4 ways that NDC is reshaping how airlines sell
Confused about what exactly IATA’s New Distribution Capability can deliver for airlines? Tom Bacon explains that the biggest opportunity may lie with personalisation and dynamic pricing
New Distribution Capability, or NDC, is promoted as an exciting revenue strategy for airlines. The initiative, launched by IATA, a global airline association, specifies a standard protocol for ancillary services and facilitates expanded content on third-party industry distribution sites like Expedia, Skyscanner or eBookers. IATA speaks of the four ways in which NDC can drive more revenue for airlines. Let’s scope out the potential in each of the four revenue-related opportunities:
1. Differentiation. Currently, airlines appear as commodities to many travellers, especially when booking through third-party distribution systems. Third-party sites focus on schedule (flights by time of day) and price (lowest fare available). There is little in a standard display to differentiate between airlines, to emphasise better customer service or lower ancillary fees. NDC, however, allows airlines to offer additional product descriptions that can help customers select the experience that best matches their needs. Of course, this mostly benefits those carriers which can actually deliver a ‘better’ experience – whether it is in dependability or seat pitch or customer satisfaction based on net promoter scores.
Given the ongoing need to simplify the booking experience, could the value of significantly more content may be limited?
Most legacy carriers, of course, have a clear need to differentiate themselves from the bare bones services of the ultra low-cost brigade – but NDC can also benefit these ULCC’s that offer their own upgrade alternatives to their most basic product. Given the ongoing need to simplify the booking experience, however, the value of significantly more content may be limited. The needs of every customer are different and clear comparisons may be elusive; for example, if one airline shows seat pitch, how does one know the pitch on each of its competitors? Nevertheless, differentiation remains an opportunity facilitated by NDC and, potentially, one of the first such opportunities to exploit.
2. Merchandising. New merchandising opportunities are available via NDC that are not available in traditional third-party displays, including marketing ancillary services and branded fares. Ancillary remains a huge opportunity for airlines and, for those airlines that rely on third-party sites for much of their distribution, limited ancillary capabilities available on those sites hinders upsell. Making ancillary services available on third-party sites may, therefore, be worth a lot. Similarly, branded fares (or ‘segmented fares’) are cited by Delta as worth more than 1 percent in additional revenue. Of course, ancillary services and branded fares are both still generic offers – all travellers see the same content and face the same choices. And, rather than revolutionising air travel, so-called ‘merchandising’ represents the extension of existing direct channel capabilities to third-party channels.
3. Personalisation. New personalisation exploits the two-way potential of NDC – recognising a traveller’s needs and presenting more individualised content. Many airlines recognise the value of personalisation and have adopted a form of personalisation on their websites with their frequent flyers.
NDC offers a much broader application of personalisation, broader in terms of customers and broader in terms of channels
NDC offers a much broader application of personalisation, broader in terms of customers (all customers) and broader in terms of channels (especially third-party channels). Personalisation has been found in other consumer industries to be worth over 5% of revenue; if airlines can implement personalisation successfully, it could dramatically change travel distribution.
4. Dynamic Pricing. Although airlines already have a form of dynamic pricing with their existing revenue management systems, NDC facilitates a radically different approach that allows prices to vary along entirely new dimensions. Machine learning will be used to identify willingness-to-pay along a continuous price curve, replacing the step-function pricing currently inherent in most existing RM systems. Such dynamic pricing has been found to drive both higher yields and higher load factors.
So, it is fair to say that NDC can drive significantly more revenue for airlines. New opportunities for differentiation and merchandising represent extension of current direct distribution capabilities to third party distribution channels. Potentially, even more revenue, however, may be gained by wholesale changes in distribution, as exemplified by new personalisation and dynamic pricing.
Tom Bacon, a 25-year airline veteran and industry consultant in revenue optimization, is a moderator at the upcoming Analytics & AI in Travel show in San Francisco. Tom is a regular EyeforTravel columnist and leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Email Tom or visit his website.