Op-Ed: Humble O&D Data Remain Key To Airline Negotiations

Travel industry automation systems, from reservation system at the beginning of the transaction pipe to airline revenue accounting systems at the end, are based on flight segments. Segments are an anachronism of the past because they do not describe what the airline sold—the passenger's origin and destination.

With the advent of hub-and-spoke networks, as many as 60 percent of all passenger destinations require two segments. This is also true for the low-cost carriers that string many segments, like stops along a bus route, to a final destination.

There are really two destinations and they may not be the same. The carrier's destination is the end of a passenger's flight on that carrier; however, the passenger's destination is the terminus of their trip which may include connecting cities and more than one carrier. Whether one examines data from global distribution systems or agency accounting systems, the passenger's trip is still recorded in segments. Carriers that still rely on segment data, such as many European airlines, do not know many of their passengers' true destinations.

Since data within segment systems cannot be altered without compromising their financial integrity, segment data are exported into independent information systems. There, complex rules are applied to construct a single origin and destination from multiple segments. The rules include length of connection times for domestic and international flights, connections over cities with two different airports or allowing multiple carriers in a single trip.

Detailed segment data are essential to constructing reliable origin and destination data. Segment data are notoriously error-prone, so these data must be checked and rechecked for accuracy. For example, to have a reliable "net" count, refunds and exchanges must be reconciled with O&Ds that were constructed in the past. Needless to say, some systems are more skillful in constructing origin and destination data. Differences in approaches to rules and levels in skill can lead to different O&D counts between systems processing the same segment data. Carriers that rely upon customer data from divergent systems end up with an unreliable cocktail of O&D approaches.

This has led for some analysts to call for a standard approach to defining O&D. A common approach is unlikely. Aside from the uneven ability of different system developers, carriers define their rules for O&D differently. Applying their own O&D rules to consolidated segment data was one of the most important advances in airline information systems. How carriers define O&D reflects their unique product approach.

Once data are in an O&D format, they may be grouped by contract term. Terms comprise complex requirements for discounts, including criteria such as market pairs, class of service and ticketing country. While corporate airline contracts generally comprise less than 10 terms, companies literally have thousands of O&Ds. Where these terms include share requirements, other airline segments must be converted to O&Ds using the same rules. Assigning each O&D to the correct term is an overwhelming task. Monthly monitoring of contract performance, without some form of automation, is virtually impossible.

Some carriers cope with the overwhelming amount of data by managing only a customer's top markets. The theory holds that 20 percent of the markets provide 80 percent of a company's spend. This is misleading for two reasons. First, the top markets are not necessarily representative. Rather than being the bulk of a customer's spend, the top markets are often more like the tip of the unseen iceberg. Second, unmanaged markets are vulnerable to competitors that have contract terms that measure all markets.

The impact of contract automation became apparent during the industry's adjustment to Delta's SimpliFares. Delta's fare reform reduced the number of restrictions on tickets, thereby eliminating restrictions targeted at the business travelers. The move caught many carriers by surprise, but no one should have been. Delta's new product differed not only from its competitors, but also its alliance partners, because Delta's markets were different. Facing increasing pressure from low-cost carriers, Delta was able to compete at the point of sale by eliminating Saturday-night stays on low-cost fares. Soon other carriers responded but with varied approaches that reflected the unique requirements of their markets. Such product differentiation is the sign of a healthy, competitive market.

Some soothsayers forecast that the new fare structures will doom corporate contracts. To the contrary, contract automation not only enables the carriers to rapidly modify contracts but also customize approaches to contracting. It is remarkable just how different the carrier's new approaches are. Again, this is a sign of a healthy, competitive market.

Contract automation is now having a significant impact on carrier alliances. Travel managers have questioned why alliances do not have common contracts. The problem had as much to do with lacking reliable data as crafting an alliance agreement. Now with common contract automation systems, alliance contracts are available today. The competitive high ground for airlines will move from simple price considerations to determining which alliances provide the optimum match to the customer's network. Mapping customer or carrier networks was all but impossible without reliable O&D data.

Reliable data is the foundation of the new marketplace. It combines the segments into the origin and destinations that we fly. It enables companies and carriers to analyze purchasing patterns and craft well-reasoned purchasing agreements. Reliable data also enables diverse approaches to discounting that fuel the competitiveness of today's global marketplace.

Michael Whitesage is president of Prism Group Inc., a travel technology company specializing in airline and corporate information systems.