Should airlines compete with OTAs and MSEs? (And how the IATA NDC may change the game)

By Hélène Dubos | Trends & Innovation

Jun 27

Online travel agencies (OTAs) and meta-search engines (MSEs) have had an enormous impact on the travel industry in recent years (big names include Google Travel, Expedia, Skyscanner and Kayak). These search and price comparison sites help consumers browse for the best deals on flights, hotels and other travel experiences and are hugely popular, especially among millenials.

However, for airlines and other travel industry players, these companies are a mixed blessing. While they certainly bring some benefits, they can also negatively affect airlines’ profit margins too - and some carriers have fought back against them.

So, is it worth airlines fighting back against these firms? We weigh up the pros and cons of competing against them and look at how the IATA NDC might change the game entirely.

For and against OTAs and MSEs

OTAs and MSEs give airline customers a transparent way of booking flights. Because they let users compare prices, passengers can find the cheapest tickets for their preferred dates, and using these services is often the first place many travellers go to seek out tickets. OTAs like Expedia reportedly account for one in five flight bookings. What’s more, in 2016, only one-third of airline tickets were bought directly through an airline’s website.

At first glance, this surely only seems like a bad thing for airlines. But, there are advantages too:

Drawbacks of OTAs and MSEs for airlines

  • Lower profit per customers
    If airlines sell their tickets through OTAs and MSEs, they inevitably have to pay a commission - of ​around 4%. If the ticket were sold directly through their own website, they would, of course, retain this money. In an industry where profit margins are already thin, passing on this commission can be frustrating.
  • Fewer ancillary sales
    If a customer books direct through an airline’s website, the airline can easily promote a range of ancillary products and services - from seating to additional baggage or upgrades. On the other hand, few OTA and MSE websites offer these options, which means airlines lose potential sales. 
  • Negative customer experiences
    Very often, using an OTA or MSE can impact negatively on the customer experience - and the airline often gets the blame! For instance, if a customer books a trip through an OTA, but then decides they wish to add baggage, it can be confusing to work out how to do it. And if the airline can’t help when the customer calls or has to add a service charge for doing so, they may feel that it was the airline’s fault (when in fact it was poor service by the OTA).

Benefits of OTAs and MSEs for airlines

While these drawbacks can be off-putting, airlines do also derive significant benefits from allowing their flights to appear on these websites:

  • Lower spend on marketing
    One key benefit of selling tickets through these sites is that airlines don’t have to spend so much on marketing, since the likes of Expedia, Skyscanner or whoever else will be paying to appear on page one of Google - the high cost of Google paid ads and the competition for the ‘top spots’ is enormous. Appearing on these websites can also introduce passengers to airlines they’ve never heard of before, so would not have searched for either.
  • Some evidence of increased profits for low-cost airlines
    According to one study by Amadeus, there is some evidence that, for low-cost carriers at least, OTAs and MSEs help contribute to increased airline ticket demand, which in turn can boost profits for low-cost carriers, since they already have reduced outgoings compared to more ‘traditional’ carriers.

While it’s understandable that airlines view OTAs and MSEs with suspicion, they do clearly bring some benefits too. So, should airlines try and compete with them or not?

Should airlines compete with OTAs and MSEs?

If an airline’s website was to compete with the Kayak’s and Momondo’s of this world, they would need to do the following:

  • Promote themselves heavily online
    Airlines would need to invest heavily in pay per click ads on Google, as well as other search engines and some social media platforms too. They would also need to invest heavily in ‘organic search’ by creating lots of content for their own websites.
  • Is it worth competing?
    The costs potentially outweigh the benefits here - especially since existing OTAs and MSEs have so much data and experience in this area.
  • Consider offering price comparison on their own websites
    It might sound counterintuitive but some airlines have already trialed this approach. By being able to show how much more cost effective their prices are than their competitors, these airlines hope to employ the tactic of MSEs and OTAs to convince customers they offer the best price or value.
  • Is it worth competing?
    On initial assessment, this approach does, in fact, seem to work, with airlines using some of the psychological tools that these price comparison sites deploy to their advantage.
  • Use their unique customer knowledge
    Airlines know far more about their customers than OTAs and MSEs ever could. If airlines begin using their customer data more effectively, they can create much more personalized marketing and effective offers which will really help them build the customer relationship. 
  • Is it worth competing?
    On this point, absolutely. Airlines can predict where customers want to fly, what their tastes and interests are and build detailed profiles which will help match them to the best flights and tickets.
  • Provide a better customer experience
    Final place airlines could compete with the OTAs and MSEs is through working on the website customer experience. By getting to know what individual passengers prefer, websites can be optimized to the user. What’s more, they can offer the most relevant ancillary options too.
  • Is it worth competing?
    Yes, absolutely - OTAs and MSEs will never be able to offer the same level of personalization as airlines can.

As we’ve seen, there are certain areas where airlines can seriously compete with OTAs and MSEs. However, it’s in the area of marketing and promotion that many will struggle and could make competing a struggle for any airline which doesn’t have deep pockets for promotion. But, this may start to change in the coming years with the growing adoption of the IATA NDC.

How the IATA NDC may change the game

The IATA NDC (New Distribution Capability) could be a game changer here. The initiative was launched in 2016 and has been steadily gaining ground ever since. Fundamentally, the IATA NDC aims to smooth the sharing of information, ticket and ancillary sales right across the industry.

So, for example, like airlines, OTAs and MSEs sign up to the IATA NDC, they will begin sharing information more effectively. The idea is that, in future, a customer using Kayak to buy an AirFrance flight, for instance, will be able to not only purchase the ticket but will also be able to purchase all of AirFrance’s personalized ancillary products and services from within Kayak’s interface too.

In many ways, this would offer the ‘best of both worlds’, allowing airlines, OTAs and MSEs to benefit from the growing demand for travel. However, as we noted last year, IATA NDC implementation cannot be partial and players across the industry need to get entirely on board - otherwise, the initiative will struggle to benefit anyone.

The IATA NDC may - or may not - be the answer

The growth in OTAs and MSEs in recent years has presented both an opportunity and a loss for airlines. And, trying to compete directly with these platforms also introduce a wide range of challenges for airlines that naturally want to increase profit margins. So, perhaps the most ideal solution would be for the IATA NDC to be fully implemented - this would be the closest to a ‘win-win’.

Nevertheless, some airlines may still be opposed to sharing any profit with middlemen, and the IATA NDC will only be beneficial once a critical mass of travel industry players decides to sign up. Until that happens, airlines will continue to ask whether they should or shouldn’t compete with online travel agencies and search engines.