It's all about the customer - Are Asia's Flag Carriers really behind the curve in airline retailing? - Farelogix
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It’s all about
the customer
Are Asia’s Flag Carriers really behind
the curve in airline retailing?
www.farelogix.com
www.farelogix.com
sales@farelogix.com
Phone: 305-552-6094
2
For some time, industry observers
have contended that airline retail-
ing in Asia is lagging behind other
markets, such as the US and Europe,
where many Full-Service Carriers
(FSCs) unbundled their fares and
are reaping substantial revenue
gains through ancillary merchan-
dising. With eight out of 11 Skytrax
five-star airlines based in Asia1, is
airline retailing here really behind the
curve? Shouldn’t we see the superior
customer experience and brand offering as a strategic advantage and not something that should be unbundled?
Moreover, what are the unique airline retailing opportunities and strategies for Flag Carriers in Asia?
Having lived and worked in Asia for more than a decade, mostly in the airline or travel tech verticals, I will shed
some light on the topic and share my take on airline retailing in Asia in this paper.
Mark McDonald
Director – Asia Pacific
Farelogix
Based in Hong Kong, Mark McDonald is Farelogix Director, Asia commerce, and travel retailing strategies. He also represented
Pacific. A digital business and technology strategist, Mark has the company in the IATA Advisory Forum. Prior to that role, he
more than 20 years’ experience supporting large business and consulted with airlines on NDC and ONE Order initiatives. Mark
IT transformation programs across a number of industries. also held a number of thought leadership positions with Cathay
Leveraging his deep understanding of the airline industry in Asia, Pacific focused on retailing, sales and distribution, CRM, digital
Mark is spearheading the company’s broader expansion into the marketing, travel retailing,and e-commerce. Early in his technolo-
region. He is working with leading airlines to support the develop- gy career, Mark held technical roles with industry leading technol-
ment of new distribution strategies and revenue generation op- ogy and companies such as Microsoft, Oracle, and Huawei.
portunities through the application of next generation technology
for airline commerce. Mark holds a Master of Science (Management) degree from
North Carolina State University and a Bachelor of Economics de-
Prior to joining Farelogix, Mark was Regional Director, Asia Pacific gree from the University of Queensland, Australia. Most recently,
at OpenJaw Technologies where he was charged with business Mark earned an Aviation Strategy and Leadership certificate from
development and consulting to industry-leading airlines in Hong US-based Stanford University’s Centre for Professional Develop-
Kong, Korea, Taiwan, and Thailand on their distribution, airline ment.
www.farelogix.com Copyright 2019 3
Why Asian Flag Carriers Have Not Unbundled
We can trace the history of ancillary fees back to the 2008 recession and the decision by American Airlines to start
charging for checked bags2. This move aimed to offset the high cost of jet fuel and other effects of the financial
crisis, which had been compounded by the emergence of Low-Cost Carriers (LCCs). In a market characterized by
high price-sensitivity and lower demand for premium products and services (i.e. lower product-sensitivity), North
American and European FSCs chose to gradually unbundle the all-inclusive airfare particularly on domestic and
some regional routes. It was a positive move for airline profitability, and in a relatively homogenized market, cus-
tomers benefited from greater personalized choice.
Unlike their North American and European counterparts, Asian Flag Carriers have not unbundled core airline prod-
ucts such as seats, meals, and bags. The reasons for not unbundling provide a window into the distinctive traits of
Asia, including:
The unique characteristics of the Asian A greater proportion of “product-
traveler sensitive” international travel in the region
Higher traffic volumes Airline history and operations
A diverse and fragmented market
Note: Asia’s Flag Carriers refers to full-service airlines including Korean Air, Asiana,
Japan Airlines, ANA, Cathay Pacific, Singapore Airlines, Garuda, Qantas, Virgin Australia,
Air New Zealand, Philippine Airlines, Malaysia Airlines, Thai Airways, Vietnam Airlines,
China Airlines, Eva Air, and the big four in mainland China – Air China, Hainan Airlines,
China Eastern, China Southern, and Xiamen Airlines.
4
Customer experience
is everything
The quality of Asian hospitality is world-renowned
and springs from a heightened, even cultural
importance. Asian hospitality is characterized by
a desire to connect with guests emotionally and
provide value-added experiences. An expectation
for a high-level of personal touch and a premium
product remains at the very heart of the travel ex-
perience for a significant portion of the Asian travel
market.
In Asia, many travelers still expect their travel to be
organized for them, whether on group tours or by
travel agents. Also, the Asian customers who book
with Flag Carriers expect the basic features (seat,
bag, meal) to be included. It is a widely held here in
Asia that unbundling basic elements from the fare
runs counter to expectations of these customers
and would cause alarm and result in customer
experience and operational issues for airlines.
This expectation is reflected in the China regulator,
CAAC, mandating all-inclusive airfares.
With yield and customer experience so tightly related
in the region, most Asian Flag Carriers are taking
a cautious approach to unbundling, especially as
price-based competition from LCCs is nipping at
their heels. While there are a number of successful
LCCs in the region, including AirAsia, Jetstar, and
Scoot, most Flag Carriers maintain a strong market
position with high-quality product offerings.
www.farelogix.com Copyright 2019 5
Fare Families: A Means to an End
To better address their specific market segments, including the
price-sensitive traveler, many Asian Flag Carriers have started
using Fare Families to offer flight ancillaries, albeit through
traditional means and ATPCO fare filing.
In Asia, Fare Families are often differentiated by attributes such
as the number of miles or frequent flyer status credits earned,
whether the seat is upgradeable to the next class, which seats
are available to be reserved, and even whether advanced seat
selection is allowed. However, meals, checked bags, pillows,
blankets, and seat selection (during the check-in window) re-
main included and not charged separately. Additionally, priority
check-in and priority boarding are highly protected benefits for
frequent fliers and passengers flying in premium cabins.
“
Priority check-in
and priority boarding
are highly protected
benefits for frequent
fliers and passengers
flying in premium
“
cabins.
6
Regional Travel in Asia: Big Enough Market for Everyone
While unbundling in the US and Europe has given customers welcome choice, the Asian air travel market features
unique dynamics which have led to Flag Carriers valuing the all-inclusive fare. None of these dynamics is more
potent than the sheer size of the Asia market when compared to other geographic regions.
Higher traffic volumes on regional routes
Regional travel in Asia cannot be easily compared with routes of similar length in Europe and the US. Of the top
100 busiest routes (domestic or international) in the world, 80 of them are in the Asia Pacific market, ten are in
North America, and the remainder in the Middle East, South/Central America, Africa, and India. Notably, none of
them are in Europe. The volume of traffic on Asian routes means a larger addressable market and more clearly
defined market segments.
Figure 1: Top 100 Busiest Air Routes3
R ank A irpor t 1 A ir po r t 2 D i s ta n c e ( k m ) 2017 P a s s e n ge r s N o te
1 Jeju Seoul-Gimpo 449 13,460,306 Domestic
2 Melbourne Sydney 705 9,090,941 Domestic
3 Sapporo Tokyo-Haneda 835 8,726,502 Domestic
4 Fukuoka Tokyo-Haneda 889 7,864,000 Domestic
5 Mumbai Delhi 1150 7,129,943 Domestic
6 Beijing Shanghai-Hongqiao 1081 6,833,684 Domestic
7 Hanoi Ho Chi Minh City 1171 6,769,823 Domestic
8 Hong Kong Taipei-Taoyuan 802 6,719,030 International
9 Jakarta Surabaya 700 5,271,304 Domestic
10 Tokyo-Haneda Naha 1573 5,269,481 Domestic
11 Tokyo-Haneda Osaka-Itami 407 5,106,584 Domestic
12 Jeddah Riyadh 857 5,091,629 Domestic
13 Jakarta Denpasar 991 4,952,852 Domestic
14 Chengdu Beijing 1559 4,951,620 Domestic
15 Guangzhou Beijing 1898 4,864,177 Domestic
16 Jakarta Singapore 896 4,810,602 International
17 Brisbane Sydney 756 4,742,771 Domestic
18 Cape Town Johannesburg 1292 4,698,849 Domestic
19 Cancun Mexico City 1294 4,656,308 Domestic
20 Jakarta Makassar 1439 4,559,737 Domestic
21 Beijing Shenzhen 1979 4,496,351 Domestic
22 Guangzhou Shanghai-Hongqiao 1176 4,469,990 Domestic
23 Shanghai-Hongqiao Shenzhen 1217 4,445,654 Domestic
24 Bangalore Delhi 1717 4,183,799 Domestic
25 Hong Kong Shanghai-Pudong 1247 4,162,347 International
26 Kuala Lumpur Singapore 296 4,108,824 International
www.farelogix.com Copyright 2019 7
Fragmentation of wealth across the region (based on GDP/capita)
If we use GDP/Capita as a proxy for price sensitivity in airfare purchasing, the GDP/capita in Asia is at
~USD$13,500 with some territories/countries such as Japan, Korea, Macau, Hong Kong, Singapore, Brunei, and
Malaysia with GDP/capita more than double the regional average. Conversely, Asia also has territories/countries
at the other end of the spectrum such as Cambodia, Bangladesh, Vietnam, Philippines, and Indonesia that are well
below the regional average.
Figure 2: Asian Countries by GDP4
With the fragmentation of wealth in Asia comes more distinct customer segments, even down to a territory/
country level. With considerably greater passenger volume comes even larger customer segments, enabling both
Flag Carriers and LCCs to successfully operate on the same route by addressing their specific market segments
and only competing for the overlapping price-sensitive economy travelers. Given the size of the premium “product-
sensitive” market, Asian Flag Carriers are best placed to service their customer need by retaining an all-inclusive
product. In Europe, where GDP/capita of European countries is much closer to the average6, there is less income
disparity and a more homogenized addressable market. This results in more competition between airlines, greater
likelihood for commoditization, and therefore greater drive for unbundling.
8
High International Traffic Volume
The third unique aspect of the market in Asia is that there It is not possible to compare routes of a similar
is significantly more international travel in the region. Of length such as the domestic-like London-Frankfurt
the top 100 busiest routes in the world, 17 are interna- (~1.5M PAX/year) with say a Hong Kong-Bangkok
tional, and 13 of those are in Asia. Of the top 10 busiest (>3M PAX/year). On London-Frankfurt only British
airports for international travel, five are in Asia (the other Airways and Lufthansa compete with 18 flights per
five are in Europe). day, with LCCs flying from London airports (e.g.
Gatwick, Stansted, and Luton) to secondary airports
Passenger expectations on international travel are more such as Frankfurt-Hahn. As for Hong Kong-Bang-
product-sensitive than they are for domestic travel, and kok, there are 22 flights per day, with offerings from
all-inclusive fares are expected. The size of the premium Cathay Pacific, Emirates, and Thai for premium and
international market in Asia drives the competition to offer connecting traffic, whereas Air Asia, Thai Smile,
better products and services. and Hong Kong Airlines service the needs of more
price-sensitive economy travelers.
Figure 3: Top 100 Busiest International Air Routes5
www.farelogix.com Copyright 2019 9
“
Competition for the premium
international flight experience has
driven Asian Flag Carriers to create
superior customer experience
and brand propositions that are a
“
strategic advantage.
Operational Concerns
Given the above, it is understandable that Asian Flag Carri-
ers have little appetite to unbundle in the same way as their
counterparts in North America and Europe. To compound
this, the internal effort to create and operationalize new
air ancillary products is sizable. Often buy-in is required
across numerous, and sometimes entrenched, commercial
and operations departments, where any change to existing
processes is likely to be met with resistance.
While holding onto a traditional business model might
make sense in light of market dynamics, it should not stop
visionary airline managers in the region from finding other
ways to create new revenue streams while maintaining a
premium customer experience.
10The Full-Service Carrier Opportunity:
Adding Value
By adding value rather than taking it away, Asian FSCs can create new revenue streams and enhance their cus-
tomer experience at the same time. Airline Retailing can go beyond unbundling the all-inclusive airfare, to retailing
individual services and transforming how an airline markets and sells its products.
Some value-added ancillary examples include:
Extra Legroom and Ad- Prepaid Excess Baggage, Upgraded Meals Special onboard products
vanced Seat Reservation dynamically priced in such as Champagne
for a fee, dynamically self-service and indirect
priced in self-service and channel
indirect channels
Off-peak Lounge Passes Booking on Hold/Fare Ancillary Bundles Non-air ancillaries such as
Lock Insurance
While leading Flag Carriers in Asia, such as Cathay Pacific and Singapore Airlines, have brought some of these
products to market, a quick look at the offerings of the major Asian Flag Carriers suggests that there is still signifi-
cant opportunity to add ancillary services and grow revenue streams.
The Challenge
Even if Asian Flag Carriers take a different approach to their counterparts in Europe or North America, existing
pricing and distribution systems (PSS, GDS, ATPCO) remain inflexible. These systems do not allow airlines to
create and sell new air ancillary products in the way a modern retailer would want. Thankfully, there are alternative
solutions in the market that enable airlines to create new ancillary products and bring them to market quickly.
www.farelogix.com Copyright 2019 11Different Strategies in a Diverse Market
Asia remains a fragmented market, with unique and diverse market conditions, and protection of the all-inclusive
offering is not right for every airline. Growing knowledge of Airline Distribution and Retailing transformation has
provided airlines in the region with new opportunities to address their specific challenges. As such, 2019 could be
a tipping point for some Asian FSCs. Expect to see bold moves aimed at adding value to existing offers and the
creation of new revenue streams. In this pursuit, the biggest hurdles to overcome will be their GDS agreements and
legacy PSS technology constraints.
Qantas
One shining light in the region is Qantas, which has
launched its Qantas Distribution Platform (QDP) with
Farelogix, providing them with full control over their
offers and distribution strategy. Qantas is also able
to bring new ancillary products to market faster than
what was previously possible. Following the success-
ful QDP launch in 2018, this is an airline to watch.
China
We will see increased innovation from Chinese air-
lines, such as China Southern and China Eastern, as
they make significant moves into retailing. Currently,
the Chinese regulator, CAAC, restricts airlines from
unbundling and forces an all-inclusive airfare with
checked bags, seats, and meals. However, there
have been rumors that the CAAC will allow Chinese
airlines to sell ancillaries in a move that should spur
significant offer innovation. From a direct connect
perspective, Chinese airlines have already been
connecting directly to partners for some time. The
big opportunity for Chinese airlines will be to take
more control of their inbound markets through
direct connects with online travel agencies (OTAs)
and aggregators.
12Japan
In Japan, the two Flag Carriers, All Nippon Airways
(ANA) and Japan Airlines (JAL), remain traditional
FSCs operating with legacy systems and processes.
I predict that neither of these airlines will look to un-
bundle but will create ancillary offers that add value
to their core brand proposition. It is likely that both
airlines will soon look to bring new fare and ancillary
product offerings to market and break some of the
limitations of ATPCO product definitions and pricing
with dynamic pricing capabilities. For example, both
airlines currently show four different economy fare
brands; these could be reduced to three without
negatively impacting yields. This would allow these
airlines to create ancillary products that unlock new
revenue streams.
Unlike in Europe or the US, the drivers for New
Distribution Capability (NDC) and direct connect will
be international growth through OTAs and aggrega-
tors, although there are also some domestic travel
agents in Japan, such as JTB, which are looking
to differentiate their service offerings with NDC
content.
South Korea
In South Korea, FSCs Korean Airlines and Asiana
have been gathering knowledge about merchandis-
ing and distribution transformation. Despite com-
petition from LCCs, the market is big enough for
both premium and low-cost products to co-exist,
so any move into merchandising will likely take the
value-added ancillary approach. As in Japan, the
drivers for NDC and direct connect will be pressure
from aggregators and OTAs. Once this happens,
expect some of the large travel agencies to increase
their interest in NDC and direct connect content.
www.farelogix.com Copyright 2019 13South East Asia
In South East Asia, state-owned FSCs, includ-
ing Thai, Garuda, and Malaysia airlines, con-
tinue to be cautious with their NDC and direct
connect strategies. However, with Singapore
Airlines taking a merchandising and NDC
leadership position in the region, we can expect
other airlines to follow suit.
In North America and Europe, one of the drivers
for unbundling was competition from LCCs.
Growing competition in the region will result in
a similar move for some Asian FSCs. Following
restructuring and intense competition from Air
Asia, Malaysia Airlines have started to unbun-
dle. Philippine Airlines (PAL) have significant
domestic operations and a world-renowned,
home-grown competitor in Cebu Pacific. As
such, PAL may start to unbundle to better
compete. Likewise, in the highly price-sensitive
Vietnamese market that also sees stiff compe-
tition from Vietjet and Jetstar, Vietnam Airlines
has an opportunity to protect their proposition
and open the offer to merchandising.
As has been commented before at the industry
level, when it comes to distribution transfor-
mation in South East Asia, many airlines have
not looked for alternatives to GDS-distribution.
Transformation will only happen if these airlines
consider the lack of differentiation, no rich
content, inability to implement dynamic pricing,
inflexibility to create ancillary product offerings,
and GDS commercials problematic or not.
14Airline Retailing:
The ‘How To’ Guide for Asian Flag Carriers.
While some FSCs in Asia have already embarked on a journey into merchandising and customer choice, con-
straints with legacy airline pricing and distribution systems remain significant challenges to overcome. The Interna-
tional Air Transport Association (IATA), NDC slogan “Together, Let’s Build Airline Retailing” indicates that NDC is not
only a best practice, but a wholesale transformation of the air commerce business. The aim of this transformation
is to move airlines from being flight-only sellers to becoming airline retailers.
What does this mean in real terms? The table below illustrates the road to transformation.
Today Tomorrow
Merchandising Static prices, fee filing, slow to Dynamic pricing, rules configuration,
market fast to market
Pricing Static pricing, RBDs/fare classes, Dynamic pricing, pricing rules con-
fare filing figuration
Offers Price/schedule-based offers Price/schedule + rich content +
product differentiators
Product Offerings Flight-only seller Flights + air ancillaries + non-air
ancillaries
Distribution GDS-controlled indirect distribution Airline-controlled direct distribution
agreements
Messaging EDIFACT XML/JSON
Product Definitions Complex product definitions (fare Clear product definitions that are
rules) that are difficult for passen- understood by passengers
gers to understand
Business Model Legacy business model and sys- Retailing business model and sys-
tems (PNRs, tickets etc.) tems (ONE Order)
Strategy Seller-first, system constrained Passenger-first, system enabled
To quote Eric Leopold, Director, Transformation, Financial and Distribution Services at IATA, airlines must “unlearn
the methods which made the industry successful in the past. Challenge existing technology constraints …. ‘decon-
struct’ our legacy processes, and build the digital airlines retailing world together.”
www.farelogix.com Copyright 2019 15“If Old Things Don’t Go,
New Things Won’t Come”
With a proliferation of five-star airlines in Asia, airline
retailing is not lagging behind; it’s already ahead and
it’s on the cusp of furthering leadership through the
creation of the kinds of value-added ancillary services
that customers want. Rather than unbundling the cus-
tomer proposition, Asian airlines need to look at their
ability to unbundle from a technical and operational
standpoint to add value to their already superior cus-
tomer experience and brand propositions. Asian Flag
Carriers should also look beyond their current systems
and process constraints.
At Farelogix, we have extensive experience and the
market-leading technology platform that is enabling
many pace-setting airlines around the world to accel-
erate growth through distribution and retailing trans-
formation. Our platform allows airlines to embrace
the new worlds of merchandising and distribution but
still fulfill through the PNR and integrate with existing
downstream processes, including support for varied ticketing options and BSP/ARC settlement for agencies. Criti-
cally, we understand that letting go of old things is challenging.
“If old things don’t go, new things will never come” is a famous motivating proverb in
Chinese culture. Don’t let old things stop you from embracing the new things that are in
front of you. A very liberating quote if you think about it.
16References: 1. Skytrax Five Star Airlines, skytraxratings.com, Retrieved from https://skytraxratings.com/airlines?stars=5&types=full_service [Accessed Date: 22 January 2019] 2. History of Airline Fees: Bags, Food & More, Farecompare.com, Retrieved from https://www.farecompare.com/travel-advice/airline-fees-bags-history/ [Accessed Date: 22 January 2019 3. List of busiest passenger air routes (2017), Wikipedia.org. Retrieved from https://en.wikipedia.org/wiki/List_of_busiest_passenger_air_routes [Accessed Date: 22 January 2019] 4. List of countries by GDP (PPP) per capita (2017), Wikipedia.org. Retrieved from https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita [Ac- cessed Date: 22 January 2019] 5. List of Asian countries by GDP per capita (2017), Wikipedia.org. Retrieved from https://en.wikipedia.org/wiki/List_of_Asian_countries_by_GDP_per_capita [Ac- cessed Date: 22 January 2019] 6. List of sovereign states in Europe by GDP (nominal) per capita, Wikipedia.org. Retrieved from https://en.wikipedia.org/wiki/List_of_sovereign_states_in_Europe_ by_GDP_(nominal)_per_capita [Accessed Date: 22 January 2019] Definitions i. Unbundling - Refers to the practice of splitting a product offering into its component parts. ii. IATA - International Air Transport Association iii. NDC - New Distribution Capability is an IATA initiative to enable the travel industry to transform the way air products are retailed to corporations, leisure and busi- ness travelers, by developing a standard for airlines to distribute their products and services using internet age XML messaging, instead of pre-internet age EDIFACT. iv. XML - XML stands for eXtensible Markup Language. XML is a markup language much like HTML. The first version of XML was released in 1997 with the design goals of XML emphasizing simplicity, generality, and usability across the Internet. XML was designed to store and transport data, to be self-descriptive and human readable. v. EDIFACT - is the international standard for electronic data interchange (EDI). The term stands for Electronic Data Interchange For Administration, Commerce and Transport. EDIFACT was designed in 1987 (pre-internet) and uses a set of syntax rules to structure data. The structure of EDIFACT is not human readable, and much of the data in the document is also not human readable and appears in the form of codes that need to be interpreted through strict adherence to the EDI specifica- tion. vi. BSP/ARC - the electronic billing systems designed to facilitate the flow of data and funds between travel agencies and airlines. vii. ATPCO - Airline Tariff Publishing Company, is a centralized system, that collects and distributes pricing and product- related data (known as fares) for the airline and travel industry viii. GDS - Global Distribution System, is a centralized system that aggregates real-time inventory from airlines to facilitate transactions between airlines and travel agencies (Worldwide there are four major GDS operators that airlines connect to, and other smaller operators in specific markets) ix. PNR - passenger name record, a record in the database of an airlines reservation system that consists of the personal and itinerary information for a passenger x. Ticket - a record in the database of an airlines reservation system, has similar information to the PNR with additional payment related information. xi. GDP - Gross domestic product www.farelogix.com Copyright 2019 17
Its all about the customer
Are Asia’s Flag Carriers really behind the
curve in airline retailing?
www.farelogix.com
sales@farelogix.com
Phone: 305-552-6094
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