E Commerce In The Airline Industry Tourism Essay

The airline industry exemplifies the effectiveness of e-commerce and the way technology can re-create the industrial structure. Today a traveler from New York can book a round trip from New York to London, rent a car, and book a hotel room online. The same traveler upon reaching the airport can get his boarding pass, confirmation to his car, and his hotel room number from the automated ticket machine of the airline. If the traveler is a non-smoker and prefers a room on the non-smoking floor, the system would have his preference saved and would book the room accordingly. If any changes have to be made in the travel itinerary at any point in his journey, it can be seamlessly made by calling the respective customer service department. All this is possible, without any human interaction, through the development of information technology and the Internet (Doganis, 2006). Research shows that business travelers are almost twice as likely to use internet travel agencies to book their tickets as the conventional model because it is faster and more convenient (Travel Weekly, 2005). This forms only a part of the overall e-commerce model, which is not restricted solely to making reservations. It encompasses the whole process of doing business, interaction between the firm and its suppliers, partners, and customers.

The Internet and IT provide immense possibilities for growth for the airlines, and a plethora of information for the buyers so that they can grab the best available offers. The airline reservation system is a sophisticated computerized system that can predict and determine the demand for tickets over time and set the price accordingly (Economist, 2001). Therefore, e-commerce becomes the interface for doing business between all the service providers and receivers.

The airlines industry was one of the early adopters of IT and it has helped in changing the whole structure of the industry. Using IT they have successfully reduced their operating costs, marketing and distribution cost. As estimated by the Economist, the management information systems and the Internet together has saved the airlines “commissions of up to 5% on ticket sales” and “cost of printing and sending out tickets and the fees (around $11 per ticket) for the computerized reservation services” (Economist, 2001, p. 20). Companies like Southwest, Easy Jet, and Ryanair have reported that almost 90 percent of their tickets were sold online (Economist, 2001). There has been significant growth in the e-booking industry in America and it is not only limited to passenger e-bookings, but also to cargo bookings. In 2005, 14 percent cargo shipping through airlines was booked online (McKenna, 2005). The advantage of e-commerce is not restricted solely to cost reduction and provides opportunity towards improving their operations and customer services. This paper traces the history of integration of IT and the Internet in the business models of airlines and studies how this has changed the face of the industry. The paper will also discuss the technologies used by the airlines presently, and the future trend of the industry.

HISTORY OF THE AIRLINE INDUSTRY AND E-COMMERCE

Today the airline industry can be called one of the best adopters of IT. An interest, therefore lingers to understand the way in which the internet and IT have changed the interface of the airline industry. The beginnings of the innovation and change in the airlines industry to adopt new technology began in the 1940s with American and United Airlines trying to adopt an electronic reservation system to reduce clerical costs (Copeland & McKenney, 1988). However, this soon led to the need to keep a track of the customer ticket numbers and other personal details important to control operations, which in turn led to this information being utilized for seat allocation, baggage, food, and other operational and service issues. This in turn led to the utilization of the data being collected for the airline’s retail distribution channels for better marketing. This section will provide a brief history of the development of the airline reservation system and development of e-commerce for airlines industry.

The initial years of the adoption of the automated reservation call system were dubbed the “experimental years” (Copeland & McKenney, 1988). The first automation was brought forth in the 1940s with the most advanced electromechanical engineering technology available at that time. During the manual era, all the flight reservation, seat allocation, operations work, was done by reservation clerks who gathered customer information manually. Huge resource availability boards placed in all reservation counters that displayed the number of seats available on particular flights which were used to make the booking arrangements. In 1950s, this was replaced by magnetic drum memories that captured the inventories of seats available so that they could be displayed in reservation offices (Copeland & McKenney, 1988). In order to know the number of seat available, reservation clerks inserted plates at their desks for the required flight which would then display the number of seats available. The cancelations or change in itinerary were done on the on the plates as well. This system was good for inventory management, but failed to capture passenger seat records. It was not until 1958, through a joint effort of IBM and American Airlines, that an automated system was created that would associate the passenger name to her reservation (Copeland & McKenney, 1988).

The initial stage of the project was installed under the name SABER (Semi-Automatic Business Environment Research) in 1961. SABER comprised of two 7090 mainframe systems by IBM. One was provisioned for the purpose of real time processing and the other for the purposes of data backup and low-priority batch jobs. For real time data transfer capability, IBM specifically designed the 7286 Real Time Channels that would allow controlling, scheduling, and assembling of data between the “7090 and the magnetic drums, disk files, and communication lines” (Copeland & McKenney, 1988, p. 355). Though SABER had some unique capabilities and was a revolutionizing technological innovation in the sixties, IBM’s previous experience in the area was not sufficient to implement a complex teleprocessing system for commercial purposes (Copeland & McKenney, 1988). It took IBM and American Airlines until 1965, when they completed installation of the SABER system to prove that the core problems with passenger reservations for the airlines could be solved (Copeland & McKenney, 1988). In turn, SABRE became the first global distribution system (GDS) available to the airlines industry.

IMPACT OF GLOBAL DISTRIBUTION SYSTEMS

In 1964, IBM announced its System/360 that made their software compatible with any kind of hardware configurations. This change, along with its experience in the SABER project, allowed IBM to develop the Programmed Airline Reservations System (PARS). This allowed airlines to utilize standardized System/360’s for their reservation systems and helped the airline operators to reduce their cost of developing customized reservation systems (Copeland & McKenney, 1988). PARS was targeted to the mid-sized airlines, and allowed them to store passenger information along with reservation information, and a specialized operating system called ACP (Airline Control Program). Copeland & McKenney (1988, p. 356) states “ACP was designed to handle a large volume of inputs that, although unpredictable, required limited computational functions and flexibility. The software objective was to achieve optimal terminal response, system availability, reliability, and recoverability.” This in turn allowed Eastern Airways, TWA, and American Airlines to come together to cooperate in screening the names and information of their passengers for better understanding of their customer profiles. By the 1970s, all the airlines were using information systems to operate their businesses. Information systems were not however a differentiating factor in their businesses because the industry as a whole was regulated by the Federal government which made it impossible for them to offer discounted fares or compete on price differentiation. The Airline Deregulation Act of 1978 changed the landscape for the entire industry, and every competitive advantage was suddenly very important. The major airlines also started facing competition from low cost airlines which added another dimension to the competitive landscape.

Airlines started using their information systems to create yield management models in order to track scheduled reservations, and selectively adjust fares on individual seats. Yield management is the science using of operational research models to save seats for late bookings that yield higher revenue from customers (Belobaba, 1987). Thus, utilizing information systems, airlines could provide tickets at low costs early on, without increasing the risk of foregoing higher revenue closer to the time of flight. This allowed the airlines to target both the price sensitive customers with their low price offerings as well as high-revenue business customers who provided high revenue to the airlines. This yield management technology adopted by the US airlines allowed them to gain much higher revenue than those who did not use them. Therefore, the low cost airlines brought in a trend of discounted tickets, which was soon followed by bigger full-service airlines like American Airlines in order to fill their otherwise empty seats through heavily discounted tickets. In 1974, an effort was made to integrate and automate all the travel agents, which was called the Joint Industry Computer Reservation System (JICRS). The joint effort was aimed at making a booking system for all the travel agents who could book tickets using a single system for all the airlines. This was the first effort to establish an e-marketing system in the airlines industry. However, the plan was cancelled when United Airlines announced the launch of Apollo, its own customized system, for the travel agents. According to Copeland & McKenney (1988) the reason for the dislodge was as follows – “During the latter half of 1975, United concluded that the JICRS proposal was going to result in United paying dearly for the industry solution, which would serve only to reduce their advantage by making all airlines equal in their reservations processing capacity” (p. 359).

This caused all the other airlines that have their own systems to expand their capabilities and install them at the offices of the travel agents. These customized systems allowed travel agents to provide flight information that was biased towards their particular airline. Airline agents demanded access to all the different systems from a single console, which resulted in consolidation of the individual systems and cross system access using a common distribution language. Therefore, GDS was utilized to “identify potential itineraries, consider schedule convenience (proximity to desired departure time, number of stops, elapsed time) as well as the carrier(s) providing the service” (Smith, Günther, Rao, & Ratliff, 2001, p. 41). The airlines that had the GDS were listed higher up in order of the customer’s itinerary (Smith, Günther, Rao, & Ratliff, 2001). The first list that appeared in the travel agent’s screen had an impact on the customer’s decision. As cited by Smith et al. (2001), seventy percent of the bookings done through travel agents were displayed on the first screen display of the agent. This display bias led to an increase in the revenue of American Airlines by an estimated $100 million per year (cited in Smith et al., 2001).

Therefore, GDS became the interface between the travel agent and the airline. It provided the agents with all possible information regarding the scheduled flights and their fares for all the available airlines. Initially the bias in the display system was used by many airlines for their own profit. However, it was regulated by the Department of Transportation in 1984 to remove the bias in order to encourage fair competition.

IMPACT OF THE INTERNET ON THE AIRLINE INDUSTRY

Before the Internet arrived on the scene, airlines, GDS, and customers interacted through a private network established for the travel agents. With the Internet, the network was open to everyone, and already built out, which for the airline industry which was highly cost sensitive proved to be a win/win situation because they no longer had to invest in complex and expensive private networks. This resulted in the communication between the travel agents, GDS, and the airlines becoming simpler especially because the airlines already had extensive experience with data distribution via a common distribution language. Initially the Internet bookings were restricted to tickets reservations and payment transactions. On completion of the booking procedure, paper tickets were mailed to the customer. This made the process complex, as the customers had to purchase the tickets in advance if they wanted the tickets to reach them on time. Once electronic tickets were introduced, this problem was solved, as paper tickets were completely eliminated, thereby “reducing the lead time and cost associated with online purchases” (Smith et al., 2001, p. 41). This led to a widespread growth of e-ticketing for bookings through the Internet. As cited in Smith et al. (2001) a research conducted by Forester Research in 1999 demonstrated that 9 million households in the US booked their flight tickets through the Internet. In 2003, the number increased to 64 million who used the Internet to gather information or book tickets. (Werthner & Ricci, 2004).

The Internet has increased sales volumes for the airlines industry and has helped it in reaching their customers more efficiently. The primary reason is an efficient distribution system, which is individually customized to meet each traveller’s requirements. Three forms of distribution are employed by the airlines – online travel agents (Business to business), direct access to the customers (business to customers), and auction and reverse auction outlets (Smith, Günther, Rao, & Ratliff, 2001). The first model provides direct access to GDS by the customers, wherein the travel agents are portals like Travelocity, Expedia, and Orbitz. The customers utilize the system to compare prices and airlines available on their chosen route of travel.

As stated by Smith et al. (2001) “the Internet … has also revived the airline sales agent in electronic form” (p. 42). The Internet has allowed many airlines to provide extra services and information to their customers and manage customer loyalty programs. Further, it also allows airlines to provide combined vacation packages to their customers. In this model the Internet is used as both a distribution as well as a marketing tool. It is used to promote low fares, special packages, and other offers to potential travelers. Further airlines often use their websites or the online travel agent’s website to promote their frequent flier miles programs, promotional offers, etc. one such example is that of Delta airlines which provides the “more for your mile” auctions through which the frequent flier club’s members can redeem their mileage for vacation packages (Smith, Günther, Rao, & Ratliff, 2001). Further, the airline booking systems have extended their offerings beyond just airline ticket booking to car rental, reservation for hotels, etc. therefore the Internet has been used to optimize the design of the GDS to predict the nature of travel and other cross-selling opportunities to the customers (Smith, Günther, Rao, & Ratliff, 2001). In addition, the airline website also helps in capturing the customer’s navigational path on the web in order to utilize this data to frame promotional campaigns.

The Internet is also used to reduce the distribution cost. For example, the Economist has reported that the average reduction in the cost of tickets is around $11 per ticket due to the change in mode of distribution systems (Economist, 2001). Further online travel agents like Travelocity save 19 to 65 percent in transaction costs (Harris, 2010). In 2001, 4% of all airline tickets were sold through the Internet. In 2009, almost 70 percent of the air ticket bookings are done online in the US (Harris, 2010).

The Internet has created new opportunities for air travel for customers and increased business opportunities for the airlines. Internet booking systems for the airlines are not restricted to being ticket providers, but rather allow travelers to plan their entire itinerary from air travel to hotel stay. The corporate websites also provide opportunities for additional customer services through unique customer web activity tracking mechanisms that can be utilized for customized offerings based on individual customers. Therefore, e-commerce has changed the way airlines do business and created additional opportunities for growth.

CURRENT TECHNOLOGIES INVOLVED IN THE AIRLINE RESERVATION SYSTEM

Airlines have adopted new technologies to improve operations, lower costs, increase profits, and to provide better customer service through systems integration and improved data mining tools from all their points of interaction. “Branding and communication of principles are also critical for airlines at the strategic level. Managing communications with all stakeholders, including investors, press, employees and customers, is of paramount importance. ICTs [Integrated Communication Tools] -enabled communications assist airlines to interact with all their stakeholders and to update them with regards to their initiatives and developments.” (Buhalis, 2004, p. 812) Further, the ICT helps in airline operations like check-in tracking, seat allocation, flight status, and also generating reports regarding flight path, weather, etc. In addition, it will aid in inventory planning, and reservation management systems.

THE CURRENT STATE OF E-COMMERCE IN THE TRAVEL INDUSTRY

Currently a lot of money is being spent by the airline industry in order to develop better information gathering tools, especially about their customers in order to customize their offerings and to provide tailored information. In addition customer convenience is another area that is a major focus for the airlines. For this reason, airlines have rolled out automated ticketing machines that allow customers to avoid long queues and do their check-in formality using unmanned kiosks at the airports (Schrage, 2005). These machines allow travellers to swipe their frequent flier card or credit card to pull up the customer’s travel itinerary and process their check in requests. Check-in can also be done over the phone or the web prior to arriving at the airport if the passenger believes that they will be late for the flight. This system is also being used to upsell passengers for additional services as a part of the check in process, as well as to collect any necessary fees for baggage, etc.

THE FUTURE OF E-COMMERCE IN THE TRAVEL INDUSTRY

As consumers become more technically savvy, additional technologies are offered to them in order to provide a better customer service experience. Consumers are also becoming more demanding while travelling. They are looking for additional services at every point in their trip, including additional details about every aspect of their travel, such as travel time, weather information, flight status, online access etc. The next generation technology in the airline industry will aim at better communications, not only with the customers, but also among the internal employees i.e. the ground force, and the airborne crew. Therefore, tools such as the GPS (Global Positioning System) can become even more important than it is today for both technology and in communication. In addition, airlines have plans to go completely wireless in future (Wilson, 2001). Wireless and mobile technology is being integrated into every aspect of airline operations to improve communication as well as allowing remote ticketing and baggage check-in through wireless devices (Wilson, 2001).

The airlines are trying to increase their customer focus by reducing the hassles faced by travellers at the airport and during air travel. According to research conducted by IBM, most of the delays in air travel worldwide after flight delays in 2008 occurred due to baggage mishandling (49 percent), failure to load the luggage(16 percent), and ticketing error or security (14 percent), and other issues (21 percent)(IBM, 2010). Therefore, the airlines have to focus on trying to reduce these issues by utilizing technologies like RFID and SOA (Service Oriented Architecture) in order eliminate the causes associated with these problems.

The airline industry is trying to expand the e-ticketing concept to make the other everyday passenger interactions easy. For instance, US airports now allow anyone with e-tickets to check in without seeing a ticketing agent. They also allow the traveler to check in their baggage using a similar process. The one major limiting factor is security, and once the airlines solve the issue of identity, I am certain that other services will be offered on a self-help basis to the traveller who chooses to do it themselves.

The next big e-commerce opportunity for the airlines is to exploit the possibility of mobile e-commerce (Wilson, 2001). Others opportunities that are being explored include trying to use Bluetooth or RF that allows transmitting of data for short distances to transmit flight related information to the customer in the waiting area (Wilson, 2001). They are also trying to understand how this technology can be used to market to their captive customers who have little choice but to wait in the designated waiting areas in airports, and perhaps even onboard the aircrafts.

In short, the use of e-commerce has only exposed a small tip of the overall airline industry, and they have been on this journey for more than eight decades. It is however very clear that the future success of the industry is very much dependent on the successful deployment of additional e-commerce opportunities for their customers and partners.