American Airlines and Travelport this week escalated a conflict that represents the latest flashpoint in airline distribution, a legal and commercial battle that highlights such key airline distribution components as full-content agreements, GDS economics, the sale of ancillary services and direct connections.
Also a 48 percent owner in Orbitz Worldwide, Travelport on Dec. 20 will "dramatically" increase booking fees charged to the airline "in many international points of sale," according to American. AA said that "as a result," it would levy fees on Travelport's non-U.S. and non-Caribbean subscribers. Travelport deputy group CEO Gordon Wilson in a Wednesday memo did not mention higher GDS fees for AA, but said the company "will continue to take appropriate actions in response to any measures AA initiates that discriminate against our customers." Wilson said AA's surcharge on Travelport subscribers "will effectively be borne by consumers."
In the United States, where the current dispute had not by press time triggered any new surcharges from either camp, managed travel programs won't see any immediate impact--unless their travel agency is Orbitz for Business. But the reverberations may be felt throughout the distribution chain, through travel management companies and down to corporate buyers. Or, this conflict may burn out, much in the way the bluster in 2006 about "new entrant" distributors and the raging debate in 2003 on Web fares ultimately amounted only to noisy, public negotiations that ended in relatively full-content agreements between airlines and GDSs.
Of course, if an organization's agency is Orbitz for Business, its travel program could face serious challenges absent a resolution between the parties, especially in situations where AA is a major provider for Orbitz for Business clients.
AA fired the first shots in the latest episode by conveying plans to terminate "a number of agreements between American and Orbitz," effective Dec. 1, according to AA court documents. The airline petitioned a Tarrant County, Texas, court for a declaratory judgment regarding its rights and obligations related to a "Preferred Fares" deal signed with Travelport and agreements with Orbitz.
Why did AA make the move? As part of a strategy discussed publicly for more than a year, the airline is attempting to persuade travel agencies to use direct connects, including technology from Farelogix, that would bypass traditional GDS connections and economics. The airline wants to cut costs and get closer to customers by tailoring offers. "Airlines are limited in their ability to receive and consider customer insight through the current messaging process of the travel agency/GDS channel," AA wrote on its blog. "Airlines have been successful in personalizing the customer experience through their Web sites and other direct channels. Now is the time to extend these benefits out through travel agencies that represent more than half of airline tickets sold in the U.S. today. For example, the agency may know that the customer is flying to a destination for a meeting that starts shortly after the scheduled arrival. With this information the agency can request that the airline provide an offer that includes a seat in the front of the cabin and priority baggage handling so that the customer can quickly move from the flight to their meeting."
"The modern direct connect technology we have proposedwould only make Orbitz's existing direct connection with American easier to maintain and more content-rich for consumers," AA claimed in another blog post. "We hope that Orbitz will agree to join the growing list of travel agencies who are committed to deliver the lowest fares and most relevant optional service offers from American." AA on several occasions has refused to name any agency users of its direct-connect model.
"Airlines want to make sure they sold the right product to the right customer in the right place at the right time," said consultant Al Lenza, a former airline executive involved in prominent distribution matters. "GDSs and OTAs have not shown that they can actually sell the products the way the airlines want to sell them."
Marc Rosenberg, a former Air Canada executive who currently is president of his own consulting practice, added that "carriers have finally understood the richness of what the new technologies can deliver: actual dollars from ancillary selling, the advantage of competitiveness when other carriers don't have the same offerings. If the GDSs could deliver this right away, there would not be issues. The fact is, they can't. The airlines simply don't want to wait anymore."
The Travelport Argument
In its filing to a Cook County, Ill., court, Travelport also lodged a complaint for declaratory judgment. "If AA terminates Orbitz, then AA will have breached its contract with Travelport, including by depriving Travelport's affiliates of full content," Travelport argued. "AA is coercing Orbitz into changing its existing business model."
According to the filing, Orbitz "generates more airline revenues for Travelport than any other travel agent." Travelport CEO Jeff Clarke told analysts during a conference call that Orbitz accounts for around 14 percent of Travelport's segments.
In discussing how a direct-connect approach would require a multitude of individual connections between airlines and agencies, Clarke said, "Most of our travel agent customers--at least every single one we've spoken to--would prefer to deal with one connection into the GDS than, in this case, 500 connections to the airlines. It just doesn't make economic sense."
Orbitz Worldwide CEO Barney Harford added that AA "is attempting to limit travelers' choices where they can least afford it."
Travelport also is circulating a memo that offers "myth-busting" on AA's direct-connect initiative. For example, Travelport wrote that it is a myth that "direct connect makes the best economic sense for agencies" because any "short-term incentives" given by AA to agencies won't overcome "the 100 percent long-term loss of an agency's financial assistance through the GDS for all of its AA bookings." It also insisted that its systems would be able to handle "the customization AA is talking about" if only AA was willing to cooperate.
According to Lenza, "It's as much economic as anything. [GDSs] are looking to preserve historic revenue streams and create new ones along the same lines for these new [ancillary services]."
Meanwhile, in a memo reacting to AA's new surcharges on some Travelport subscribers, Wilson wrote that "the true cost of booking AA will need to be shown to consumers at the point where a buying decision is made so that consumers can make an informed choice about which carrier to fly. Through this action, AA is penalizing the very people who deliver valuable revenue to AA in markets outside the USA and the Caribbean."
Regarding the AA's decision to end its Orbitz agreements, Amadeus CEO David Jones, speaking with analysts last week, said, "We are a bit puzzled, because [AA] has had a direct-connect agreement in place with Orbitz for years. This looks like a bit of a hardball negotiating ploy. We have had plenty of them over the years."
Sabre Travel Network vice president of marketing Chris Kroeger would not comment.
AA 'Not Unique'
American more than a year ago decided to take its arguments for direct connectivity into the public realm. Though other U.S. carriers have been quiet (aside from a Delta Air Lines September filing to the U.S. Department of Transportation expressing similar sentiments), several industry observers are presuming that other airlines share AA's views.
"American is not unique in its desire to renegotiate distribution terms," according to UBS analyst Kevin Crissey. "Other airlines will likely be aggressive in pursuing this strategy as well."
Rosenberg had that same expectation. "Whether [other carriers] choose to follow the same model as American is yet to be determined, and whether they choose to approach their client base in the same style as American is yet to be determined," he said.
"This same direction permeates throughout other airlines," said Lenza, adding that the urgency may be greatest for American, which in 2011 faces the expiration of all three major GDS contracts.
Many also suspect that AA isn't only targeting Orbitz. For one thing, AA CEO Gerard Arpey in April 2009 shared now-infamous commentssuggesting that intermediaries should "pay for access to our product rather than us paying them to distribute our product." Though AA would like to cultivate its direct-connect strategy among all types of agencies, including traditional corporate travel management companies, the online travel agencies as a group may be the first targets.
Crissey offered several reasons why: OTA bookings generally are lower-yield, they "cannibalize" airline websites and they generally don't "upsell" customers into higher-priced seats.
Orbitz's Harford this month told analysts that American's decision to terminate its relationship with Orbitz represents the "first salvo" in a "broad attack ... on the travel distribution landscape," including global distribution systems and "agencies in general."
When asked by email if AA has made decisions similar to the Orbitz move that affect other distributors, AA manager of merchandising strategy Cory Garner wouldn't say.
What's Next
Still in doubt are AA's success with its direct-connect initiative, any further back-and-forth retaliatory actions by the airline and Travelport, and the ultimate outcome of the next wave of GDS-airline negotiations. Meanwhile, both the AA and the Orbitz/Travelport side said they are working to resolve their dispute.
"I get the sense that the parties have very hardened positions," according to Lenza. "No one is going to want to fold on this one; it will be aggressively fought. I doubt that Dec. 1 will be the end game." Without knowing the specifics of contracts between the companies, Lenza added, "I would be quite surprised if the GDS has any leg to stand on, because these arrangements tend to be structured between the OTA and the airline. First and foremost, [Orbitz] is a travel agent governed by ARC rules. An airline can arbitrarily amend how it appoints and maintains relationships with agents."
Fellow airline veteran Rosenberg said AA's move "is not discriminatory against a particular GDS; American has not said, 'anybody on the Travelport system has to go direct connect, I am pulling content.' This is targeted specifically to one retailer. It is a very different play than in the past."
Rosenberg added that ceding ground to AA "would cause a major change in Travelport's view and a precedent that I am not sure they can live with right now."
Crissey of UBS, however, predicted AA and Orbitz by year-end would settle, adding that "American is likely to receive better financial terms."
According to a blog post by former managing director of HRG UK Mike Platt, GDSs "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.
"It was not that long ago that airlines around the world seemed to see these OTAs as the answer to combat TMCs," Platt wrote. "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. Something has to happen, as these airlines cannot go on paying this level of fees to the GDS indefinitely" while alternative mechanisms develop.
"GDS cost," Platt predicted, "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."