Continental Airlines president Jeff Smisek last month during a keynote address to buyers and suppliers assembled in New York for BTN's 22nd annual Corporate Travel World conference listed the litany of woes that have burdened the legacy airlines since 2001—growth of low-cost carriers, war, SARS, high fuel costs, federal and local levies that outweigh "sin taxes" and a consequent $42 billion industry-wide loss—and then moved to another topic that has troubled Continental and other carriers: the cost of distribution.
"We're optimistic that the market is becoming more competitive," Smisek said. "We want to be in every global distribution system—there's no question about it. We want to be in every channel of distribution that we can and that makes economic sense for us. There is clearly momentum building for a more rational model of GDS fees and that's driven by necessity. Our business today is very different than it was when we entered into the DCA3 agreements and it continues to evolve and change. The GDSs that are going to be successful in the future are going to be competitive and are going to change just as the airline industry has changed."
Smisek lashed out at recent GDS content-sharing agreements and ties between GDSs and sister online travel management companies. Sabre and Amadeus recently signed a content-sharing agreement
(BTN, March 20), and Sabre recently has signed several carriers to deals through its Travelocity unit.
"This tying amounts to a threat to deprive many other travel management companies around the world of our content, in order to protect the economics of that GDS's own online TMC—a company that competes with the very travel management companies who could lose our content if they rely exclusively on that GDS," Smisek said.
Continental and American, the only legacy carriers yet to sign with Sabre, have been the most vocal opponents of the Amadeus/Sabre agreement. "Content sharing would breach our current content agreements and, we believe, would not stand up to even cursory scrutiny by the DOJ or DOT—I'm a lawyer, I can say that," Smisek said.
Continental also is working with its alliance partners to create a new distribution channel and booking portal for corporate travel managers, which should be available by the third quarter of this year. Through the booking portal, Continental is seeking to mimic the economics of the carrier's fastest-growing channel: its own Web site. In addition to 50 percent year-over-year growth, the channel gives Continental better economics than the GDSs—costing roughly $3 per ticket, compared with the $11 to $14 range for GDSs.
"People booking Continental.com aren't in a managed program," Smisek noted. "We are currently working with domestic alliance partners on a corporate booking portal that would have all the appropriate features for a managed travel program. Hopefully we'll be launching that in the third quarter this year as all technology projects go those things can get delayed."
Like many carriers, Continental said it wants to lower GDS costs closer to the rate of distribution through its own channels. "The amount of cost is staggering," Smisek said, "especially on low-yield tickets." He told the audience to "stay tuned," noting that Continental "may have to forego providing content to a particular GDS."
One GDS that Continental will participate in is Worldspan. The day before the address, Continental and the GDS signed a five-year distribution pact—Continental's first in the deregulated GDS environment—giving the GDS access to the carrier's published fares, including those sold through Continental's Web site, third-party sites and other distribution channels.
Smisek would not detail the terms of the deal. "There is an economic difference," Smisek told BTN, "but I think Worldspan's going to be rolling out some different models as well that are content related."
Smisek also proposed a change to the relationship model between travel management companies, airlines and GDSs, suggesting that TMCs pay GDSs for content and airlines then pay fees to agencies. "I believe that TMCs should be paid by airlines on a per-ticket or other value-based model and they should pick and pay for the technologies that they'll use to book those tickets. I think TMCs would be better off on this structure."
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Immediately following Smisek's address, other players in the distribution chain had their chance to sound off on the topic. American Express Business Travel senior vice president and general manager of North America Andrew McGraw straddled the line that divides GDSs and airlines. "They have good arguments on both sides of the fence," noting that GDSs provide strong value to buyers and TMCs, yet the struggling airline industry needs new economic models to keep costs down. "If you look at GDSs today, they're a marketplace where buyers can buy, shop and compare. It's a valuable marketplace. It brings over 400 airlines and over 50,000 hotels together," McGraw said. "When you look at some alternatives, they have 10 to 12 airlines. GDSs, from a value-proposition standpoint, stand on their own legs. At the same time, the economic model has to change from the airline perspective. You're starting to see signs of that and I think that deals will get resolved"
Representing the GDS perspective, Ken Esterow, president and CEO of travel industry services for Cendant Travel Distribution Services, justified GDS pricing and value while dismissing new distribution entrants, labeling them "LTDs"—limited travel distributors.
"Did you feel the love this morning?" Esterow began, referring to Smisek's stance on GDSs. Yet, Esterow said, "We're not looking for a fight, and I don't think the airlines are either. Relative to the U.S. dialogue, we feel good about where we are and these will come to a conclusion in the next couple of months."
While the deals thus far struck between carriers and GDSs have been less than transparent, panelists agreed that negotiations are yielding not just renewals of expiring contracts, but new and different models from carrier to carrier. Apart from American Airlines' Frank Morogiello, who maintained the possibility of not participating in all GDSs, panelists largely agreed that deals between the majors would come to fruition in approaching months.
Trip Davis, president and CEO of TRX, said, "You'll likely see all the major carriers have a relationship with all the GDSs, but there will be some different flavors."
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PricewaterhouseCoopers' hospitality practice head Bjorn Hanson kicked off the two-day event with his prediction of increasing hotel rates through 2008, spelling further negotiating complexities for buyers.
Hanson said this trend meant higher room rates, less availability and a lower priority on group travel by hotels.
"Hotels are in the best condition they've been in since 2000," said Hanson. "The industry right now is stable and our forecast for 2006 is even better, which is bad for buyers." He forecasted that 2006 hotel profits would reach $25.6 billion.
Although occupancy rates, at 63.1 percent in 2005, remain below the long-term trend line, Hanson said, average daily room rates continue to rise. PwC predicted a 5.8 percent year-over-year increase in ADR this year, with luxury and midprice without food and beverage registering the highest gains. Revenue per available room also rose 7.7 percent from last year's level, which Hanson said was due in part to increased business travel by Generation X, which now makes up a higher portion of business travel than the baby-boomers. While occupancy levels continue to rise, Hanson cited minute increases in supply.
The good news for hotels was tempered by a Hanson's prediction that sustained growth and profitability would slow after 2007. "2008 will be the peak, then there may be weakening," he said. He predicted RevPAR and ADR would dip in 2008, but occupancy rates would remain similar.
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"With airfares and hotels the way they are today, we need to find another way to save money," said one buyer during the hotel benchmarking session for small companies. That way, it seems, is putting online booking tools in place, as many buyers are finding it cheaper to have employees book travel arrangements themselves.
Even so, the breadth of options available through online booking tools confuses some buyers of small companies, while others remained skeptical of such tools, believing an agency is more effective in managing travel spend because its familiarity with company policy eliminates the need to double check reservations.
Smaller companies are beginning to fully utilize the small business programs provided by airlines. One buyer admitted it took some time to fully understand the program, but once she managed it, she saw a definite impact on her bottom line.
Buyers from small companies also expressed frustration in their inability to negotiate chainwide hotel rates this year, blaming the difficulties on transient business and a tougher market. To cope, many buyers said they are turning to negotiations with specific properties.
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Travel buyers from large and midsize companies, defined as those with between $2 million and $30 million in annual U.S. booked air volume, discussed how to best communicate hotel and meeting policies to stakeholders and how best to track hotel volume.
One travel buyer said her company requires a monthly report from hotel partners to determine when the company attempted to place business at the property but was turned away due to availability. The company's hotel partners have been cooperative in the project, she said, and the data supports the company's ability to negotiate for better rates.
Another buyer at the session said her company books entire blocks of hotel rooms for months at a time to ensure availability for its transient travelers. Buyers evaluated the benefits of building or buying hotel space as availability tightens in major cities. One buyer, however, stressed the benefits of using alternative destinations near top-tier cities. Many buyers stressed the importance of preferred partnerships with hotels, as long-term relationships helped to mitigate rate increases.
Some corporate travel buyers at the sessions said they were experiencing resistance from hotels on accepting a combined transient and meetings volume in negotiations
(see story). Hotels in top-tier cities, such as New York, were the most reluctant to accommodate leveraged spend, they said. Other buyers said they had found greater success in leveraging their small, ad hoc meetings volume with their transient volume.
Regarding air negotiating practices, large and midmarket corporate buyers said low-cost carriers still are not optimal for preferred partnerships because of the limited number of markets they serve.
Many buyers discussed methods of increasing compliance among employees with the company air booking policy. One buyer said his company has a strict mandate on air booking, with the threat of nonreimbursement as a penalty.
Buyers also discussed the benefits of systemwide agreements over negotiating discounts for specific citypairs. One buyer said he used a blended approach, setting up an overall discount with a nationwide carrier and then negotiating additional discounts for the company's most heavily traveled routes.
One buyer said his company had foregone enforcing an air booking policy altogether, and embraced at-will booking. Employees will often act in the best interests of the company and the no-policy approach is "better for morale," he said.