Impact of Internet for the airline industry

Aviation and air services industry is a large, competitive, and challenging industry, characterised by high capital and labour requirement, together with customer participation during transactions hence service fulfilment.

Providing great reach and the potential for rich interaction, the internet is a natural medium for travel transactions. Airlines are turning to e-commerce to keep business flying, and the reason they are focusing on selling tickets through their Web sites is that it is the cheapest distribution channel.

From the customers perspectives, Internet have revolutioned the way of buying flight ticket. Customers can now purchase their tickets directly from the airlines via the Internet using intermediaries and/or cybermediaries in order to find the possible cheapest ticket.

Moreover, online discount travel services, such as Priceline and Hotwire, allow airlines to dump excess inventory. They can use these channels, along with their own online specials, to drive traffic to less-popular routes, such as flights with inconvenient connections. Airlines are also using electronic channels to keep business travellers informed of potential delays and schedule changes.

Furthermore, Industry players use different technologies to differentiate their services to customers, to create customer loyalty, and serve them faster and in more convenient ways than their competitors do. Therefore, flight companies have developed some tools to communicate with their customers as in-flight broadband service and new mobile service,

Air Flight industry is moving into an environment characterized by an abundance of information – the new source of airfare information is the Internet, especially the WWW. Therefore any player in this industry needs to produce informative materials in digital form, which can be disseminated using the new information technologies.

1.0 Introduction

Few inventions have changed how people live and experience the world as deeply as the invention of the airplane. Until now, the airline industry has progressed to the position where it would be hard to think of life without air travel. It has shortened travel time and altered the concept of distance, making possible for people to visit and conduct business in places once considered remote.

A microcosm of the overall “dot-com” online business phenomenon, aviation e-commerce continues to evolve at light speed. Change is happening so fast, in fact, that you can’t tell the players without a scorecard, or rather, a good search engine. (Esler, 2001)

Accordingly, the growth of the Internet and related technologies has resulted in drastic changes in the way business and consumers communicate, share information and conduct business. Forrester Research estimates that the business-to-business e-commerce market will grow from $43 billion in 1998 to $1.3 trillion by 2003 (www.partsbase.com). For the aviation industry, there is an issue that must be addressed in the Internet age that is to facilitate an integrated e-business environment among suppliers, customers and business partners in order to collaborate in creating a more efficient and profitable product life cycle.

This research project will describe and discuss about the extention of how the Internet is impacting and changing the industry, how it has affected the competitive strategies & behaviour of the firms, including indicate likely future outcome.

2.0 Industry Characteristics

Aviation is a global industry, owned and operated largely by private commercial companies, and forming a seamless network of manufacturing, airline operations, engineering design, sales, maintenance, repairs, customer services, finance, insurance, leasing, marketing, advertising, media and other activities (www.spacefuture.com, 2000). The aviation (air services) industry is characterized by high capital intensity, high fixed costs, and mobile assets, which drive competitors towards marginal pricing (www.aph.gov.au, 2001). Therefore, it could be said that the air services industry is intensely competitive market.

Unlike most businesses, which have either high capital requirements or high labor content, aviation is an economically challenging business, which needs both large amount of capital (aircraft, technology etc.) and lots of people.

Aviation and air services require a high degree of customer participation during service fulfillment. Moreover, as consumption and decision-making are mostly decoupled, travel and tourism services can be seen as information products. Prospective customers need plenty of information to comprehend offerings, compare them and make their choices. “Organizations must become more strategic if they are to survive and succeed in the current business environment” (Singh, 2002). Consequently, the air travel industry is among the leading users of IT.

The existing Computerized Reservation Systems / Global Distribution Systems (CRS/GDS) which provide the main links to tour operator systems and to travel agents, give a good insight into the current market situation and are the basis for the airlines’ yield management, i.e. capacity planning and pricing.

Figure 1: Traditional industry structure in the scheduled airline market.

Source: www.wi.uni-muenster.de

3.0 Porter’s 5 Forces analysis of air services industry competition

Figure 2 – Source: http://www.marketingteacher.com

– Threat of new entrants

At first glance, it seems that air service industry is extremely difficult to break into. However, in fact it may depend on whether or not there are substantial costs to access bank loans and credit. For example, if borrowing is cheap, then the possibility of more airliners entering the industry is higher. Brand name and frequent flyer point also play a significant role in the Airline industry. An airline with a strong brand name and impressive incentives can usually attract a customer even if their prices are higher.

– Power of suppliers

The airline supply business is mainly dominated by Boeing and Airbus Company. Therefore, it can be said that the competition among suppliers in this industry is not intense. Moreover, it is unlikely that suppliers will integrate vertically. For instance, suppliers are certainly not starting to offer flight service over building airlines.

– Power of buyers

In the airline industry, the bargaining power of buyers is quite low. Apparently, there are high costs of switching airplanes. However, the ability to compete on service is one of the issues that need to take into considerations. If the seat in one airline is more comfortable than another, it is probably that customers are willing to pay more for their pleasure.

– Availability of substitutes

It is certain that regional airlines the threat might be a little higher than international airlines. That is because there is a possibility that people will take a train or drive to their destinations. Other issues that need to take into account when determining this in the airline industry are money, time, convenience and personal preference.

– Competitive rivalry

The airline industry is a highly competitive industry. Generally, highly competitive industry earns low returns, as the cost of competition is high. Moreover, it would be more intensely when the economy is decelerating.

4.0 B2C perspectives & changes

Since the economic slowdown and the impacts of the September 11, airlines are turning to e-commerce to keep the business going more than ever (Pappas, 2000). That is one of the main reasons for them to try to cut all the costs they possibly can (McCarthy, 2002).

As a result, Airlines are increasingly pushing sales through their websites in a bid to cut costs and pass savings on to customers, a new survey claims. The Airline IT Trends survey, commissioned by Airline Business magazine and technology company SITA, reveals that 67 per cent of airlines believe their websites are the most important electronic sales channel. In addition, seven per cent of airlines are making more than half their total sales online. The survey reveals most airlines still rely on agents and global distribution systems, but the switch towards internet distribution is being driven by customer confidence and lower costs (Fox, 2002).

Besides, another impact of the Internet on the airlines B2C is the way they sell their tickets to customers, where in the past they had to use travel agents, customers can now purchase their tickets directly from the airlines via the Internet and this also helps the airlines to get rid of travel agent cost, which also helps them to offer lower fares to their customers (Pappas, 2000)

This is because the Internet provides a set of enhanced tools to enable airlines to develop special relationships with their customers, as well as benefiting from the reduced costs they are trying to achieve (Pappas, 2000). All the players in the industry is benefiting from doing business online. Carriers are looking to the Internet to reduce the cost of sales and improve customer satisfaction. (Wagner, 2002)

In addition, the consumer behavior has also changed during the last decade,where today they ask for better service, want more specific offers, both with regard to content as well as to the complete travel arrangements, are becoming more mobile and travel more frequently, tend to make more frequent but shorter vacations, and decide later, leading to de-creased time span between booking and consumption, are becoming more critical and less loyal; and are more price sensitive, comparing more and more offers, which leads the airlines and travel agencies be more competitive to serve all these needs. (Klein, Randolph and Selz, 2001)

5.0 B2B perspectives & changes

The Internet has also brought many advantages to the players in the industry, giving the chance to combine their assets together with the other players, and by this way, serve the customers in more efficient ways, get more advantages to survive in the very competitive environment, reduce their costs significantly.

For example; online discount travel services, such as Priceline and Hotwire, allow airlines to dump excess inventory. They can use these channels, along with their own online specials, to drive traffic to less-popular routes, such as flights with inconvenient connections (Wagner, 2002)

All those competition and customer needs lead some of the players create alliances to combine their powers and be able to stay on the stage. As an example; in January 2000, a major travel alliance was formed among 27 US airlines in order to build a travel Web site or portal, code named Orbitz, to offer discounted fares and ticketing directly to travelers. (Business Week, 2000). On Aug. 19th 2000, it announced Supplier Link travel system, which will enable the company to book tickets directly through airlines’ reservations systems.American Airlines has implemented the system, and is expected to save as much as 77 percent of booking costs on tickets bought through Orbitz. (McCarthy, 2002)

Airlines with strong brands and loyalty programmes are able to create very advantaged deals with non-airline industry players to provide additional services and products to their customers, such as hotels, car rentals, insurances, etc. (Pappas, 2000)

6.0 How do companies use various digital technologies, why? How & why do the strategies & offerings of companies differ?

As the competition in the air services industry is increasing dramatically, it is vital for the companies in this industry to adopt the new technologies in their system in order not be thrown out of the competition by their rivals. Industry players use different technologies to differentiate their services to customers, to create customer loyalty, and serve them faster and in more convenient ways than their competitors do, as we will see in the 3 examples below.

For example, the flight search engine of Orbitz searches the airfares and schedules of 450 airlines and has up to 2 billion flight and fare options in its system at a time. (Martinez, 2001)

Aircraft manufacturing giant Boeing moved a step closer to the commercial launch of its in-flight broadband service, which will deliver in-flight, high-speed Internet access, with applications ranging from e-mail to corporate intranets to TV and streaming media with the Federal Aviation Administration’s (FAA) approval of the satellite-based system. To demonstrate the system, the paperwork required for certification was e-mailed to FAA officials in Los Angeles using a satellite communication link from the Connexion One test airplane while it flew 35,000 feet above New Mexico. The document and supporting material, totaling 800 kilobytes, were transmitted to FAA officials in real-time in less than half a minute, the company said. (Wrolstad, 2002)

British Airways rewards frequent flyers with new mobile service, which includes all activities conducted through wireless devices, such as PDA (Personal Digital Assistants), and cellular phones. They also offer Wireless Seat Selection via a new WAP-service in theU.K., allowing passengers to check in and select seating using their cell phones, avoiding check-in lines at the airport via a graphical seat map, which is based upon the seat map used in British Airways’ airport check-in kiosks, on their handset. Customers can look up flight availability and view up-to-the-minute flight arrivals and departures information for any British Airways flight (Market Research and Trend Scouting, 2001)

Responding to new airline trends, Worldspan will deploy FareChase User Recognition System (URS) technology. URS allows travel agents and corporate travel managers to automate access to their accounts on airline Web sites. With URS, Worldspan users will be able to access Web-only fares offered through various airline sites. (M2 Presswire, 2002)

7.0 Case Studies

7.1 Background of case studies: Web-Based Intermediaries

In the past years, CRS/GDS have built so-called ‘online travel supermarkets’, also called web-based intermediaries, for consumers using Web technology. Preview Travel (www.previewtravel.com) and Travelocity (www.travelocity.com) are two of them. They are offering on the one side a one-stop-shopping site for travel and tourism products, with a wealth of travel related online content, and on the other side a highly efficient transaction mechanism based on advanced technology, customer profiles and interaction design.

While industry incumbents have developed different business models and (re-) positioned themselves in the online market, new players, so-called cybermediaries, have entered the market and positioned themselves prominently as consumers’ advocates with innovative pricing models (demand collection, demand aggregation, reverse auction, see also Klein, Löbbecke, 2000). TravelBids and Priceline are two outstanding examples of these new entrants, which focus on innovative pricing models.

7.2 Case Study: Travelbids

TravelBids (www.travelbids.com) is an example of a reverse or procurement auctions. Customers’ requests are posted on TravelBids, which is a specialized electronic market. While in the Lufthansa auction, potential customers submit bids for flights, in reverse auctions, travel agents submit bids for customer orders. In contrast to the Lufthansa auction, customers using Travelbids have a wide range of attributes, which they can specify or intentionally leave open. They take an active role by specifying their preferences for travel offerings.

On this market, all bids are visible for everyone to see; hence prospective customers can view other listings and see the results. The bidding period can be set up to 72 hours, unsuccessful bids can be repeated. TravelBids’ fee of USD 10 for successful bids is split between the travel agent and the customer. On the supplier side, travel agents bid to fulfill the demand. They use their knowledge to identify flights that fit the customers’ preferences and use part of their commission in order to gain additional orders. (www.wi.uni-muenster.de)

7.3 Case Study: Priceline

Based on the assumption that supplier-side fixed prices do not always lead to an optimal allocation of products and services, Priceline (www.priceline.com) has set-up a market platform initially for airline tickets. The product range is continually expanded and includes by now e.g. hotel rooms, new cars and mortgages. Customers can specify their preferences, including the price. Priceline, then, advertises these offers to airlines, car companies, or financial services companies who can decide whether they want to fulfill this additional demand at the listed price. Airline customers, however, do not give a detailed specification, but specify only day, place of departure and place of arrival, and request a flight operated by a major airline. In this way, airlines have sufficient scope to fulfill the demand, if they wish. Chances are increased that the offers are met. Priceline earns a commission for every sold ticket of USD 10.

The specified offers are forwarded sequentially in a highly efficient and patented process to potential suppliers. Customers’ offers are binding and have been substantiated by a credit card authorization. Airlines then decide whether they want to take additional customers at the listed price depending on their current load factor and price policy. Feedback is given to the customers within hours.

In contrast to auctions, Priceline has set-up a private market. The demand is actively advertised to airlines, but neither the offers nor the deals are made public. Suppliers can decide based on internal policies; they do not risk any kind of signaling effect that a flexible price strategy otherwise might send to the market. Priceline is called a demand collection system because it functions as an intermediary, which collects customers’ requests for products and services at a different than the advertised price.

This demand typically is not articulated and thus could not be fulfilled. Priceline was granted several US patents for its business model. While Priceline has been admired for its innovative business model, its share price has suffered severely during 2000. Airlines with low spare capacity were hesitant to acknowledge customer prices and therefore most customers showed stronger preferences for convenience and choice in a tight market situation.

(www.wi.uni-muenster.de)

Figure 3: Cybermediated industry structure in the air travel industry

Source: http://www.wi.uni-muenster.de

8.0 Web-Based Airline Strategies

The Internet is having a profound impact on today’s global economy, and as most aerospace executives can attest, the Web unquestionably is challenging long-held business norms in their industry sector. (Cofoni, 2000)

The success of Travelocity and other online travel supermarkets is attributed to the ease of booking combined with comparison-shopping features. Faced with this success, major airlines have formed alliances like Orbitz, as mentioned in part 6.0, which mimic the supermarket business model and attempt to compete aggressively with them.

Mirroring the efforts of their US competitors, eleven European airlines, among them Air France, British Airways and Lufthansa, announced the launch of an online travel agency,

code named Otopenia, in order to attract a significant proportion of total online travel sales in Europe. Backed by six of the largest U.S. airlines, Hotwire.com (www.hotwire.com) was launched late October 2000 as an online discount travel site, focusing on the sale of empty airlines seats. With rebates of up to 40% but at fixed prices, the airlines involved attempt to sell those last minute seats, that otherwise would have led to unused inventory without affecting their established price schema (Saliba, 2000). The business model mimics Priceline’s business model. It is, however, based on a fixed price strategy. Although neither Orbitz nor Otopenia are operational at the end of 2000, they have already been the subject of legal scrutiny as the American Society of Travel Agents (ASTA) and the German Travel

Agents Association (Deutsche Reisebüro- und Reis-everanstalter- Verband) have asked the respective antitrust agencies to check the announced alliances. (www.wi.uni-muenster.de)

Today, the air travel industry, almost like any other industry, is currently characterized by an increasing number of distribution channels. Triggered by increased information and communication possibilities combined with lower costs, we see a mixed-mode structure that represents a continuum of combinations of traditional channels such as Travelocity. On balance, two trends have to be distinguished. Firstly, the rise of new intermediaries are mainly successful on a large scale in the role on online travel supermarkets, parallel to the push of airlines into various forms of direct selling, and secondly, decreasing market transparency and increasing concentration against the prevailing electronic market rhetoric.

(www.wi.uni-muenster.de)

9.0 Likely future evolution of this industry

Planning ahead implies viewing the future, envisaging the world travel scene and succeeding in your business. It is appropriate to look at probable future technologies and how they will affect air travel industry -and how they can be incorporated into the planning for new products and marketing-.

What is expected is hundred per cent automation, commission capping by airlines, which is a ‘reality’, e-mail billing – at present at least sixty per cent of agents receive their billing through e-mail and all agents should opt for the option-.

The scene for 2004-2006 also looks promising, electronic ticketing would eliminate all forms of manual labour and be electronically viable. The only thing needed by an agency will be the itinerary, and the customer will only need photo identification at the airport, and the rest will all be on the system. The system would also bring service charges lower, where for a printed ticket the cost is US$ 10, for an electronic ticket it would be US$ one. The next in line would be Internet bookings and virtual printing network, which would work between the International Air Transport Association (IATA) office, agents and airlines.

In 1999, online ticket purchases accounted for US$4 billion, and forecasts for 2003 range up to US$29 billion. By 2003, 10% of US travel bookings will be conducted online. (Pappas, 2000)

Schuster (1998), based on a Delphi study with 40 participants from the German speaking countries, estimates that within the next 10 years 30% of tourism business will be Internet based. According to Forrester Research, USD 64 billion in travel will be booked on the Internet by 2004 (Klein, Randolph and Selz, 2001).

Air Canada and Cathay Pacific Airlines are testing an onboard Internet service for high speed Internet and email servies, as business traveler want the comfort of Internet access also in the sky, whereas Boeings plans to equip customer airplanes with the ‘Connexion by Boeing’ for two-way Broadband communications – a service providing high speed, two-way Internet and live television services to aircraft in flight, and Boeing officials say they are in talks with about 30 airlines worldwide to provide the service.(Peter and Harras, 2002)

10.0 Conclusion

The rapid growth of the Internet is becoming an increasingly vital tool for information technology. More people and industries are going online to conduct activities such as business transactions, personal correspondence, and information gathering almost everyday. Digital connection between the industries, companies, and individuals becomes more critical to economical advancement. With regard to Internet development, the airline industry has significant progress in recent years in developing new, more sustainable technologies.

From the B2C perspectives, the Internet can facilitate the way to do business. Moreover, the advantage of using Internet leads to decrease the cost of the products and services, and improve customer satisfaction. In B2B, the progress in Internet and technologies has impact on improving relations among the airlines, hotels, car rentals and travel agencies.

Finding a balanced response to these influences on future business is a significant challenge for all parts of the aviation community. (www.adlittle.uk.com). Therefore, in the future, e-commerce needs the accurate response in every part.

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