As airlines take measured steps towards recovery in a post-COVID world, the aviation industry faces a stark new reality.
A reality that includes smaller networks, reduced frequencies and significantly lower load factors. Shrinking networks mean that airlines are now more willing to look for partnerships with other airlines via interline and codeshares to reduce costs and maintain relevant network presence.
Recent developments like American Airlines' announcement of extensive codesharing with Alaska Airlines and JetBlue are examples of this.
Over the past several months, cost optimisation has mainly focused on pilot and crew salaries, the reduction of aircraft orders and renegotiation of aircraft leases.
Airlines take this opportunity to reassess their legacy technology solutions and are open to new distribution channels. This can result in either dropping existing legacy technology and/or vendors or complementing it with new technology from a disruptor.
The cost of sale and the associated costs to distribute fares or interline content fall under the latter category. Airline distribution is an area where legacy technologies have continued to enjoy success despite several disruptive new cost-effective options available.
The costs associated with issuing an interline ticket using legacy technology
Hundreds of airlines use the IATA legal and operational process framework to create and offer their interline itineraries to customers.
There are several benefits in using this well-trodden path, such as the ability to successfully interline with multiple airlines in all parts of the world using a single, standard agreement.
Even though it takes some administrative effort and financial resources to become part of IATA’s Multilateral Interline Traffic Agreement or MITA, it gives airlines access to a large seat inventory pool, multiple fares and provides a comprehensive framework for legal requirements.
It also provides an insured payment and settlement mechanism that brings together all stakeholders under one single umbrella and reduces credit risks for all parties.
However, all of this infrastructure comes at a cost. For example, airlines joining the IATA clearing house (ICH) may have to pay a $100,000 deposit and a $5,000 security charge, in addition to which there is a monthly recurring charge. For gross filed fares, an 11% clearing house charge may also apply. These charges apply for every new country ICH that an airline joins.
Global network carriers are already invested in these processes and find that the benefits of such an extensive setup well justify its costs.
But this may not be the case for many other carriers who have different requirements, notably low-cost Carriers operating with a much more simplified model. Many operate without becoming part of the IATA program and may never feel the need to join.
For them, issuing an interline ticket using the traditional Interline process carries several additional cost components that may not fit well with their business model.
A high-level look at some of the cost drivers associated with issuing a traditional interline ticket reveals multiple items such as GDS distribution fees, IATA agency commissions and volume incentives to key partners to ensure market share.
Another, albeit smaller, cost item in this category is the Override Commissions paid to the General Sales Agent (GSA) for representing the airline in a foreign country towards the maintenance of ticketing offices, sales and marketing activities and the number of staff deployed on behalf of the airline.
This is not all. There are still more charges that apply specifically to the issue of interline tickets and may be recurring, for example, Interline E-Ticket (IET) setup charges ranging from $3,000 to $9,000 for each new airline partner.
This fee is usually charged by the airlines’ PSS providers. Furthermore, unilateral and bilateral interline are considered two separate projects so each needs to be accounted for individually.
Codeshare charges are usually anywhere between $10,000 to $12,000, followed by e-ticket database charges, a monthly recurring fee of about $10,000 that carriers using IATA e-ticket stock pay.
Additionally, other charges that apply are the Interline service charge (ISC) of 9% of the fare issued, charged per interline ticket paid by the operating carrier to the marketing carrier and Interline Through Check-in (IATCI) gateway charges payable to the vendors that provide this gateway.
This could be around $2,000 for a one-time setup charge for each new airline. In addition, there is a recurring minimum monthly fee, or a per checked-in bag charge, around $2 to $3.
Given the entire spectrum of directly applicable charges on the issuance of an interline ticket using legacy systems, an airline forfeits 18% to 20% of the gross fare paid by the passenger, a considerable amount.
Furthermore, this still does not account for several other costs associated with accounting expenses, personnel and software and management time spent in recoveries. All of these are accounted for under overheads.
Therefore, there has been a need for an alternative model of interline that is lighter both on costs and processes and addresses the basic requirements without adding complexity.
The costs associated with alternative models
Virtual Interline has gained popularity in the last few years with easyJet at the forefront with the launch of WorldWide by easyJet (WW) in 2017. The WW model is powered by technology provided by Dohop.
This is a model where the bookings are owned by the airline and sold directly on the airline’s website but also by distribution partners and Dohop takes care of the passenger in case of disruptions.
easyJet and the industry perceive WW as a great innovation as it allows the airline to become competitive in long haul markets without the risk and costs associated with buying long-haul aircraft or changing their model, while providing diversity and a seamless offering to customers.
But easyJet is far from being the only airline to see the benefits and choose Dohop’s model. Dohop has active projects with more than 10 carriers across four continents, such as Eurowings, Transavia and Jetstar to name few who have chosen the agile, cost-effective approach towards expanding their networks and increasing revenues.
However, the real question is, how do the charges incurred by an airline using the Dohop model compare to the costs incurred in the traditional Interline model? The cost of a Virtual Interline or an Interline 2.0 solution (Dohop’s model that includes passenger and baggage check-through) is significantly more straightforward.
The airlines usually incur a one-time implementation fee starting as low as $30k, depending on the amount of customization required.
In the post-COVID-19 period, Dohop has made changes so as not to burden the airlines with this cost upfront. The only other cost that applies is a small fee charged per transaction paid for by the passenger, not by the airline and saves the customer any additional costs in case of disruptions.
Airlines usually dislike incurring non-cash expenses such as expensive IT resources and airline IT departments are usually under significant resource constraints.
Dohop, therefore, does most of the heavy-lifting on the project and is very light on airline IT resources. Given the low fee structure, Dohop powered interline programs are a significant profit centre for its airline customers.
Dohop’s interline solution has the benefit of being highly customizable, with its ingrained start-up DNA, which allows more flexibility in their pricing and in the approach to each airline on a case-by-case basis.
Dohop sees itself as filling an important need by bringing simplified interline that low-cost carriers prefer while complementing the existing full feature interline programs run by global carriers.
More importantly, this bridges the gap between these two diverse business models by providing a mechanism for them to interline and benefit from each other's networks.