Trends in the Travel Industry

Influences on the air travel industry include increased competition through globalization, changing customer lifestyles, and the perception of risk that consumers attach to air travel. Some market trends include increased consumer knowledge about product offerings (driven by more direct marketing and also the ease of comparison that the Internet affords), higher customer expectations of convenience, added value through the customization of offerings, increased consumer affluence and the more intense exploitation of leisure time to "get away." All of these factors tend to increase consumer power, allowing consumers to exert more leverage on the industry in terms of pricing and choice. However, they also increase the total market size: sales in the first quarter of 2002 exceeded those in the first quarter of 2001 significantly (Jupiter, 2001). In 2000, leisure travelers (55 percent) outnumbered business travelers (37 percent)—the other 8 percent of travelers were those who combined business and pleasure (Heartland, 2001).

The bundling of a variety of products and services into an attractive package is made possible by the exploitation of preferential pricing to a value-added provider (normally a travel agent). The ability to access "value added" services has recently been offered to travel agents through a variety of real-time, online reservation systems. Travel agents who exploit online reservation systems do not have to sell their packages to consumers online, although they may have to strive to compete with the convenience of those who do. Bundling gives travel agents more power, as they can present the consumer with more attractively priced product bundles than if the consumer buys these services separately and may add value with items that the consumer would not have thought to add, such as a bottle of iced champagne waiting in the room!

Air travel bookings provide US travel agents with the majority of their revenue (Heartland, 2001). On average, 54 percent of travel agents' revenues accrue from air travel bookings. Cruises account for 19 percent of revenue (margins are higher on sale of cruises, but this also may be threatened as cruise operators increasingly employ direct sales channels). Hotel bookings provide 11 percent of revenue, car rentals 8 percent and sale of rail tickets and other services provide 8 percent. Hence, direct and online sales of air tickets represent a huge threat to the survival of most travel agents. Coupled with the year-on-year cuts in airline commission payments to travel agents, as a percentage of sales value, and a similar trend in other commissions, such as hotel bookings (Heartland, 2001), travel agents may well struggle to survive. Unless they can find a way to differentiate their products and services, the smaller travel agents will not survive for long.

Technology trends include the ever-increasing sophistication of data mining and customer relationship management software (providing detail on both patterns of purchases and hypotheses for the motivation behind purchases), increasingly seamless connectivity between systems and the ubiquitous availability of trustworthy, secure online purchasing. Such technological advances mostly benefit the airlines. Because of the amount of information that they can collect about their customers and the impact of various pricing and marketing strategies—all in real time and collated by geographical region and some demographics—airlines can leverage direct sales channels to a high degree. They can then exploit the brand recognition of their direct channel online sites and can offer differential pricing to preferred customers. Airline direct channel sales could well offer a challenge to online travel agents, in the future, particularly when catering to frequent flier consumers. This may cause tension between the preference and price structures allocated to indirect sales channels (Travel Agents) and direct sales channels (their own online reservation systems), as there is obviously more profit in disintermediation. There has been a recent trend of airline mergers, which effectively combine multiple travel routes and result in less competition on any particular route. Airlines have significantly increased their direct sales, and in some cases doubling these sales between 2000 and 2001 (Heartland, 2001). Effective customer relationship management systems may now permit airlines to lock customers into using their airlines, through frequent flier programs, an element that has been missing in the industry until now, since most frequent fliers belong to several airline schemes.

The Challenge for E-Commerce Transactions

Individual e-commerce customers are demanding and often unforgiving. They expect page downloads in less than eight seconds and expect to complete the shopping process in less than ten minutes from when they open the retailer's homepage. They demand convenience, speed and a seamless buying experience. Nearly a quarter of online shoppers stop using the site after a failed transaction. In fact, failure has a serious impact - ten percent never shop online again (BCG, 2000).

The challenge for airlines, in common with other businesses, will be to offer a consistent customer experience across channels. Customers shopping on an airline website expect the same level of service that they would get through a travel agent. Customers buying airline tickets via a third-party website, such as Travelocity, expect the same sort of treatment, including recognition of frequent flier privileges. In an increasingly connected world, online customers expect a consistent experience via Palm devices and mobile phones. There may well be a role in the future for e-commerce wireless portals, connecting consumers to online travel agents, direct channel sales and perhaps even allowing the consumer to customize their own, value-added bundle of travel products. If travel agents are proactive in their use of online technologies, they may survive and even remain competitive. However, the corporate market is more susceptible to disintermediation by the airlines, which see the development of business-to-business markets as the most significant of their long-term strategies (IBM, 2000). It is ironic that the industry that originally limited direct sales to corporate customers because the cost-overhead of dealing with individual customers could more profitably be mediated by travel agents is now returning to that position once again.

A consequence of e-commerce purchasing is the commoditization of products and services sold via e-commerce direct distribution channels (Kalakota & Whinston, 1996). With increasing information about product and service features and pricing, consumers tend to treat direct channel products and services as interchangeable. This is particularly true for online services, such as travel bookings, where the service provider is acting as an intermediary for third-party products and services. Consumers will increasingly see both online and traditional service-providers as interchangeable, as their experience of comparing online prices increases. The theory is that consumers select their service-provider based on price. However, Gallaugher (199) argues that both product and service brands are significant in reducing the impact of commoditization. Users have difficulty locating product and service information on the Internet and so rely on known brands to reduce the effort in locating a trustworthy purchase. This presents a way for travel agents to reduce the threat from direct sales by airlines. However, the challenge for travel agents is to differentiate their offering. Some ways of achieving this are by building a strong agency brand, by identifying a less price-sensitive niche target market segment (e.g. affluent senior citizens) whose needs they anticipate better than competitors, or by reducing search time and effort. Analysts at Jupiter (2001) found that poor customer service in the travel industry disproportionately affected consumer perceptions of a travel agency or airline brand. Seventy-nine percent of consumers said they would be less likely to buy airline tickets online a second time from a company with which they had a poor experience and 54 percent said that the experience would adversely affect their future off-line relationship with that company. Most consumers appear to prioritize communication about delays and cancellations - this is a differentiated service opportunity for the right travel agent.

Increasingly, we see online travel agents attempting to differentiate their service from that of their competitors. Expedia promotes their service on the basis of a powerful information system search capability that allows users to find more combinations on pricing and schedules than their competitors; users can sort flights by price, flight duration and departure times. Travelocity has responded by revamping its information systems to provide innovative search facilities - for example, a user can select a flight based on destination and fare, and then view a three-month calendar of the flight's availability. This echoes the lesson learned from SABRE: branding is not enough to provide competitive advantage in a high-rivalry, turbulent product-market characterized by rapid technological change. However, most of the online travel agents are owned by, or have very close ties to, a major Global Distribution System company (GDS are global, computer reservation systems). The exception to the dominance of a few major GDS companies is provided by Orbitz (see Appendix for ownership), who have created their own GDS software. GDS fees accounted for 4.72 percent of an air ticket's cost, in 2000 (Kasper, 2000). Orbitz created their own software in response to their perception that there are flaws in the major GDS software packages that eliminate "the overwhelming majority of itineraries from consideration before they are checked for prices" (Kasper, 2000). Coupled with the high concentration of the market between the major players (see Appendix 1 for the year 2000 online travel market share figures), the major GDS companies dominate the market and bias the competitive offerings (Kasper, 2000). Orbitz strategy is to offer access to all airfares - including the very small percentage of fares offered only by airlines directly through their own websites (as airlines pay no GDS fees on these fares, direct-booking fares may be significantly lower). In return for providing Orbitz with all fares that they offer, the airline receives a significant discount on the booking fees that a carrier pays for bookings through an online travel agent such as Travelocity or Expedia. Complaints from competitors, accusing them of giving preference to major airlines, resulted in a DOT audit of Orbitz that concluded that they had spurred competition in the market. However, this innovative technology may not change the face of competition and lower prices for consumers in the long term. Orbitz introduced a booking fee for customers in December 2001. It is debatable whether this is because of low online sales margins (a consequence of highly price-sensitive customers) or an experiment on the part of the major airlines that own Orbitz (see Appendix), to test the market's willingness to pay for online bookings.

It can be seen, then, that an effective information system platform is the basis for success in this market, whether the service provider is a brick and mortar travel agent, an online agent or a direct-channel airline provider. Successful companies need to evolve a set of systems, developed in response to business needs and technical opportunities. Continual evolution alone is not the success factor, but continual evolution in combination with the opportunistic exploitation of opportunities offered by the industry environment. As we saw in the comparison of the European market with that of the USA, differences in the structure of the local market environment require different technical responses.

The Future of the Air Travel Industry

All is not doom and gloom: brick and mortar travel agents are beginning to exploit the new technologies, to add value and information services to their basic service package. To this factor is attributed the rise of travel agent revenues in the USA, which rose 25 percent in 1998 (Kellendar, 1999). A report by Heartland (2001) argues that smaller travel agents are becoming increasingly uncompetitive, given squeezed margins, reducing commissions and cherry picking of higher-value custom by online travel agents and by airlines. The question is, to whom is the increased business going?

In the individual consumer market, are sales going to the traditional travel agent, hampered by older technology in booking flights and tinkering at the margins? Alternatively, are they going to the new, online travel agents, establishing radical brand images and innovative ways of obtaining a low-cost, high-quality package?

In the corporate travel market, are sales going to the traditional travel agent, who reduce the search time and effort of corporate travel buyers, but whose profit margins are squeezed at both ends: by corporate rebate negotiations and by airline commission reductions? Are they going to the online travel agents, whose economies of scale can support radical discount strategies? On the other hand, are they going to the airlines, whose direct sales channels can offer dynamic bulk pricing and who have the ability to squeeze out indirect channel service providers by limiting availability and by employing differential pricing? The major airlines see corporate direct sales as their most strategic market opportunity, long-term. Given the airlines' ownership of the major online travel agencies and their ability to set commission levels for their competitors, this strategy may well be highly successful.

Annals of Cases on Information Technology
SQL Tips & Techniques (Miscellaneous)
EAN: 2147483647
Year: 2005
Pages: 367 © 2008-2017.
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