Airline reservations: a deep dive
The commercial passenger airline industry is huge. In 2018, the system-wide, commercial passenger airline revenue was $561B USD [6]. Since air travel is a large part of travel, including and especially that of business travel, I tried to make sense of how an airline ticket gets from the airline to the consumer. Knowing where the airline sales and management industry is going can help anticipate where business travel might be headed in the next 5-10 years.
To the typical vacation traveller, it may seem simple: log onto Google, search for flights, pick one, enter credit card number, hit book, and voila!
Under the hood, it gets complicated...
[Add your voice to the conversation here]
So, how does it work?
[A sea of acronyms]
Without getting lost in a sea of acronyms, I’ll try to summarize how airline reservations work as simply as possible:
Airlines have inventory – flights and seats
This inventory is stored in an Airline Reservation System (ARS)
Global Distribution Systems (GDS) are these old and established, massive software companies that provide a link between the inventory and someone requesting inventory; for example, a travel agent. Instead of the travel agent having to contact every airline individually, they could go to one of these distributors and get inventory for many airlines at once.
Front-line agencies liaise with customers to sell inventory – brick & mortar travel agencies, online travel agencies (OTA), or travel management companies (TMC)
Online aggregators (like Google Flights or Kayak) pull data from a number of sources, including GDSs, and other sources that have inventory
Customers can also buy direct from airlines, and travel agencies can go direct to airlines
[A very rough system diagram]
Three major players control distribution
Although at one time (ahem, the ‘70s), it made sense to aggregate the inventory of many airlines for easy access, does this make sense anymore? In 2017, three software companies owned 100% of the world’s global market share* for distribution of airline ticket/seat inventory: Amadeus, Sabre, and Travelport [2].
These large, middlemen companies may have centralized things at one time, when travel agents had to pick up the phone to find inventory. Today, travel agents (physical and online) represent only 31% of airline ticket sales (2016) [5].
Open source software and APIs are at the forefront of the digital age. The underlying hardware is more powerful, meaning we can fire off thousands of requests per second for cheap. Google Flights or Kayak (both are aggregators) can scrape the web in a matter of seconds for the cheapest and best flights.
Yet we’re still beholden to three major GDS companies. Shifting off of large, complex, and established systems takes time, but this space seems ripe for innovation.
*Note: With the exception of four countries that have local GDSs – Russia, China, Korea and Japan.
[Rough research notes]
Airlines are pushing for direct sales, and trying to circumvent sky high fees
Since most airline reservation systems are owned and operated by global distribution system companies [3], airlines pay hefty fees to store and manage their inventory. The net profit margin for the average commercial airline was only 3.7% in 2018, and this number is trending downwards [5]. The International Air Transport Association (IATA) predicts direct sales of airline tickets will rise from 33% (2016) to 45% (2021) [5] with airlines trying to reduce fees paid to GDSs.
What does this matter for us?
At this point, I’m not sure how much this matters to our project – it may be more interesting than useful. The space is large and complex, and probably warrants its own fellowship! New standards are being introduced, like the New Distribution Capability (NDC) – which is incentivizing a shift from the old technology, EDIFACT, to the new standard, XML [7].
But we do know there are trends towards direct sales by airlines, mobile-first platforms, and consumers moving to search engines to find flights [5]. This shift in consumer behaviour may influence upstream changes in the GDS space – driving democratization of distribution channels, and driving rapid changes in technology (Blockchain? Open APIs?).
And don’t forget! Travel is much more than just airlines. Trains, busses, hotels, car rentals, food, taxis, local transportation… some (or all) may route through other computer reservation systems. But I digress, and leave that for another day.
What now?
Further reading – here’s an in depth article that does a much deeper dive into the background of global distribution systems, how they came about, and how their role in the travel industry may change.
Join the conversation – did I get something wrong? See an interesting trend I didn’t pick up on? Drop me a line, or respond to this Twitter thread!
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Sources
The information in this blog was pulled from a number of sources:
[1] “What is a Travel Management Company?”, Egencia, https://www.youtube.com/watch?v=fK0Fimlcz5E. Accessed July 17th, 2019.
[2] “What is a Global Distribution System?”, Egencia, https://www.youtube.com/watch?v=aGXffNJF_zk. Accessed July 17th, 2019.
[3] “The ineluctable middlemen,” The Economist, Aug 25th 2012, https://www.economist.com/business/2012/08/25/the-ineluctable-middlemen. Accessed August 7th, 2019.
[4] “The Difference Between CRS and GDS in the Travel Industry,” Michael Strauss, Travel Industry Blog, June 26th, 2018, https://www.travel-industry-blog.com/gds/the-difference-between-crs-and-gds-in-the-travel-industry/. Accessed July 17th, 2019.
[5] “The Future of Airline Distribution, 2016-2021,” Henry H. Harteveldt, Atmosphere Research Group, 2016, https://www.iata.org/whatwedo/airline-distribution/ndc/Documents/ndc-future-airline-distribution-report.pdf. Accessed July 17th, 2019.
[6] “Industry Statistics Fact Sheet, June 2019,” IATA, https://www.iata.org/pressroom/facts_figures/fact_sheets/Documents/fact-sheet-industry-facts.pdf. Accessed July 17th, 2019.
[7] “Channel Shock: The Future of Travel Distribution,” Andrew Sheivachman, August 7th, 2017, https://skift.com/2017/08/07/channel-shock-the-future-of-travel-distribution/. Accessed August 7th, 2019.
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