Internet bookings - passing fad or distribution revolution? March 1999

What is the most important challenge facing airline managers and strategists as the industry prepares for the new Millennium? Costcutting? The search for alliances, perhaps? It may be neither of these, because whether airlines like it or not, a far greater challenge is being posed by an external factor — the Internet.

At this point some airline managers are likely to have a quiet chuckle and turn quickly to another page. But more and more strategists are beginning to realise that the Internet is having an impact upon distribution that cannot be ignored.

While Internet penetration in Europe and Asia lags behind North America (partly due to slower PC penetration and partly due to European and Asian telcos charging for local calls, unlike in the US), it is catching up. In Europe, for example, more than 50m people are forecast to be online by 2001. That is just 13% of the population (compared with one–third connected in the US today), but the percentage will be significantly higher in the more ‘wired’ countries such as the UK and Germany. Significantly, survey after survey shows that travel is not only the fastest–growing area of Internet commerce — but now also the largest area.

Sceptics may also want to reconsider their opinions in the light of what happened in the North American market in January 1999. Early in that month three North American airlines started imposing fare surcharges on all customers that did not use the airlines’ preferred method of booking — the Internet. Delta added $1 to every domestic flight while Alaska and its regional affiliate Horizon Air imposed an extra $10 on certain paper–issued tickets. Condemnation from US travel agents was predictable and instant, and less than two weeks later Delta was forced to drop the non–Internet ticket surcharge.

However, two–tier pricing — offering cheaper fares to customers booking tickets over the Internet — makes perfect economic sense. Internet ticket sales are at least 5% cheaper for airlines to process than any other sales means. According to Al Lenza, Northwest vice–president: “It’s pretty clear that the Internet is the lowest–cost channel for us. It’s pretty easy to book and buy the product.” And with a lower cost, airlines can and will pass this on to consumers through lower prices. The only mistake Delta appears to have made this time around is to increase costs for non- Internet customers, rather than to decrease prices for Internet bookings, leaving fares booked through agents at the same level. That’s what Continental does, with a $20 discount to customers booking online.

The last cost-cutting frontier?

Travel agents counter that whatever the methodology, this would be price discrimination against their customers — but that misses the point completely. The Internet is a cheaper channel, so why shouldn’t there be price discrimination?

As recently as 1997 the head of the Association of British Travel Agents claimed that she hadn’t heard of Microsoft’s Expedia web site, and added that “the Internet may take a small amount of business away from agencies, but it will never replace them”. She’s right of course — the information age will divide people into the haves and have–nots, and perpetually IT–afraid consumers will always want to see an intermediary such as a travel agent in person, But today Net users (even in the UK!) are high–income, sophisticated people who want a lot of information about purchase options — and, more importantly, their children will grow up to think that the Internet is as natural as the telephone is today. (British Airways’ e–ticketing trials found that it was only older and less frequent flyers who disliked ticket–less travel.)

But whatever their public protestations, what travel agents know only too well is that distribution costs account for 20–25% of airline costs, second only to labour. Given the aviation industry’s wafer thin margins, any development that could slash costs in distribution cannot be ignored. Airlines are already attempting to reduce commissions (which account for 50–60% of airline distribution costs) but some are now starting to realise that an even better strategy is to bypass the agent completely and sell direct to the public, via call–centres and the Internet.

But it’s not just about lower costs. In essence the Internet truly is a revolution because it allows any one PC or laptop user to gain access to information that was previously only accessible through, for example, a travel agent. Instant consumer access to airline schedules and fares fundamentally changes the way the aviation industry does business, as anyone with a PC now has 24- hour accessibility to airline ticketing, with options to choose seat and meal preferences, as well as destination information, video clips, currency converters etc. As more and more tickets become available online, the comparative value–added services that agents provide become more and more eroded. For all their claimed added value, travels agents are basically intermediaries — and what the Internet is guaranteed to do is dis–intermediate.

For businesses, the Internet will mean that they will be able to control better the travel booking process by doing it themselves online, and as a byproduct capturing travel expense data directly and ensuring that corporate travel policies are kept to.

The Internet also gives another benefit to airlines, and one that may have the greatest effect of all. Marginal pricing becomes much easier online, and last–minute price reductions to fill up an aircraft are available to the public as soon as someone at an airline types them in (or, more likely, a computer generates them). Delta is already exploiting tie–ups with the numerous US auction web sites, which allow customers to make bids for tickets within a certain time frame, with the highest bidder winning when the time limit expires.

And, in addition, when a customer books direct it is the airline that captures direct the details of the customers for its database and not an intermediary such as a CRS or a travel agent.

The next few years will be an interesting time for the CRSs. An attempt by Galileo (soon withdrawn) to impose a 50 cents fee on electronic ticketing in May 1998 prompted Continental to announce plans for Internet distribution that would bypass CRSs entirely. But Continental had to tread warily, given its stake in rival CRS Amadeus. Nevertheless, as airlines reduce their ties to the CRSs the large US airlines may be even keener to support e–ticketing and Internet bookings than they are now (particularly as some airlines feel that CRS fees are rising too sharply).

Most of the CRSs realise this too. Some of them are setting up their own Internet products (e.g. Sabre with Travelocity) or joining up with new media experts (e.g. Worldspan and Microsoft’s Expedia). In effect they too are saying that if customers want to bypass agents, then they will do all they can to facilitate this.

How Internet booking will evolve is still open — it could be via one or two vast, neutral web sites (such as Expedia) which collate all ticket and fare information, or it may be that each airline will produce its own web site, allowing consumers to trawl through each site to find the best deals around. This later option may not be as far–fetched as it sounds, as Internet users will be able to automate the process for ticket searches via software programmes (called spiders) that search the Web for suitable fares and only inform the user when the most suitable deal is found.

Is it all good news?

Inevitably, the Internet also presents dangers to the aviation industry. The Internet gives more power to consumers — not suppliers. As price comparisons are instant and clear, they may persuade many an executive to take a cheaper flight (particularly if Internet booking is controlled by a company’s own in–house travel team). The distinction between business and leisure travellers will be eroded by the Internet unless business class products are truly valued by customers.

But evidence that Internet sales can be significant cannot be ignored any longer. In its financial year to September 30th 1998, easyJet sold 10% of its tickets over the Internet, with peaks of 40% during certain times. Of course easyJet has one significant advantage — it has always bypassed travel agents, so there is no agent backlash to counter. In fact British Midland was the Internet ticket pioneer in the UK, closely followed by BA. Although e–ticketing (ticket–less travel, which can be booked direct via the Internet or a call centre) and Internet bookings account for just one per cent of BA’s revenues, according to a BA executive “the potential is huge and new ways of buying and organising travel are fast becoming reality”.

What is clear is that to understand the potential of the Internet needs a change in industry mindset — it’s not just a case of taking out the insurance of a potential new distribution channel. Last year United bought a stake in the travel technology company Internet Travel Network. Is this a pointer to the future — or is it more likely that new media giants such as Microsoft will buy airline stakes?