NDC: An Inevitability for Airlines and Ticketing Agents?

Imagine you’re planning a trip. You open up your favourite travel website, enter your destination, and within seconds, a list of flights appears, offering various options at different prices. It seems so simple, no?



But behind this seemingly effortless experience is a complex system orchestrated by the Global Distribution System, or GDS.

Well, but what exactly is this GDS?

Buckle up. 

I. Once Upon a Time in the World of Air Travel

Back in the day, booking a flight was a cumbersome process. Travel agents would manually call airlines, check availability, and make reservations one by one. As air travel grew more popular, this system couldn’t keep up with the demand. A faster, more efficient way was needed, and thus, the Global Distribution System was born.

The Birth of GDS

The story of GDS begins in the 1960s when airlines started to realize that computers could help manage their rapidly growing business. The first GDS was created by American Airlines in partnership with IBM. They named it Sabre, a cutting-edge system at the time that revolutionized the way flights were booked. Sabre allowed travel agents to access flight information, check seat availability, and make reservations all in one place.

Soon, other airlines followed suit, and more GDS providers emerged—Amadeus in Europe and Travelport (which includes Galileo and Worldspan) in the U.S. These systems became the backbone of the air travel industry, connecting thousands of airlines with millions of travelers worldwide.

The Role of GDS: How does it Work?

Think of the Global Distribution System (GDS)  like a giant computer network that helps travel agents and booking websites find all the available flights, prices, and seats from different airlines.

Here’s how it works:

1. Connecting the Players: GDS are like massive data hubs. Airlines send their flight information to the GDS Provider, including schedules, seat availability, and prices. But the GDS doesn’t just handle airlines; it also connects with hotels, car rental companies, cruise lines, and more. It’s the ultimate middleman, bringing together all the pieces of a traveler’s journey in one place. MakeMyTrip? Well GDS is the backbone on which it functions.
   
   
   
2. The Travel Agent’s Best Friend: Whether it’s an online travel agency or OTAs  (like Expedia or MakeMyTrip) or a corporate travel management company, sellers rely on GDS Providers like Sabre to do their job. When you enter your travel details on a booking site, the GDS springs into action, searching through its vast database to find flights that match your criteria. Within seconds, it delivers the results to the online travel agency’s page, ready for you to choose from.
   
   
   
3. Creating a Seamless Experience: Once you’ve selected your flight, the GDS continues its work behind the scenes. It books your seat, creates a Passenger Name Record (PNR)—a digital file that stores all the details of your trip—and ensures that your reservation is sent back to the airline. The seat you’ve chosen is now yours, and the GDS updates its records to make sure no one else can book that same seat.
   
   
   
4. Making the Money Flow: The GDS also plays a key role in the financial side of things. When a booking is made, the airline pays a fee to the GDS for handling the transaction. But the GDS Provider doesn’t keep all that money—it shares some of it with the travel agency or seller as an incentive for using its system. This keeps everyone in the ecosystem happy and ensures that travel agents continue to rely on their GDS for their bookings.
   
   Here’s more on this:
   
   The process of booking a flight involves several parties, each playing a specific role in making the travel experience seamless. Here’s how the money flows through the system:

• Travelers or Their Employers Pay for Tickets:
  • The process begins when a traveller or a company (in the case of business travel) books a flight. They usually pay for the ticket either directly to the airline or through an intermediary like a travel agency or an online travel platform. (Say MakeMyTrip)
  • The payment covers the base fare, taxes, and any additional services or ancillaries, such as extra baggage or seat selection.
    
• Airlines Pay Fees to Global Distribution Systems Providers (GDS Providers):
  • Airlines rely on GDS Providers to distribute their flight inventory to a wide network of travel sellers (e.g., travel agencies, corporate booking tools, online travel agencies like Expedia).
  • For each booking made through a GDS, the airline pays the GDS Providers a fee. This fee is a service charge for displaying the airline’s inventory to sellers and facilitating the booking process.
  • The fee amount can vary based on factors such as the type of booking, the GDS Provider involved, and the terms negotiated between the airline and the GDS Provider.
    
• GDS Providers Pay Incentives to Sellers/OTAs:
  • To encourage travel sellers (e.g., travel agencies like MakeMyTrip) to use their platform, GDS Providers offer incentives. These incentives are payments made to sellers based on the volume of bookings they process through the GDS.
    
  • The more bookings a seller/OTA like MakyMyTrip makes through a particular GDS, the higher the incentive they receive. This creates a mutually beneficial relationship: GDS Providers gain more transactions (and thus, more fees from airlines), while sellers earn additional revenue.
    
  • Incentives can take various forms, such as cash payments, discounts on GDS services, or other rewards. The structure and amount of these incentives are typically negotiated between the GDS and the seller.
    
    See, how the ecosystem has developed here? More on this later.

II. Conundrum: The Circle of Incentives plays against Airlines?

• For Airlines: The fees paid to GDS are considered a distribution cost. Airlines aim to manage these costs by negotiating favourable terms with GDS Providers and if that is not possible they tend to try  increasing direct bookings (through their own websites), which helps them retain more revenue per ticket sold.
  
  
  
• For GDS Providers: The revenue GDS Providers generate from airline fees is balanced against the incentives they pay to sellers. Their profitability depends on maintaining a large network of sellers and processing a high volume of transactions.
  
• For Sellers: Incentives from GDS Providers represent a significant portion of their revenue. However, sellers also have to balance this with the costs of using the GDS platforms and the need to offer competitive prices to travelers.

Challenges with the Traditional GDS Model

The traditional Global Distribution System (GDS) model has been the backbone of air travel booking for decades, but it has limitations that affect both airlines and travellers. Here’s a closer look at these challenges:

1. Limited Ability to Bundle or Unbundle Content

What It Means: GDS can handle the distribution of flight inventory, but they have limited capabilities when it comes to bundling or unbundling content. Just to simplify further:

Bundling:

• Bundling refers to combining different travel elements (like flights, hotel stays, and car rentals) into a single package deal. While travellers might want an all-inclusive vacation package, traditional GDS Providers often struggle to create these seamless bundles.
• For example, if a traveller wants to book a flight with added extras like extra luggage, lounge access, or in-flight Wi-Fi, the GDS typically cannot offer these options in one integrated package. Instead, these services are often handled as separate transactions.

Unbundling:

• Unbundling is the process of separating out additional services from the base flight fare. While some airlines have moved towards offering a basic fare with optional add-ons (like choosing a seat or paying for baggage), GDS Providers have difficulty managing these separate components cohesively.
• This means travellers might experience a fragmented booking process where they must add extras in separate steps, rather than as part of a single, streamlined purchase.

2. Limited Airline Control Over Inventory Packaging

What It Means: Airlines typically have little say over how their flight inventory is presented and sold through GDS Providers.

Lack of Customization:

• Airlines want to present their flight options in ways that highlight their strengths or match their marketing strategies. For instance, they might want to showcase premium seating options or special promotions.
• However, GDS Providers use standardized formats for displaying flights, which often means airlines can’t customize how their products are presented to travellers.

Distribution Constraints:

• GDS Providers distribute airline inventory according to their own rules and algorithms, which can limit the airline’s ability to differentiate their offerings or control how they’re marketed.
• For instance, if a GDS prioritizes showing only the lowest fare available, higher-value options or special services might not be as visible to travellers.

3. Lack of Travellers Information for Personalization

What It Means: Airlines receive minimal information about travellers at the point of sale when bookings are made through GDS Providers.

No Personal Touch:

• Personalization is a key aspect of modern retail. Airlines would ideally want to tailor offers and experiences based on traveller data (such as past bookings, preferences, or frequent flyer status).
• Since GDS Providers handle the booking process without passing detailed traveller information to airlines, there’s no opportunity for airlines to offer personalized promotions or tailor the travel experience to individual needs.

Missed Opportunities:

• Without knowing more about the traveller, airlines miss opportunities to upsell additional services or provide targeted offers. For example, a frequent traveller might appreciate a special offer on an upgrade to business class or a loyalty reward, but the GDS doesn’t enable airlines to identify and act on such opportunities effectively.

4. Evolving Consumer Expectations and Airline Business Strategies

Online Shopping Carts and One-Click Purchasing

• Convenience and Speed: Modern consumers are accustomed to the seamless and instantaneous experiences provided by online shopping platforms like Amazon. The concept of a shopping cart, where customers can easily add, remove, and review items before purchase, has set a high standard for convenience. One-click purchasing, popularized by tech giants, has further raised the bar by reducing friction in the checkout process. This shift towards streamlined, user-friendly transactions has extended to all areas of online shopping, including travel.
  
• Immediacy and Effortlessness: In the context of air travel, consumers now expect a similar level of convenience. They want to book flights, select seats, and add extras like baggage or upgrades with minimal effort. The traditional booking process, often fragmented across multiple steps and interfaces, feels outdated to the modern traveler accustomed to the efficiency of online retail.

Personalization and Relevance

• Tailored Experiences: Consumers increasingly seek personalized experiences. They expect businesses to understand their preferences and offer tailored recommendations. Studies have shown that personalized marketing can significantly enhance customer satisfaction and loyalty. For airlines, this means offering personalized fare options, upgrades, and ancillary services based on individual travel history and preferences.
• Data-Driven Insights: The ability to analyse consumer behaviour and preferences is critical. Advanced analytics and machine learning can provide insights into travel patterns, preferences, and booking behaviours. Airlines that leverage this data can craft more relevant offers and improve the customer experience.

Looking at the inherent challenges in the legacy GDS, the International Air Transport Association or the IATA decided to step in.

III. IATA Steps In: The Emergence of NDC

What is IATA, you might ask. Well, the International Air Transport Association (IATA) is like the referee in the global airline industry. It sets the rules and standards that help ensure airlines operate safely, efficiently, and sustainably. 

Founded in 1945, IATA works to make sure that airlines around the world follow consistent practices, which helps keep air travel smooth and secure.

It came up with the concept of NDC in 2015.

New Distribution Capability (NDC) is a new way for airlines to sell tickets and travel extras directly to you, making the whole process more flexible and personalized.

How It Works

1. Direct Connection:
   • Before NDC: Imagine you’re booking a flight and you go through a travel agency or a website like Expedia. These sites use a system called a Global Distribution System (GDS) to show you flight options. The GDS acts as a middleman between the airline and you.
   • With NDC: NDC allows airlines to connect directly with you or the travel agency, cutting out some of the middlemen. This means the airline can offer better deals and more personalized options.
     
2. Personalized Offers:
   • Before NDC: You might see the same flight options and prices, whether you’re a frequent flyer or a first-time traveler. There’s no way for the airline to offer you special deals based on your past travels.
   • With NDC: If you fly with a particular airline often, they might offer you special deals or perks, like a discount on upgrades or free extra luggage, based on your travel history.
     
3. Bundling Services:
   • Before NDC: Booking a flight, a seat upgrade, and extra luggage usually involves separate steps. You’d first book the flight, then choose a seat, and finally add luggage, often paying for each step separately.
   • With NDC: NDC allows airlines to bundle all these extras into one package. You can book your flight, select your seat, and pay for additional luggage all at once, making the process smoother and easier.

Examples

1. Booking a Vacation:
   • Before NDC: You’re planning a trip and book a flight through a travel website. You see the basic fare and have to add extras like baggage and seat selection separately. It can feel like you’re piecing together a puzzle.
   • With NDC: You visit the airline’s website, and they offer you a vacation package that includes flights, a hotel, and a rental car all in one. You can also choose to add extras like extra legroom, onboard WiFi or airport lounge access as part of the package. Everything is handled in a single transaction.
2. Frequent Flyer Perks:
   • Before NDC: As a loyal customer, you might not get special offers or upgrades because the booking system doesn’t recognize your loyalty.
   • With NDC: The airline recognizes you as a frequent flyer and offers you a discounted upgrade to business class or free extra luggage as part of your booking.

In summary, NDC makes the booking process more flexible and personalized by allowing airlines to offer tailored deals and services directly to you. It simplifies booking by combining all your needs into one package and recognizes your loyalty to offer you special perks.

While many airlines are adopting NDC, the transition is gradual. Some airlines continue to utilize GDS Providers for their extensive reach and established infrastructure, but the trend is shifting towards NDC as it aligns better with modern retailing practices and customer expectations.

IV. But Why the Transition from GDS to NDC is Taking Time

The shift from traditional Global Distribution Systems (GDS Providers) to the New Distribution Capability (NDC) is a significant change in the airline industry. While NDC offers many benefits, the transition is more complex and slower than many initially expected. Here’s why:

1. Complexity of Integration

Technical Challenges:

• Legacy Systems: Airlines and travel agencies have long relied on GDS Providers, which are deeply embedded in their operations. Integrating NDC requires overhauling or adapting these existing systems. The complexity of integrating new technology with old systems can be daunting and time-consuming.
• Diverse Technologies: NDC involves new data formats and protocols that need to be compatible with a variety of technology platforms. Ensuring that all systems can work together smoothly requires significant technical adjustments.

Data Management:

• Handling Different Data: NDC allows for more detailed and personalized data to be transmitted. Airlines and travel agencies need to adjust their systems to manage and process this new type of data effectively. This requires careful planning and substantial investment in technology.
  
  We are seeing some teething problems already:
  
  2. Financial Considerations

Cost of Transition:

• Upfront Investment: Implementing NDC involves considerable costs. Airlines and travel agencies must invest in new technology and training. Smaller players may find these costs particularly burdensome.
• Return on Investment (ROI): The financial benefits of NDC, such as reduced GDS fees and increased customer insights, may take time to materialize. This delay can be a deterrent for some companies, especially if they are unsure of the long-term ROI.

Revenue Models:

• Changing Incentives: GDS Providers have traditionally provided incentives to travel agencies based on transaction volume. As airlines shift to NDC and reduce their reliance on GDS Providers, these incentives decrease. Travel agencies may need time to adjust their revenue models and find new ways to generate income.

3. Industry Resistance and Adaptation

Resistance to Change:

• Comfort with Existing Systems: Many airlines and travel agencies are accustomed to the familiar GDS model. Transitioning to NDC requires not only new technology but also changes in business processes and workflows. This can lead to resistance from organizations comfortable with the status quo.
  
• Learning Curve: Adopting NDC involves a learning curve for staff and systems. Training employees to use new tools and understand new processes takes time and effort.

Adoption Rates:

• Gradual Adoption: The industry is seeing a gradual adoption of NDC as more players test and implement the technology. The slow pace of adoption reflects the cautious approach many companies take when integrating new systems. They want to ensure that NDC will deliver the expected benefits without disrupting their existing operations.

4. Regulatory and Industry Standards

Compliance and Standards:

• Regulatory Issues: The introduction of NDC may involve navigating regulatory requirements and industry standards. Ensuring compliance with these regulations while implementing new technology can add to the complexity and delay the transition.
• Standardization: Achieving industry-wide standardization with NDC is an ongoing process. Different airlines and travel agencies may implement NDC in varying ways, leading to inconsistencies and slow progress in achieving full industry-wide adoption.
  
  

V. Conclusion

The transition from GDS to NDC is not happening as quickly as anticipated due to a combination of technical, financial, and industry-related challenges.

Mid 2022, only 10% of bookings had migrated from GDS to NDC.

The complexity of integrating new technology, the costs involved, resistance to change, and the gradual nature of adoption all contribute to the slower-than-expected pace. As the industry continues to adapt and overcome these hurdles, NDC has the potential to reshape how air travel is booked and managed, but it requires careful navigation and time for widespread implementation. 

However, an article in July captures some interesting details:
Source: Phocuswire

Also, as you can see from the IATA Report 2024,  there’s been a significant surge in the adoption of NDC (New Distribution Capability), and it’s no surprise. The tangible benefits are becoming increasingly clear, driving more and more players to get on board.

If I had to summarize the above article in a nut-shell it would be this:

Every airline is after two things: revenue and keeping passengers satisfied. To do that, they need to understand their customers better and offer a few extra perks like baggage insurance or a meal on board. It’s all about finding ways to make a bit more money while keeping people content.

The evolution of ancillary services and the need for personalized passenger experiences have made it clear: the current global distribution system or GDS is no longer enough. Airlines need direct access to their customers to boost revenue and satisfaction. Enter the New Distribution Capability (NDC)—a game-changing standard that allows airlines to deliver tailored offers and services directly to passengers.

Based on a study by BCG, it looks like 2025-2030 is the period when the benefits of NDC will truly start kicking in for the industry as a whole, while 2023-2025 is going to be the period where the industry integrates with NDC. 

It’s not going to be super smooth, trust me, but slowly and surely NDC is becoming an inevitability. We are seeing an increasing number of industry players are already integrating themselves into this evolving value chain. Airlines and tech platforms that quickly adopt and leverage NDC will gain a competitive edge, maximizing ancillary revenues and customer loyalty.

Moreover, though NDC is primarily designed for the airline industry to enhance communication and data exchange between airlines and airfare sellers, its principles can also apply to hotel distribution. Similar to NDC’s standardization efforts for airlines, hotels can develop standards to improve content sharing across channels. By adopting NDC-like approaches, hotels can provide rich content about their offerings, implement dynamic pricing and personalized packages, and utilize technology such as APIs to connect directly with travel agencies and booking platforms. Ultimately, while NDC is focused on airlines, its concepts can foster a more integrated and customer-centric experience in the hotel industry and other travel services.

Therefore, as investors, the question is: are we attuned to these emerging trends? The shift is happening now—are we positioned to ride the wave of change?

Interestingly, and a Food for Thought: New deals are flowing in for companies like Accelya:
 

Accelya is a prominent global software provider for the airline industry, specializing in innovative solutions that empower airlines to enhance their retailing capabilities. The company has established itself as a leader in enabling New Distribution Capability (NDC), facilitating over 50% of global NDC transactions in 2022. Accelya’s modular platform supports airlines in modernizing their distribution strategies, personalizing offers, and increasing ancillary sales without the constraints of legacy systems.



Additionally, Accelya is advancing towards the “One Order” concept, which aims to streamline order management across various channels, enhancing the overall customer experience and operational efficiency for airlines. With its extensive experience and partnerships, Accelya is positioned to drive significant transformation in airline retailing.

And it has a subsidiary which is listed in India – Accelya Solutions Ltd. which is poised to be impacted positively as the world transitions towards NDC, and by effect One Order.

However, it is not that straight forward. The business that Accelya Solutions India does is entirely different to what its parent group does and one needs to take a step back and evaluate their business before investing considering the trend in the industry.

Would you like us to clear the air on Accelya Solutions and and know more? Write it in the comment section below along with your feedback on the blog.

Thank you.