When Megabus, the nationwide discount bus service, launched last month, it stated that it was following the example of the no-frills airlines such as EasyJet by running its business off the back of an online ticketing system. In fact, it showed its total commitment to the model by becoming the first UK travel operator to sell tickets exclusively over the web.
After four weeks of operation, Megabus has 20,000 hits per day on its site and a quarter of a million tickets have been sold for its 18 destinations. The company says that being web-based has enabled its owners, Stagecoach, to go from initial idea to launch in only six months and to deliver a completely ticketless operation.
Online ticketing has been a dramatic success. EasyJet founder Stelios Haji-Ioannou initially said the internet was "just for geeks" but later he did a U-turn, launching the first UK online booking for an airline in April 1998. A year later, the site was selling 15% of all tickets online, and today the figure is 98%. EasyJet's call centre now only takes bookings for flights less than two weeks ahead.
The simplicity of online booking is partly responsible for its success. However, the way it integrates what are known as yield management systems (or revenue management systems) is the secret of how it is transforming the travel industry.
Yield management software, first devised by academics in the 1980s for American Airlines, allows operators to segment seats into scores of different price brackets, like steps on an escalator, with prices that change in relation to demand, the time remaining, and the flight date (which triggers seasonal differences). Such software has grown in sophistication to the extent that it is now commonplace for prices to be modified in real time and respond to subtle changes in buying patterns or sudden events that impact on demand. In essence, pricing is set by predicting demand from the previous year's travel patterns, and modified whenever the operator believes that prices need to be shifted up or down.
Ian Tunnacliffe, an analyst with Meta Group, says that such software is transforming the travel industry: "Traditionally, it was a massive investment: now it can be bought off the shelf for around £100,000 from a handful of suppliers. And the major airlines are taking it to the next level with systems that look at their whole network of routes and assign 'bid prices' to each leg to gain the maximum revenue across the whole net work. The systems are also finely honed to try to ensure that customers willing to pay at one level do not get tempted into paying less - it's about creating conditions to prevent them taking advantage of lower fares on the system."
EasyJet, which recently took over rival Go, now sells 149 seats every 20 seconds and handles 20m passengers a year. EasyJet web manager Simon Pritchard says the aim is still about driving a higher level of web sales: "We look at what people do on a phone call and try to offer that online." Last year, Easyjet added the ability to look up booking details and make changes to a booking, succeeding in shifting 70% of such transactions online. Four staff run the web operations, while 100 are needed in the call centre, which shows the cost savings of pushing activities online.
In a Guardian interview last year, Haji-Ioannou described how EasyJet's yield management system works: "We start with a low headline price that grabs attention, then raise it according to demand. But we won't tell you how high it will go, or how quickly." Lack of visibility of the pricing model appears to be part of the secret of running such systems.
So how do buyers behave on the web? "People do all kinds of weird and wonderful things," says Pritchard, "for example, many buyers trawl the site repeatedly to try and figure out pricing and get the best deal." So why not make pricing more transparent? He says EasyJet is looking at a range of options for improving the site but that its message is simple: "book early for the best deals."
EasyJet and the other no-frills airlines have the benefit of running simpler yield management systems than the larger airlines they threaten to engulf. They sell all or most of the tickets themselves, which makes it simpler for the systems to manage minute-to-minute changes. Large airlines sell direct, and through huge worldwide reservation systems (Amadeus, Galileo, Sabre) that provide online services for a global network of travel agents and online travel agents such as eBookers, Lastminute.com, Expedia and Travelocity. The larger airlines usually allocate a set number of seats for online sales to ensure a spread across different distribution channels.
A further channel has been created by airlines banding together to form their own online agent sites such as Opodo and Orbitz. They also sometimes sell what are known as "opaque tickets" on sites like Lastminute.com. These are offered cheaply to offload what might be called "distressed stock". The catch is that the customer must agree to buy the ticket before being told which airline they are flying. "This allows airlines to offload seats without sending out a message to buyers that a particular flight is going cheap," said an industry insider.
Amadeus, which also provides online ticketing systems for airlines, says that when buyers surf the web, only one in 300 visits to booking sites results in a sale. "We call it the Look-to-Book ratio," says Ian Wheeler, managing director of Amadeus e-Travel. "Most people look at four or five sites online before they buy. This is a sea change for the industry, and the result is that operators with legacy systems experience crashes due to increased traffic when offers and promotions are available.
"A few years ago, buyers would call two to four travel agents and get a maximum of 12 quotes; now they go online and in the same time get about 600 quotes. A call centre just can't do that."
Meta Group's Tunnacliffe says the large airlines are now facing a fork in the road: "They either think revenue management has gone too far and should be simplified or they are investing heavily in making it even more sophisticated. We advocate the latter. Only a handful of airlines have really implemented ticketing that takes account of the whole network they run because it involves structural change for the airline, because the system will override local pricing and sales incentives that may be in place. But the real revolution takes place when you tie these systems into the computers that organise scheduling. That is the long-term challenge."
With hotel and car hire following the online sales trend, most observers believe that booking services in the travel industry will increasingly be web-based, leading to a radical shakeup of distribution channels and the role of travel agents. Haji-Ioannou's ability to make a U-turn - and his faith in yield management systems - looks like paying off many times over.
