The global airline industry is an economic force multiplier, making a staggering impact of USD 2.4 Trillion when direct, 1 indirect and catalytic effects are included . With the coming New Distribution Capability (NDC) revolution, the industry may finally be able to improve its own prospects by reversing chronic profitability issues.
NDC is an International Air Transport Association (IATA)- backed, XML-based data transmission standard that allows carriers to distribute a full range of products through travel agents via greatly improved communications. Significantly from an adoption standpoint, NDC is open to any third-party, intermediary, provider or non-IATA member to implement and use. It promises to give airlines control over the exact product or product suite they offer, at any given point in time, to any given traveller.
However, capitalizing on the NDC opportunity will require an overhaul of airline business processes and IT systems. Carriers, therefore, need to carefully study the issues that NDC is designed to address, understand the likely costs and benefits, and make an intelligent decision on how to proceed.
Once the airline industry pays its suppliers and services its debt, there is virtually nothing left over — with returns on invested capital reported to be an unhealthy 4.1 percent 2 according to the latest research by IATA .
This has made profit improvement and cost reduction urgent imperatives for airlines worldwide. On the cost side, distribution expenses stand second only to expenditure on fuel. Consequently, the industry is exploring ways to drive down distribution costs, including booking fees of approximately USD 4 per flight paid to Global Distribution System (GDS) operators.
Second, airlines as a whole would be unprofitable without 3 ancillary services and premium fares, so airlines are also laser-focused on increasing sales of add-ons. However, doing this presents a challenge as carriers cannot currently sell their full range of options such as preferred seating, on-board Wi-Fi and in-flight meals through the indirect channel.
Further, the industry faces chronic issues around control of its inventory, which to a significant degree is regulated by intermediaries such as travel agents. In an ideal world, carriers would like to have greater sway over how bookings are made as well as greater transparency in the booking process.
The NDC standard completely transforms the abilities of an airline to serve their customers and drive greater revenue through the indirect channel. With NDC, they can:
Carriers need to get three things right at the outset of any NDC program to ensure they are ready for success. These critical elements are an NDC feasibility study, a robust functional requirement document and the right technology and business process provider.
With NDC, the airline industry is making bold moves to end its low profitability and commoditization tailspin. While the path ahead is long, carriers need to act today to gain the full benefit of the coming distribution revolution. By positioning themselves correctly, farsighted airlines can outperform not only industry benchmarks but also their competitors.
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28 January 2022
Finance and Accounting