Month: July 2022

The pandemic brought the airline industry to a standstill. Not only were flights and aircraft grounded and much project work came to a halt, the shutdown also affected many activities around airline commercial systems. Due to the sudden drop in revenues, airlines often had to request relief from contractual commitments with vendors, which was often granted in return for early contract renewals or agreeing contracts for additional services.

Now the pandemic seems to be over and the industry is fighting other challenges such as the effects of the war in Ukraine and an overall shortage of resources and infrastructure. At the same time, projects once stopped have been restarted again. The experience of the past two years has shown that customer service and the need for additional revenue streams are becoming essential for airlines. Thus, a flood of engagements in airline customer centricity, customer servicing and airline retailing are currently underway, shaping the commercial future of the industry. But when outlining and executing a strategy in this area, airlines often hit reality when identifying that their current Passenger Service System (PSS) represents a bottleneck. Traditional PSS are built around supporting a trip and do not focus on customer-centric servicing. In addition, growing revenues through ancillaries is often limited to seats, additional baggage, and other flight-related offerings. Providing further third-party ancillaries (not even considering a broader retailing strategy) often appears more wishful thinking then reality. Modern Offer and Order Management Systems are being built to close these gaps, but as they are in most cases dependent on a PSS, they are also limited by them. In addition, existing PSS contracts are typically of a monolithic nature, meaning that airlines have little freedom to pick and choose solutions from a handful of providers at competitive cost.

But as the pandemic has ended, numerous PSS contracts (including those that were temporarily renewed during the crisis) are coming to market. This provides airlines with an opening to rethink and restructure their setup of commercial systems. In essence, they need to achieve two sometimes conflicting targets: continue their operations on a proven “legacy” PSS that supports existing industry processes and industry-specific connectivity (codeshare, interlining, etc.), as well using this opportunity to shift to customer-centric, retail-driven commercial systems. In essence: combining the old world with the new. But the providers, both “legacy” and more “modern” ones, try to push the airlines into their own direction: remain on a classical PSS with a promise to enhance services towards real customer centricity and airline retailing, or move into the bright new world built around customer centricity and airline retailing, but with limited integration into the legacy airline world.

The ultimate target for airlines currently thinking about renewing or changing PSS is to secure the best of both worlds: to remain on a legacy solution at least temporarily, while preparing to embark on their customer-centric retailing journey. Consequently, airlines need to shift from a “one-stop shop” to a multi-vendor approach and avoid putting all their eggs in one basket.

A number of items should be considered when contemplating this approach:

• Be clear about the airline commercial model and the commercial strategy, as these are key to choosing the right commercial ecosystem. Some basic questions must be answered, such as how will the airline interact with other airlines, what kind of service will be provided to the customer and how does the airline plan to sell its services?
• How will products and offerings be distributed? Through digital-direct channels? Will aggregators be used? Maybe even legacy GDS? The airline’s distribution strategy needs to be clearly defined, as this sets basic parameters for many subsequent choices.
• Is the airline willing to be a trailblazer, with the ability and appetite for something new to really differentiate from competition? Or is the preference to de-risk the use of new technologies, maybe at the cost of competitive advantage?
• Are the resources available to integrate technologies and services from numerous providers? Regardless of whether they are in-house or provided by system integrators, they represent a cost that must be managed.
• What is the optimal split between capital expenditure and operating expenses? Using a system that is provided out of the box as Software as a Service (Saas) mainly drives operational costs, while a dedicated solution from multiple vendors carries higher capital expenditure.

Not all questions can be answered ahead of a procurement process, especially as most of these considerations are highly interdependent. Therefore, the structure of a procurement strategy should reflect the following points:

• Do not focus on buying a “prefabricated house”. Identify and define modules which can be combined, even if they are provided by different providers.
• As the industry is evolving, prevent long-term commitments for services that are only starting to take off. Maintain flexibility to replace modules through third-party suppliers, even during the term of the contract and have this reflected in the contracts.
• Agree on pricing for the integration and utilisation of third-party solutions. Do not accept paying for services you no longer use.
• Get the providers’ commitment to technically support and integrate third-party solutions based on APIs and web services.
• Look for integration capabilities – a “custom-made house” needs an architect and the staff to put it together. The same applies for the procurement of unbundled commercial system components.
• Do not neglect the importance of data, the ownership thereof and the airline’s access to own data in light of making this data available throughout the ecosystem.
• Start the procurement exercise early, based on the airline’s commercial strategy. A complex process with numerous solutions and suppliers providing different modules may take up to a year. Migration planning and the actual migration may easily take an additional year.

The industry is changing, and the pandemic and current resource crisis have accelerated the need for change. It is more necessary than ever to bridge the gap between legacy and the new world, with a clear commitment to customer centricity and retail-driven commercial systems. Unfortunately, the airline industry is one of the slowest movers, and at least for the time being, airlines need to have a foot in the door of both worlds.

 

This post has been published in collaboration with Terrapinn.

(Boris Padovan, 14. July 2022)