Is this summer’s baggage crisis an innovation opportunity?
BBC News published an article this summer about the “tech aiming to prevent lost airline luggage”. It was certainly timely given the horror stories at some European airports over the summer, both in mishandled bags and in customer service. The article quotes the SITA report that highlighted 19m mishandled bags and 1.3m lost bags in 2021. We are in 2022, and you still hesitate to check a bag for your next flight? You’re not alone 😉
Have you noticed that new warehouses, like Amazon’s, or new factories, like Tesla’s, are fully automated, also like data centres? What about bag handling at airports today, is it fully automated? No, unfortunately bags are still loaded manually in aircraft today, like 50 years ago… Until we go to “dark airports” and implement automation in bag handling, what options do travelers have when they travel with bags? This paper explores the root causes of the chaotic situation, the alternatives in the short term to avoid issues and in the longer term to fix the problem.
Root causes
Overall the baggage operations for airlines is roughly a zero sum game. The cost of carrying 3 billion bags per year is about $30bn, or $10 per bag. This cost is roughly offset by ancillary bag fees also at around $30bn. The mishandled bags represent roughly an extra $3bn cost. The baggage operation processes are very complex and manual. Large airports use sophisticated sortation systems running on kilometres of belts. Bags are loaded and offloaded from aircraft manually, except for large aircraft with containers.
In this spring in Europe, as the Omicron wave was fading, consumers regained confidence, air traffic resumed and reached almost the levels of 2019 with load factors of 86%. The airport and bag handling staff, who were furloughed during 2020 and 2021, did not return fast enough in their jobs. This shortage was worsened by the Coronavirus still being active and putting staff on sick leave. Overall there were not enough hands for the manual bag processes.
Can tracking bags with electronic tags help?
The bag tags currently provided by airlines are equipped with barcodes which are read only at certain points in the end-to-end process. This means that airlines and airports have a limited view of where the bags are. Adding an electronic tag, either provided by the airline or included by the travelers themselves (like the Apple AirTag), may help locate the baggage beyond the existing tracking points at bag drop and before the carousel.
Tracking the bags may indeed help the travelers to find out where their bags are, for example if a bag is stuck in a warehouse waiting to be picked up by a delivery team. As such it can accelerate the retrieval of the bag and save time looking around 10,000 bags for a needle in a haystack. But these tags don’t make bags travel faster, don’t add hands to load bags in aircraft and don’t deliver bags at home.
Can one remove the baggage bottleneck at the airport?
One approach to tackle the baggage operation issue is to remove some baggage from the sortation systems, or at least at the peak times. This can be done at departure by dropping the bags off-airport or by picking up bags from home and processing them in parallel. At arrival, the airline may offer a home or hotel delivery of the bags.
There are live solutions that exist today, like Airportr quoted in the BBC article. A baggage agent comes to the traveler’s home, seals the bag and loads it into an electric van. The bag is carried safely to the destination. Due to current regulations, the bags travel in the same aircraft as the customers, but in time we can imagine that bags can travel independently. They could also be picked up by drones that can lift 20 kilo payloads.
Is there an alternative to bag sortation systems and manual loading?
The air travel industry still handles every bag individually and manually. Conversely the maritime shipping industry went through a containerization transformation. The maritime organizations got together and set standards for 20-feet and 40-feet containers. Over the past 50 years, lengthy processes were removed and replaced with container ships.
This transformation inspired André Safir with the Squarcle project, whereby travelers drop their bags directly into containerized lockers. There is no need for bag sortation and no manual intervention. Such radical invention has the potential to transform the baggage operations, reducing costs and mishandling, but also avoided future congestions and chaos in case of rapid changes in air traffic.
Conclusion
While bag operations have done a tremendous job at delivering billions of bags per year, they represent relatively high costs and a low resilience to irregular operations. The air travel industry has a major opportunity to learn from this summer’s Europe crisis and to explore new ways of handling bags – more automated, more cost-effective, most resilient and ideally more sustainable.
I keep hearing the same concerns about the perceived speed of the transition to airline digital retailing, whether I speak with airlines, sellers and travel tech companies who have embarked in the transition, or with other players who have chosen to wait and see.
Understanding the good and bad reasons for the lack of speed (compared to expectations) is helpful to find ways to accelerate the transition. It will be even more valuable to plan for the next transition, towards order management.
What are the expectations?
Having one airline implementing one distribution API is fast. Air Canada had a distribution API before NDC started. easyJet had an API connected with one GDS before NDC started. An airline group called Open Axis even had a standard for API distribution before NDC started. If this is all we know, NDC should be implemented globally in a couple of years, right?
On the other hand, airlines, travel agents and GDSs have been working hard for the past 50 years to build a global interconnected platform allowing any customer to find in real-time the best itinerary and best fare to get from A to B anywhere in the world. Even after 50 years of hard work, using pre-internet technologies, the platform does not support the latest innovations in dynamic pricing and ancillaries. Upgrading this entire platform, with new processes and technologies, should take at least 50 years, right?
A reasonable expectation lies probably in the middle. Implementing NDC worldwide has clearly not taken 2-3 years (this was only the time necessary to get the US DOT approval). But hopefully upgrading the distribution infrastructure of the air travel industry won’t take 50 years. For a program launched in 2011, the transition will be completed for the first players in 2025 and probably for the rest of the industry by 2030.
What are the key remaining challenges for implementation?
The initial challenges were typical of a major digital transformation program, except for contractual and business models issues, which are specific to the status of this industry. Challenges included: awareness, business case, funding, skilled resources, contractual restrictions, technical solution, innovative partners, incentives, on-boarding, and differentiated content.
Awareness: I’d be curious to see the results of an awareness survey, showing how many travel distribution professionals have heard about NDC and can define it.
Business case: While many airlines have figured out a business case, including revenue generation from ancillaries, cost reductions and enhanced customer experience, there are still many players still scratching their heads. Indeed, selling the same product, to the same customer, via the same channel, won’t create value even with a new technology.
Funding: Any project requiring investment in the current environment is a challenge. The pandemic crisis has cut the cash resources for most airlines and travel agents. Despite the crisis, some airlines and travel agents keep investing because the new distribution channels, enabled by NDC, are more profitable.
Skilled resources: The transition to digital retailing first required a mindset shift from the management. Then the training or recruitment of staff able to manage API distribution and create new offers across multiple distribution channels. Last but not least, sales teams briefed and equipped to engage the travel agencies about partnership and value creation.
Contractual restrictions: Airlines and travel agents have signed distribution contracts with GDSs, which may contain restrictions or incentives preventing the implementation of alternative channels. Although the European Commission recently closed their 2018 GDS investigation about “possible restrictions in competition in the market for airline ticket distribution services”, such restrictions may remain a challenge today.
Technical solution: With the most advanced airlines having shifted 50% of their indirect bookings on NDC, the technical questions (scalability, look-to-book, polling, caching, etc.) are identified and discussed within technical industry groups. There is still a lot of progress and improvement to be made, i.e. innovation opportunities.
Innovation partners: A key benefit of an open standard for air travel distribution is that it allows new entrants to enter the market, to innovate and partners with existing players. Today there are NDC API providers, NDC aggregators and other NDC service providers (post-booking, etc.).
Incentives: Airlines have designed various distribution strategies and travel agents have elaborated content sourcing strategies to take advantage of the new content and fares. The current transition shows a mix of incentives, ranging from carrots (commissions…) to sticks (surcharges…). After the transition, value creation should become the driver between partners.
On-boarding: Airlines who have built their “distribution platform” are on-boarding travel sellers, either directly or through aggregators. This process takes time and will accelerate over time.
Differentiated content: The purpose of NDC is to enable a new distribution channel, for airlines and travel agents, capable of supporting any kind of airline offers. This channel adds value to partners once content is differentiated, i.e. more than “airline code – origin-destination – date – fare”. Dynamic offers, where the product and the price are constructed dynamically, will leverage the channel and create even further value.
There are more challenges ahead. They reflect the ambition of the modernization of air travel distribution, the opportunities for new services and new entrants, and the reasons underpinning the time the transition takes.
What next?
Although I wish the transition moved faster, the current pace is probably right. NDC was launched as something that will and must happen, regardless of the timeline. Knowing that it would happen, the challenge was to make it happen as quickly as possible, but also as robustly as possible in case it lasts for another 50 years.
The next phase of the transition is about order management. The question is not “if” but “when”. The travel industry needs to accelerate the transition to order management if it wants to capture the full benefits of digital retailing. Or we may soon hear “Why is ONE Order taking so long?”.
When low-cost carriers designed their business models to simplify their business and reduce costs, they went ticketless. But why do legacy network carriers need tickets (now e-tickets) after all? Will they still need to issue tickets to customers who accepted their NDC offers? What are the steps for airlines to move to Order management?
Would we invent airline tickets today?
If you ask the question “what is an airline ticket, and can airline live without tickets?” pundits may argue that it is critical to many airline processes (which is correct), and it makes no sense to get rid of tickets. But if you ask the question differently “if we invented network airlines today, would we invent tickets?”, the answer will certainly be different.
In today’s world, network carriers are selling through travel agencies and through airline partners, they are operating at shared airports, and they are doing business like retailers, making offers to customers and delivering their orders. Indeed, they don’t need to issue tickets. Being ticketless and moving to orders is a goal shared by other modes of transport, like railways.
In September 2016 IATA published a report that studied the transition to order management, meaning retiring tickets from all airline processes and replacing them by orders. The report was drafted by Travel in Motion, on behalf of IATA’s airline distribution standards team. What are the key questions for the transition?
1 – Cost benefit analysis
The customers benefit from order management because they can easily create their own order and modify it before or during the trip. The airlines benefit from the increase in ancillary revenue, including for interline flights, and from the reduction in costs related to customer servicing and IT systems. Of course each airline has a different mix of customers and product offering, which will influence their analysis of the costs and benefits of order management.
2 – Impact on stakeholders
The report explores the vast impact on stakeholders of such a transition. Within each airline, customer service will access orders, ground and inflight staff will deliver orders, revenue accounting will process and settle orders, reservations will create and modify orders, digital channels will display orders, sales teams will notice the satisfaction of customers, revenue management will create offers than can be fulfilled in orders. Outside of airlines, interline partners, travel sellers, ground handlers, and payment providers will handle orders and benefit from them.
The PNRgov message containing Advanced Passenger Information, sent by airlines to governments prior the flights, will be based on Orders instead of PNRs.
3 – End state Architecture
The report recommends an architecture based on an “Offer and an Order management system” that support sales channels and rely on internal delivery and accounting systems. This architecture is free from any legacy record or message, such as PNR, E-ticket and EMD.
The alternatives include the “encapsulate” option, where the legacy records and message are encapsulated into orders, and the “on-top” option, where the core functions remain in the PSS and the new management functions are built “on-top” of the PSS.
4 – Approaches to transition
The report recommends the “staged” approach, as opposed to the “shadow” or “big bang” approaches. Indeed the approach that takes place in phases or stages help minimize risks. The steps can be defined by channel or by product or by function, which progressively cutover from the PSS to the new Order Management System.
Each airline may start the transition with a different configuration, either a PSS and a website, or already a merchandizing platform creating offers and an NDC API distributing offers. Each airline may have a different end state architecture in mind, which generates as many possible transition paths.
5 – The right transition
The report argues that different profiles of airlines may choose different paths, which find the best compromise for them. At a high-level, the three airline profiles are network airline, hybrid airline or low-cost airline, and within those profiles there are innovative or follower airlines. The decision criteria include cost/benefit, architecture, transition approach, impacts and risks.
Conclusion
In summary, the air travel industry has moved from asking “if” to “when” to “how” the transition will take place. In the “how”, the 5 questions to ask are: What are the costs and benefits? What is the impact on stakeholders? What is the end state architecture? What are the possible transition paths? Which transition is right for my airline?
The airlines which will get this transition right will be the first to deliver a smoother travel experience to their customers.
