Distribution fragmentation: How should we respond?

AeroTime is excited to welcome Ann Cederhall as our columnist. An instructor with IATA on Airline Distribution Strategy and with Aeroclass on Airline Retailing, Ann is a frequent speaker and panelist at industry events. She has authored numerous highly regarded articles and white papers in the travel industry press. As one of the owners of the consulting firm LeapShift, Ann brings an extensive track record of delivering business value in project and product management roles worldwide.   

The views and opinions expressed in this column are solely those of the author and do not necessarily reflect the official policy or position of AeroTime.

The ongoing struggle between airlines and Global Distribution Systems (GDS) is impossible for anyone in the industry to ignore. GDSs were initially introduced by airlines to distribute their content to travel sellers globally. However, with the rise of low-cost carriers (LCCs) and the advent of internet-based distribution in the early 2000s, traditional airlines began to focus more on the high costs associated with GDS distribution, often ranked as the third or fourth largest expense for an airline. Despite the introduction of new technologies, these costs remain stubbornly high, and the relationship between airlines and GDS providers remains strained, even as the era of litigation has faded.

Key challenges with GDS

GDS platforms do not provide airlines with the same technical capabilities as their own websites. The primary challenge, however, is the commercial model. Airlines pay GDSs a fee for each ticketed segment, with roughly half of that fee passed on as incentives to travel sellers, based on their booking volumes.

This model means that airlines have limited influence over the distribution of their content, as the incentives are controlled by the GDS. Another pain point is the distribution landscape, where third parties such as schedule and fare distributors, as well as payment clearing houses like BSP and ARC, add an additional layer of complexity. In turn, this reduces the airline’s ability to react fast to any distribution changes. In response, many airlines have sought to address the cost issue by introducing NDC for their indirect channels, or a GDS NDC solution. The airline typically introduces a GDS surcharge, and while GDS NDC solutions, essentially a business competing with their own, help reduce costs to some extent, the airline still applies a surcharge.

Many travel sellers rely on GDS-centric process flows such as mid and back-office, accounting, invoicing etc. This in turn leads to the seller becoming reliant on the GDS, making it difficult to integrate or account for bookings coming from outside the GDS. This leads to further fragmentation, as sellers must manage content from multiple sources, each with different standards and integration requirements.

The reality of fragmented content

Fragmentation means travel sellers must juggle content from GDSs, direct airline connections and airline websites, each using different standards and systems. When the mid- and back-office tools, as well as accounting and booking systems, are designed around GDS content, this further complicates the integration of direct or alternative sources. In addition, the charging models for content come with a level of complexity which is steadily increasing.

The traditional travel seller commercial model is substantially challenged today.

Key Examples Include:

TMCs and travel agencies receive incentives based on their GDS booking volumes. As more content moves away from GDSs, these incentives decrease, impacting their revenue. Also, incentives driven by NDC content tend to be lower.

Plus, the agent spends more time making and servicing bookings because of the added complexity.

Airlines’ introduction of surcharges and exclusive direct content adds complexity, requiring system updates and renegotiation of customer agreements.

Agents must decide whether to pursue direct content, which may require new integrations, or partnerships with aggregators, further increasing operational complexity and adding cost.

Is Fragmentation Fixable? Three Perspectives

Regulation as a SolutionSome argue that regulation could address the dominance of a few players who control both airline IT hosting and global distribution. Separating these entities (see also: the current debates around tech giants like Google and Facebook) could reduce costs and promote competition. However, regulatory change is unlikely to offer a quick fix.
Disrupting the Business ModelThere’s long been discussion about reversing the traditional model – that’s to say, having TMCs/agencies pay for GDS services while airlines receive payment for their content. This could incentivize airlines to participate in GDSs, modernize infrastructure and attract LCCs. Agencies would benefit from comprehensive content and travelers would gain confidence in using TMCs. Content would become a revenue driver for airlines and change airline distribution strategies completely.Such a product will be best in breed when it becomes customer-led and money is invested focusing on true modernization, rather than ‘broken’ NDC solutions with Band-Aids. However, the dominance of a few major providers makes such a shift unlikely in the near-term.
Emergence of New EntrantsStandardization and API-led distribution could offer a complete alternative and solve the issue of fragmentation. With advances in AI and content aggregation, the future may lie in platforms that seamlessly integrate content from all sources, regardless of the booking channel. This would allow sellers to focus on curating the best options for travelers, rather than executing transactions. Modernizing underlying processes like pricing, settlement and accounting could deliver significant cost savings, as well as a more connected travel experience.
Looking ahead from a customer perspective

We must start talking about the customer pain points and what we can do to fix them. No matter which path we take with distribution and fragmented content, the customer is looking for simplified processes. They don’t understand why they must contact their travel seller when they want to change their flight. Breaking down the commercial barriers between airlines and sellers will almost certainly have a positive outcome for the end user who needs a seamless travel experience, a factor frequently ignored in the current airline community. They should be allowed to freely move between airline and seller, regardless of the point of sale.

Similarly, they don’t understand why they cannot book their own content and bring it into a reservation, or why the website they use for their leisure travel offers a much better user experience than the one they must use for work.

Achieving seamless integration and reducing fragmentation will require not only technological innovation but also new business models and, potentially, regulatory intervention. The goal is a future where content is accessible, processes are streamlined, and all players – airlines, sellers and travelers – can benefit from greater choice and efficiency.

I wish to thank Aash Shravah at Traxo for valuable input.

For the readers of this article, I welcome your thoughts on how you see a way forward.The post Distribution fragmentation: How should we respond? appeared first on AeroTime.

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