Direct Connect, GDS Or Both?

Stripping away the emotion from the debate, AA's new model moves the industry into uncharted distribution territory. Ironies abound. AA is fighting the very distribution platform it created. One year AA made more profit on Sabre than from running the airline. While not one to knock my brethren, the legal fees of the court cases will have to be recovered through higher fares for all when the dust settles. All this is happening in an industry that continues to consolidate--and may consolidate further this year. With dramatically higher oil prices, driving out costs seems imperative to the airlines. [more]

Can the airlines control how their inventory is sold?

Even though they are not paid (except overrides for mega agencies), agents are agents, per ARC, and to sell must be "plated." A court in Illinois confirmed in the "McTravel" case over five years ago AA's unconditioned right to price its product while it controls inventory. If agents buy and resell seat inventory, with the associated risks, they are de facto suppliers in their own right and are not under the contract of or direction of the airline. However, as long as they remain agents, they cannot dictate to the supplier the level of the pricing or how inventory is offered for sale. This opens the door for direct connect as a supplement to or replacement of the GDS platform.

Why would airlines want to go to direct connect when they get so much in sales and revenues through the GDSs?

GDSs have been the exclusive "one-stop shopping" tool for distribution for years. They reach far and deep throughout the industry. They provide for centralized purchasing but also competitive benchmarking of alternatives. Customers and agencies can compare fares easily and move between competitors one screen at a time.

Almost like a "private" Internet for travel sales, GDSs have garnered a nearly exclusive role for agencies and airlines. Want to sell? Pay the GDS. Want to buy? Take a rebate from the GDS out of the carrier segment fees. When the airlines challenged the GDSs on threat of limiting content, GDSs blinked and reduced their segment fees. Not being of a charitable mind, GDSs stayed whole by surcharging agencies who, of course, passed surcharges through to customers. No one pays for content, right?

The truce on content has been fragile. Two developments threaten the GDS model. First, travelers have been flocking to Internet websites. Lured by frequent flyer bonuses, travelers--including company employees--find these sites almost too good to be true. At about $7 per sale, this is the lowest-cost distribution model imaginable for airlines. Second, there appear to be no better ways to power down the GDS than for an innovative airline like AA to thrust ahead with direct connect. Incentives can then be tailored away from the GDS management and payable only on revenue received--and not on traditional "transactions." This could mean less for agencies from GDS rebate streams. Companies would be chasing "incentives" versus traditional rebates, but confidentialities in the deals would still mean no transparency.

Agencies have little clout in this fight. Carriers can choose or not to use the GDSs. They can require "agents" to use direct connect to access content. They do have to honor contracts, until they expire or, if they can be, terminated at will.

GDSs have not been especially innovative in dealing with the rapid-fire emergence of ancillary products and fees, the new form of airline price increases. Airlines are frustrated, AA in particular. Looking for ways to improve revenues by less costly distribution, AA believes it's on the right track. It wants to control its own incentive model. The supporting rationale seems strong if not compelling, at least long term.

Is all this posturing for new GDS deals versus substituting a new model for the GDS as a sales platform? Do other carriers have a "dog this hunt"?

The current battles seem to reflect a serious plan to reform the distribution model. Pressure on the GDSs may produce needed improvements without elimination of centralized inventory access. Time will tell.

One of two results seems likely: either the GDSs innovate fast and become so lean and mean as to be irresistible for the airlines, or GDS departures could begin and spread disaster for the GDS platform. With such adversity, however, there would be opportunity for innovative technologies from agencies for fare shopping outside reliance on the GDS. Agencies have to do fare comparisons now between GDS options and non-GDS web fares.

For now, it seems problematic that the new model, if it works for the U.S., will spread. AA's partner BA says it has no problems with its GDS partners or the deals to sell exclusively via GDS through 2013. Other U.S. carriers have extended with GDSs for "full content" for another two years. Marketing joint discounts to U.S.-based customers with over-the-water volume will not be easier if AA and BA split distribution platforms.

Should agencies and customers pay for inventory?

GDS fees are recovered in the fares, like other costs. Customers are paying for inventory. Direct charging for content seems problematic even with the concentrated leverage of airlines today. Google is too smart to make that mistake.

Is AA a true industry leader on the new model?

Yes, they deserve kudos for innovation to reconfigure distribution and redefine "fares" while reducing major operating costs. However, hundreds of millions have been invested in the GDS infrastructure--and it works. The combatants should find "common ground" and come together. Penalizing a major airline for innovation by prejudicing its displays--or anything else similar--is not only unfair but also injurious to all other parties in the industry. Some of this sounds almost political in the incriminations.

When will the confusion end?

Never, or no fun would be left.

John Caldwell is president of Caldwell Associates, a travel management consultancy