Today’s airline industry is a vibrant, growing and evolving ecosystem. Strong profits over the past half-decade have led to massive reinvestment into aircraft, the on-board experience, gates, terminals and internal systems and technology.
These upgrades take direct aim at enhancing brand value, operational excellence and, most importantly, the customer experience. Additionally, increased earnings are driving a deep commitment by all the major airlines to compete across the entire market landscape. While many factors play into the cost of a ticket, the impact of this increasingly competitive environment can already be seen. As ARC reported earlier this month, the average ticket price (ATP) in April 2018 for domestic round trip itineraries was $484, 3.5 percent less than in April 2017 and about 10 percent less than in April 2014 – consistent with overall trending data.
However, if airlines are to succeed in the future, commoditization of their products and a race to the bottom is simply not sustainable. Airlines will need to find new ways to monetize offerings and generate revenue. Ancillary revenues will continue to grow in importance. Interestingly, during a recent Spirit Airlines earnings call, its Chief Commercial Officer, Matt Klein, stated that ancillaries account for roughly half of the airline’s overall revenue. In short, what this all means is that airlines need to be able to consistently display and differentiate their products across an array of diverse distribution channels .
It was the reality of this future that drove the creation of the International Air Transport Association’s (IATA) New Distribution Capability (NDC) messaging standard. Designed to address current distribution limitations throughout the industry, most of the promise of NDC has rightfully focused on the ability for airlines to have more control and ownership of the offers presented to travelers — differentiated offers that can be put into the market faster and provide a more transparent shopping experience.
To survive in this brave new world of airline commerce, the technology providers that enable relationships between airlines and those that sell their products (e.g., travel agencies) will need to adapt in ways that support the emerging relationship models as a result of NDC and shifting distribution strategies.
For more than 50 years, ARC has delivered trusted and reliable travel agency accreditation and settlement services to the air travel industry. Our solutions are built upon the traditional travel agency airline distribution model — offers are provided through the Global Distribution Systems (GDSs) and transactions flow to ARC for reporting and settlement. It has always been a one-size-fits-all model with one set of rules for all travel agencies and one set of rules for all airlines. It’s a model that has thrived. In 2017, ARC processed more than $88.5 billion in sales (including $9.8 billion in cash sales), connecting more than 225 airlines and 12,000 travel agency locations.
But, in a rapidly evolving airline distribution landscape, one size will no longer fit all . Airlines are evolving to more flexible distribution models within which they exert more control over how their products are offered to the traveler. These varied models will introduce new opportunities to the agency community, but also new complexities. As ARC President and CEO Mike Premo recently noted in The Company Dime, while most of the focus has been on the actual offering, how content is managed extends past the buying experience to post-ticketing servicing, where processes for ticket refunds, exchanges, voids and other actions may vary based on how the agency and airline conduct business individually and together.
Not All NDC Implementations Are Created Equal
To help the airline and agency community navigate this change, ARC has taken a proactive role to identify what the future will likely look like and ensure that its systems, processes, products and services support shifting dynamics and help our customers thrive.
After numerous in-depth discussions with airlines, agencies and technology providers, including at ARC’s Settlement Council, we see a broad spectrum of distribution strategies evolving across airlines. Some are decisively moving toward a full-control model, where they not only provide the offer, but also manage the entire transaction – from billing the traveler’s credit card through the calculation of the travel agency’s commission and post-ticketing service. Meanwhile, other airlines are primarily focused on the offer creation and acceptance process, relying on the traditional model for servicing, credit card billing and settlement for cash transactions and commissions through ARC.
The crucial question to all of this is: How do 229 airlines* move more than $88.5 billion in sales volume via 12,032 travel agencies* in an environment that has such divergence in process and technology?
The answer is fairly straightforward : Create a platform that provides the scale and flexibility needed to manage the wide variety of individual relationships.
Flexible, Scalable, Reliable
ARC has a proven history facilitating complex processes on a global scale. To ensure that we continue to deliver trusted and reliable distribution services to our customers, regardless of where on the spectrum they may fall, we have begun a massive undertaking to completely transform our systems.
The first step in this journey was a recent collaboration ARC undertook with British Airways to enhance our settlement platform. British Airways has taken a very controlled approach to their distribution strategy and by partnering with them, ARC was able to develop enhancements that allow airlines and travel agencies to tailor the process for reporting and settlement based on bilateral agreements. In other words, ARC can now identify transactions as being “NDC Transactions” and apply special processing rules agreed upon by the individual airline and travel agency, ensuring they can work together in the way they choose, rather than relying on the one-size-fits-all model standard.
Whereas ARC once solely relied on the GDSs to provide transaction detail, we are now distribution source agnostic and able to receive an airline transaction from across the distribution spectrum, including the traditional GDS process, through an airline’s API or other transaction format, IATA’s NDCLink — or even through the ATPCO and SITA NDC Exchange. Furthermore, these enhancements allow ARC the ability to facilitate voids, refunds and exchanges and output transaction data in multiple formats, providing seamless integration into our customers’ revenue accounting and back office systems — without the need to make costly changes. This is a true return on innovation for ARC, our customers and the industry as a whole.
The Emerging Models
As with any quickly changing market, individual entities and organizations are at varied stages of their evolutionary lifecycle, particularly as it relates to NDC and other emerging technologies in the airline distribution landscape. Airlines, travel agencies and their partners are all evaluating their individual workflow processes and workforce distribution models that manage the reconciliation and accounting of not only sold airline tickets, but also other airline products, including those highly valuable ancillaries.
As a connector, ARC generates collaboration and inspires relationship-building among industry players. Historic examples include our work bringing airlines, travel agencies and others together to standardize and reduce debit memos and as a leader in facilitating the transition to e-tickets in the early 2000s. This time is no different. ARC is proactively working with our airlines, travel agencies and other partners to adapt — as individual entities and as an industry.
Throughout its history, ARC has focused on four main areas of interaction with our customers—interactions primarily aimed at reducing complexity in a complicated marketplace:
- Travel Agency Accreditation
- Transaction Reporting and Management
- Credit Card Billing and Cash Settlement
These four main areas will likely remain critical to our airlines and travel agencies, but the management of them will change based on where our customers fall along the distribution spectrum. The ability to activate or deactivate specific components based on individual relationships will be critical to a successful platform.
ARC sees two emerging distribution models:
The Standard model maintains the standard ARC reporting and settlement process, wherein relationships between airlines and travel agencies are governed by ARC’s Agent Reporting Agreement (ARA). ARC’s agency accreditation services provide airlines with the assurance they need to feel confident that those selling their products are well-vetted and that ARC’s fraud detection and financial guaranty are minimizing airline losses. Travel agencies manage their transactions through ARC’s Interactive Agent Reporting (IAR) tool and authorize their transactions for settlement. This is how hundreds of airlines and thousands of travel agencies have settled transactions for decades. The traditional many-to-many relationship means airlines and travel agencies can focus on their core business, while ARC oversees the relationship between them.
The Custom model is designed for those airlines and travel agencies that choose to create and maintain managed relationships. Airlines will still receive the same sense of security from ARC’s accreditation services, but they and their agency partners will also benefit from the ability to customize processing basis according to bilateral agreements between the agency and airline. By creating a flexible and configurable environment, airlines and travel agencies will be able to do business together in the way they choose, while still leveraging ARC’s expertise.
Airlines seek to better manage content in a retail-driven, omni-channel experience for their customers. Travel agencies have always been and will remain crucial to future airline success.
These platforms need to offer flexibility, scalability and reliability, all while remaining as automated as possible, easy to use, and out ahead of any content fragmentation.
ARC is still in the early stages of its transformation and build-out to of the Custom model, but our path and goals are clear: To connect airlines and agencies, enable the spectrum of our customers’ distribution strategies, and help our industry not only grow, but thrive.
For more information about ARC’s enhanced settlement platform and how it helps airlines and travel agencies create customized, efficient partnerships that leverage NDC, click here.
*Participating airlines and travel agencies as of April 2018