Ah yes … here it is again – the end of the month.
Eastman's "Off-the-Wall Comment(s)"© ...
So, just how many of you OTWC readers really believed that internet intermediation was solely impacting airline travel and travel agents?
Of the six newly Internet impacted industries, three have direct impact on the travel industry; although most readers will see only the changing hotel structure as important. So, initially, let’s address the hotel dynamic.
While the hotel chains have come up with the penalty model as an interim “stop-gap” protection … one has to ponder just how long such a solution will sustain itself in the dynamics of today’s hyperarchy of information.
The clip alludes to an obvious competitive probability – the speed at which a prospective buyer can move from one possible property to another; a “mouse-click” on one’s computer. But, as with the airline war-of-fares between the legacy and low cost carriers – the “lower price via mouse-click” is sustainable only so long as the lower cost can be sustained. Unlike the cost disparity between legacy carriers and low-cost alternatives, the hotel properties do not have the same major differences in core culture, business processes, or labor costs that split the legacy and low cost carriers.
In fact, probably the major difference between properties of like-product offerings … is chain-brand! And the commodities-nature of the information hyperarchy is such that even the smallest business entity can have the look-and-feel of the very biggest corporation; and brand value has only marginal benefit among like-product offerings among commodities. That suggests that, as with many of the legacy airlines, the value of brand will become less-and-less – and the ability of the intermediary chains to sustain their brand will become harder and harder.
It will take a while for all of this to play out … a year or two. But in the end, the brands are going to have to offer greater value-add at significantly lower costs if they are to sustain their hold on the distribution of rooms.
Basically, branded products are most effective when the product offering is a “goods” … an item purchased when buyers go to a retail outlet to compare multiple similar product offerings. Brands can command value-added pricing over generic products. Brand worked well when hotels were sold primarily through travel agent distribution channels or through one-way mass-media information outlets (television, radio, etc.).
But the bi-directional nature of the Internet and other information tools lesson the value of a branded product. Buyers can now “see” what a property looks like … can easily fine like properties at destinations … and can compare competitive pricing in real time. The hotel room, like the airline seat, is increasingly a commodity offering; no longer a good. Among like commodities, price differentiation becomes primary … generally superseding brand.
Accordingly, penalty protection as a tool for ensuring brand protection cannot long sustain itself. Accordingly, it would seem that two new value-add dynamics can be expected …
First … as with the airline seat, the primary way to off-set the commodities price differentiation is through value-added packaging. We can expect to see the chains interactively packaging in real-time with other commodity vendors (like airlines) to offer true linked value-add products.
Second … the chains will necessarily need to evolve new brand benefits; benefits that either add-value for the buyer (as in the packaging idea above or cross-property pricing breaks) or that add-value for the property (such as real-time settlement, lower cost software management solutions, or gateways to interactive packaging solutions, etc.).
So, not only do we expect the legacy carriers to evolve interactive real-time integrated digital packaging of their seat-product; we also expect to see hotel properties evolving to a similar interactive packaging distribution model. Since there does not seem to be any alternative on the horizon, I suspect that the value-add via interactive packaging to become one of the major thrusts in travel in very short order.
While I mostly addressed the issue of the Internet on hotel distribution … I would be remiss if I did not address those other two “back-office” related trends overtaking business in general, including the travel industry; the elimination of checks in favor of direct electronic settlement and the impact of open-source on the technology costs of enabling these tools.
In the case of interactive direct settlement, it is essential to recognize that net technology is again, replacing the intermediary. While the clip above discusses check settlement, the parallels between checks and the physical tickets that airlines use OR the physical vouchers of tour and cruise companies are virtually identical. Tickets and vouchers, like checks, are physical representations of entitlement. Thus, whether we’re checks used to pay for travel or hotel rooms, tickets that provide entitlement o airline seats, or vouchers for hotels, ground transportation, cruises or other en route or on-board extravaganzas … the quest is to use digital technology to replace historic paper-driven business processes dependent on human intervention!
People and businesses fulfilling those roles today … MUST change or adapt … and/or re-value their contribution and value-add to serve new roles! While travel agents were among the first to face this disintermediation … and it is now forcing the consolidation and restructuring of the GDS distribution channels; the decline of checks in favor of digital direct settlement processes is about to burden ARC or the other IATA BSPs.
While we’ve talked about this in past OTWCs … and concurrently, ARC and some of the BSPs have enabled new settlement solutions; the full impact of direct settlement has been slow to evolve – due in large part to the co-aligned business settlement processes of ticket and check processing. Thus, as non-travel businesses move more rapidly away from checks … the expectations of travel industry buyers and businesses will follow a similar path. And the hierarchal structure of the airline (and hotel) settlement processes will be forced to change at a greatly increased pace.
The move from printed tickets is little different than the move away from printed checks. The dynamic that evolves is, accordingly, little different – and the “middleman” becomes disintermediated unless that “middleman” can find new ways to add value Further, in the airline and hotel business, the ability to separate the digital product from the physical product (not really possible when a printed document had the buyers name appended … and to change the owner required re-issuing the printed document) – it becomes possible to evolve independent separate markets for airline seats or hotel rooms that have already been sold. .
It appears then, that ARC and the BSPs will come under increasingly significant threat of disintermediation in the face of direct electronic settlement (particularly among interactive real-time packagers) and new digital market-making instruments.
A new market-making environment is the focus of two independent European companies, Virteos and AirCash. In each case, the common aim is to establish a virtual primary and secondary market for air travel; including automated planning, matching, settlement and credit facilities for air travel. The process is a significant departure from the hierarchical, primary market only, approach used in the industry today. It enables an order driven market in seats. The value-add of either intermediary will a) increase revenue by increasing average occupancy rates for the airlines and b) encourage earlier reservations by customers with beneficial cash flow implications due to the airline’s own ability to pre-sell (or buy) in the secondary market.
And while these two companies are focused on the airline markets, there is nothing to suggest that such a digital market-making structure would be any less successful in selling hotel rooms. And clearly, such innovations are a major threat to the hierarchal structure needs of ARC, BSPs, and similar hotel settlement processes as provided by Pegasus Financial Solutions. .
Such models become increasingly viable was society and business in general turn away from the traditional check settlement processes in favor if faster, more efficient, flexible and interactive bi-directional digital settlement.
The third aspect to impact the travel industry will be open-source software solutions. For most of us long used to the high prices of software development … either in the form of development costs and/or transaction fees … the thought of integrated bi-directional digital packaging and/or settlement as noted above -- is easily set aside by the perceived cost of such solutions. But the open-source software revolution suggests that these traditional high-cost platforms will also fade from the scene. Again, the intermediary software developers of the operating platforms are the business entities at risk. The value-add will likely evolve to some form of service-related function; in lieu of selling software or solutions out-of-a-box.
The major point of this discussion is that the travel industry, still reeling from the onslaught of Internet on the core airline distribution and business process hierarchies – is about to find itself in a new orbit of new Internet dynamic changes. This second surge of Internet enabled business structures is actually beginning to provide a bigger picture of the impact that digital information management tools can have on all aspects of society and businesses serving society.
While many of us originally perceived the Internet as a passing fad … and that once past, the economy would re-align itself as in the past – this second surge of Internet dynamics is suggesting that it is unlike that the business in general – and the travel industry specifically – can or will ever return to any structure resembling the past.
The “transaction processing” functions requiring human intervention that has been at the foundation of most intermediary travel functions is rapidly being replaced by technology and automated intelligence. Today’s intermediaries are being forced to restructure or transform their transaction functions into unique value-add services; or exit the business.
And of equal importance, new or re-constructed intermediaries are evolving to offer new types of digitally related value-add solutions for manufacturers (after all, airline’s “manufacturer” seats; hotels “manufacture” beds, tour operators “manufacture” experiences, etc.) -- as well as buyers!
It took less than five years to push through the first phase of Internet intermediation and … including both a boom and an economic recession … and begin to explore the second phase. We can pretty well expect that the third phase will be upon us half-again as fast; perhaps 2 to three years hence. Those players that are still lagging in the first phase will be ill-prepared to participate in the third phase; and those just beginning to embrace the second phase will find themselves in an ever-changing business travel dynamic.
While it’s not possible for everybody to be a part of the leading change dynamic, as with all business transformation, that is where both the risk and the opportunity lie. It will interesting to see how many of the legacy businesses in today’s travel industry are able to transform themselves in response to this increasingly rapid transformation of society and the business itself.
Eastman's "Off-the-Wall Comment(s)"© ...
And the question is … does this new group of management understand the dynamics of the evolving technology driven hyperarchy of information in airline management – or will they revert to trying to incrementally improve on historic legacy airline management processes and practices?
A Delta news release points out that, “The appointments ‘accentuate Jerry's priorities: customer service, operational excellence, employee morale, cost competitiveness,'' said Joe Kolshak, a Delta executive who was promoted to chief of operations”. Jerry Grinstein is the current CEO of Delta Air Lines.
Keeping in mind that I’ve not met any of these people, it still seems from my perspective that there is no technology or data information management experienced person in the group – nor any mention of any individual with responsibility for those tasks as a part of the senior management team!
And, among the priorities identified in the press release and quoted above, there is not one that is not 100% dependent on current and relevant digitally provided information. Yet no one in the new management team has been challenged with or identified to assume that responsibility. This suggests a lack of awareness, or recognition of the need, for information management at the senior management level. It would imply that Mr. Grinstein hopes to find success through traditional legacy airline people-relationships and business processes, using historic airline cost control disciplines fed by legacy data processing solutions.
The immediate rhetorical question that springs to mind is, “How does one manage these costs in today’s digital information world without contemporary revenue and cost management information tools?” The legacy airline information platforms do not generate that kind of information … and while Delta is building a new “nervous system”[1] environment to move data in and around its current disparate business processes – there does not seem to be anybody in the top level management team with responsibility or oversight to direct how that system evolves.
Without leadership including information management at the highest levels of management, the economic rebound will necessarily need to be fast and universal if Delta really expects to survive in this era of digital information-driven knowledge. It will be very difficult for Delta to compete dollar-for-dollar, cost-for-cost with the low cost airlines that work from information platforms that manage new business processes and information already; not to mention the legacy carriers that have come to recognize the importance of information management and given it senior level attention.
A very bright friend, long embedded in the airline business, suggested that automation takes massive amounts of time to develop and suggested that there is simply no time for Delta to implement any significant new IT solutions.
This assumption reflects the traditional legacy airline IT thinking. In the traditional legacy airline information processing platform environment, this is a very valid statement. The problem is that those systems have been surpassed by newer technology, newer platforms, newer software languages, and newer networking environments. Yet using these newer tools overlaid on the existing Delta structure would provide Delta with a relatively quick response to the new dynamics. Yet the key link to enabling that is totally missing from the senior management team – a person with the authority and inside knowledge.