What is NDC and How is it going to Affect Travel Professionals and the Travel Industry as a whole?
Written By: Tom Ogg, Co-Founder and Co-Owner – www.TravelProfessionalNEWS.com
Over 25 years ago Delta Airlines capped the commission on tickets written by travel agents and it shocked the entire travel industry. With the exception of Southwest Airlines, all of the other legacy airlines followed Delta to remain “cost effective”. The subsequent commission cuts and eventual elimination of commissions, completely disrupted the retail travel agent business.
Over the following decade thousands of travel agents moved their business into a home-base and abandoned their ARC appointments and brick and mortar storefronts. It spawned entirely new business models and concepts that are quite relevant in today’s world. While everyone thought it was a death sentence to travel agents, just the opposite was true. It opened up so many new opportunities that the home-based travel agents are now a major part of travel distribution.
While the commission caps were imposed for many reasons, the bottom line was technology enabled it to take place with e-tickets and e-documents and direct settlement. The primary reason the airlines capped, cut and eventually eliminated travel agent commissions was to dramatically cut distribution costs. Fast forward 25 plus years and NDC is being driven for the exact same reasons.
What is NDC?
The history of the airline’s NDC can be traced back to the International Air Transport Association (IATA), which is an international airline trade association representing the global airline industry. Recognizing the need for modernization in airline distribution, IATA launched the NDC initiative in 2012.
IATA established the NDC Program as a collaborative effort involving airlines, travel agents, technology providers, and other industry stakeholders. The program aimed to develop a set of standards and protocols that would enable airlines to distribute their products and services directly to consumers through various channels.
The NDC standards encompassed XML-based messaging formats, allowing airlines to present rich content, ancillary services, and personalized offers in a more flexible and dynamic manner. It sought to enhance the shopping experience for travelers by offering real-time availability, pricing, and ancillary options, and allowing airlines to differentiate their products beyond traditional fare classes.
In effect, the net result of NDC is to provide airlines with alternative distribution channels and cut their dependency on the major GDS (Global Distribution Systems) by having segregated inventory rather than having 100% of inventory in the GDS. It will allow them to distribute inventory however they wish. In the airline’s defense the GDS revenue segment fees have gone up so much while their value proposition has gone down.
How will NDC affect Travel Agencies?
It remains to be seen exactly how NDC will affect the travel agent community however, there are some obvious elements of NDC that will have a negative impact.
Reduced Transparency and Increased Complexity
NDC enables airlines to directly distribute their products and services to customers through their own platforms, bypassing traditional Global Distribution Systems (GDS) utilized by travel agents. This shift reduces transparency and increases complexity for travel agents, as they need to access multiple airline platforms to compare fares, availability, and ancillary services. It adds layers of complexity to the booking process, making it more time-consuming and challenging for agents to provide efficient and cost-effective options to their clients.
Alteration to the ARC Agency Sales Agreement
American Airlines altered the Sales Agreement to accommodate NDC. They require agents to offer NDC content to all clients with the exception for those clients that specifically request to not be offered NDC content. It limits the service charge an agency can charge the client to the same service charge that they charge for all airline tickets. While AA is the first carrier to move forward with NDC, it is likely that agents can expect all additional airlines to alter their relationship with travel agents.
The implementation of NDC requires travel agents to invest in new technologies, system upgrades, and staff training to adapt to the changing distribution landscape. These financial burdens disproportionately affect smaller travel agencies with limited resources, potentially leading to increased costs and reduced profitability. Moreover, the transition to NDC disrupts established workflows and forces travel agents to learn and adapt to new systems, causing temporary inefficiencies and potential loss of business during the transition phase.
GDS Agreements with Travel Agents
Since a transaction processed through NDC will not generate any revenue segment fees for the GDS, it will affect any incentives that exist in the GDS Agreement with the travel agency. If there are also disproportionate revenue incentives, it would also affect those. This could have a huge impact on an agency’s profitability. GDS providers may need to adapt their systems and processes to support NDC, and travel agencies may need to negotiate with them to ensure continued access to comprehensive content, functionality, and support.
Loss of Content
As airlines gain control over the distribution process through NDC, there is a concern that they might limit the availability of certain fares and ancillary services through traditional distribution channels, favoring their own platforms. This imbalance could lead to a loss of content for travel agents and hinder their ability to offer a wide range of options to their customers. As an example, American Airlines has committed to have 40% of their entire inventory in NDC, leaving only 60% for traditional distribution. Additionally, the lack of fare parity across channels might result in discrepancies between airline websites and travel agents’ systems, creating confusion and undermining trust. This is especially true if the content is blocked from having metasearch engines crawling it.
Direct Competition From Airlines
Travel agents have long played a crucial role in building relationships with customers, understanding their preferences, and providing personalized recommendations. However, NDC’s direct distribution model may diminish the role of travel agents in the booking process, reducing the opportunities for personal interaction and customized services. This is true especially if the NDC incorporates artificial intelligence.
Travel Agencies May Be Less Competitive
American Airlines has set the bar at 1 1/2 million dollars before negotiating any NDC agreements with intermediaries and direct corporate accounts. The OTAs and TMCs have all already negotiated contracts with American Airlines which will make it much more difficult to remain competitive. Unless consortia or host agencies become involved it seems likely that smaller agencies will be at a distinct disadvantage.
While NDC is sure to impact travel agencies in ways other than described here. The uncertainty and disruption to the travel agency community is much like in 1995. The bottom line is that consumers are more than likely to need consultation and advice than ever before and a travel agent is in the very best position to make that happen.
What Can Travel Agencies Do?
Move Market Share
After the Delta Airline commission caps occurred, travel agents said “I will only sell Delta if my client asks for it”. As a result, there was no market share loss for Delta and it taught airlines that they could do just about anything to the agency community without any fear of retribution. If I were selling air, I would have a difficult time selling AA and would be willing to lose a customer by sending them directly to AA. I would explain that it is going to cost me more to conduct the transaction and AA has limited my ability to charge a reasonable service fee to cover my costs. Believe me when I say if everyone did this AA would be wondering how they could get the agency community to support them again.
Consider New Business Models
In the early 1990s when we wrote “How to Start a Home Based Travel Agency” it was considered to be so radical that none of the industry associations and agency groups would touch it. It was obvious to me that the traditional brick and mortar storefront was not going to work moving forward because of the rapid growth of low yield short haul airlines.
The plan fact is that travel agents are in higher demand now than ever before. As the purchase of travel gets more and more complex for consumers, they are going to need help with it. AA’s aggressiveness towards travel agents is a sign of things to come, in my opinion. The obvious desire for airlines using NDC is to improve profits by eliminating marketing costs. Imagine booking direct with an airline and having a problem.