Competing with CRS-generated information in the airline industry

Abstract

For over 20 years, computer reservation systems (CRSs) have been cited as a source of competitive advantage for the airlines that developed them. This paper reviews the developments that have given rise to such advantage, emphasising the use of CRS-generated information as a competitive tool within the airline industry. New evidence is presented suggesting that the control, dissemination and manipulation of CRS data by owning airlines continued to allow them to capitalise on their investment at the expense of competitors during the 1990s.

Introduction

This paper presents, for the first time, the findings of a detailed study investigating the ways in which CRS-owning airlines have sought to maintain an advantage over their competitors in relation to CRS data, and the subsequent information and knowledge created from it, when other channels, notably regulation and legislation, have contrived to erode their earlier competitive advantage.

The growth of the airline industry has been one of the most well documented success stories of the past few decades (Clemons and Weber, 1990, Richer and O'Neil-Dunne, 1998). Technology, whether aviation, information and communication based, has been central to such developments, as has the changing nature of the regulatory and business environment, and the increasing sophistication of the consumer. Arguably, the introduction of computer reservation systems (CRSs), originating in the 1950s but now an integral part of what are now termed global distribution systems (GDSs), has been one of the major catalysts for change, and has resulted in improved efficiency and competitiveness within the airline sector (Porter and Millar, 1985, Poon, 1993, Balsamo, 1996, Powell and Dent-Micallef, 1997).

Ostensibly, while investment in, and development of, CRSs arose largely in response to a desire for improved operational efficiency, the utilisation of CRS-generated information has become a powerful means of creating new strategic knowledge to enhance competitive performance (King et al., 1989, Dordick and Wang, 1993, Kenney, 1996, Buhalis, 1998, Pemberton and Stonehouse, 2000). However, the sensitivity surrounding the issue of CRS information, exemplified by the reluctance of airlines to divulge details of activity in this area, has ensured that little published material has appeared previously.

The research presented in this paper concentrates specifically on the role of information derived from, processed and managed by CRSs. In particular, issues relating to the use of CRSs by their owning carriers to enable the acquisition of competitive advantage are reviewed by reference to developments that have taken place within the airline industry. New evidence, arising from a variety of sources and methodological approaches, is presented to indicate how CRS-owning carriers have continued to have the upper hand despite regulatory safeguards. This 5-year study represents a departure from the usual emphasis on technology per se and focuses on the uses and manipulation of technology generated information and knowledge, methods of dissemination, and the influence of CRS-owning airlines in controlling the flow of commercially important information to competing airlines.

Schulz (1992) notes the airline sector was among the earliest of industries to explore the potential of information technology through its pioneering development of real time computing, creating, at one stage, the largest privately owned networks in the world. Today, sophisticated global distribution systems (GDSs) provide travel agents in remote locations with the facility to make on-line, real-time bookings or, increasingly, empower individuals to make bookings directly via the Internet or other digital media (Richer and O'Neil-Dunne, 1998).

The ability to operate in geographically dispersed markets, coupled with the information intensive nature of the airline business, give some indication of why carriers have been at the forefront of developing and exploiting new technologies designed to create and sustain competitive advantage (Feldman, 1987, Wardell, 1987, Humphreys, 1990, Humphreys, 1994, Richer and O'Neil-Dunne, 1998). Furthermore, CRS technology has been a critical element in shaping the industry's strategies and operations to the extent that industry and government watchdogs have imposed regulatory safeguards in recognition of CRSs’ potential to influence airline competition (Hopper, 1990, Barber et al., 1993, Humphreys, 1994, Barber, 1998, Richer and O'Neil-Dunne, 1998).

CRSs have, in their lifetime, provided their owners with six main sources of competitive advantage as shown in Fig. 1.

Barber (1998) gives a detailed account of the various issues presented in Fig. 1 which, broadly speaking, correspond to the following three phases in the development of CRSs:

• Internal seat inventory systems (1958–1960s),

• Subscriber products (1970s and 1980s),

• Global distribution systems (1990s).

In response to inefficient manual administrative systems, phase one was characterised by the development of real-time systems which resulted in internal operating efficiencies and new market opportunities (Truitt et al., 1991, Button, 1991, Archdale, 1993). However, high development and investment costs ensured that only a handful of the larger US airlines proceeded to develop their own in-house seat inventory systems, essentially the forerunners of the CRS (Feldman, 1987, Barber et al., 1993). Recognising the cost reduction and efficiency benefits of these automated systems, smaller carriers without the resources to finance such developments began to contract out their seat inventory and reservation function to the CRS-owning airlines (Humphreys, 1990). Such contracting was the first evidence of CRSs being used to generate external revenue for their owning carriers. At this stage, competitive advantage arose for the CRS-owning airlines through more effective operational and tactical management of its value adding activities. In contrast, later use of CRS information by owning carriers centred on creating new knowledge and attempting to disadvantage their competitors.

Phase two saw the development of subscriber products where CRS owners allowed other airlines to display information on their systems for which a charge was made (Barber et al., 1993). This provided CRS-owning airlines with an opportunity to regain their earlier competitive lead which had been eroded by increased competition following deregulation in the US (Wardell, 1987, Button, 1991). Revenue generation from the CRS, via booking fees for competing airlines, allowed CRS-owning airlines to increase profits, at the same time as increasing competitors’ costs. Differential pricing policies based on charging discriminatory fees to competing carriers, weighting fee structures inequitably between distributors and subscribers, charging excessive fees for the services rendered and structuring prices so that high initial costs prevented smaller carriers from accessing services, were all contributory factors in ensuring CRS-owning airlines capitalised on their investment.

Two contentious issues also surfaced at this stage, namely:

• Screen display bias—a deliberate ploy to display a CRS-owning airline's flight information ahead of that of its competitors in an attempt to distort consumer choice. Such bias within CRSs was highly significant, leading to legislation to prohibit bias of primary screens i.e. those screens designed for use by the majority of travel agent subscribers (Civil Aeronautics Board, 1985, United States Department of Transportation, 1988).

• The ‘halo effect’—incremental bookings achieved for an owning carrier via their CRS because of their status as systems provider and the natural tendency of travel agents using the CRS to book flights of the carrier providing the system (Wardell, 1987, Humphreys, 1990).

Various regulatory and other initiatives have attempted to deal with the issues of unfair advantage given by screen bias and the halo effect. Barber gives a thorough analysis of these developments over the last 20 years (Barber, 1998). However, while many of the more blatant examples of discrimination have been eliminated by legislation, incremental revenues have proved an enduring form of advantage for CRS controlling carriers.

The third phase relates to the 1990s during which time the airline industry was dominated by strategic alliances that spanned international boundaries (Feldman, 1992, Barber et al., 1993, Humphreys, 1994, Richer and O'Neil-Dunne, 1998). Mergers and alliances between US and European CRSs, coupled to closer links with Asian vendors, transformed the industry and its CRS technology base spawned a number of global distribution systems (GDSs). Throughout this phase, attention focused on the potential use of data contained within the GDSs to create knowledge-based advantage, with the issues of personalisation, customer targeting and the sharing of information figuring prominently (Stonehouse and Pemberton, 1999).

Arguably, a new phase is emerging, characterised by advances in the Internet-related technology including mobile telephony and digital television, which are altering the traditional channels of airline product distribution, and providing new ways of interacting with potential customers (Richer and O'Neil-Dunne, 1998). GDS owning partnerships are reluctant to relinquish their previous advantage and concerted efforts are already visible in the quest to keep abreast of developments in information, knowledge and technological applications. Third parties, not historically linked to the airline industry but with Internet expertise, are shaping the ways in which airlines conduct their business. For example, Microsoft's Expedia, an Internet based booking facility, has resulted from partnerships with several airlines, while the UK's Flightbookers has resulted from partnerships with Germany's TISS and AA's Sabre GDS (Richer and O'Neil-Dunne, 1998). In terms of information and knowledge management, the ability to by-pass traditional intermediaries and gain direct access to customers represents a potential opportunity for CRS owning airlines to exploit their position.