Posted January 6, 2011

American Airlines Is Right! Time To Move Travel Into 21st Century Only One Decade Late

The travel industry is riveted by the chutzpah of American Airlines. By forcing Orbitz and Expedia to de-list AA flights, they are taking a hard stance on the future of distribution. The media storm suggests a stand-off of epic proportions -- one of the largest suppliers vs. two of the largest agencies in the world (and now Sabre is in the fray also).

But what is really going on here? Is this about fees? Is it about control? Is it about technology costs? A little of each, of course. But let me say what everyone is thinking deep down inside but few want to admit: American Airlines is right. Expedia, Orbitz, Travelport, and Sabre are wrong. 

For the online travel agency and global distribution system worlds, this is about protecting legacy, antiquated, unfortunate business models from technology that can cheaply and directly provide for us. This is like a tobacco company lobbying against anti-smoking because it'll hurt their profits, even if its good for the public (yes, I just went there, and no, I don't work for American, I don't even fly them much).

The industry is in an uproar that AA wants them to build new technological interfaces to work with Direct Connect. They are upset that TMCs won't get GDS fees if they go this route and the commissions that AA will pay them are uncertain. They claim that it is bad for the consumer, because it prevents apples to apples comparisons (really?) and other unsubstantiated complications.

Wow, could they have come up with anything else? How about those floods in Australia? Brought on by AA, no doubt. Quick, shut off Direct Connect before the floods reach Sydney!

The truth is American has been talking about this for years. They have established the API in conjunction with Farelogix, the Open Travel Alliance (and Open Axis Group), with many other carriers and industry players. They have been setting the stage that this is the future of distribution, that they want agencies to connect to them directly rather than through an intermediary. So it makes no sense to me that when they finally put their foot down and say that it's time to follow-through -- the travel technology community raises it voices in surprise, in confusion, in downright fury.

Let me quote Michael Strauss of PASS Consulting from a recent TNooz article:

"So here we are in a world where technology is ready to be implemented but progress and innovation are slowed down by political forces. It is as if we have this brand-new airplane that produces 50% less atmospheric pollution, but you are not allowed to use it as the revenue stream of the oil lobby would be cut in half as well."

Of course, he said that only after admitting that "it is challenging for us to promote direct connects"  for at least the near term. So we all know the truth, right? We're just not collectively brave enough to act on it as an industry. That's a recipe for massive external disruption. If we can't do it, someone else will.

Agencies need to realize that they are distributors of travel inventory, and they are (whether they like it or not) at the behest of the supplier. Southwest doesn't want OTAs booking for them, so they don't allow it. If American wants OTAs to continue to distribute their tickets (which I'm quite sure they do), then they'll make the business model work for the agencies. Putting agency revenues at risk is not a sustainable strategy for a supplier who wants that distribution channel. And if they don't want the distribution channel, it's their prerogative and the onus is on the OTA to deliver more value.

The GDS needs to realize that their core business model is at risk (actually, if they haven't realized it yet, it's too late). Amadeus has been diversifying into more broad IT solutions for years. Sabre is a heavily diversified company, but the GDS is its gold mine. Travelport, well, they're getting there also, and their Universal API could be the "GDS 2.0", creating less cash, but playing a core role in travel distribution that will allow them to monetize other parts of the value chain. Of course the current GDS is a cash cow, but just like tobacco is watching their core model disappear, GDS also need to evolve. Simply saying "no" to the likes of AA won't do it. In the history of technology, it is invariably the companies that are first willing to put their core model at risk to innovate in the value chain that survive disruption, NOT the companies that put up walls.

If you don't believe me, let's examine Netflix vs. Blockbuster. Netflix put up streaming video as a free resource for subscribers, thereby making their core DVD business almost irrelevant. They put their core revenue stream at risk because they knew the future is in streaming, not DVDs. Now they have an opportunity to monetize the new model first, surviving the disruption. Blockbuster held onto its brick and mortar stores even though we knew the future wouldn't include them. Why? Because they made so much money and they thought it was a competitive advantage. Turns out, not so much. Now they're in big trouble (aka bankruptcy).

This is not an isolated phenomenon. Try Kodak. They invented the first digital camera in 1975. Yes, 1975. What did they do with it? Not much for decades, because it would completely destroy their underlying business of film and film processing. Even when they did have products, competitors had better ones. In fact, one of Kodak's first implementations of digital photography was to license it for a Nikon camera! (See Motorola, Nokia and digital phone technology for a similar story). By 2006, Kodak was the #3 player in digital cameras, with both Canon and Sony eating their lunch. They've also not managed to mitigate the impact of reduced film processing, having to cut employees.

When I look at Travelport's list of reasons why Direct Connect is bad, I think of a Blockbuster executive telling me that consumers want to always be able to go to their local store for a movie. That the infrastructure involved in delivering DVDs to their mailboxes or streaming would raise costs for consumers. That the business model of media companies will never support the digital revolution. In other words, that we're all destined to destroy the industry if we go along with this new, annoying, innovator. They'd be wrong. And Travelport et al, so are you.

Sooner or later, when this all settles, consumers, suppliers, and agencies will all win. Except for the GDS...they will lose. But the fact that they still wield so much power in 2011 is ridiculous. They should be happy their core model lasted this long and transition their businesses to lead this revolution, not respond to it.

So Orbitz, Expedia, Travelport, and Sabre -- Stop posturing for the benefit of GDS and hook up to Direct Connect already! We've heard from all your agency cronies but has anyone stopped to think what is really best for the consumer in the long-run? As a general rule, close connectivity with suppliers is GOOD for consumers. More customization, relevant merchandising, perks and rewards, etc. The notion that you need a GDS create discipline in shopping is technologically obsolete.

The delicious irony of this story is that American Airlines, the company that created the first GDS (and made billions off of it), is the company sticking out its neck to destroy them. Of course in other technology industries that would have happened in a matter of years, not the decades it took in travel. It's time to enter the 21st century --- I'll place my long-term bet with American.

Evan Konwiser is co-founder of FlightCaster. These thoughts are excerpted with permission from his blog

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Posted by: Evan Konwiser | More by Evan Konwiser

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