A Short Dive into Travel Distribution: GDS and NDC
Understanding the history of distribution and how new technology is going to change it.
The travel, tourism, and hospitality industry has been extremely hard to define. With the growth of giants such as Airbnb and Expedia, which allow a one-stop shop for all your travel needs, it has become increasingly easier for individuals themselves to book their own trips, rather than using traditional methods. In 2019, travel and tourism alone contributed approximately 2.9 trillion dollars to GDP in the U.S. Additionally, the U.S. leads the world in international travel and tourism exports and ranks third in terms of total visitation. However, the current industry leaders for the technical side of distribution aren’t adapting to the new technology. That, tacked on with COVID’s prevention of normal travel, means that airlines are scrambling to cut costs, increase cashflow, and adopt new technologies and ideas more rapidly. So what does this mean for the travel industry? In order to understand this, it’s important to first consider two things: current trends in the travel startup ecosystem and changes being made in the travel industry.
In the past decade, there have been a few unicorns that have modeled their company around creating infrastructure for developers to do their jobs easier. Stripe, Plaid, and Twilio, just to name a few, are all companies that have been extremely successful and have grown rapidly in this space. Their API service provides ease of use for developers creating software around payments and texting, allowing those users to easily scale their own product as their user base grows. So it’s no surprise that this business model/idea spread to other industries that lagged behind. Specifically, the process of booking a ticket.
A Little Bit of Travel History
In order to understand what motivates companies to build software infrastructure for travel, we need to break down the history of travelling a little bit. Say you’re a traveler who’s interested in flying from Chicago to Miami. During the pre-covid era, this task would have been extremely simple. Go to Google, type in “flights from Chicago to Miami,” and bam! You have a wide array of flights to choose from with built in functionality to compare dates. In fact, the concept of a frictionless travel experience was one of Expedia’s main value props that they provided to travelers hungry for adventure. The old segmented platforms made it extremely difficult for a user to go through the entire process and book a ticket seamlessly.
Before these travel booking services even existed, if people wanted to book a flight, they would go directly to an airline or a travel agent and discuss potential options. The travel agent would find a physical copy of the flight’s availability through an actual, physical ticket that they would punch. Naturally, as travel became increasingly popular, this process became increasingly harder to scale. There were problems in quality assurance and the entire process inconvenienced everyone involved. This is where GDS, otherwise known as Global Distribution Systems, comes in. Essentially, airlines started using GDS decades ago as technology started advancing to all industries, rather than focusing on problems just in computing. American Airlines, along with IBM, created SABRE (Semi-Automatic Business Research Environment), which allowed users to enter data, process requests, and create a more comprehensive and robust system for people to actually use.
Now that we actually have this system, what does it mean for airlines? Each individual airline can now attach their inventory and seats into this massive system. At the time, this was amazing, especially since the growth of the internet and an increase in online booking tools meant that people were able to book flights from the comfort of their own home. But looking at the current GDS market, it’s interesting to note that the main source of revenue comes from distribution. Take Amadeus, for example, one of the largest companies currently involved in the GDS space. Approximately 65% of their revenue comes from distribution fees, usually a result of querying, hike up on prices, and other hidden fees as a way to profit off of companies using GDS software.
This reveals the main problem with this service — it passes off most of the costs to the consumer as a result of hidden fees, similar in a way to Ticketmaster or other ticket selling platforms. European airlines have especially been the most active over the last few years in finding different ways to foster distribution capacities. For example, companies like Lufthansa have placed a surcharge of about $16 on transactions made through the GDS system (which doubles to $32 dollars with a flight with one connection). British Airways employed a similar tactic on bookings made through large GDS services such as Sabre, Amadeus or Travelport. Given the number of tickets that people are buying (either through connections or round trip flights), it makes sense that one way to increase airlines revenue streams is to decrease the cost of using this platform. If they could somehow find a new way to navigate this problem, every user involved in the purchasing process would have a better experience.
NDC (New Distribution Capability) is exactly the way in which airlines have avoided using GDS. It primarily uses an XML schema (similar to HTML, the language that makes up this browser) in order to pass information between airlines and potentially interested customers. But most importantly, it allows for selling ancillary products like seat upgrades through its more robust data transfer and updated technology. This is significant because over over the past decade, the ancillary market has grown rapidly as a result of airlines needing to use these third party platforms and find other ways to adjust to the growing demands and problems that GDS forced them to deal with. Therefore, by completing more of these transactions directly, airlines can decrease their costs of production.
What’s stopping people from changing and implementing NDC enabled services? As of now, there are currently 62 airlines that are either NDC certified or XML-capable. This is because many airlines haven’t been able to adapt their technology in order to keep up with the rapid advancements made by smaller startups in this area such as Duffel, Farelogix, or Paxport. As of now, the total impact that NDC will have on the market is uncertain. Since NDC has the capability of adding features like purchasing seats, upgrades, meals, and car rentals (which previously limited GDS) and also has the capacity to provide external API’s for developers, this is an exciting time for all relevant companies ready to make waves. Whether that’s through integrating with chatbots to provide higher levels of support or bundling products together, startups and other tech companies are prepared to make changes to the status quo of how airlines are running a fundamental aspect of their business.
A short note on COVID, given its relevance and impact on the travel industry. The World Travel and Tourism Council projects a global loss of 7 million jobs and $2.1 trillion in revenue. From this chart on the left provided by National Geographic, it’s easy to see that COVID has resulted in a drastic change in how people travel around the world. It has made them book less tickets, cancel vacations, or just stop traveling altogether. However, although COVID has forced people to avoid travel as much as possible, travel has become a fundamental aspect of the modern human. We enjoy the opportunity to be whisked away from one place to another, visiting new countries, new places, and new cultures in the blink of an eye (at least, if you sleep on the plane). Although COVID has stopped current travel, this seems to be a perfect opportunity for the travel industry (and airlines especially) to optimize their own operations and run a leaner business with a higher cash-flow. With all the talks of going fully remote (Congress is even thinking of transitioning to Zoom), it makes sense that a lot of industries and aspects of society have accelerated a decade towards the future, where people are able to do whatever they want digitally. However, what people are forgetting is that exploring, travelling, and being together defines human nature. Thus, although some activities will shift online forever, the travel industry will come back.
I’m personally super excited to see how Duffel and other startups in this space will innovate the travel industry. Business traveler focused companies, such as Lola or TravelPerk, have also become more prominent within the last couple years and have pivoted to becoming an aggregator for travel tools. We’ve seen numerous software infrastructure startups become extremely successful by fixing and creating solutions to old problems that developers struggled to find solutions for. Given that technology is constantly changing and adapting every day, it’s surprising to see these large airline distribution aggregators such as Sabre and Amadeus fail to actually make waves. I have no doubt that one of these startups will become the new platform that all airlines integrate with, given how easy it is to integrate a new API or platform on their server.