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E-Commerce in the Airline Industry

Introduction

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 return flight from New York to London, a car on reaching, and the hotel room. The traveler on reaching the airport can get his boarding pass and confirmation to his car and hotel room number from the automated ticket machine of the airline.

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And if the traveler is a non smoker and prefers a room in the non-smoking floor, the system would have his preference and would book the room accordingly. If any changes are to be made in the travel itinerary at any point of the travel, it can seamlessly be made by calling the customer services. All this is possible, without any human interface, 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 agency 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 e-commerce, 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 provides immense possibilities for growth for the airlines, and plethora of information for the buyers so that they can grab the best available offer. The airline reservation systems are sophisticated computerized systems 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 this they have successfully reduced their operating costs and marketing and distribution cost. As estimated by the Economist, the management information system 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 a growth in the e-booking industry in America and it is not restricted only to passenger ticket booking, but also to cargo booking. 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 airline industry can be called one of the best adopters of IT. An interest, therefore lingers to understand the way internet and IT has changed the interface of the airline industry. The early beginning of the innovations and changes in the airlines industry to adopt new technology began in the 1940s with American and United Airlines tried to adopt a reservation system to reduce the clerical cost (Copeland & McKenney, 1988).

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However, soon the need to keep a track of the customer ticket numbers and other personal details important to control operations, so this information was then started being utilized for seat allocation, baggage, food, and other operational and service issues. This led to utilization of the data to 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 adoption of the automated reservation Copeland & McKenney (1988) call system the “experimental years”. They point out that the first automation was brought forth in the 1940s with the electromechanical engineering available, when the manual reservation systems were automated. During the manual era, all the flight reservation, seat allocation, operations, reservation clerks did customer information gathering manually.

There were huge availability boards placed in all reservation counters that displayed the number of seats available in particular flights. In 1950s, this was replaced by magnetic drum memories that captured the inventories of seats to be displayed in reservation offices (Copeland & McKenney, 1988). In order to know the number of seat availability, reservation clerks inserted plates at their desks for the required flight.

The cancelations or change in itinerary was changed in the “availability system” on the drums available to them. This system was good of inventory management, but failed to capture passenger seat record. It was not until 1958, through a joint effort of IBM and American Airlines, an automated system was created that would record 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) was installed in 1961. SABER comprised of two 7090 systems by IBM. One for the purpose of real time processing and the other was supposed to data backup and low-priority batch jobs. There were six magnetic drums with 72 million characters to capture the information on seat inventories was devised, a large data storage was made to all reservation terminals that would allow storage of inquiries. For real time data transfer of capability, IBM designed specifically for SABER the 7286 Real Time Channels that would allow controlling, scheduling, and assembling of data between “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). By 1965, with completed installation of IBM SABER, it was proven that the core problems with passenger reservations for the airlines could be solved (Copeland & McKenney, 1988). Therefore, 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 software compatible with any kind of hardware configurations (Copeland & McKenney, 1988). Using this, and with its experience into SABER project, IBM developed the Programmed Airline Reservations System (PARS). This system allowed airlines to purchase System/360 as well as helped the airline operators to reduce their cost of developing customized reservation systems (Copeland & McKenney, 1988).

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PARS 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.”

The in the 1970s Eastern Airways, TWA, and American Airlines together needed a system that would screen the names and information of the passengers for better understanding of the customer profiles. In the 1970s, all the airlines were using their information system to operate the in order to carry out their operations and communications.

This era revolutionized air travel with the introduction of commercial jet airplanes, and improved navigational techniques in the 1950s through 1970s. In the 1970s with the Civil Aeronautical Board (CAB), the government regulated the airline industry. Due to which discounted fares and differentiated prices were not available for different carriers. By mid-1970s, chartered fights started operating. With deregulation of the CAB allowed the low-cost airline operators to compete in the American airline market.

The low cost airlines became a success due to their low cost strategy and showed the other full service airlines that they had almost zero incremental cost for flying other empty seats. Therefore, yield management became highly important for the airlines in order to track scheduled reservations, and selectively utilizing the low cost airlines according to the availability of low fares to the customers. Yield management is using of operational research model to save seats for the late booking that yield higher revenue from customers (Belobaba, 1987). Thus, utilizing information system, airlines could provide tickets at very low cost without increasing the risk of foregoing their revenue.

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 through heavily discounted tickets. In 1985, one such scheme launched by American Airlines, called the “Ultimate Super Savers,” shifted the discount seeking low cost travelers to the full services airlines. In 1974, effort was made to integrate and automate all the travel agents, which was called the Joint Industry Computer Reservation System (JICRS).

The joint effort aimed at making a booking system for all the travel agents who could book tickets using one system for all the airlines. This was the first effort to establish e-marketing in the airlines industry. However, the plan was removed when United Airlines announced lodging of Apollo, its own customized system, at 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 travel agents. This customized system allowed travel agents to provide flight information that was biased towards the particular airline. Therefore, GDS was utilized to “identify potential itineraries considers 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).

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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 internet arrived in the scene, airlines, GDS, and customers interacted through a private network established for the travel agents. With the Internet, the public network was open for the airline industry’s cost was further reduced, as they so far had to invest in complex and expensive private networks. Therefore, the communication between the travel agents, GDS, and the airlines become simpler. Initially the internet bookings were restricted to only reservation of tickets and payment transaction.

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 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 airline ticket booking 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 or gather information (Werthner & Ricci, 2004).

Internet therefore has increased the sales of the airlines and helped it in reaching to the customers more efficiently. However, why has the ticket sales have increased due to the Internet? The reason is efficient distribution, which are customized to meet the travelers’ 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 of GDS to the customers, wherein the travel agents are portals like Travelocity, and the customers utilize the system to compare the prices, and airlines available in their chosen root of travel. Thus, the customers, utilizing the online travel agent websites can access the information for more than one available airline, and decide the best option herself.

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 carriers to provide extra services and information to the customers and manage a customer loyalty program. Further, it also allows airlines to provide vacation packages to the customers online. The internet is used as both a distribution as well as a marketing tool. It is used to promote low fares, special packages, and offers to potential travelers. Further airlines often use their websites or the online travel agent’s website to promote their frequent flier mileage, promotional offers, etc. one such example is that of the Delta airlines who provide the “more for your mile” auctions through which the frequent flier club’s members of the airline can redeem the mileages for vacation miles (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 nature of travel and other cross-selling opportunities to the customers (Smith, Günther, Rao, & Ratliff, 2001). Further, the Internet also helps in capturing the customer’s navigational path in 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 mode of change in distribution system (Economist, 2001). Further online travel agents like Travelocity save 19 to 65 percent transaction cost (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 immense opportunity for the for air travel for the customers and increased business for the airlines. Internet booking systems for the airlines are not restricted to being only ticket providers, but allow the travelers to plan their whole itinerary from air travel to hotel stay. Further, the internet provides opportunity for customer services through unique customer web activity tracking mechanism that can be utilized more customized offerings. Therefore, the internet has changed the way airlines did business and created immense opportunity for growth.

Current Technologies Involved in the Airline Reservation System

The new technologies that are has been adopted by the airline industry to better their functioning especially to better their customer service is through integration of their systems. The plethora of information that can be gained through internet reservation systems are being upraised after 9/11. The focus of the system management is to do content management of the websites or online interfaces, increase business intelligence, and technology that will allow customization of the website according to the customer’s preferences (Buhalis, 2004). Therefore, it is suggested that the Internet is used as an integrated platform to help in

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 assisted 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 will help in airline operations like check-in, seat allocation, and also generating reports regarding flight path, weather, etc. it will aid in inventory planning, and reservation management system. Better security solutions too are being implemented in order to avoid 9/11-like situations in future.

The other new technology being used by the airline sis rattling SABRE (Hoppe, 1990; Blessing, 2006) through this American Airlines is establishing a premium price on all other online booking websites. Therefore increasing the price of the tickets for the travel agents and lesser on their websites, thereby increasing the customer usage of their websites. Further agencies have also been asked to give up their incentives in order to increase their cost. Still the airline industry is trying to innovate ways to drive down their distribution cost in order to run more efficiently (Blessing, 2006).

The current state of e-commerce in the travel industry

Presently a lot of stress is being given by the airline industry in order to develop gather more information regarding the customer in order to customize their offerings as well as provide tailored information. Further customer convenience is another area that concerns airlines. For this, an automated ticketing machines (ATM) that allow customers to avoid long queues and do their check-in formality using the kiosks at the airports (Schrage, 2005).

These machines allow the frequent fliers to swipe their frequent flier card or credit card to get the customer’s request done. This allows fliers to choose their destination and their preferred seat. For example, Alaska, American, and Continental airline’s ATMs show customers arrays of colored available seat options and the traveler just has to choose the color to determine the seat she prefers. Therefore, this allows customers to avoid the crowd of the check-in counter and do the formalities online through the kiosks, without any human interface. Check-in can also be done over the phone if the passenger believes that she will be late for the flight. Therefore, technology is being used by the airlines to simplify traveler check-ins.

The future of e-commerce in the travel industry

As better technologies are offered to the customers, they become more demanding on the travel and specifically the airline industry. The next generation technology in the airline industry will aim at better communication, not only with the customers, but also among the internal employees i.e. the ground force, and the airborne crew. Therefore, the GPS (Global Positioning System) technology can become an important measure for both technology and communication. Further airlines have plans to go complete wireless in future (Wilson, 2001). Wireless technology to improve communication is being developed so that they can allow remote ticketing and baggage check-in through wireless devices (Wilson, 2001).

The airlines are trying to increase their customers focus by reducing the hassles faced by customers at the airport or during air travel. According to a research conducted by IBM, most of the delays in air travel worldwide in 2008 occurred due to baggage mishandling (49 percent), failed to load (16 percent), and ticketing error or security (14 percent) (IBM, 2010). Therefore, the airlines must try to reduce the airlines must utilize technologies like RFID and SOA (Service Oriented Architecture) in order to avoid these wastage of time and therefore increasing customer satisfaction.

The airlines are trying to expand the airline-ticketing concept to make the other passengers’ actions easy. For instance, US airports allows anyone with e-tickets to board in and check in without standing in the queue for the ticket. They also allow the traveler to check in their baggage. The next big ecommerce opportunity for the airlines is to exploit the possibility of mobile commerce (Wilson, 2001). Others are also trying to use Bluetooth or RF that allows transmitting of data in short distance to transmit flight related information to the customer in the waiting area (Wilson, 2001). Therefore, the airlines are not trying to increase their sales and exploit another mode of technology through the increase use of mobile phones.

References

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Blessing, G. P. (2006). American Airlines rattles Sabre. Carribean Business , p. 36.

Buhalis, D. (2004). eAirlines: strategic and tactical use of ICTs in the airline industry. Information & Management, 41 , 805–825.

Copeland, D. G., & McKenney, J. L. (1988). Airline Reservations Systems: Lessons From History. MIS Quaterly, 353-370.

Doganis, R. (2006). The airline business. New York: Routledge.

Economist. (2001). Webbed wings. Economist , pp. 20-21.

Harris, S. (2010). Booking Tools Automate Ticket Changes. Web.

Hoppe, M. D. (1990). Rattling SABRE-new ways to compete on information. Harvard Business Review , 118-125.

IBM. (2010). Beyond the Carousel. Web.

McKenna, E. (2005). E-Booking Boost. Web.

Schrage, M. (2005). The Zen of Airport Kiosks. Technology Review , p. 81.

Smith, B. C., Günther, D. P., Rao, B. V., & Ratliff, R. M. (2001). e-Commerce and Operations Research in Airline Planning, Marketing, and Distribution. Interfaces, 31(2) , 37-55.

Travel Weekly. (2005). Internet is best in business. Web.

Werthner, H., & Ricci, F. (2004). E-commerce and tourism. Communications of the ACM, 47(12) , 101-105.

Wilson, J. (2001). Aerospace looks for lift from e-commerce. Interavia , pp. 16-17.

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