Posted March 19, 2009

Serious GDS Situation

It seems another loaded deck of cards is going to be played against a member of the global distribution system community. Air France have observed how Lufthansa seem to have got away with their attack against GDSs in a way that has smacked travel management companies, enabled corporate fares to be hiked and lost Lufthansa minimal (if any) business. Air France want to jump on a similar bandwagon. Poor old customers, one day they are going to wake up to the fact that such airlines take advantage through hitting them via their supply chain partners whilst deflecting cost from themselves with the same effect as using a Kevlar jump suit. The Lufthansa gambit seems to have proved that when it comes to the crunch, corporations seem neither aware nor inclined to move their business.

I am not sure I blame them, really. If airlines see a way of reducing their distribution costs and customers seem neither interested in nor understanding of the supply chain then perhaps good luck to them. It is a price corporations now have to pay for forcing fares down so low that suppliers need to look elsewhere to make money or cut cost. TMCs got it first, so they passed their costs to the corporate. There have been a few skirmishes with charge card merchant fees and more will follow. Now the GDS is under siege to the point when people will ask, "Who needs them?" For what it is worth, here is my opinion.

The GDSs are as near to a "one-stop shop" schedule and bookable content provider you are ever likely to find in our industry. They were mainly formed by airlines as part of their distribution methodology and were for many years earning more for them than their flights. The idea was that if the traveller wanted a central booking shop for all airlines, they could provide it and charge themselves and all the other carriers for displaying on it. The charge was a high one as demands from GDS technology grew. All was sweetness and light until pressures grew to make GDS content independent of any particular airline and suppliers wanted to shift their distribution costs.

Having lived off and profited from their in-house GDS for so many years, the airlines then set about trying to reduce both dependency and cost by looking for alternatives and negotiating lower fees. Meanwhile the GDS firms had become stuck with only one major source of income, which means their only true alternatives are to lower profits by reducing fees or clawing back lost income from elsewhere in the supply chain. No business can survive long with lowering margins, so cost offset has become the choice alternative.

So here we are now right in the middle of this industry step change with Lufthansa making their move and Air France next in line. If anyone thinks it will stop after that they are mistaken and all stakeholders (especially the customer) need to take this very seriously or they may become unable to book the content they want the way they want to book it--or end up picking up the tab. In the meantime, the GDSs themselves seem to have decided their best response is to strategically reduce their fees in countries they are not strong in to both undermine the market leader and replace lost income with higher share. It is a bit like a new airline coming in and undercutting everyone on a new route. Great stuff, but what is left after the initial euphoria? Lower yields for all, I suspect. I think history has shown that the last model to be followed is the airline one: Look what a mess they have made with their profits through such civil war.

All this may be academic if the GDS concept has become obsolete. After all, there are alternatives, aren't there? Well no, I do not think there are. Airlines have made efforts using their own Web sites, cut-price GDS models have been introduced and various other e-solutions have come and gone, but nothing does it like a GDS. This is because anyone who wants a seamless central booking and administrative system which links effectively with a TMC and provides a composite global and local solution to a broad range of travel solutions has to use a GDS as an integral part of their programme. The above-mentioned competitors can provide key parts of the solution, but not all of it. Only a GDS can do that, which is why all stakeholders need to find the right financial solution.

As for the GDSs themselves, I think they need to step back and take a long good look at themselves. Like TMCs, they do not market their value well and they make what I believe are fundamental errors in the way they interface financially and otherwise with the market. For example, like the old TMC model, they charge the airline and then often share some of that money with clients. No wonder the carriers think they must be paying too much. They also need to broaden their portfolio into other areas of travel as they only tinker with hotel and rail at present. Finally, they need to try and stop slaughtering each other and fight for a common purpose, which is to demonstrate the value of their link in the chain.

Posted by: Limey Mike | More by Limey Mike

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