One of the hot catchphrases in the airline industry is new distribution capability (NDC), but does it truly hold the key to optimizing ancillaries and enhancing the retail experience?
Distribution has been a much talked about topic within the commercial aviation space, and for good reason. The historically complex distribution landscape has made it difficult for airlines to stay in control of valuable data and keep costs down. Airlines are projected to make just $7.70 of net profit per passenger in 2019, largely due to these extra distribution expenses.
For many decades, airlines have had their hands tied by old systems and out of date practices when it came to the retailing process. This called for a new standard and paved the way for New Distribution Capability (NDC) to allow airlines to better meet the expectations of consumers’ demands for seamless purchasing from carriers and their third-party contractors.
What is NDC?
For those unfamiliar, NDC is a communications protocol created by IATA in 2012 aimed at streamlining the airline distribution process. In order to improve the connection between airlines and third parties, such online travel agencies (OTA) and global distribution systems (GDS), an XML standard has been adopted since this is the technology that underpins most online marketing from e-commerce transactions to podcast distribution to powering search engine optimization to graphical presentations.
For purposes of this discussion, the use of XML within an NDC allows airlines and airline service providers to deliver rich content and ancillaries (such as baggage allowance and seat upgrades) directly to customers.
"The idea for the New Distribution Capability (NDC) came out of an industry ideation group, comprised of strategic thought leaders, which looked at ideas to transform the entire passenger journey through the implementation of innovative solutions," said IATA Head of Corporate Communications USA Perry Flint during an interview with Kambr Media. "It came as a solution for airlines’ desire to close the capability gap between their direct and indirect channels."
"NDC is, in effect, the modernization of 40-year-old data exchange standards for ticket distribution developed before the Internet was invented," Flint added.
The antiquated standard Flint is referring to is the EDIFACT (Electronic Data Interchange for Administration, Commerce, and Transport) system, which dated back to the 1980’s. Among the issues associated with this legacy system was that it was rigid, inflexible and difficult to adapt. The new XML protocol alleviates many of these problems with being updatable and flexible and providing a standardized set of APIs.
This all sounds great, but what exactly can airlines achieve with NDC? For starters, airlines will gain more control and access over customer information. Not only are these complex distribution models monetarily costly, but they are also taxing on another valuable commodity — data.
For many airlines, a lot of data is stuck in the hands of GDS and OTA. As a result, carriers are left with barebones details about their customers. The NDC protocol strives to provide airlines with direct information of their customers, opening the doors to greater levels of personalization.
For instance, a frequent flier could be given a special offer for a window seat (her preferred choice) to her most frequented destination London.
“The focus of NDC is to address limitations in today’s third-party distribution channel: product differentiation and time-to-market, access to full and rich air content and finally, transparent shopping experience,” said Flint. “To the extent that the NDC standard enables GDSs and OTAs to deliver a superior travel shopping experience to the end customer while meeting airlines’ needs to differentiate their products, customize and personalize offers, and escape the commodity trap, it will be a win-win-win.”
But the true power of NDC is that it creates opportunities beyond just the ticket sale. As even most full-service carriers are adopting an a la carte approach offering customers a base fare with their choice of add-ons, the importance of ancillary revenues to bottom-line results is increasing tenfold.
According to a report carried out by IdeaWorks and CarTrawler ancillary revenue was projected to reach 92.9 billion worldwide for 2018, representing a 13 percent increase from 2017 and a 312 percent increase from 2010. Prior to the onslaught of NDC, airlines were unable to merchandise their offering on OTAs beyond the base ticket price and date of departure. Through the rich content now airlines can show added value by including all service details.
"On airline websites, customers have access to bundled and unbundled offers that let them compare the full value of the airline offering. They can choose to be recognized (by inputting their loyalty information) and be rewarded for their status," said Flint. "NDC will enable this to occur in third party channels (brick-and-mortar and OTAs), something that is not typical today. Customers will also have the ability to be recognized by the airline if they choose, and to receive customized offers, or to shop anonymously."
In line with the personalization and ancillary sales opportunities comes the potential to offer truly dynamic pricing. For a long while now, dynamic pricing has been a pipedream for airlines, but those dreams may slowly become a reality.
“There are many definitions of true dynamic pricing. They all share the desire of airlines to better understand and meet customer´s willingness to pay. This requires a different type of customer interaction and systems,” said Flint. “NDC strongly facilitates this, as it enables airlines to interact with their customers (via intermediaries) and propose tailor-made solutions. Differences in approach will depend on the airline objective, whether to rely on legacy processes (fare filing, booking classes) or on moving to other ways to create and distribute their offers.”
Who is Using NDC?
As with any new technology or protocol, NDC will only be as strong as its adoption rate. According to IATA, the NDC registry is now comprised of more than 100 companies, including 66 airlines. IATA has created what it refers to as the NDC Leaderboard. The leaderboard is currently comprised of 21 airlines that carry over 30 percent of IATA passenger volumes. These airlines will each have an individual goal that will consist of having at least 20 percent of their sales powered by an NDC API by 2020.
However, airlines are just one side of this equation. It’s imperative that IATA also gets buy-in from the GDS segment. Each of the three major GDSs have reached certification: Travelport achieved its certification in December 2017, Amadeus in July 2018, and Sabre in September 2018.
IATA is aware of their importance in this ecosystem, writing, “It has always been clear that to achieve critical mass of NDC, the industry needs the GDSs to become true aggregators. An airline’s ability to deliver its individual target as well as IATA’s overall goal for 2020 are intrinsically dependent on the above GDSs’ commitments.” According to Flint, “currently all main GDS are NDC certified.”
How is NDC Being Deployed?
A number of airlines, from American Airlines, British Airways, Air Canada, Lufthansa to Finnair, FlyBe, and GOL Linhas Aéreas, have incorporated varying degrees of NDC implementation.
Lufthansa sees a strong future for NDC, with 70 channels in its pipeline. As of November 2018, 1 percent of its bookings in the UK came from NDC channels. Although the number appears small, the airline had a 300 percent increase in bookings from NDC channels between that time and August 2018.
One way in which Lufthansa is growing its NDC footprint is by offering cheaper fares on NDC channels as opposed to non-NDC channels. This has become a growing practice among airlines. For instance, British Airways and fellow IAG-owned airline Iberia, impose a fee on bookings made via non-NDC channels, while American Airlines has followed a similar practice.
American Airlines has also found success selling via NDC especially in the corporate travel market.
“It’s great to be able to sell premium economy directly through NDC, talk about our products, like Casper, and also talk about our first-class check-ins,” said Alison Taylor, SVP of Global Sales at American Airlines, while speaking at IATA’s Airline Industry Retailing Symposium in Rome. “These products are really enabled through everything that we’re doing through NDC and the bundles that we can offer to our customers. If we have customers who want to just bundle through their travel management program—bundle all of that through NDC—they can now.”
Air Canada has made significant strides itself. The Canadian flagship carrier processed its first transaction via NDC Exchange in August 2018. NDC Exchange is a platform that transforms data from an airlines’ web services into a way that’s readable by sellers using any of the different versions of New Distribution Capability. This is significant as it paves the way for varying channels to seamlessly plug into an airlines’ distribution network.
Fortunately for the industry, it’s not just airlines getting in on the act. OTAs have been slow to adopt new NDC standards, but with the help of Amadeus, Travix is jumping aboard. Currently, content from 16 airlines have been integrated into Amadeus and then connected to Travix.
According to Travix CEO John Mangelaars, Travix is projected to sell about 1,000 tickets a day via NDC. By the end of the year, Amadeus hopes to release this integration as an API so that other OTAs can create the same connection.
While NDC appears to be promising in many ways, it’s not without its skeptics who point to the initiative's limitations.
“If they would have adopted the open travel alliance standards where you can do hotels, car rentals, train tickets, cruises and flights, I would have agreed with [it improving the customer experience],” said Tik Systems Managing Director and travel distribution expert Roland Heller during an interview with Kambr Media. “NDC is just XML; the replacement of some things we already had in the form of proprietary formats.”
Not only does Heller believe the customer experience improvements are limited, in his view NDC also fails to reduce the cost or complexity of distribution.
“NDC is targeted for travel agencies that use GDS. You don't get OTAs moving away from GDS because they know their world. OTAs are in a comfort zone and to get them out of their comfort zone I think NDC is just not good enough.”
“Distribution still goes through the GDS so instead of reducing costs, you still have the same costs, but the airlines have to pay it, said Heller. “With NDC they said they want to replace the monopoly of the GDS, and now basically GDS dominates the NDC platform - the distribution of it.”
Heller summarized his thoughts succinctly and straightforwardly, saying, “NDC doesn't provide a lot of value added features except there is an additional messaging standard to what we've done for the last 40 years. There are no benefits for an airline – considering that all the sophisticated airline.com websites were built without NDC.”
On the surface, NDC does provide a better connection between airlines, GDSs and OTAs, giving airlines a standardized means to sell their products beyond the base fare via these third-party distributors. However, the industry still has a long way to go to simplify its tangled distribution process; a process that will likely only become more complicated with new incumbents arising.
“Airlines definitely want to have their own distribution but, Google Flights is coming and Amazon just started in India where they try to act as a portal to also sell flights,” said Heller. “I think airlines will need to provide very sophisticated APIs and basically make sure that they can feed all these different platforms – and I’m not sure that NDC is mature and flexible enough to do that. But at least it is an evolving standard. And any standard is better than no standard.”