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Journal of Air Transport Management 9 (2003) 325331

Airline e-commerce: the revolution in ticketing channels

Abstract This paper focuses on web reservation and on-line ticketing services provided by airlines and travel agents. The impact of the Internet on the air transportation industry in Taiwan, the development of e-commerce and e-business in airline operations, and the conicts between virtual and physical channels are discussed. A questionnaire is developed to determine the major consumer behavior differences among channels. Some new trends and airline e-commerce issues are examined. The research outcome showed that virtual channels are good enough to dominate the market, but the traditional channels also have their own niches in some specic segments. r 2003 Elsevier Ltd. All rights reserved.
Keywords: Web reservation; Airline e-commerce; Channel conicts

1. Introduction The idea behind and practice of e-commerce are far from being totally new. Rather, they might be considered as an old-fashioned application to most airlines since the beginning. Together with some related service industries, the airline industry had applied similar technologies since the early-1970s, nearly 30 years before the web-driven e-commerce activities turned into dot com fever in the mid-1990s. Airlines have been applying on-line technologies for booking and ticketing for decades. Starting from the early-1980s, the computer reservation system (CRS) has played a very important role in the provision of airline services. Soon after the data communication network technologies had been developed, CRS was sold to various markets around the world. Later in the 1990s, the CRS was integrated with a revenue management system. With some other added functions, car rental and hotel booking systems were introduced. The entire system has thus turned into a global distribution system (GDS), which is the main idea behind current travel websites on the Internet. These systems have not only reduced airline operating costs,
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but also represented the computerization and globalization of the air transportation industry. The title of traditional e-Tourism or e-Mediaries was thus introduced by some researchers to describe the contribution of these systems in the early days, thereby also keeping them apart from newer ones on the Internet (Buhalis and Licata, 2002). Related to airline e-commerce is the development of frequent yer programs (FFPs). Since the mid-1980s, FFPs have been very popular among mega carriers, and a number of databases with customers information have been created since that time. With a few more columns and information added, these databases were soon to become critical factors for airline relational marketing and CRM activity success. These factors are also very important elements of todays e-commerce (May, 2000). Such historical e-commerce ideas and activities were virtualized in the mid-1990s. Since then, fast growing Internet applications and infrastructure constructions reduced the costs of data transmission, and made individual data exchanges possible. From airlines to travel agents, nearly all the travel businesses were doing e-business on the Internet. From business travelers to leisure travelers, many consumers have begun looking for products provided on the Internet. The industry has been effectively encouraged by both the demand-side and supply side factors within a very short time. Web

0969-6997/$ - see front matter r 2003 Elsevier Ltd. All rights reserved. doi:10.1016/S0969-6997(03)00040-1

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326 Z.-Y. Shon et al. / Journal of Air Transport Management 9 (2003) 325331 Table 1 On-line travel site categories and business models Category Traditional agent on the internet Virtual agent in reality Airlines own websites Airlines investment Portal websites ASP ICP Auction Business Model Travel product sales Travel product sales Direct sales and promotions Travel product sales Advertisements and commissions Whole sales and system construction Advertisements and commissions Advertisements/surcharges/commissions

reservations, on-line ticketing, electronic tickets, kiosks, and fully functional on-site FFPs have appeared soon. By the end of the 20th century, nearly every scheduled airline had its own website. Some travel agents also have Internet-related services from advertising via e-mail to on-line inquiries. Third parties including traditional GDS providers and some of the portal websites are also joining the Internet market. The e-marketplace for the airline ticketing business became very popular in a short time. It soon replaced traditional travel agents as the major ticketing channel of airlines. Although a number of academic studies on e-commerce have been conducted over the past years, those focusing on the air transport industry are still rare. One interesting issue is the competition between traditional travel agents and on-line websites. This competition has nally given away to some serious conicts between different channels in some specic regions. This papers attempts to examine the airline e-commerce and its impact on airline ticket channels.

2. The development of airline e-commerce in Taiwan As a major hardware facility solution provider to the worlds information technology products, Taiwan developed her own e-commerce and e-business model in the e-marketplace as soon as e-commerce reaches its fever. The e-story of air transportation began with the successful Ysticket travel website which was founded by some Taiwanese web pioneers at the end of 1997. None of the four founders had the experience to run such an e-business, and nor did they have any experience in the tourism industry. In the beginning they simply leased everything including the web host and the license to sell tickets, and in fact, the business model was just as simple as posting discount ticket information on an electronic bulletin board. No on-line transaction mechanism was in place in this phase. Consumers were asked to send the company a fax or e-mail for a responses. The 2% only commission strategy of Ysticket was a total success. The lower fare advertised on the web spread all over the bulletin board system at different Taiwan college campuses. By mid-1998, six months after the website was set-up, Ysticket reached a sales volume of 6 million NTD, approximately US$180,000. In the second phase, having decided to turn themselves into a real travel agency, the operators bought their own web server and applied for a license to become a legal tour agency. In 1998, they reported a sales volume approaching 60 million NTD. In 1999, total sales reached 150 million NTD, and 320 million NTD in 2000. Today they are selling discount airline tickets on line at 3.4 million NTD a day (Ysticket, 2001). From almost nothing to a relatively powerful player in the market, Ysticket has

enjoyed a success that has attracted or at least accelerated new investment in on-line travel services. Throughout 1998 and 1999, the booming e-commerce business generated lots of investment in setting up virtual ticketing websites in Taiwan. In addition to the business model of the electronic bulletin board described above, 8 other e-business models can be found in Taiwan. These types of business models are categorized in Table 1. Among these 8 categories, the rst two types are the simplest. Traditional travel agents doing the same business on the Internet basically make up the rst type. A website run touring and ticketing business on the Internet that then turns into a physical travel agency characterize the second model. Ysticket is one typical example of this model. An airline with its own website selling tickets on-line is the third type. However, airline websites are always more complex in that they provide not only on-line ticketing and reservation services, but also other airline information including FFP functions, timetable downloads and searches, tour package sales, and even nancial statements. If an individual airline is not able to create its own website, a joint venture involving various airlines is another solution, and precisely this is the fourth classication of ticketing websites. Airlines can easily control and share a virtual channel through integration and cooperation. A Portal website is the fth virtual channel. Although numerous visitors have lled portal sites, providing them with great bargaining and purchasing power, portal sites have not seemed to be interested in developing their own reservation systems. Having strategic alliance with an application service provider (ASP) is currently the most popular way for a portal site to run a ticketing business on the net. At the same time, ASPs are also running their own websites on the Internet and this is the sixth category of e-business model. Technically, ASPs are one very powerful channel with the best knowledge in website design and in handling reservations. The seventh type of business model was created by some travel magazines or travel guide publishers. Printed books and documents were translated into

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Z.-Y. Shon et al. / Journal of Air Transport Management 9 (2003) 325331 Table 2 Major websites providing air travel products Company Ezy Eztravel Ysticket China Airlines Eva Airways Yahoo! Kimo Yam eBay Ubid Website www.ezy.com www.eztravl.com.tw www.ysticket.com www.china-airlines.com www.evaair.com www.kimo.com.tw www.yam.com www.eBay.com.tw www.ubid.com.tw Business model Largest domestic ticketing website, selling some exclusive tickets provided by three airlines who are the major founders of the website On-line tour agents, largest bulk ticket sales website; founded by major physical tour agents The frontier of on-line ticket sales; grew from a relatively small agent to a huge one First airline group to construct a website and provide on-line reservation/ticketing services in Taiwan Late arrival; its domain name has been registered by someone else and EVA has been asked to pay to own it Portal website joining operation with Eztravel Portal website providing advertising space only Auction website with limited discounted tickets provided by Ysticket 327

electronic les, and then posted on websites. Since these websites provide lots of information for travelers. They are usually dened as an ICPthat is, the Internet content provider. Most ICPs chiey focus on providing valuable or useful information, rather than ticket sales, which explains the fact that vertical integration with travel agents and airlines is also popular on these websites. The last type of business model is the auction site that is not so popular in Taiwan. In particular, the successful Priceline reverse auction model is still hard to nd. Similarly, auction tickets trading volume is limited. Only a few of e-business players, nevertheless, can be put on this list for discussion because so many smalland medium-sized websites are created and disappear each week that only the ones with operating niches can survive, but even so not all are protable. Table 2 represents the list of the eight most typical types of ticketing websites in Taiwan. Among all of these virtual channels, Ezy is currently the largest. Funded by three major domestic carriers in Taiwan at the beginning of 2000, Ezy has set up a successful direct sales channel for these carriers. This means that distribution costs are reduced, and some deep discounted tickets can be offered on this website. It is these discounted tickets that eventually turned out to be triggering channel conicts. The second largest virtual agent on the Internet is Eztravel. Not unlike Ezy with respect to type of business model, Eztravel was founded in January 2000 by a group of physical travel agents to sell bulk tickets, especially discount tour tickets on-line. From its beginning, Eztravel set-up its operating strategy as a virtual channel but one with physical service sites as well, a strategy which seems to have been successful since the virtual and physical market segments could be penetrated. Only after operating as a virtual website for a few months did Ysticket establish its physical address as a tour agent. Although this physical site was not included in the initial business plan, its booming business forced Ysticket to set it up to reduce operating

costs and enhance service quality. An on-line reservation mechanism was also introduced later. Apart from these virtual channels, China Airlines and Eva Airways, the major air carriers in Taiwan, are providing their own fully functional, frequently accessed, and multilingual airline based websites to sell tickets on-line. Seemingly, however, on-line transactions are not the most important mechanism on these airline-based websites. Providing one direct sales channel and various kinds of services to keep in touch with customers is evidently the main goal for both airlines. Two other big names in virtual ticketing channels are Yahoo! Kimo and Yam, and both are very important portal websites in Taiwan. As portal websites, Yahoo! Kimo does not do anything more than provides a hyperlink to Eztravel. On the other hand, Yam does provide a platform for different travel agents or airlines to sell their products on the Yam website. Although the business model is quite different, both have a limited investment in travel products and make use of strategic alliances with other channel members. Yahoo! Kimo earns a commission from Eztravel in return, whereas Yam collects advertisement fees from all linked tour agents. Finally, the auction website of e-Bay Ubid in Taiwan is an example of the last type of e-business model. Ubid was the former largest website offering on-line auction services. It was acquired by e-Bay in early-2002. The tickets and travel products sold on the website are still limited since the transaction mechanism is not widely accepted in Taiwan. In addition, the reverse auction function, anything similar to Priceline in US, is rare in Taiwan.

3. Potential channel conicts The business models of the websites discussed above are quite different, and their functions are not all the

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same, either. However, these virtual distributors have certain characteristics in common: low-cost operations, free access strategy, huge number of users, well-dened databases, and connectivity to related websites. Some websites also provide tour information, shopping experiences, and even comments on and criticisms of different websites. While cases of transaction disputes can still be found (Abeyratne, 2001), and while virtual distributors on the Internet might also be less friendly and reliable, the e-marketplace has become and still remains one of the most important channel for airlines to sell tickets. Websites together have formed a powerful virtual channel throughout the world and in the absence of service boundaries. Not surprisingly, the more power the virtual channel owns, the fewer customers physical channels can keep. This is especially true now that the paper ticket is being replaced by the e-ticket. In 2000, tour agents in Hong Kong allied to boycott Cathay Pacic Airways because the airline offered extra low fare products on the Internet. The web-only price was believed to have been even lower than the cost for agents to purchase a similar ticket. This type of channel conict can only be found at the rst stage of digitalization, and only within the industries that heavily depend on their channel members. Consultancies have suggested that suppliers avoid such conicts by maintaining product marketing and delivering procedures (Guo, 2000), however, this is not always possible. One major reason for airlines to establish their own websites is to build a direct sales channel that can easily be accessed by consumers. Yet in some ways, this function is a replacement of other channel members. After the channel members boycott, Cathay Pacic ceased its promotion on the Internet, and soon developed another B2B2C model on the Internet to enable the tour agents to sell the same deep discounted tickets on the Internet. Only selected tour agents that were big enough to build their on-line transaction systems had the capability to run such e-businesses. Simply put, still lots of mediumand small-sized agencies excluded in the new e-marketplace. Bear in mind that each website is a competitor not only to traditional distributors, but also to the other virtual ones as well. In the middle of 2001, the Fair Trade Commission (FTC) of Taiwan received a plaint from certain websites accusing Ezy of unfair business activities. Competitors argued that Ezy was exclusive in selling deep discounted ticket on the website. All other distributors, both virtual and physical, were unable to sell the same low fare tickets. Because Ezy was established by the three major domestic carriers, tour agents believed Ezys business model was a certain kind of unfair competition. The FTC has yet to decide what to do with this case. However, the relationship between the airlines and tour agents has considerably changed since such channel wars began.

One feature of these cases is that all of the conicts were initiated by the airlines. In 1995, not long before virtual channels became main stream had airlines in the US already red at their own channel members by cutting their commission. Tour agents fought back, accusing the airlines of acting in collusion, but the lowered commission has never been increased to what it used to be (Alamdari, 2002). The idea of building a direct sales channel has been promoted in different airlines around the world (Dumazel and Humphreys, 1999). Although the case in Taiwan is unique, most of the airlines depended very little on their direct sales channels before B2C e-commerce was applied. Transactions proceeded through their traditional channel structure, something similar to the B2B2C model in e-commerce now. That is, airlines would seldom directly sell customers tickets but rather sell them, rst of all, to wholesale parties, then distributors, and nally to customers. B2C airline e-commerce has largely created accessibility to airlines and tickets to passengers. Other members in the channels therefore suffer. Even in the extreme case in Taiwan where the airlines are much more powerful than the other members in the channel, travel agents can still play important roles in expanding the market. That is why e-commerce does not look like a strategy to assist channel members to expand their business to new territories. It appeared that airlines were taking away prot that used to belong to the agents. Apparently, airlines are now thinking about doing a protable ticketing business themselves through electronic virtual channels. There are, however, some interesting issues left in the airlines e-business model.

Some customers are not willing to purchase items over the Internet due to credit card security issues. Other potential customers do not use computers and therefore are not even connected to the Internet. Traditional tour agents are still attractive to those that do not have credit cards, do not trust the transaction mechanism on the Internet, and are not familiar with computers. Secondly, Large virtual channel members on the Internet also have great bargaining power when they come to different carriers. Unless the airlines themselves can create more attractive offers for potential customers on the Internet, successful websites will still have a chance to dominate the virtual channel. The investment in website construction and maintenance is not cheap at all and small sized carriers cannot afford such expenses. Thus, they are still forced to sell their tickets through various channels, including those that are virtual and physical. These facts have led us to one solution to channel conicts on the Internet: clearly dened market segmentation.

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4. Market segmentationpossible solution to channel conicts Fig. 1 shows the market-share data of different ticketing channels for 20002001. It is evident that the proportion of tickets sold through direct sales channel is consistently the highest. Around 7075% of passengers pay the highest published fares at the airline counters either in the airport or in the city ofce, thus contributing a great deal to the airlines operating revenues. Compared to the 80% market share enjoyed by travel agents in the UK and the 20% direct sales found in some US studies (Dumazel and Humphreys, 1999; Jarach, 2002), the level of direct sales over the airline counter in Taiwan has made airlines there much more powerful. The remaining 30% of the passengers had been tour agency customers at the beginning of 2000 before ticketing websites were created. After 18 months operation, direct sales passengers were still contributing 70% of the market share. Websites shared half of the remaining ticket sales. That is to say, traditional tour agents have lost at least half of their customers to the ticketing websites. This would have certainly led to some issues of contention between the new and existing channels. Although the major reason for the excessively high direct sales ratio in Taiwan should be analyzed in great detail, there are still some interesting facts worthy of discussion. The capacity provided on some specic links is one possible reason for consumer ticketing channel selection behavior. During the peak years in the mid1990s, there were, on average, 6 ights an hour throughout the year in the largest domestic market in Taiwan (Civil Aeronautics Administration, 1997). Many believe this could be the reason why taking a ight in Taiwan was more like taking a bus. The over capacity

also ensured seat availability during the best years in the air transportation. People merely had to show up at the airport and jump on the earliest plane without any advance reservation because the air fares were regulated and very little differences between airlines were found. One interesting issue pertaining to market segmentation is to identify the attractive features of the different channel members. During the 2nd and 3rd quarters of 2001, this study was initially proposed to better understand the differences in consumer behavior in different channels. One questionnaire was developed and distributed to different passengers in different airports in Taiwan. Some new ndings are of particular interest (Fig. 2). First of all, the issue of on-line transaction security was the rst major concern that swayed customers to stay with traditional tour agents. One other major reason for customers not choosing Internet ticketing channels was that the customers were not used to booking in advance. In responding to the 70% percent over the counter passengers, this major reason seemed reasonable. Other reasons included the complicated Internet booking and ticketing process, also the not so attractive Internet fare. With still many nonInternet users, opportunities are available for traditional tour agents to pursue to survive. Fare levels on the Internet, the development of more user-friendly technologies, and issues relating to transaction security should evidently be of major concern by the carriers before they take further actions (Alamdari, 2002). Table 3 reports an integrated list of some selected statistical data from this study. The signicant differences among various ticketing channels with regard to certain attributes that are easily visualized in the table represent possible areas for channel members to target to determine their niche market and segmentations. Cross-tabulations and chi-square tests were used to

Market Share of Ticketing Channels

2000/3

2000/5

2000/7

2000/9

2000/11

2001/1

2001/3

2001/5

Direct Sales

Travel Agencies

Ticketing Websites

Fig. 1. Market Share of Ticketing Channels.

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Worry about data security No need to book in advance Not used to accessing the Internet Web Fare is not attractive Process is too complex Not aware of on-line booking services Improper schedule on web reservations Others
0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% 35.00%

Fig. 2. Major reasons for not buying tickets on websites.

Table 3 Socio-economic variables and channel selections Attributes/Channel Trip purpose Business Leisure Education Junior high and below High school College and University Graduate School and above Monthly income (in NT Dollar) Below 20,000 20,00049,999 50,00079,999 80,000119,999 Above 120,000 Travel frequency within past 3 months 03 412 1325 Direct sales (%) 71.7 55.08 Tour agent (%) 7.4 21.85 Website (%) 13.5 13.85 Others (%) 7.40 9.22 Statistics signicance w2 85:325; df 2; po0:000

54.2 64.1 60.3 44.8

20.3 18.6 16.2 25.4

11.9 7.4 16.0 23.9

13.60 9.90 7.50 5.90

w2 23:330; df 9; po00:01

59.3 58.8 67.1 64.5 45.0

15.7 19.7 16.8 12.9 30.0

16.5 13.0 11.6 16.1 15.0

8.50 8.50 4.50 6.50 10.00

w2 12:270; df 12; po00:424

52.8 74.9 71.2

21.6 9.0 13.5

16.0 11.6 5.8

9.60 4.50 9.50

w2 31:259; df 6; po0:000

determine the relationship between channel selection and the designated socio-economic variables. As Table 3 shows, the purpose of a trip is signicantly associated with channel selection (w2 85:325; df 2; po0:000). Clearly, more business passengers (over 70%) than leisure travelers (55%) follow the direct sales channel. The relationship between education and channel selection is also signicant (w2 23:330; df 9; po0:01). Passengers with a higher education were more likely to make web reservations and do on-line ticketing. Travel frequencies (within the past three months) also had some signicant inuence on channel selection (w2 31:259; df 6; po0:000). The more frequently the travelers took a trip, the fewer tickets bought on websites. On the other hand, monthly income had no

signicant impact on channel selection, a nding supported by the fact that direct sales attracted most of the passenger from all income levels. The airlines do not seem to have worried too much about the aforementioned channel conicts given that the size of the population through the airline counters is always the largest. According to the statistical data, tour agents were not that important in Taiwans domestic market, which might well explain the fact that real agents can so easily be replaced by virtual ones. It is true, nonetheless, that some customers are not used to, not able to, not to mention not even willing to buy items over the Internet, suggesting that for websites, some unreachable marketplaces remain. Much as traditional channels can still nd their niche market to survive, the

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size of the niche market will more than likely be too small to support many competitors in the future.

5. Conclusions remarks For most investors in the e-commerce business, the rst year of the 21st century was a nightmare. Even in the middle of a recession, however, such investment in the market as in Travelocity in Asia, and Orbitz in the US, has still been observed. The Asian ticketing website Zuji was founded by some major airlines in Asia, including Cathay Pacic, Singapore Airlines, Qantus, Air New Zealand, and China Airlines. Travelocity has provided their logo and related on-line ticketing technologies for the airlines to increase their sales capability in the market. Orbitz was a joint venture by the largest carriers in the US, including United Airlines, Northwest Airlines, Delta Airlines, and Continental Airlines. They have been trying to market tickets through direct channels instead of through virtual channels on the web which are controlled by other groups, like Travelocity. These new investments have served as good indicators of the on-line ticketing market in the foreseeable future since all of the investors had already experienced the free falling in the NASDAQ. The huge volume of investment has also pointed out the great potential for earnings through ticket selling on the web. The conicts between physical and virtual channels temporarily ceased after the September 11th terror attacks. The scenario in Taiwan was no different. Surviving instead of earning has become the main goal for operations. Lay-offs and cutbacks have become everyday casualties in the industry. Huge investment in the web to construct a more competitive virtual channel no longer worked. Cost reductions has become less important than lling the aircraft with customers. Suddenly, airlines and travel agents reunited to ght the decreasing trips. The long lasting damage of terrorism has not yet recovered, but long before the

September 2001 attack, the e-commerce bubble and the world economic recession had already adversely affected the industry, especially in Taiwan. Heavily dependent upon electronic products, including computer components and mobile phones at the beginning of the 21st century Taiwan began to face its worst economic situation in history. The air transport industry has suffered as a result. Meanwhile, many websites have shut down and countless physical tour agents have declared bankruptcy. The resulting reduced number of channel members has, as a sequence, lowered the channel structure complexity, and made vertical integration much easier. It is not clear whether airlines, tour agents, and websites can nally work together. Niche marketing is still suggested for all the members in virtual and physical channels. Each of the members should nd its niche by providing different products and services to different market segments. This would probably be the best solution to the potential future channel wars.

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