The first half of 2011 proved to be a challenging year in terms of air travel, resulting in major changes in the overall global travel landscape.

Presenting in the Abacus Chinese Carrier Conference on 20 June 2011, Mr Ho Hoong Mau, Division Head of Airline Distribution at Abacus International, highlighted the key trends and insights on how airlines can leverage the GDS channel to achieve better value through opportunities within the evolving airline industry.

"The travel industry is undergoing a period of immense change. The East is set to take over the West in terms of new traveller numbers and technology continues to change the face of the industry as well as redefine how we conduct our business," said Mr Ho. "Airlines must therefore be quick to adapt and adopt the right strategies to keep themselves at the forefront," he added.

While the disheartening Japan catastrophes have shaken the airline industry over the first half of this year, a recent report by Pacific Asia Travel Association (PATA) expects quick recovery from June onwards as the economy in Asia remains strong^[1]. International arrivals have grown five and six per cent respectively during the first two months of this year, and with countries like China and India anticipated to boost travel demand, the airline industry can anticipate a promising 2011 ahead of us.

To stay ahead in the industry, however, Mr Ho highlighted that airlines should continue to be mindful of leveraging the major trends this year, which include the growth of capacity-driven growth, the China factor and the power of BRICs (Brazil, Russia, India, China) in addition to maximising opportunities through a multi-channel strategy, ancillary revenues and the mobile explosion.

"Looking at market growth in China as well as other BRIC countries; capacity-driven growth driven through airline and route expansion; and airline growth driven by multi-channel strategy, ancillary revenue and mobile; great opportunities are apparent for the airlines to each take advantage of. These key trends provide new commercial impetus for airlines to work together with key travel solution providers to deliver top results," Mr Ho said.

Despite greater penetration in recent years by the online Airline Direct model, this has mostly come at the expense of Airline Call Centre and Ticket Offices. In fact, there has been data that a "reverse channel" shift to the Travel Agency has taken place in 2009-2010. Airlines need to look at the bigger piece of the pie that travel agents currently serve in order to tap the myriad opportunities available and to differentiate themselves from the other airline competitors," according to Mr Ho.

He said, "Online growth is not synonymous with supplier direct; in fact, recent data suggests that online unique visitors to online travel agent outnumber supplier direct sites by 2:1. It is critical for all industry players to separate the truths from the hype."

Capacity-Driven Growth

Airlines around the world have increased their capacity in recent months. Scheduled airline capacity and number of flights increased by five per cent in March 2011 to 285.7 million seats while the number of flights increased by four per cent to 2.3 million departures and the average number of seats per aircraft increased by 1.3 per cent^[2]. Low-Cost Carriers (LCCs) showed an even stronger growth, with a 10 per cent year-on-year increase in scheduled capacity, following a growth of nine per cent in February 20112. 

The Asia Pacific region also displayed strong growth, making it the largest region in the world in terms of passenger seat capacity with the third fastest growing market after the Middle East and Africa.

The number of scheduled seats inbound and outbound the region was expected to grow to more than 107 million in March this year and capacity within the region has increased by eight per cent to 92.5 million². Seats to and from the region also grew 11 per cent to a total of 15.2 million, the highest globally².

China Factor

China is set to become the biggest contributor of new travellers by 2014, contributing 214 million out of 800 million global new travellers^[3]. Capacity to and from Beijing Capital Airport would increase by 14 per cent while capacity for the domestic market would increase by six per cent, making it the second largest airport in the world in regards to scheduled capacity2.

China also aims to build 55 airports in the next five years^[4]. By 2022, it is estimated that China will reach 1 billion air traffic passengers – a 3.5-fold increase within 12 years^[5]. As China continues to liberalise its air transport industry, its major airlines are expected to gradually shift their focus from domestic to international markets to become competent global competitors². 

Emergence of the BRIC Nations

Other air travel giants are on the rise with the increasing affluence of Brazil, Russia, India and China – countries that are collectively called the BRIC nations.

The BRICs are poised to become a force to be reckoned with, accounting for nearly 30 per cent of the world's land area, 42 per cent of the global population, 18 per cent of the world's GDP and 15 per cent of global trade volume⁵.

Over the next five years, business travel in countries like India and China will grow at rates of 5.3 and 6.5 respectively – almost 18 and 22 times that of the US' projected growth rate. In addition, the BRICs are expected to make up 50 per cent of global air travel demand by 2050, up from 15 per cent achieved in 20085.

According to Mr Ho, this sharp increase in air travel heavily concentrated in the Asia Pacific region means that airlines in Asia have to be prepared to cope with the increased demand.

Already, we are seeing the main Chinese carriers making their intentions known that they will deploy more of their capacity on international flights as they face increasing pressure from the high-speed train in their own domestic markets. India too is on a high trajectory of growth and the underlying travel demand is so robust that travel bookings were not affected at all by the recent Japan earthquake and Tsunami.

Growing Adoption of Multi-Channel Strategies

Airlines are clearly adopting multi-channel distribution. Travel agency channels will continue to maintain their roles due to prevalence of (1) wholesale models in Asia, (2) the need for aggregation of the huge amount of information out there and (3) management help in the complexity of travel.

Likewise, consumers' high propensity to purchase at travel fairs and travel in package tours, growing business travel (where TMCs dominate) and growing emergence of Asian OTAs help to ensure a healthy and competitive travel agency channel.

In 2010, airline-direct website sales weakened while online travel agent sales have escalated^[6]. According to Specialists in air transport and IT solutions (SITA), more than 50 per cent of tickets are now sold through Travel agents (online and offline) as compared to 40 per cent which are sold through airline-direct website^[7]

In the Asian market, it was anticipated that both direct and indirect channels will achieve steady levels. Nevertheless, Mr Ho added that airline carriers must be aware that Asia is complex and non-homogenous. For example, while online penetration is considerably high in Singapore (due in part to the conditioning of consumers to do online DIY transactions by Low Cost Carriers), online penetration in countries like Hong Kong, Taiwan and many others are still poor. It is also very clear that the rate of growth of OTAs is higher than those of supplier direct.

"Airlines need to be very clear about the true ROI of each channel. The yields that airline sell on the Travel Agency channel is usually higher than those sold by online supplier direct. In addition, airlines need to fully account for the potential hidden costs in the online supplier model such as advertising costs to bring eyeballs to website as well as credit card merchant fees," Mr Ho stated.

Recognising this complex market, Mr Ho stressed, "The future belongs to the airlines that are adept at executing a multi-channel strategy."

Tapping into Ancillary Revenue Opportunities

Events such as the Middle East crisis and earthquake/tsunami in Japan continue to put pressure on the airline industry, resulting in a reduction of business travel spending and consumers that are more aware of travel costs. "Due to the higher margins and stability that ancillary revenues offer, ancillary services are increasingly gaining traction among airlines around the world, and many airlines are looking exploring how to monetise products and services which were traditionally bundled free (such as lounge access, meals, extra pillow etc)" Mr Ho said.

Ancillary revenues are forecasted to make up 18 per cent of travel suppliers' revenues by 2015, with overall revenues increasing by 50 per cent. The United States has been at the forefront, earning US$4 billion in baggage fees alone in 2010^[8]. Out of all the airlines, LCCs have been faring comparatively well globally, where US$58 billion of their revenue in 2010 were derived from ancillary sales5.

Asia, however, is slowly awakening in adopting these measures. In 2010, an Abacus study revealed that only 20 per cent of Asian airlines' leadership teams placed ancillary revenue as their top priority, while 40 per cent of respondents felt that these services were somewhat important^[9]. On top of that, only seven per cent of airlines felt that ancillary sales contributed to five to ten per cent of their total sales, lagging behind the global norm of 13 per cent. This trend however has been rapidly changing as more and more airlines in Asia are gradually tapping into the opportunities of ancillary services, pioneered by LCCs like Air Asia and Tiger Airways.

Mr Ho added that after all, success in maximising ancillary revenues is not only for airlines to understand the consumer retail behaviour and the right products, but also for them to ensure partnering with the right GDS. "As reports begin to show a continued trend of turbulence for air travel, this is also the right time to get on board with ancillary revenue opportunities to bring greater stability," he said.

Nonetheless, airlines (especially network carriers) also need to be aware of the downside of swinging too quickly with unbundled services to charge for ancillary services. One of the key issues to manage is the pushback from consumers who perceive ancillary services as ‘hidden costs'.

Airlines might also alienate their elite customers if they begin to allow all comers to access services (with a fee) which were previously restricted to only elite customers. Airlines will have to evaluate carefully how they wish to position themselves and the debate between proponents of bundled services and unbundled services will continue for some time.

Exploring mobile opportunities with GDS

"There are over 5 billion mobile subscribers globally and they clearly outnumber Internet users: for example in India, there are over 800 million mobile subscribers compared to 100 million internet users. Many mobile subscribers are also accessing the Internet through mobile browsers or through native apps in smartphones. This is a significant pool of customers that airlines need to tap through the mobile channel," said Mr Ho.

There are growing expectations from customers for convenient access to up-to-date information from airport monitors through automated phone systems, mobile-friendly websites, or mobile phone apps and messaging. However, for many airlines, collecting, formatting and distributing timely and consistent data through patchwork of legacy systems is not only expensive, but also a maintenance nightmare. Furthermore, it is fairly expensive to distribute to code sharing partners with code sharing agreements.

"We have launched Abacus VirtuallyThere to help airlines improve their customer service and allow ease of access via mobile devices," Mr Ho said. "It enables seat changes and upgrades, check-in integration with airlines, real-time flight notification alerts, as well as e-ticketing, all through mobile devices."

Recently, Abacus VirtuallyThere was also adapted for mobile using HTML 5, resulting in an amazingly easy-to-use interface. Aligning with this rising trend, Mr Ho urged airlines to get ahead by developing mobile technologies for a more interactive experience with customers.

Exploring Social Media

The world is becoming increasingly linked through social media and many airlines are looking tentatively at how to increase its customer engagement and build loyalty through social media.

"In China, the total number of registered users in mico-blog sites operated by Tencent and Sina has already crossed 200 million and are at par with Twitter. With the increasing use of smartphones, we are also seeing more campaigns that leverage location-based attributes. Airlines are starting to experiment with the power of social media in brand building as well as in crisis management – such as during the volcanic ash crisis last year in Europe, many airlines such as KLM and Lufthansa relied on social media to provide timely updates on their flight status and even circulated successful stories of customers securing flights home to lift spirits, "said Mr. Ho.

Looking Ahead with Optimism

"The coming years are exciting times for the airline industry," said the Abacus executive. "Airlines need to invest in technology, prepare for these changes and find the right balance to work with a GDS partner, or risk losing the chance to capitalise on markets that will drive outstanding profits and values in the years to come."

www.abacus.com.sg

Refs:

[1] PATA 2011
[2] Centre for Asia Pacific Aviation, 2011
[3] International Air Transport Association, 2011
[4] CNN, 2011
[5] Goldman Sachs, 2010
[6] PhocusWright 2010
[7] SITA 2010
[8] Centre for Asia Pacific Aviation, 2010
[9] Abacus International, 2010