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The Airline Industry 101


Kevin Bélanger - April 8, 2018 - 0 comments

With air passengers expecting to reach 7.8 billion in 2036 no wonders why websites like SecretFlying, Fly4free, TheFlightDeal or even newsletters like ScottCheapFlight are becoming more and more popular.

Lots of these passengers are travelers and most of them will try to look out for the best price for their upcoming destination. Few of them, however, understand the layers of the industry and what drives the price they pay.

To go deeper into finding the best price for your upcoming flight, we need to clear things up a bit and while we are at it let’s check-in into some business concept of one on the most complex industry.

In case you think otherwise, powerpoint overview here.

Online Travel Agencies

First, when you want to book a flight, you have three choices: direct with the airline, with an Online Travel Agency (OTA) or with a travel agent. Most of you book through an OTA.

The OTA you choose doesn’t matter very much; we live a duopoly where Booking Holdings (booking.com, priceline.com, Kayak, Agoda.com, …) and Expedia Group (Expedia, Hotels.com, Orbitz, …) own most of the OTA (giving you a false impression of choice, but that is another story).

Booking Holdings and Group Expedia

Most customers have the impression that OTAs are the only layer between them and the airlines. Wrong. Here is a general and simplified overview of how most airlines work. I say “general” because with over 5000 airlines operating in a n:n relationship with a significant amount of third-parties, there is a lot of exceptions.

Overview

Data flow of the airline industry

It’s not that complicated, but we need to debunk all this with a little bit of history.

During the 70s, the Airline deregulation changed the whole airline business model. Airlines were only competing for service as fares, routes and schedules were regulated by the government. After the Airline Deregulation Act of 1978, airlines were now able to determine everything on their own. This led to deregulation across the globe. It also led to a more competitive market were some airlines could not compete (hello Pan Am, Eastern Air Lines, Braniff International, …) and the one that did had to reorganize their business model.

Since the industry came from a regulated environment using computerized systems splitting three main components (Fares & Rules, Schedules & Routes, Seat availability), they could not change everything overnight.

Fares & Rules

Fares & Rules are managed by the ATPCO and SITA. The Airline Tariff Publishing Company (ATPCO) is a privately held corporation by 15 major airlines. The company was founded in 1945 as a body within the Air Transport Association of America (ATA) to publish passenger tariffs (fares). It became an independent company 1965 and now more than 430 airlines across the globe use them to publish fares to GDS.

The only competitor to ATPCO is SITA, founded by 11 airlines in 1949 to achieve shared infrastructure cost efficiency. Fast forward today, they work with more than 400 air transports industry members.

Schedules & routes

Schedules & routes are managed by the OAG. For schedules and routes, the OAG (Official Aviation Guide Of The Airways) was first introduced in 1929. They began producing data for computer reservations systems in 1962 as well as participating in the development of IATA Standard Schedules Information Manual (SSIM). OAG is dealing with 900 airlines and more than 4,000 airports.

Taxes & geography data

IATA conference

Taxes & geography data are managed by the IATA. The International Air Transport Association (IATA) was formed in 1945 in Havana, Cuba and is now located in Montreal, Canada. It supports many areas of aviation activity and helps formulate industry policy on critical aviation issues. The trade association represents some 280 airlines. GDS use Ticket Tax Box Service (TTBS) to retrieve taxes, fees, and charges. They are also implicated in the message construction standards on the SITA’s high-level network (HLN).

You now have a good overview of the first layer above the airlines, but what about the seat availability, or commonly referred in the airline industry as inventory?

Inventory

Airlines used to have Airline Reservations System (ARS) that managed everything (airline schedules, fare tariffs, passenger reservations and ticket records) but evolved in time to become Computer Reservation System (CRS). From my understanding, anything but inventory became irrelevant to CRSs and airlines began to outsource their CRSs to GDSs. So airlines are the one providing the inventory of seats available with live queries to the CRS.

Global Distribution Systems

This leads us the second layer, Global Distribution Systems (GDS).

GDSs are computerized system network enabling transactions between industry service providers (airlines, hotels, car rental and travel agencies). At the moment there are four major GDS used worldwide (Amadeus, Travelport (which operates the Apollo, Worldspan and Galileo systems), Sabre and Shares). There is also Abacus for Asian market that starts to become noticeable and some more local to specific markets. Each GDS have its own history, but you guessed it, airlines are not too far from their creation or ownership. It is hard to know as they are all privately owned companies (except Amadeus that traded on Spanish exchange in April 2010). You can look at the history of each of them by yourself.

So, GDS collect information from APTCO, SITA, OAG, IATA, Airlines, put everything together and feed the Online Travel Agencies and Travel Agents with crappy API.

Airline revenue optimization

Like any other corporation, airlines have to optimize their revenue and profit. This lead them to change the price of their fares/buckets times to times. It’s a bit chunky but very interesting if you like to learn more about business/revenue model, you can start with this Yield Management paper and follow-up on the case of LLCs and see how they are changing how it’s done.

If you learn about a specific airline yield revenue optimization, then you can move to another level of finding nicely priced flights. Remember that tickets work in fare class/bucket. Once a fare class/bucket is sold out (each airline allow a specific number of booking in each class/bucket per flight), then the OTA/Flight search engine show you the next cheapest class/bucket. If you are checking for a flight and a couple of days later the price had increased, this is the most common explanation.

TANGO Fare Quote System

You probably get the point that with profit optimization, the reverse to what we just explained is true. If a class/bucket does not sell (besides the most economic one), then you can most likely score something. Unfortunately, I can’t find any concrete information or example on this one, I would have to dig more to see if it’s still relevant.

Conclusion

This is a general overview of the traditional airline’s industry. Of course, the industry is changing and evolving with exceptions. For example, Lufthansa recently announced that it is adding a fee to GDS booked tickets, to get more travelers purchase through their website.

You may also have noticed that some low-cost carrier are not available through OTAs or Travel Agencies. This can be explained by various reasons specific to each one. Plugging yourself with everyone and GDS can be very expensive. Other airlines like Southwest, for example, has an in and out relationship with APTCO and tend to restrict his information for the USA market. Some other use turn-key solution proposed by a single GDS so don’t end up on all the OTAs.

By now, you should have a better understanding of all the parties involved in the flight ticket you will be purchasing. There is only one thing missing in all the explanation, ITA Matrix. This one is a little bit special so I made a post just for it coupled with cheap flight history.