NDC: The paradigm must succeed, and why

October 14, 2014

NDC: the new distribution capability. The oft discussed and rarely understood new trend in airline distribution promises to present significant changes to how airlines address direct distribution. Much has been made of the issues of privacy, disintermediation, cartels, agendas, etc. After all, the airline distribution discussion has been a circular affair, with great leaps in distribution capabilities aligned with small steps in improved legacy distribution contract terms.

This view is simplistic, and rote.  What it misses is that NDC is not just a technology framework, it is a paradigm shift for distribution. Consider that the current benchmark, ’airline ecommerce’, is built on enabling technologies which are 10+ years old. The ecommerce department itself is typically treated as - excuse the deliberate pun - an ’ancillary’ organization within the airline.

The technology and the organization do not align the core disciplines of revenue integrity, brand alignment and distribution strategy. There is no comprehension of the customer or the journey. We are dealing with first generation query response web services layers built on top of legacy systems.

Our assertion is that airlines need to own proven new generation ecommerce platforms that drive real business value. NDC, albeit incomplete and not yet fully ready for market, represents a new way of looking at distribution - omni channel distribution.

Interested?  Read on.

First let's consider our current enabling technologies for direct distribution.

Direct Distribution Pioneers - all tech, little business

The teams that initially took the airline product to the web were tech savvy opportunists. These guys focused on the technical challenges of serving up fares and good enough inventory to an online market place. Their focus was conversion first, revenue a distant second. The 80:20 rule pervaded and airlines essentially abandoned the learnings and experience of their revenue management teams in a rush to get online.

There are winners and losers here. The LCC tribes did very well, focusing on low price backed by low cost could actually generate demand. Whereas the brand carriers rushed to compete at the lowest levels of entry, diluting their value and brand, and committing the cardinal sin of cannibalizing their own revenue.

Today, direct distribution represents anywhere from 30% to 70% of a traditional carrier’s distribution mix.  Yet the traditional channels, although contracted, continue to yield greater margins and value. Now, for the first time in over 10 years we have seen these channels increase market share.

Is this an indication that price sensitive markets could be tapped out, considering that the leaders in low prices (the LCCs) have had to quickly revise their strategies to start targeting a more affluent, connected consumer in an omni-channel retail marketplace? Click here to watch Michael O’Leary speak to Bloomberg about the changing market.

Building the bridge to offer optimisation and profitable engagement

Airlines are successfully distributing their lowest-cost products at the smallest margins direct. This is no mistake, per above it's by design. The tool sets that enable direct distribution did not offer fidelity or the learnings of revenue management.

We have observed and are invested in a distinct shift from such behaviour.

Datalex is leading an NDC pilot with Swiss International Air Lines, PROS and HP. This pilot is being driven directly by the Swiss revenue management team to drive offer optimization for more profitable customer engagement. Through NDC and with our customers, we are driven to progress distribution standards beyond the existing piecemeal messaging and enablement tools. NDC can be an enabling message set but must keep pace with those innovating beyond the standard.

Many airlines have progressed the concept of NDC, where availability is calculated, fare bundles are an intrinsic branded entity and the customer is known. This allows the airline to present specific market-tested fare combinations based on loyalty tier, past travel experiences and market demand. The airline and providers involved will help progress NDC and afford the airline the lexicon to understand the customer journey, and to drive the right offer at the right price at the right time.

 In summary:

It used to be ’distribution costs savings + increased direct distribution revenue/yield’. Now it’s ’profitable customer engagement as an omni-present travel retailer’.

 NDC thus far has enabled this discussion. It has brought to the fore the need to align internal business and technology systems to design products that will not only distribute simply, but will be targeted to specific audiences to drive revenue.

 NDC in itself is not the solution. As it stands, the message set is incomplete. The internal changes within the airline,  the adoption and ownership of the airlines new gen distribution technologies and a core understanding of what it means to be omni channel will differentiate the winners from the losers.

 The internet is how business is done. It’s time to evolve.

Gianni Cataldo
GM Americas, Datalex