Ai Editorial: Cost differentiation, NDC, machine learning… signs of change?

First Published on 2nd June, 2017

Ai Editorial: It might be only a handful of them, but airlines are reassessing their commercial strategy, embracing data-driven merchandising and artificial intelligence. This marks a welcome change, writes Ai’s Ritesh Gupta

 

Airlines are often criticised for not evolving fast or not being “agile” enough to embrace change. And this evaluation is fair enough considering what all can be done to serve today’s omni-channel, connected shopper.

But airlines are changing. Rather than looking at how many carriers are attempting to progress or the pace of change, it is worth noting what’s evolving. The list includes distribution, merchandising, automating customer servicing and booking via chatbots etc. These initiatives aren’t only about customer centricity, but they can also result in cost cutting. Here’s how:

·          Commercial strategy: It’s been two years since airlines of the Lufthansa Group announced their distribution cost charge of €16 for every ticket issued by a booking channel using GDS. A lot of discussions ensued about this bringing in a change.

“There are so many tightly integrated processes in this industry… the combination of an organization owning PSS plus GDS is a dangerous combination,” used to be a common response from senior executives from the industry. But now the future of “full content agreements”, the role of GDS, airlines controlling their offer etc. are being discussed and even scrutinized in detail. And now with British Airways and Iberia stating that fees of €9.50 (per segment surcharge) will be levied on bookings not made via the airlines’ own websites or direct sales channels (exempted list also includes NDC connected channels and self-booking tools connected via NDC), airlines are trying to go for clear cost differentiation in the various booking channels. One of the reasons behind this move is to ensure as owners and providers of core offerings, carriers’ don’t compromise their “earnings”.

While it is pointed out that NDC or New Distribution Capability, an IATA initiative for the adoption of a data transmission standard initiated in 2012, didn’t trigger any change in commercial strategy of airlines, the fact remains that airlines also have been working on plans to let their sales partners connect to their IT systems directly based on the IATA data standard NDC. Paul Byrne, SVP Development at OpenJaw Technologies, says one aspect of NDC is for the airline to “control and create the offer, understand their customer and deliver relevant Offers that will enhance their travel experience”. He added, "NDC is about being able to offer better content, contextual content (to very channel) and a better customer experience by ensuring consistent content across all channels."

The role of GDS could morph into being an NDC aggregator, acting as a conduit by passing on the request to the airline which would then know who the customer is and make a personalised Offer (rather than the GDS constructing an anonymous Offer and merely checking the airline PSS for flight availability, as is the situation today).

Overall, distribution of ancillary products is opening up. For instance, today meta-search engines for the first time are letting travellers pay for their preferred seat on certain carriers via their site. Previously, this could only be done on airline.com.

·          Data-driven merchandising: OpenJaw’s Byrne also points out that NDC is facilitating distribution of existing and new products via the indirect channel in a much more timely manner, an avenue that wasn’t previously available. NDC will enable airlines to become better retailers – better use of data for increasing the conversion rate, coming up with relevant and contextual offers, etc., all of it getting extended to the indirect channel. For their part, British Airways have underlined that NDC will result in better service of customer needs with their ancillary products (for instance, pre-book additional luggage), faster access to new offerings, view product features for a true product comparison, etc.

There is a realization that technology isn’t an issue - rather the drive or willingness to do it is the biggest hurdle. The entire organization has to support retailing. Airlines are becoming smarter with merchandising techniques. Yes, airlines need to focus on design, content, frictionless checkout, personalisation etc. to come across as a facilitator of travel essentials. But there is no need to do “heavy-lifting” all the time - like analytics for certain initiatives, maybe cohort analysis or access to data related to a holiday is enough to sell ancillaries (opening up of PNR data). For instance, as we highlighted in one of our recent articles, certain carriers are going ahead with their “pre-order” service, offering shopping of duty-free in advance. Airlines experience a ‎€70 average order buying, very often with a 15% conversion. Airlines should look at such conversion rate rather than worrying about .5% fulfillment error!

From data and technology perspective, merchandising is being increasingly driven by optimization of data – transactional data, contextual data etc. Airlines are already relying on merchandising rules that control their business model, and as algorithms become more proficient, rules would become sharper and offers created would result in better conversion rate.

Artificial intelligence (AI): Airlines can personalise, but without AI, without an ongoing conversation to learn from, customers and airlines can’t realize the value of true personalisation.

“Similar to the way Uber brought the idea of ‘everyone’s private driver’ to the world, chatbot technology allows the idea of ‘everyone’s travel concierge’ to come to life,” says Jonathan Newman, commercial director at Barcelona-based Caravelo. The company recently introduced a transactional chatbot (via Facebook Messenger), Vale, for Mexican carrier, Volaris.

Customer service and bookings are two facets that are starting to stand out. The industry is bullish about chatbots learning fast enough to serve travellers better. No reason why chatbot can’t take an order for a meal in an aircraft, or convey whether the flight is going to be on time or not etc. Airlines are starting to count on chatbots to capitalize on the usage of messaging apps in today’s API economy.

Other than commercial strategy, initiatives such as merchandising and AI can also result in cost cutting.

 For instance, the pre-order service shows technology and merchandising can also reduce waste. “Many airlines accept a 35+% food wastage, with preorder of food not only do you reduce waste but you can offer a more appetizing range of food which will increase the demand and revenue. Fewer passengers will buy food before they get on plane! When you know and see what is being demanded you can respond as well,” says Paxport’s CEO Tony Barker.

Similarly, with the efficacy of AI and chatbots, airlines can automate 1/5th – 1/4th of the tasks done by contact centre staff. Of course, automation of the customer service workforce would take time but by offering travellers a channel within the platform (like Facebook Messenger) they prefer and cutting down on certain operational expenditure there is definitely a case for building on AI.

Be it for differentiation of their products, being in control of offers, cost differentiation, cost cutting or serving customers better than before, airlines are evolving. There might be only a few of them in most of these areas, but at least the change has been initiated.

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