GDS/Airline Issue: Coming To A head?

This whole issue is not only becoming a little tedious but also beginning to build like a volcano about to erupt. We have had quite a few years of the dormant stage but now the tremors are getting longer, bigger and more frequent. [more]

The first sign of life started 5/6 years ago when airlines like British Airways started charging TMCs fees for booking their lower promotional or short haul flights via the GDS. Their logic seemed to be that, as their profit margins were lower then so should their cost of sale. The point having been made most of those airlines then went to their top TMCs and found a way of giving most of the charges back. Meanwhile the GDS also went to the same all important TMCs and compensated them for the cost through their incentive agreements.

Are there GDS/TMC incentive agreements? Yes there are. Or there certainly were and I am practically sure this has not changed in the last couple of years. You see, despite what you may read in the AA Distribution Blog the GDS are locked in a battle with not just the airlines but each other as they make sorties into others markets and buy themselves in. Alongside this the all GDS want to be sure that they preserve their near monopoly over unbiased content within the business travel sector, and they are prepared to pay to do so.

These GDS incentives must drive the airlines mad. A key reason for taking commissions and some incentives away from TMCs was because those TMCs used the money to pay their own incentives to clients as well as subsidise necessary unprofitable transactions (rail, car etc.) elsewhere. Now they are dealing with the same thing with the GDS to whom they pay a very large fee only to see large chunks of it passed down the supply chain in incentives to win/keep business.

The problem is how they solve the problem. Like commissions and everything else whatever they do is going to have implications down the line. If you take something away from any intermediary the balance will be rectified somewhere else. Rather like pressing a balloon full of water and finding it bulges elsewhere to compensate for the displacement. The only way cost can be truly saved is if what is taken away does not need to be replaced and we are not quite there yet in travel however much the airlines wish it so.

There has been one major tremor which happened shortly before I retired. The not so shy and retiring Lufthansa decided to break the mould but only in their home market where they enjoyed an unusually dominant position. Much to the howls of GDS, TMCs, corporations et al they started making bookings more expensive if they were not transacted direct or through the certain GDS who had reduced their fees. They 'enjoyed' mixed fortunes and their success, or otherwise, depends on who you talk to. From what I saw they lost significant business in certain sectors, antagonised people who were once partners and ended up paying much back in different ways. Talk to them and I am sure they will say it was all wonderful!

As soon as I saw that American Airlines had introduced their own distribution blog I knew that something was going to happen. It is certainly a tremor and could possibly become a significant eruption. To do something like they are planning they had to have an outlet to put out their justifications and propaganda. It started relatively brightly but now anybody can see it for what it is.

From my observations the first rumble has come with AA removing the ability for Orbitz to issue their tickets. In a strange way it made me smile. After all it was not that long ago that airlines around the world seemed to see these OTAs as the answer to combat TMCs. They persuaded themselves that it was just what corporations wanted and expected vast volumes of business to transfer over to these new players. It simply did not, and will not happen for all sorts of good reasons. Now, having lovingly introduced and supported these OTAs they are trying to damage them. Rather like a female praying mantis with it's: mate Make love then eat it.

So. Back to our volcano. Is it going to erupt or not? I think it will but not immediately. Something has to happen as these airlines cannot go on paying this level of fees to the GDS indefinitely and there are now growing alternatives, however basic (and costly to others) they may be. Every other part of the supply chain has reinvented themselves so as to respond to enabling technology, new players and changing clients but not (that I can see) the GDS. They have to adjust prices and action new ways of making money just like the TMCs did. Staying as they are is not an option.

To end with my volcano analogy I would say that there will be no big explosion but more a growing flow of lava that will cover and impact the rest of the chain. GDS cost will be taken away, or at least significantly reduced but will pop up again elsewhere until it finally rests with the customer and their employers. They won't like it and will probably use their power to demand compensation from the 'offending' airline. The end result? Rather like the removal of TMC commission the airlines will make a saving in one area only to find a corresponding cost in another. You see what they need to realise is you can only make a lasting saving by improving on the status quo not just changing it.

This post was republished with permission from the blog of former managing director of HRG UK Mike Platt.