23 June 2012

IATA Wakes Up To Benefits Of Distribution

In Beijing last week, at IATA's AGM the announcement of its NDC (New Distribution Capability – see press release here) initiative does seem to hint at fabulous things to come but before we all get carried away, it’s time to consider at least some of the major implications of IATA making this move.

The tablet toting Tony Tyler, IATA’s General Director and CEO, has thought about this problem but probably not spent much time looking at the implications of the revenue bucket system; he described the GDSs as 1970s technology. In reality it’s from the 1950s. I recall a major carrier's CIO lamenting that IT's biggest problem is that there were only 23 usable letters in the Latin alphabet for airlines to use. We have a really arcane system of revenue management that makes no sense to man nor beast, except for one thing - it is designed to obfuscate the price.

Today's connected and social world makes the principle of obfuscation less attractive, something the legacy carriers have yet to cotton onto. Their efforts to do away with it have been met with derision and failure but perhaps now is the time to rethink everything. The core architecture of PSSs and GDSs have changed little in many, many years. The elements of one way messaging and handling were models of efficiency in the 1950s. Today with anywhere/anytime/always on, this doesn't hold true. Other factors are more relevant. Consumers are fatigued at being gamed by the systems. They trust little and engage in practices that are a direct result of the lack of trust engendered by the airlines and their games. Why else would the average consumer search 22 sites (US figures), which is increasing? Each monetisable transaction for an airline is at the incredible 1,000+ interactions (and rising). This is hardly the model for efficiency or value to either end of the chain but a cash cow to the infrastructure in the middle.

While the airlines must accept their obfuscatory principles as the core of the problem, their chosen instruments of implementation – namely PSSs and GDSs - have become the gatekeepers of the arcane model, as evidenced in their resistance to change by their contracts to airlines and intermediaries alike.  IATA is to be applauded for taking a stand for change. Tony Tyler is definitely singing a different tune from his brash Italian predecessor. The message in his speech is one of "partnerships" rather than confrontation.

But the problem remains. His wish for the GDS’ to join with the airlines in making this progress flies in the face of their cash-cow business model. Amadeus's company reports recently have started to hide the yield they get from both airlines’ IT and the GDS. Surprisingly the former is generating more profit yield than the latter. However any business that is making profits in excess of 40% when the stakeholders are struggling with a 7% target they have never achieved smacks of advantaged position, which the Spanish Company's shareholders love but customers, and ultimately consumers, hate.

A further challenge exists in that the processes of IATA are themselves arcane and not suited to the speed of business as in other sectors of the economy. It was against this backdrop that the US airlines founded Open Axis. (www.openaxisgroup.org), nominally designed to focus on driving faster change and adoption of airline-specific messages in the travel community. The OpenTravel Alliance (www.opentravel.org ), the broader industry W3C body was considered not attractive enough for the airlines. However, while the two organizations have grown closer together in recent months, IATA's move to take over the standards brings a third party to the game might be a spoiler. Don’t get me wrong – I am a huge supporter of standards. But this process of trying to get the GDSs into the tent has failed before and will fail again. In my view unless the airlines put muscle behind the commercial model the effort to bring about change in standards will be window dressing.

Not all parties are waiting for this new initiative. Privately many airlines feel this is a total waste of time. A few big airlines believe that they can exert control over the GDS’. Singularly they cannot and collectively they have proved to be incapable of working together There is palpable fear that the GDSs can and will cause the fragile airlines’ bottom lines damage unless the airlines play nice with the GDSs. What is missing from this debate is that the consumer doesn't care. He cannot understand why this complexity exists. He laments the lack of transparency.

What is likely to happen? The new standards groups will indeed get formed soon. And will take years (note the plural use of the word) to bring about any standard that is ratified and even more years before they are adopted/implemented. By this time the subculture of disrupters funded by venture capital will move aggressively to undermine these efforts. Airlines will lose their initiative (more accurately fail to regain initiative) and will have to find new players to blame.

The GDSs are slowly sinking. Mr Tyler's numbers he presented in his speech are off. Our analysis indicates that GDS distribution for ALL airlines is now around 40%. He claims 60% for the IATA members. If that is not a telling statistic then I don't know what is! Both Open Axis and OpenTravel will happily continue their cooperation with new tools that will result in the technology community moving ahead (and faster) without the ponderous IATA committee system.

The longer it takes to get change in place the fatter the GDSs’ bank accounts will become and the poorer the legacy carriers will be as a direct result. If IATA doesn't see that and make a radical change in how they approach the problem (particularly the commercial model), then I for one will be a naysayer in this effort. I do hope for the industry's sake that I am wrong. At least one GDS has developed a scenario that allows for the collapse of the GDS model in favor of their PSS charging model. And they like what they see. Let's hope the airlines wake up and see the issues for what they are.

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