United and American Airlines... why the love for NDC?

Distribution Costs

The GDS is brilliant technology at the backbone of the industry, but, using the GDS is just plain expensive (for both airlines and advisors!) For US airlines alone, our calculations show that remaining GDS-dependent leads to $58.1 billion in yearly opportunity costs due to inefficiencies along the entire distribution chain. In this article I plan to break down this opportunity cost to shine a light on why airlines have been shaking things up in 2023.

Direct Expenses

According to the Bureau of Transportation Statistics (BTS)¹, US Airlines report $8.8 billion in reservations and sales expense. The vast majority of this is costs related to supporting GDS infrastructure. With NDC, we estimate that this will be reduced to just 20% of current costs. This leads to $7 billion in savings.

Airline Ancilliary Revenue

Next is ancillary revenue. $39 billion² in ancillary revenue generated annually by US airlines. In a best case, as is with Lufthansa Group³, 50% of bookings are made through direct channels. This means that the remaining 50% of GDS bookings have no ability (except in limited bundled pricing) to capture any ancillary revenue. It is fair to say that this figure would be doubled if all bookings are made through NDC. Another $39 billion in revenue.

Revenue Integrity

Revenue integrity is another concern that airlines spend an incredible amount of money to combat. These are actions that lead to Agency Debit Memos (ADMs) including churning, hidden-city ticketing, and married segment manipulation. Airlines' goals are to find and cancel these abuses to keep inventory up-to-date and protect their markets⁴. According to an Amadeus report⁵, revenue integrity efforts comprise of 3% of an airline's total revenue. With NDC, this is no longer a major concern as all actions must be validated by the airline through their systems. Considering the $279 billion in total operating revenues¹ for US airlines, this is $8.3 billion in savings.

Staffing

Now let’s consider staffing. Airlines are behemoth organizations and a knowledge of the GDS is absolutely critical for so many employees. According to the Bureau of Labor Statistics (BLS)⁶, there are 119,000 airline reservation and ticketing agents in the US. The average IATA training course is 60 hours long⁷. The following chart breaks down the annual costs to train and maintain proficiency of the GDS based on wage figures from the BLS for a total of $398.3 million.

Beyond reservation staff, airlines also need a force of talented software engineers at multiple pay scales to manage the aging technology and infrastructure needed to support GDS. Let’s consider what the costs are to train and maintain GDS proficiency, just like reservation staff, assuming each airline employees 500 engineers. We’ll also limit this to the 50 major airlines¹ with over $20 million in revenue and assume each employee works for 2,080 hours per year (52 weeks * 40 hours/week). The total cost is $921.6 million

Consulting Services

Lastly, airlines procure the services of external consulting firms⁸ to further maintain their legacy infrastructure and come up with “innovative” workarounds to keep their operations alive. For the 50 largest airlines, it would not be uncommon to have 5 yearly consulting projects across cross-functional teams, each costing $10 million broken down into strategy then implementation phases. This is a $2.5 billion combined cost.

What does this all mean for travel advisors?

While the first gut reaction towards NDC is that airlines are focused on eliminating commissions for advisors and agencies, the reality is that there is so much more going on. In reality, post-COVID, airlines are looking for ways to minimize decades of legacy costs by serving a wider audience through direct booking channels. Airlines want to cut their distribution costs to $0 and control the entire process.

At Jetpack, we help you run your business by creating a standard dominant design for all your bookings. Let the tech shake itself out over time - we provide you a single source of truth and take care of all the complex and nonstandard technical implementations so you can focus on what you do best: serving your clients.

Learn more about Jetpack by scheduling a meeting at this link: Jetpack Consultation