To slash costs, airlines try direct Web connections to customers
This is part of IEEE Spectrum's special report: What's Wrong—What's Next: 2003 Technology Forecast & Review.
In the old days, getting a seat on an airplane was easy: call the local pilot of the airmail plane and ask for the plane's spare seat. Now, the trip from travel agency to ticket counter is infinitely more complicated, and "every wrinkle, bell, and whistle costs more," says Ron Kuhlman, vice president of Unisys R2A Transportation and Management Consulting Practice (Hayward, Calif.).
At a time when turbulence applies as much to an airline's financial status as to its flight status, cost is everything. Airlines recognize that the key to survival is cutting costs, and they are looking to technology to do just that. In particular, the airlines aim to slash a US $2.2 billion item-a large part of the surprisingly expensive process of selling tickets, or distribution. To do so, they are counting on their own Web sites and other Internet-based technology to link them directly to their customers at far lower cost.
No-frills airlines RYANAIR and JETBLUE are just two low-cost carriers that made a profit while most airlines lost money last year. Ryanair's profits rose by 68 percent in the first quarter of 2002 alone. Both airlines rely heavily on their Web sites to sell tickets
Though the world's airlines as a whole fared better, the U.S. AIRLINE INDUSTRY LOST US $7.7 BILLION in 2001, and 2002 looks to be worse. In December, the world's second largest airline, United, declared bankruptcy—the latest in a rash of airline bankruptcies and the largest in the history of the industry
Under the one-two punch of 9/11 and a weak economy, BUSINESS TRAVEL DROPPED 30 PERCENT and general travel slowed about 8-9 percent
Orbitz president and CEO, Jeff Katz, with one of the company's 400 Low Fare Search servers. Orbitz is the first online travel agency to build direct connections to airline reservation systems.
Technology has always been central to selling and tracking airline tickets, but, in Frankensteinian fashion, the system originally developed to help airlines sell tickets efficiently has turned distribution into the industry's third largest expense. Today 90 percent of all U.S. tickets are sold through four global distribution systems (GDSs), privately owned data centers operating on mainframe computers to provide travel agencies and Web sites with the entire inventory and fare information of the world's airlines. The systems are expensive: they charge airlines a fee for every segment of travel sold. A one-stop flight, for example, has two travel segments. If the airlines have one goal for distribution technology, it is "anything that can replace the GDS," says Lorraine Sileo, an airline analyst at PhoCusWright (Sherman, Conn.), a strategy and research firm that specializes in the online travel industry.
The simplest and cheapest way for airlines to avoid using a GDS is to sell tickets on their own Web sites. This is exactly what many low-cost airlines have been doing. Southwest Airlines, for example, sold half its tickets on its Web site last year, while Ryanair's online sales have made ryanair.com Europe's most-visited travel site. According to Southwest Airlines, a ticket sold on southwest.com costs it about $1 versus $5-$6 for tickets sold by a travel agency through a GDS. To push even more sales through their Web sites, some airlines, including American, are beginning to offer the discounted fares traditionally only available online to travel agents provided they book through the airline Web site instead of a GDS.
READY ACCESS TO ALL FARES to all fares, including those only offered online, enabling travel agents to provide better service and cheap airfares
DIRECT INTERNET CONNECTIONS between airline reservation systems and travel agencies, to eliminate expensive third-party distributors
But airline Web sites don't draw enough customers. Most people dislike having to hop from site to site to compare fares and prefer the one-stop shopping provided by a site backed by a GDS. For the airlines, "the GDS is like a marketplace," says Ricks Tucker, director of marketing for AgentWare, an Internet travel software company (Atlanta, Ga.). "One airline relies on the inventory of other airlines in order to bring buyers to the marketplace."
If airlines want to replace the global distribution systems, they have to build another marketplace. One possible solution is to allow travel agencies, on- and offline, to connect directly into airlines' internal reservation systems. Orbitz, a Chicago-based online ticket seller set up by American, Continental, Delta, Northwest, and United Airlines in 2001, is experimenting with direct links of this kind.
So far, Orbitz is the only travel Web site that has set up such connections, a technology the company calls supplier link [see "Sites to Fly By,"]. Going through the interface that the airline already used, Orbitz taps into each of the airlines' reservation systems to find and book tickets. As of this month, supplier link connects Orbitz to American, Continental, and Northwest Airlines. Eight other airlines have committed to participate, and others have shown interest. For those of the 450 airlines that Orbitz sells that are not signed up, Orbitz must rely on a GDS.
Supplier link "saves airlines about 77 percent of what they pay [through a GDS]," Leon Chism, the chief Internet architect at Orbitz, told IEEE Spectrum. Airlines pay Orbitz a flat $4 fee for every ticket sold instead of the average $17 fee per ticket processed through a global distribution system.
Other technologies that bypass GDSs are beginning to find their way into the brick-and-mortar travel agencies still relied on by many travelers. For example, the Travel Console developed by AgentWare searches airlines' Web sites for fares and flight information, and gathers the results in one place for travel agents. The system eliminates GDS fees.
With the potential for huge cost savings, direct connections between airlines and travel agencies, on- and offline, are only going to multiply. Their use is still limited, but there is ample room for expansion.