Airline ticket distribution: How airlines might reduce Global Distribution System (GDS) fees by encouraging customers to use direct distribution channels

10 September 2015

Last week I was booking a ticket on an airline website. When it came to paying for that ticket I ran into difficulty - I could only pay with a local bank account (no charge) or a credit card (€8 fee). I didn’t have a local bank account and I wasn’t going to pay the €8 fee. After a quick search I found and booked the same ticket through an online travel agency for a bit more than the price on the airline website, but less when you included the €8 fee. Unfortunately this small change in booking method would have cost the airline a substantial amount of money. Here’s why…

What is the issue with airline ticket distribution? 

Selling costs generally represent around 4% to 8% of overall airline expenses. Airlines generally sell tickets either directly to customers (e.g. through the airlines website) or indirectly to customers (e.g. through a 3rd party distributor such as an online travel agency of business travel agency). Many airlines sell a large proportion or the majority of their tickets through indirect channels.

Selling tickets indirectly is substantially more expensive with the cost being 20-times more compared to selling tickets through direct channels for some airlines [1]. A key driver for the high cost of selling tickets through indirect channels is the fees charged by Global Distribution System (GDS) companies for each ticket sold. With airline profit margins under constant pressure airlines need to find ways of reducing distribution costs by selling tickets to customers directly instead of through 3rd parties.

What is the GDS and how costly is it for airlines companies?

The GDS acts as a central location for different airlines to market/sell its tickets and also for 3rd party distributors to search for tickets. Essentially, the GDS is a central point of aggregation for airline tickets that can be searched by 3rd party distributors.

The fees to distribute tickets through the GDS are relatively high averages around US$12 per return ticket [2]. In 2012, it was estimated that approximately US$7 billion in GDS fees was paid by airlines which was over twice the industry’s expected net profit for that year [3].

How reliant are airlines on GDS?

Quite simply, the GDS is something that airlines cannot live without. Why? If your competitors are using the GDS and you are not then your tickets will not appear in any searches by 3rd party distributors meaning it is unlikely your tickets will be sold by the 3rd party. Even low-cost carriers such as Air Asia and Ryanair that have avoided the GDS for years have recently started selling tickets through the GDS as they have realised that they are missing out on revenue from not selling tickets through the GDS.  

The GDS is not something that can be easily bypassed by airlines. One leading US carrier attempt to bypass the GDS by encouraging 3rd party distributors to book tickets through their own distribution system. However, this led to protest from several distributors and an incumbent GDS provider that blocked and deprioritised the airline’s tickets in searches. It is estimated that the airline lost US$50 million from this event [4].

What about the 'New distribution capability'? Will this help reduce distribution fees?

The ‘New Distribution Capability’ (NDC) is a XML-based data transmission standard set by the International Air Transport Association (IATA) and provides a set of guidelines for communications between airlines and 3rd party distributors. The NDC will allow for the sale of ancillary products (for example, baggage, meals, special seating etc.), something which the GDS currently cannot handle. However, while the NDC has the potential to help airlines boost revenue, there are still questions as to whether there will be any benefits stemming from reduced distribution costs.

What can airlines do about distribution costs?

Airlines will have to recognise that GDS fees are not going away anytime soon and that there will always be some tickets that will be sold through the GDS. However, airlines should aim to reduce the amount of tickets sold through the GDS by asking itself “How can we make our direct channels so attractive that customers will want to use them over indirect channels?”

The simplest solution is to ensure that the user experience on the airlines website is seamless and easy. Users are highly likely to abandon online bookings and use another booking website if they encounter difficulties. Simple actions such as ensuring customers are not diverted to an error page can translate into a significant increase in direct bookings.

Airlines might also want to re-think the way it provides incentives and commissions for ticket sales. For example, airlines might be able allocate some incentives to customers in the form of extra frequent-flyer points or a free drink for booking directly through the airline website. Alternatively, airlines might provide a disincentive to customers such as by imposing a fee on tickets sold through 3rd party distributors - something which is currently being considered by Lufthansa [5].

With the trend moving towards airline consolidation (for example, partnerships, equity interests and mergers) airlines might also consider how they can work together to sell each other’s tickets on their websites. This strategy goes well beyond the sale of interline or codeshare tickets and will give customers benefits including the ability to book multi-airline itineraries directly from an airline website. Of course airlines must be wary of how they do this to ensure they are not in breach of any anti-trust regulations.

There is no ‘one size fits all’ approach and for an airline to decide on the best distribution strategy it will need to conduct a solid analysis into their customer behaviours, channel usage and also the commercials of their different distribution systems. While this is no easy task, a strong distribution strategy will help airlines remain profitable in an industry where profits are razor thin.

Michael Ng | Senior Associate, Consulting
Email | +44 20 7212 6329

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[1] Atmosphere Research Group: The Future Of Airline Distribution A Look Ahead To 2017 – A Special Report Commissioned by IATA (2012)

[2] The Economist: The ineluctable middlemen (2012)

[3] The Economist: The ineluctable middlemen (2012)

[4] London School of Economics Blog: Losing access to online distribution platforms cost American Airlines more than $50 million in revenues (2014)

[5] Lufthansa Press Release: Lufthansa redirects commercial strategy (2015)