Pestronk: No Apparent Downside To Signing Up For AA Direct Connect

Though there are many questions and potential ramifications--known and unknown--on American Airlines' Direct Connect program, travel industry attorney Mark Pestronk said that for travel agencies, "there seems to be no harm" in signing up for it.

"Although I don't know of any agencies that have done any actual Direct Connect transactions, signing the agreement that I have seen does not commit you to anything," he said Thursday during an American Society of Travel Agents webinar. "It all seems to be optional even after you sign, but frankly it also seems to be quite vague at this point. It's not quite clear what it is you are signing up for or what the consequences are."

Pestronk also said that he does not envision AA's Direct Connect attaining critical mass among travel agencies. "A small number of agencies will use Direct Connect so American will be able to claim at least partial victory," he said, but by and large, he expects the status quo to prevail.

In his view, here's what won't happen:

• Lawsuits between airlines and global distribution system operators "probably will not resolve anything in the long run," Pestronk said. "They are just negotiation by other means. Nothing will be decided in the lawsuits until 2013, by which time all the issues probably will have blown over."

• The U.S. Department of Justice, currently investigating the GDS marketplace, "probably will not find antitrust violations," Pestronk predicted. "DOJ will find that all that is going is on is that one competitor simply is refusing to do business with another competitor, and that's OK under the antitrust laws, as long as there is at least some competition."

• The U.S. Department of Transportation, currently considering a rulemaking on airlines' disclosure of optional service fees through global distribution systems, won't act until after ongoing airline-GDS negotiations are over. (If it does, though, Pestronk said DOT's order would "dictate the outcome of this war.")

• AA will not "take the risk of ordering mandatory use of Direct Connect anytime soon" because it would lose too much business. Therefore, Pestronk said he believes Direct Connect "will remain a very limited phenomenon."

What then, in Pestronk's estimation, will happen?

"Most likely, there is going to be a 2006-type outcome where American Airlines and most majors get a break on their GDS fees, leading to lower net agency incentives," Pestronk said, adding that major airlines in that case would remain in GDSs. That, he said, would lead to "another hit for travel agencies eventually," either in the form of lower net incentives, a higher full-content fee or, more likely in Pestronk's view, a new fee. "In general, it is a fact that all standard GDS contracts in effect today [with travel agencies] do allow incentive cuts, new fees and higher fees," he explained, though he encouraged agents to check their contracts.

By getting breaks on booking fees, Pestronk continued, "airlines will agree to sell all their ancillaries through the GDSs." He predicted that arguments suggesting GDS are technically incapable of handling that will "all be moot by the time this is resolved."