NDC was it enough? Article Part 2
Part
2 – Commercial Restraint
Cue Music: Stop in the name of love! (Before you break my
heart) http://en.wikipedia.org/wiki/Stop!_In_the_Name_of_Love
(With apologies to Messrs Holland–Dozier–Holland for
abusing the title and first line of their famous song).
In part one of this two-part series on the progress of NDC
we looked at technology, process and enablement. In this part two of the series
let’s address 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 as a whole. 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 GDS’ an average 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.
Current airline commerce is based currently on a model of
legacy homogenous technology. The GDS model (few to many via a portal or
gateway), while fine in 1960s economics, 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
restrictive 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. GDS contracts always contain
clauses peppered throughout the agreements 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,
while 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? In my opinion the industry needs to grow up and demand the removal
of these restrictive clauses. 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 GDS business model, and not necessarily to enable
the business of the airlines and their business partners. I would challenge
anyone to demonstrate in public that the GDS 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 GDS
companies themselves. By locking themselves and their trading partners into an
arcane 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. IE 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
respective app stores provided by Sabre, Travelport and Amadeus, the
contractual terms sound 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 NDC
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.
But what we really all want is this.
(Cue Music - http://en.wikipedia.org/wiki/Happy_Together_%28song%29 )
Timothy
O'Neil-Dunne is a contributing Node to Tnooz (now PhoocusWire) and managing partner at travel
consultancy firm, T2Impact. He serves as the
lead for the airline, aviation and airport practice. He is also a Co-founder of
VaultPAD an accelerator devoted exclusively to travel and travel-related
startup businesses.
Timothy
was a founding management team member of the Expedia team where he headed the
ground transportation and international portfolios, before founding T2Impact in
1998.
He
has worked in aviation and travel distribution for more than 30 years,
including time with Worldspan as head of technology where he managed
international technology services from product to infrastructure.
T2Impact
Blog.
