Less than two years away from the next wave of full-content deal expirations, global distribution CEOs are in the midst of ongoing discussions with domestic airlines and anticipate a less disruptive outcome.
After contentious negotiations, airlines and GDSs three years ago this month implemented a reinvented distribution model in which airlines agreed to pay a smaller share of distribution costs, leaving agencies and corporations to make up the difference
(BTNonline, Sept. 11, 2006).
This time, the top brass at the three largest GDS companies told BTN they're staving off cost increases to travel management companies as they attempt to shift the conversation with airlines from one solely about cost to one about product differentiation and revenue opportunities enabled through distribution capabilities they are building.
"I don't think you'll see a big bang," said Sabre Holdings chairman and CEO Sam Gilliland. "We've arrived at a pretty reasonable equilibrium over this last round in terms of pricing."
Travelport GDS president and CEO Gordon Wilson seconded. "With the American carriers, there are talks commencing, but it's a different type of talk this time around," Wilson said. "Anybody who thinks the GDSs are just going to drop prices again willy-nilly is living in cloud cuckoo land. The price points are much more reasonable. The dialogue is much more about what else can we do to help the airlines sell more of their product, particularly this unbundled or attribute or added-service type thing."
The major distribution companies have worked to enable new functionality to let airlines merchandize, unbundle and upsell through GDS and agency channels.
Instead of allowing airlines to simply sell a schedule and seat, GDS executives envision the ability to charge for bags, upsell coach passengers to premium cabins—as Sabre already does for United Airlines
(BTNonline, Dec. 8, 2008)—or offer any number of airline goods and services through their channels. The goal of the new systems is to let carriers differentiate products through indirect channels in ways similar to their Web sites.
Distribution CEOs see these capabilities—which still lack standardization and face other technological hurdles—as an opportunity to prove the value of their channel to carriers.
"If the airlines are going to make their revenue goals—selling more of their product outside of just the raw ticket—they need to embrace third-party distribution to get there," Travelport's Wilson said. "There's a limit to how much they can sell through the kiosk at the airport or at the time of booking on their own Web site. Some of what we're developing here is geared around enabling that. That's going to play a big part in our discussions."
Amadeus president and CEO David Jones said the new technology would enable distributors to move away from the transaction model and place less focus on the per-booking price that dominated the last round of negotiations.
"To the extent that some of the things which were previously bundled up with the booking fee become optional extras—both on the agency side and on the airline side—it takes the pressure off the booking fee as the source of money," Jones said. "This is what the airlines dislike so much about the old booking fee model: They paid one amount, undifferentiated. With unbundling, using our Airline Retailing Platform, you can move from that model as the be-all and end-all. The price is commensurate with the value the airlines receive."
Another factor making this set of negotiations different is that airlines have staggered expiration dates. In 2006, in the span of a few months, every legacy carrier restructured agreements with every GDS. However, United and Delta will conclude their seven-year deals well after American, Continental and US Airways re-bid their five-year agreements, which expire in 2011.
"You probably have 35 or 40 percent of the U.S. market where we won't be refreshing those relationships for quite a few years," Gilliland said. "We won't see the same type of activity that we saw in 2006 or 2003 with this bubble of negotiations. We've moved more to business as usual, working toward the next refresh in the relationship.
"There's quite a bit less drama than maybe you'd hoped for," Gilliland continued. "We're not as focused on the terms of those agreements as on ensuring the distribution relationship is sound, productive and working well. That may mean we refresh deals in advance of their terms, like with United."
United signed a contract extension in the past year, and Delta Air Lines from the beginning structured seven-year deals with the GDSs. With Northwest under Delta's wing, half of what used to be the Big Six still have several years before they face expiration.
"It's a good thing that some of the carriers have extended their agreements already," said Carlson Wagonlit Travel North America COO Mike Koetting. "Having all the contracts due around the same time can be rather apocalyptic. This reduces a little bit the opportunity for gamesmanship and brinksmanship and that benefits everybody."
While the last round resulted in higher costs to travel agencies and ultimately corporate travel buyers, Amadeus' Jones said, "It will be a different conversation. We will negotiate very hard in the interest of our subscribers, and this is one of the big problems we had with the previous round, which was the interest of the sellers didn't seem to enter into the picture."
Still, several airline CEOs in April waxed philosophic on shifting distribution costs to the intermediaries that sell their products.
Though he noted, "maybe I'm dreaming here," American CEO Gerard Arpey envisioned a future "where those folks who are the intermediary between us and our customer have to pay for access to our product rather than us paying them to distribute our product." Arpey called that shift a "long-term vision," rather than a near-term reality. Delta CEO Richard Anderson said, "Over time, the industry has to evolve to the model of other industries, where people pay us for our content rather than us paying them to take our content."
"I've been hearing those types of things even before I got into this job," Gilliland said. "I don't think they're really new concepts or tenets they're pushing for."
Airlines are likely to continue to paint the global distribution systems as a cost center rather than a revenue generator, but Gilliland said, "In many cases they do see the value. They're not going to talk about that openly, because it wouldn't be a good negotiating posture to take."