Who serves who?

First we had airline owned travel agencies...then the CRS was invented. The CRSs were eventually divested by airlines....then along came the Internet. At first airlines wanted to use the Internet to regain control of their distribution, however they realized that third-parties were too valuable and had to find a compromise. Now it appears as if the status quo is over.

The third-party, Kayak.com, has removed American Airlines from their inventory as a result of a dispute where Kayak was sending AA customers to purchase their tickets. This makes one wonder: who serves who? Is Kayak dependent upon AA, or is it the othe way around? If this behavior continues it only solidifies the notion that the industry is a commodity. If passengers continue to patron Kayak for their low fares and loose AA as an option, it only proves that airlines have a real battle to boost their brand. Although many can name the largest and most successful airlines, we know that price is nearly always the determing factor when choosing a carrier. If strengthening a brand is so vital then distribution is one of the key elements, since it is the link to the end consumer.

Now the next element that needs to be strengthened is the service once the customer has purchased a ticket.

Is price the only deciding factor?

The airline industry is elastic. The product is perceived as a near-commodity by a large portion of the customer base. Many passengers are not loyal to an airline, but rather to their frequent flyer miles. Some passengers hardly even know the airline they are flying with, the type of aircraft, and probably don't even care. People are flying to go somewhere and not to actually fly. This is the air travel experience, not the cruise travel experience. When people book a ticket using a search engine, such as Travelocity or Expedia, they are presented with options ranked according to price and can usually be sorted according to other factors such as total travel time, connections, etc. Now a new website will launch soon which will incorporate subjective criteria in the search process. The website, InsideTrip, has 3 factors that are used in the booking process: speed, comfort, and ease. Within each factor there are 4 rankings. So, InsideTrip will basically use 12 criteria when searching for flight options for passengers. This is an interesting idea because there are passengers who do want to fly on a larger aircraft, there are passengers who want to consider on-time performance in their decision, there are passengers who value the lost luggage metrics. These are what many airlines use as selling points aimed at their customers, however that message is diluted among all the other messages that float around. Now InsideTrip will incorporate these metrics in a trip search.

My only comment is that passengers may find this worthwhile, however since it is a highly elastic product and market they may still select the lowest fare...as long as the airline gets them there near the time they would like to arrive. Is flying with Alaska, who may have a great baggage handling record, really worth $100 more than United? Many passengers may think yes, but United doesn't loose my luggage every time so I'll stick with United and save that $100 for the cab ride into downtown. Considering that InsideTrip is linked into Orbitz the site will only present users with more ranking criteria than Orbitz then they might as well use InsideTrip.

Take my money...please

If a firm has a great, great product but payment options are a hindrance then customers won't put up with the hassle of buying. Cash is a great liquid payment option, but it sure doesn't work online, and that is how the majority of travelers purchase airline tickets today, either through an airline's own website, a consolidator (i.e. Orbitz), or a travel agent. Cash payments tend to also raise a red flag in today's security-hyped times. That is where airlines have to find some other distribution and payment options. We have seen some creative solutions by airlines that adapt to the local culture. Air Asia and other Asian LCCs allow customers to buy tickets at 7-11s, ATMs, and video stores. Why? Because these are institutions that locals use a great deal and trust, and their tickets are priced such that customers of these institutions are the ones that airlines want to get a hold of. In Europe we have heard of Air Berlin and SAS discuss distributing their tickets via supermarkets. Research indicates that the woman in the house holds a great deal of sway in deciding where the family will go on vacation, and the woman tends to be the lead shopper for food; so placement of travel products in their location is ideal. Make it available and some may come.

It looks like Southwest has introduced a new payment option for its patrons, Paypal. Click here. Paypal is in essence an electronic bank account that can be used to make purchases online and does not require customers to enter sensitive information on a slew of websites. Rather, customers can link their bank account to their Paypal account, which instills trust in online purchasing. Northwest Airlines recently made the same option available to their customers. This a great way for these airlines to expand their reach by making payment for their services simple and inviting. As with all innovators, this is something new that maybe only tech-freaks will utilize in the beginning, but as online retailing expands more and more these airlines will be well positioned to benefit.

Paypal was purchased by online auction house, Ebay, in 2002 and offers travel solutions on its site. I was unable to determine if genuine travel auctions are offered by Ebay, but this may be a natural transition for airlines like Southwest and Northwest. However, this distribution method has contributed to the commodization of the airline industry and I would imagine that airlines would be hesitant to going down that path after their experiences with Priceline. That may be a future topic for this blog. However, if these airlines strike a deal by distributing their seats via Ebay, bypassing the auction function, may be an interesting distribution method. Definitely something to keep an eye on.

Southwest is a changin'

Southwest Airlines, that stable, low-cost airline that sticks to what it knows best and is consistently rewarded financially for doing so, has decided to make a sweeping change to its distribution policy. The airline has traditionally relied on its own distribution channels, which today means the Internet, which accounts for nearly 70% of all tickets sold. However, the airline has stressed that it is finding it increasingly challening to meet its targets and now it wants to get some better paying passengers into its seats. That means business travellers. Business travellers book closer to departure when there are fewer seats. My economics teacher in high school taught me that if supply is limited and there is a demand we can expect a higher price. So, business travellers are good for Southwest. There is only one caveat. Business travellers usually don't book their tickets themselves, they use travel managers. And since travel managers have to make a lot of bookings they use the global distribution systems because they don't have time to surf the Internet like we do when we go on vacation. To be visible in GDSs requires that airlines pay a fee, which is what all the other GDS-present airlines have been trying to lower. Southwest, being a low-cost airline, has been reluctant to be visible in GDSs because it adds cost, complexity, and it relinguishes some pricing control. In the past though Southwest has been present in the GDSs via a GDS bridge, but it was limited access. Now, the airline has done an aboutface and signed a 10-year content agreement with Galileo which will eventually see the airline in the Apollo system. The agreement excludes Southwest's web specials, promotions and Ding offerings, which is unique in that all other airlines have full-content agreements. GDSs more or less demand that airlines make all their fares visible, including those cheap web fares, but not Southwest. That's how much pull the airline over GDSs right now. In addition, Galileo is not authorized to pass the information on to third-party sites. So, what we are seeing is a partly a response to JetBlue's GDS agreement as Southwest is experiencing increased competition and an imitative strategy of those nasty network carriers on the other end. Southwest is exposing itself to more and more full-service networks by entering markets such as Denver and San Francisco, which increases competition with those carriers. To be competitive Southwest places itself in GDSs to capture some of the network carriers' customer base with their lower fares. It makes for interesting watching.