rise of digital technologies. The
consumer trends involve an increasing use of online channels for
search and booking, the use of multiple devices, and the growing
popularity of social media. Meanwhile, changing dynamics within
direct and indirect sales channels — online travel agents, traditional
travel agents, and travel management companies — offer
opportunities and pitfalls for airlines.
Airlines can benefit from this only if they undertake three major
initiatives within a holistic strategy enabled by technology. They have
to transform their travel distribution model in both direct and indirect
channels. They must pursue closer partnerships with channel,
content, and technology players. Finally, they should enhance internal
capabilities (operating model, processes, skills, and technology) to
capture the opportunities of the new distribution trends and so
become centered on customers in their organizational setup. In
particular, airlines need to adeptly manage digital innovation and use
these technologies to improve areas of the business, particularly direct
channel sales, marketing, cross-selling, and dynamic pricing and
inventory management.
Executive summary
4 Strategy&
Airlines should increase their understanding of how consumer behavior
is changing in the retail and corporate sectors.
Changes in retail travel
Retail behavior varies signicantly across geographies, but four themes
prevail globally.
1. The increasing use of online channels for search and booking
2. The use of multiple devices during the research and booking process
3. The growing popularity of social media to share rst-hand
experiences — and the use of these as objective input in the travel
decision-making process
4. The increasing relevance of loyalty programs
1. Increasing use of online channels for search and booking
Within most mature markets, retail consumers typically research
airlines, online travel agents (OTAs), and metasearch websites before
making purchases online. In these countries, the online shop-to-buy
ratio is often above 90 percent. This ratio is lower, though growing, in
emerging markets because of market-specic characteristics: lower
Internet penetration (e.g., in India), lower credit card adoption rates,
issues with online payment security, and less packaging of travel
components owing to the relative lack of supplier and online travel
agent sophistication (see Exhibit 1).
The changing airline customer
Airlines should
increase their
understanding
of how consumer
behavior is
changing in
the retail and
corporate
sectors.
5Strategy&
Source: “Search, Shop, Buy: The New Digital Funnel,” Phocuswright, June 2015 (http://www.phocuswright.com/Special-
Projects/2014/Search-Shop-Buy-The-New-Digital-Funnel); Google, The MENA Travel Book: 2014 in review; Strategy& analysis
Exhibit 1
Travel booking and online adoption varies by region
70%
75%
95%
15%
The U.S. is a matur
e
market with high
Inter
net penetration
and online uptake.
Over 70 per
cent of
consumers r
esearch
and finalize flight
pur
chases online.
The online conver
-
sion ratio for
shop-to-book is
nearly 100 per
cent.
In Australia there is a
maturing travel
market with strong
trends in online
research and
booking. The online
shop-to-book
conversion rate is
around 95 percent,
slightly behind the
U.S. and U.K. The
online share of
revenue r
emains high
because of concen-
trated supply and
strong airline direct
channels.
Western Europe has
varied online
purchasing. Online
uptake is strong in the
U.K. and France with
ratios of shop-to-book
near the U.S. level,
but only 75 percent in
Germany because of
longer and complex
itineraries and lower
credit card usage.
In the Middle East
there is growing
Internet penetration,
with a rapid rise in the
use of mobile. Around
15 percent of all
Middle East travelers
use only mobile to
access booking sites.
In India, Internet
access and broadband
penetration lag behind
other markets.
However, there is high
online penetration in
the air travel segment
because of the
simplicity of products
and price transpar-
ency. Price is a key
driver of uptake, and
online channels are
well aligned with the
market.
88%
In China, consumers
have high online
adoption rates because
of strong economic
growth and broad
Internet penetration.
The online shop-to-book
conversion rate of
around 88 percent is
higher than that of
Germany.
6 Strategy&
Mobile is increasingly important, although most online research and
booking still typically occurs on the desktop. For example, mobile
accounted for 6 percent of airline website gross bookings in the U.S. in
2013, and is expected to grow to 17 percent by 2016.
1
Meanwhile, the
use of mobile and tablets for shopping, as opposed to buying, is
accelerating even faster in emerging markets — in which the desktop
buying wave will mostly be skipped as consumers move straight from
oine to mobile/tablets (see Exhibit 2).
2. Use of multiple devices during the research and booking process
As mobile gains traction, airlines, OTAs, and metasearch providers such as
Expedia and Hipmunk are catering to the increasing numbers of “multi-
device travelers” (those who use desktops, smartphones, and tablets) by
oering cross-platform features. These allow users to pick up and continue
their history and searches across devices and operating systems. Expedia’s
Scratchpad and Hipmunk’s Anywhere connect the same traveler across
multiple devices to provide a seamless digital experience. Airlines mostly
lag behind in catering for this.
Source: Google Consumer Barometer, 2014–15
Exhibit 2
Consumers tend to use tablets and phones, singly or in combination, to research rather than
to buy
Online shopping (research) Online booking (purchase of leisure flight)
58%
45%
49%
69%
78%
73% 73%
20%
19%
13%
18%
36% 34%
23%
17%
23% 21%
4%
U.S.UAE U.K.GermanyAustraliaChinaIndia U.S.
UAE
U.K.GermanyAustraliaChinaIndia
81%
76%
78%
97%
92%
90%
14%
14%
15%
93%
6%
6%
7%
10%
4%
3%
5%
Computer
Tablet
Sm
artphone
Other
3%
4%
2%
3%
1%
2%
1%
1%
4%
3%
3%
2%
2%
2%
7Strategy&
3. Growing popularity of social media
There is increasing use of social media to share experiences during trips,
mostly via mobile. In emerging markets in particular, where a greater
proportion of travelers tends to be young and tech savvy, social
networking is especially popular and is mostly via mobile. Seven in 10
Chinese leisure travelers shared a travel experience online in the past 12
months. Online sharing among Brazilians and Russians was also well
above more mature markets. People increasingly view this shared content
as unbiased travel information they can use to inform their own travel
decisions. For this reason, partnerships between social media platforms
and travel suppliers will become more common as a way to integrate
social media into the sales and service channel. For example, Facebook
Messenger allows KLM Dutch Airlines’ customers to check in, receive
ight updates, and change their travel itineraries from within the app.
4. Increasing relevance of loyalty programs
Customers are increasingly using loyalty programs as a means to directly
engage with airlines. The interaction has evolved beyond the traditional
use of points to earn and redeem seats. Instead, these programs have
become platforms for customers to provide the airline with their
preferences and to engage with them for a range of benets beyond seat
redemption; for example, lifestyle memberships and rewards from
everyday spending through multi-brand coalition loyalty programs.
Airlines can benet from loyalty programs because they reduce the cost to
capture customer insights, but only if airline and loyalty program
communication is well integrated. In addition, loyalty programs are
benecial because business customers prefer loyalty programs to reduce
travel costs, and they are a way of rewarding employees or redeeming
non-travel expenses. In response, many airlines now have loyalty oerings
for small and medium-sized businesses (SMEs) to create “stickiness” (i.e.,
customer loyalty) in a highly competitive market segment. Etihad, for
example, has launched Business Connect, which awards frequent yer miles
to passengers and allows the business to earn loyalty points redeemable for
ights, upgrades, or even cash.
In the corporate market, customers request the same ease of travel as in
the retail market. Many businesses (e.g., large corporations) are
demanding greater cost eciency and they are more strictly enforcing
their travel policies. Their employees are simultaneously demanding
the same ease of use they have become accustomed to for their leisure
travel. Travel management companies (TMCs) are responding to these
trends by oering solutions that blend policy management, reporting
requirements, and ease of use. For example, TMCs are developing
front-end mobile applications for approvals, requests, and schedule
alerts, and monitoring travel expenses. At the back end, TMCs are using
enhanced predictive and reporting capabilities.
There is
increasing
use of social
media to share
experiences
during trips,
mostly via
mobile.
8 Strategy&
Besides consumer behavior, a second major trend aecting airline travel
distribution models is the changing dynamics within sales channels.
Globally, direct (airlines’ websites) and indirect (OTA) online channels
are forecast to grow the fastest. However, traditional channels continue
to occupy important, protable niches (see Exhibit 3).
Changing dynamics in sales
channels
Exhibit 3
Traditional travel market sales channels are resilient
Global travel market, by channel (US$ billions, % of total, CAGR %, 2013–2020)
Note: OTA = online travel agencies, TA = travel agencies, TMC = travel management companies.
Source: TechNavio, Global Business Travel Market 2014-2018, 2014 (http://www.technavio.com/report/global-business-travel-
market-2014-2018); Global Travel Agencies Market 2015-2019, 2014 (http://www.technavio.com/report/global-travel-agencies-
market-2015-2019); Phocuswright, Global Online Travel Overview, Third Edition, 2014 (http://www.phocuswright.com/Travel-
Research/Market-Overview-Sizing/Global-Online-Travel-Overview-Third-Edition); Strategy& analysis
TM
C
TA
OT
A
Dir
ect online
Dir
ect offline
5.6%
2020
2,895
17%
34%
17%
28%
4%
2015
2,209
16%
40%
14%
23%
7%
2013
1,983
16%
43%
13%
21%
8%
CAGR
(2013–2020)
9.9%
9.5%
1.8%
7.4%
4.7%
9Strategy&
The direct online channel is expected to remain the fastest growing in
terms of sales and interaction. Leisure customers will use the airlines’
proprietary websites whereas businesses, particularly in the SME
segment, will use intranet portals to connect directly with airlines. SMEs
will also use intermediaries with global distribution systems (GDS) for
non-contracted ights. Other intermediaries, such as travel agents
(particularly the non-IATA [International Air Transport Association]
agents) are increasingly making use of technologies to bypass GDS
entirely and connect directly with airlines’ inventory systems.
For airlines, direct online sales are usually the lowest-cost channels and
an ecient way to gather customer data. Airlines can analyze this
information to identify trends and make personalized oers. The low-
cost carriers, in particular, are eectively using the direct online
channel to increase or cross-sell ancillaries and related products and
services, such as a preferred seat (aisle, bulkhead, etc.), meals,
baggage, or in-ight communication services. With the basic airline seat
becoming an increasingly commoditized product, these ancillaries will
become important to drive protability.
For consumers, the direct channel oers the most comprehensive view
of everything an airline oers. This channel also allows a more
personalized transaction, where previously set prole information can
pre-populate parts of the booking ow (such as meal selections, choice
of seats, etc.). Interestingly, a recent study found that consumers
“trusted” airline direct sales channels for booking more than they did
OTAs and metasearch, often by substantial margins.
2
Airlines have an
opportunity to build upon this trust and strengthen the relationship
further by oering solutions that personalize travel research and
booking across multiple touch points in the direct online channel.
However, airlines will achieve this only if they organize their customers’
data well enough to provide personalized content that is more valuable
to customers than the ease of comparing ight times and prices in the
indirect channels.
Airlines have
an opportunity
to build upon
this trust and
strengthen the
relationship
by oering
solutions that
personalize
travel research
and booking
across multiple
touch points in
the direct online
channel.
10 Strategy&
The future of
direct online
is more than
selling an
airline’s own
content; it is
about oering
all the content
travelers need
for their entire
journey.
The future of direct online is more than selling an airline’s own content;
it is about oering all the content travelers need for their entire journey.
If airlines fail to create this kind of seamless travel/customer
experience, they will lose direct ownership of their customers.
Consumers will turn to alternate channels (e.g., metasearch or OTA
sites), and airlines will become mere production engines.
Indirect channels’ common use of GDS makes it difficult for airlines
to differentiate their products. As a result, consumers’ buying
decisions are heavily influenced by price, which reinforces the trend
toward commoditization. However, the New Distribution Capability
(NDC) initiative by IATA is an effort to remedy this problem by
offering a new XML-based messaging standard to give travel agents
richer content via GDS. This will enable the airlines to make
customized offers via travel agents and help bridge the gap between
the commoditized information currently available to the agents and
the full content available on the airlines’ websites.
Given the prevalence of GDS in the industry, airlines are likely to seize
on any opportunity to integrate or enhance their ancillary
merchandising capability with the GDS. For example, in its partnership
with Travelport, Air Canada allows Travelport Agencia™ users access to
all of Air Canada’s à-la-carte fare and Flight Pass products, as well as
product attributes. This includes its cheapest category, Tango fares,
which are not available on any other GDS. Interestingly, one major
global carrier recently introduced a fee on all bookings made via GDS, a
fee not levied on bookings made via the direct channels. Although this
policy has led to some short-term pressure on sales, it is expected that
other carriers will follow in a move to reduce GDS costs unless other
ways can be found to reduce distribution costs to the airlines. If more
carriers were to adopt such a strategy more consumers would favor
direct channels over indirect channels as they would oer lower fares.
11Strategy&
Online travel agencies will continue to grow organically by moving into
less-mature markets, capitalizing on their brand, ease of use, and
scalability. Moreover, they will maintain their dominance in the hotel
sub-vertical over airlines given the fragmented and complex nature of
hotel accommodation. OTAs will also expand through acquisitions.
There have been a few recent examples of this type of activity:
• Expedia invested in Orbitz (to build a multibrand portfolio), Travelocity
(to expand market share), Wotif (to acquire Asia-Pacic hotel market
share), Trivago (to have a metasearch capability in the EU), and
Homeaway (to enter the vacation and rental market as a form of
indirect competition with the online accommodation channel Airbnb).
• Priceline invested in Open Table (to strengthen its restaurant
oering), Ctrip (to gain a foothold in Chinese OTAs), and Kayak (to
have a metasearch capability); and the company launched
Bookingsuite (a booking and property management system for hotel
owners built through the acquisitions of Buuteeq and PriceMatch).
OTAs have other advantages over their competitors. A recent study found
that during the research stage, in most countries, consumers favored
OTAs as the sites with the best prices over metasearch or suppliers’
websites (though, consumers perceive that it is safer to book with the
supplier than an OTA). Consumers rated OTAs the highest in terms of
both price availability and breadth of options for ights and hotels.
12 Strategy&
Traditional travel agencies (TTAs) will continue to lose market share at
the global level, but they will stay relevant by focusing on oerings with a
strong service angle, specialized oerings, and selling third-party
ancillaries. This is particularly the case for luxury and cruise travel, a
market in which travelers want expertise and a “real person” to look after
their specic requirements. Similarly, they will remain relevant in
emerging markets such as China, India, and the Middle East, in which
many rst-time middle class travelers prefer agent-organized groups and
a personal relationship with an agent. One other niche is travel retail
service to older travelers who are less technology adept or willing to use
modern channels.
Travel management companies (TMCs) are expected to remain
dominant in the business travel market. However, more consolidation can
be expected with the big four — American Express, BCD, Carlson
Wagonlit, and HRG — remaining dominant. TMCs are also taking
advantage of new technologies to expand their oering and stay relevant
in light of changing customer preferences. For example, they are:
• exploiting big data to perform travel policy checks and perform
expense management
• promoting traveler eciency through mobile apps
• integrating and reselling corporate self-booking tools
• expanding dynamic pricing capabilities to maintain margins
For airlines, the TMC channel provides important access to highly
protable corporate customers. Suppliers can exploit the increasing usage
of corporate self-booking tools and dynamic pricing to win more business.
13Strategy&
Disruptive distribution models are adding more complexity to this
distribution landscape and are expected to be the most likely catalysts
for change. These models are based on emerging technologies that
savvy customers are quick to embrace. For example:
• TripAdvisor is blurring the lines between the classic OTA and
destination content providers. It oers a reservation platform, an
application to secure advance payments made when booking a
homestay, and has announced partnerships with Marriott, Hyatt, and
Priceline for its instant hotel booking platform.
• Apple Passbook currently manages a customer’s itinerary and may
soon integrate with iPay, ADP’s mobile payment platform.
• Google’s new search product “Destinations on Google” helps discover
and plan the next vacation through Google Search on a smartphone.
It integrates information about places with Google Flights and Hotel
search, and presents available ight and hotel prices instantly.
• Other Google Search products, including Google Flights and Hotel
Ads, move users more quickly from intent to action. For example,
Google Flights uses an algorithm that trades o price, duration,
stop-overs, and even amenities such as baggage fees.
• Airbnb has disrupted the industry by building a marketplace where
individual property owners can oer accommodations directly to a
wide online audience.
14 Strategy&
A wave of new digital technologies continues to provide strategic
opportunities in the field of airline distribution.
Marketing
The lines are blurring between sales channels and marketing platforms
(e.g., OTAs). Search engines, social media, crowd sourcing, and mobile
are redening the consumer journey, particularly in the “discover” and
“research” phases. Consumers can now book directly from travel
metasearch portals that were once strictly for research. Moreover, as
the consumer journey becomes more digital and complex, there are
more opportunities for suppliers to market across multiple touch points.
Emirates, for example, uses Instagram posts that tout premium
products and encourage consumers to imagine dream destinations.
Finding the right touch points between social media and direct sales
channels will be important for airlines.
New digital technologies also allow airlines to reach consumers in real
time during their research phase. Airlines can further personalize the
travel experience. TAM, for example, used Facebook proles to
personalize inight magazines placed on the seat of each passenger to
celebrate the 35th anniversary of its São Paulo to Milan route. Each
cover bore a dierent passenger’s photo and name, in accordance with
the seat assignments, and content was geared toward each individual’s
interests and life experiences. Airlines need to improve their specic
destination content and inspirational media if they are to stay relevant
in the search/inspiration part of a consumer’s travel booking journey.
Direct channel
Airlines have a powerful array of digital platforms at their disposal that can
help enhance direct revenue channels, while reducing reliance on indirect
channels (e.g., GDS, consolidators, and tour operators). On their websites,
airlines can change the search paradigms available to consumers from
More digital opportunities
15Strategy&
route-based searches to interest-based, theme-based, and map-based
search experiences. By improving their landing pages to engage users and
capture those directed from search engine pages, metasearch pages, and
others, airlines can make the most of the direct channel.
Cross-selling and up-selling
Emerging technologies also provide a platform for airlines to improve
their merchandising capabilities, and to sell additional travel-related
products and services (e.g., hotel stays) across both direct and
indirect channels with and without GDS connections. This is because
passengers are an airline’s greatest asset as they can be sold additional
airline and non-airline products. These new technologies offer greater
flexibility to set up and manage business rules, as well as high-margin
ancillary products and more varied fare options. Here again, airlines
can personalize offers based on frequent flyer information — such as
status, flyer profile, past behavior, and so forth (see Exhibit 4).
Exhibit 4
Airlines will benet from merchandising and personalization capabilities
Note: GDS = global distribution systems, ATPCo = airline tariff publishing company.
Source: Strategy&
Standard
Enhanced merchandising
(no personalization)
Enhanced merchandising
(with personalization)
Bags
Fare
up-sell
Other
ancillary
Seats
- Flat charges as filed in ATPCo, e.g.,
fixed fee for extra legroom, no
differentiation on frequent flyer
status
- Flat fee based on number of
checked bags. Differentiation based
on destination but unable to charge
based on booking class/frequent
flyer status.
- Difficult to display “fare families,”
combination fare/simplified rules
- Limited ability to offer items not
supported by ATPCo
- Able to apply different business
rules to the ATPCo filed fares, e.g.,
by type of seat (aisle vs. window),
flight, aircraft, booking class, etc.
- Able to apply different business
rules to ATPCo filed fares
- Fully supported on condition airline
has access to an ancillary platform
that can feed requisite data into the
system
- Able to offer ancillaries, e.g., special
lounge, priority boarding, stopover
tour packages, “meet and greet”
- Able to vary offer based on
passenger frequent flyer status,
e.g., waive extra legroom charges,
offer upgrades
- Able to vary based on passenger
profile/preference as primary
criteria. Secondary criteria include
destination, class, and fare.
- Manage fare rules to protect
inventory for high-status flyers
- Personalized offers and integration
with frequent flyer programs so
passengers can buy ancillaries with
money, points, or both
16 Strategy&
Dynamic pricing
The ability to analyze big data increasingly allows airlines to predict
with a high degree of certainty when a known passenger will be ying
next, to where, and what his or her travel preferences are. For example,
airlines can use the customer data gathered in airlines’ direct channels
— e.g., customer segment, seasonality of ight, and ight timing — to
make better and more targeted oers to customers. Furthermore,
airlines can integrate this tailored pricing with marketing and
promotions in real time to optimize bidding. Fully realized, dynamic
pricing could usher in a new era of ne-tuned channel distribution
strategies.
Loyalty
Loyalty programs are the main tool for airlines to collect a wide range
of customer data. Supported by technology and increasing online
penetration, loyalty programs can be the backbone of airlines’
customer data centers. Coupled with analytical tools, these programs
allow airlines to remain closely engaged with their customers,
allowing them to build personalized offers, tailor a marketing
campaign to specific profiles, and drive the sale of ancillary products
and services. Moreover, with airline partnerships on the rise,
harmonized loyalty programs could become a key differentiator in the
marketplace.
17Strategy&
Staying on customers’ radar
To become a benefactor, not a victim, of evolving customer behavior on both
retail and business sides, of the changing dynamics within sales channels,
and of the rise of digital technologies, airlines need a holistic travel
distribution strategy that is underpinned by the smart application of
technology. Such a strategy has three main focus areas:
• Transform the travel distribution business model
• Pursue deeper partnerships with channel, content, and technology
players
• Enhance internal capabilities (operating model, processes, skills, and
technology) to engage eectively with customers to capture the
opportunities of the new distribution trends
Transform the travel distribution business model
Airlines need to redefine their travel distribution business model for
direct and indirect channels by first identifying the key challenges
(e.g., load factor, yield, and cost of sales) by cabin, by country, and by
channel, and then clearly understanding the travel distribution
environment in each country. Armed with this information, they can
address gaps in revenue performance and set priorities across direct
and indirect channels as well as loyalty programs, in order to use
distribution as a targeted tool to overcome weaknesses in their
commercial performance.
In any case, airlines need to focus on making the direct channel very
attractive for both business and leisure customers. In the leisure segment,
airlines need to showcase their products and services, and exploit big
data capabilities to deliver personalized and seamless service across
multiple platforms and devices. In the SME segment, airlines need to
deploy direct connect portals to bypass the GDS and showcase tailored
products and fares. Low-cost carriers are usually more advanced in this
regard. Therefore traditional carriers that have not yet prioritized their
direct online channel suciently, or have been hampered by the diculty
of connecting legacy IT systems to state-of-the-art websites, will benet
from improving the value of their online game.
18 Strategy&
In the various indirect channels, airlines should assume that GDS will
remain integral for the foreseeable future given the fragmented
nature of intermediaries, the access GDS provides to inventories
across multiple suppliers, and the significant investment in GDS many
travel players in the industry have made. Thus, airlines should partner
with GDS and develop technology solutions that improve their
merchandising and personalization capability to cross-sell/up-sell
through GDS-enabled indirect channels, and thereby avoid product
commoditization. In the managed travel segment for large corporate
clients, airlines should partner with travel management companies to
deploy corporate self-booking tools. Airlines can use these tools in
conjunction with any preferred carrier/tariff agreements with its
corporate clients to encourage a preference for the airline and to help
enforce corporate travel policies.
Airlines should also use loyalty programs, in both the leisure and business
segments, as a distribution tool for targeted oers and as a means of
getting to know customers’ travel needs exceptionally well. They can use
loyalty programs also to avoid commoditization by keeping customers
engaged and loyal. Loyalty programs usually work across channels in
inuencing customer behavior and create “stickiness,” but the ability to
connect and engage is highest in direct channels.
Pursue deeper partnerships
Traditional commercial arrangements between airlines and channel
players often lack opportunities to exploit synergies and align strategic
objectives. In the future, airlines will need to craft partnerships that
dierentiate them and help them maintain pricing power and develop a
stronger bond with retail and corporate customers. New distribution
models will involve strategic partnerships with channel, content, and
technology players that purposefully identify and leverage synergies
and align objectives. Distribution players can benet from those
partnerships by taking advantage of the airlines’ brand awareness and
quality in certain markets, as well as access to the airlines’ customer
base, especially those who are loyal customers.
19Strategy&
For example, airlines can form equity partnerships with traditional
travel agencies to target niche markets and customer segments in
markets such as the Middle East, which remains a high-touch/high-
yield leisure market. In other markets such as Germany, Japan, and
India, tour operators provide access to a large volume of customers
who prefer package travel.
When possible, the airlines should link agents with the airlines’ inventory
system using direct connect technologies. In addition to reducing GDS costs,
this will help bypass low-yield consolidators and allow an airline to showcase
its products and services to dierentiate itself. These solutions are also being
oered by the GDSs themselves; for example, one large technology player in
the travel industry has developed a direct connect platform that allows an
airline to connect directly with an agent via a portal.
Meanwhile, equity partnerships with TMCs give airlines access to
profitable corporate customers. The self-booking tools help enforce
corporate travel policies, and dynamic pricing capabilities help
establish the airline as a company’s preferred choice. In addition,
airlines can partner with technology providers to stay abreast of
evolving trends and be responsive to new technologies. For example,
airlines can leverage technology partnerships to enhance their
merchandising capabilities as IATA progresses with its NDC initiative.
Through its dedicated ground and travel services business, dnata,
Emirates has pursued strategic investments across specialized travel
agencies and TMCs. The acquisition of Travel Republic and Gold
Medal Travel Group (the latter also offering it access to the OTA
Netflights.com, and the travel brand Pure Luxury) has strengthened
Emirates’ position in key markets and segments.
Airlines can also partner with OTAs to gain access to high-growth
customer segments across multiple geographies. Since 2011, AirAsia
and Expedia have operated a joint venture aimed at improving
AirAsia’s distribution reach on Expedia’s storefronts. Of course,
airlines should carefully plan any partnership decision and base it
upon the intent to solve strategic travel distribution issues. The
partnership should also be beneficial to both parties.
20 Strategy&
Enhance internal capabilities
Only those airlines with sucient capabilities within this new world of airline
travel distribution will be able to seize these opportunities. The others will
experience increasing challenges and will nd it harder to retain meaningful
interaction with their customers outside of the immediate day of travel, and
will struggle to maintain sustainable prot margins.
As mentioned before, a range of partnership opportunities exists. However,
airlines will need to build, enhance, and retain a signicant spectrum of
capabilities if they do not want to hand over the key to their customer base to
online distribution partners. A capable airline will therefore need the right
level of investment in the following capabilities:
• Customer knowledge: Integration of all pieces of customer data into a
holistic view of the customer, allowing personalized oers, products,
and distribution services
• Commercial capabilities: Ability to transform customer insights into
the appropriate customer products and services — and market them
successfully
• Digital channel capabilities: Market leading digital oerings, across all
direct channels, that link product sales and information with far-
reaching access to relevant travel information and preferred social
media channels — all characterized by ease of use
• Loyalty oering: Attractive, value-adding loyalty oerings that keep
customers engaged so that they alter their booking and travel
behavior in favor of the airline
• Technology environment: A technology landscape that enables the
eective use of direct channels without major constraints — which
means moving away from the wrong enterprise architecture and old,
or inadequate, technology platforms and applications
21Strategy&
Of equal importance, however, are the right operating model,
organizational setup, and culture. These allow the airline to deploy its
capabilities in a holistic, customer-centric, and eective manner. This
would be in contrast to too many airlines that have created silos of
functional excellence in various parts of the airline that lead to no
noticeable benets for the customer. Success depends upon a:
• Customer-centric organization: Historically, marketing, sales,
distribution, pricing, data analytics, strategy, IT, and loyalty
programs have been separate functions. Often, especially in the case
of loyalty programs, they have been dierent business entities. A
closely aligned operating model that is centered on the customer can
break functional silos and enable a holistic and well-informed view of
the customer as an individual.
• Coherent customer strategy: Successful customer-centric businesses
operate around a coherent customer-centric strategy that is known to
all parts of the organization. This ensures that all of an airline’s
employees understand their specic contribution to “knowing the
customer.”
• Customer-oriented service culture: Organizations that have managed
to remain on the forefront of customer service excellence over
extended periods of time possess an inherent desire to delight the
customer. For airlines to be visible to their customers, this means that
they will use the above-mentioned capabilities to generate customer
insights that they will translate into action every day.
22 Strategy&
Conclusion
Airlines need to identify the key opportunities and challenges from
the new distribution environment, as well as the scope of their own
internal capabilities, and put a plan in place to close any gaps and
strengthen their travel distribution models. They can benefit from the
disruption of travel distribution only if they build these capabilities
and execute them in a holistic way with a smart usage of leading
technology. In most cases, this will require strong partnerships with
channel, content, and technology suppliers. Those airlines that master
the new environment will be closer to their customers and will sell
more in less competitive, direct channels than ever before. Such
proximity to the customer will minimize the risk of dropping off the
customers’ radar and losing them to the emerging travel distribution
disruptors. Instead, the emerging and new travel distribution players
will seek partnerships with airlines that succeed at this challenge,
while diminishing the other airlines to pure transport providers.
23Strategy&
Endnotes
1
“U.S. Online Travel Overview, Fourteenth Edition,” Phocuswright,
December 2014 (http://www.phocuswright.com/Travel-Research/Market-
Overview-Sizing/U-S-Online-Travel-Overview-Fourteenth-Edition).
2
“Search, Shop, Buy: The New Digital Funnel,” Phocuswright, June 2015,
page 38 (http://www.phocuswright.com/Special-Projects/2014/Search-
Shop-Buy-The-New-Digital-Funnel).
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