One year after the federal government completed deregulation of the airline business within global distribution systems, not much has changed in terms of the typical booking channels, processes and economic models used by most corporate travel programs.
Beneath the surface, however, competitive forces are in motion. With suppliers and GDS companies free to be more selective with whom they work and more tactical in crafting individualized relationships, the status quo will not last indefinitely. Furthermore, as new-entrant systems work to convert pre-launch hype into actual corporate customer usage, the level of competition will continue to accelerate. Whether they be wars or mere skirmishes, certain moves by suppliers and distributors to gain control over content likely will impact corporate programs and the travelers they serve.
For now, though, all major U.S. carriers continue listing in all four primary GDSs, GDSs continue to pay travel agencies incentives to attract or maintain business and travel agencies can still promise corporate clients the widest possible access to content. Most parties discuss distribution changes in evolutionary terms, and as a continuation of developments that began well before last July. "There was tremendous opportunity for innovation and change even before deregulation took place, but with that said, when you deregulate a portion of the industry as important as airlines, there clearly is an opportunity for even more innovation and change," said Chris Kroeger, senior vice president for Sabre Travel Network in North America. "In that sense, it has been an exciting year."
The last rules governing GDSs technically expired July 31, 2004, when the U.S. Department of Transportation lifted prohibitions against display bias and restrictions on contractual parity clauses
(BTNonline, Jan. 5, 2004). At that time, many around the industry predicted all sorts of movement—some positive for the corporate travel community and some potentially negative—but in practical terms, little has occurred.
"The pace of change has been slower than anticipated, but change will continue because of competitive needs and competitive pressures," said Norm Rose, president of Travel Tech Consulting. "It is causing the GDS oligopoly to react in different ways, some of it just public relations and some of it real."
"A lot of the predictions of what would happen in a deregulated environment really have not manifested themselves," added John Slater, Continental managing director of distribution and e-commerce.
For example, the idea of bias—suppliers paying a premium to GDS operators for preferential treatment within displays—is one notion that raised eyebrows in the market and spawned much discussion with suppliers but has not yet come to pass for airlines.
A primary factor slowing change during the first year following deregulation was that pricing covering the bulk of GDS-booked tickets remained relatively intact under terms of content-for-discount deals in force between GDS operators and major airlines.
Another inhibitor is the ongoing practice of GDSs paying incentives to travel agencies, which in turn compel GDSs to maintain per-segment fees paid by suppliers. Despite all the rhetoric around the need to alter the economic structure of distribution relationships, agency incentives, also called inducements, have stayed relatively flat in the past 12 months, or, in some cases, actually increased. "So far, we have not seen this groundswell of support from the travel agency community for doing away with inducements," said Ninan Chacko, Worldspan senior vice president of e-commerce and product planning.
That could change if suppliers begin withholding content from higher-cost channels. "You might have these great inducements, but if you do not have the product on the shelf, what good is it?" Slater asked. "We are not willing to bear the cost of GDSs buying business any longer."
Yet, with so-called DCA3-type agreements maintaining relationships around the industry, suppliers have not yet abandoned the four major systems nor imposed new terms on GDS bookings. Northwest Airlines last August tried such an imposition by adding a fee to GDS-processed tickets, but it was rebuked by Sabre and many others in the corporate travel industry
(BTN, Sept. 6, 2004).Sabre's Kroeger said the spat between Sabre and Northwest "highlights that we are now in a competitive, open marketplace." Citing unresolved litigation, Northwest declined comment.
"That certainly was an issue for the whole industry that made all stakeholders take notice that people were willing to take risk," said Scott Brandt, United managing director of worldwide sales strategy. "United had a clear mandate for development of new alternatives to inject competition into the marketplace."
Such aspirations by carriers led to much of the noise heard on the distribution scene during the past 12 months, namely the role of new-entrant distribution systems and their impact on relationships between buyers, travel sellers and traditional intermediaries. For the most part, that noise came in the form of repeated claims of new technologies and cost efficiencies from both traditional and newer distribution firms.
Executives of traditional GDSs offered differing views on just how realistic new-entrant claims are, even as more rumblings surfaced regarding G2 SwitchWorks and ITA Software penetrating the corporate travel market
(BTN, May 16).There have been other developments at GDS companies in the past 12 months, including those related to low-cost carrier participation. JetBlue Airways, for example, in January exited the Sabre system, effectively ending its GDS participation. Fellow low-fare carrier Independence Air, on the other hand, has enlisted in each of the four primary GDSs since launching last year.
Meanwhile, GDS operators in the past year have integrated new functionalities in their respective corporate travel management platforms and deployed new technologies to make their GDSs more cost-effective and user-friendly for agency subscribers.
For example, the general migration to open systems architecture from the decades-old Transaction Processing Facility platform furnished by IBM—by no means a new development in 2004—accelerated during the past 12 months. "Now, every bit of our North America pricing and shopping is running through open systems," said Sabre's Kroeger.
"We just completed the first phase of an international shopping expansion, which allows us to more efficiently price itineraries from the United States to the rest of the world," added Worldspan's Chacko.
Ken Esterow, president of travel industry services in the Americas for Cendant Travel Distribution Services, similarly highlighted new faring technologies deployed in the Galileo GDS, including full automation of domestic and international published and private faring rules within the Airline Tariff Publishing Co. "The ability to take the feed from ATPCo and get it into the system in a matter of minutes to reflect the carriers' latest fares and fare constructions has been a great success," he said.
Open systems, along with enhanced user interfaces, similarly allow GDSs to display more robust hotel information, including enhanced descriptions of services and amenities and such visual elements as 360-degree views.
Meanwhile, it has been with hotel suppliers that GDS companies made progress in selling preferential marketing programs. "We are allowing certain suppliers to participate at such a level that their properties rise to the top of the screen," said Sabre's Kroeger, referring to a Sabre program similar in concept to an earlier offering by Cendant's Galileo and a more recent one introduced by Amadeus.
Next on the horizon likely is more of the same public relations battles between incumbent GDSs and new entrants. Following last week's extension of the current Sabre-US Airways content distribution deal
to October 2006, most similar deals between legacy airlines and GDS operators are set to expire next year. Discussions that are underway on the next wave of airline-GDS agreements have been described by sources as intensive and interesting.
"The new entrants have helped to change the dynamic in the marketplace," according to Continental's Slater. "They have helped GDSs with the admission that existing models no longer are structurally sound. They need to come up with pricing that airlines are willing to pay."
With their newfound freedom to tailor programs for individual suppliers, GDS firms said they are doing just that. They have forwarded the idea of value-based pricing—a concept first formalized by Amadeus and now in vogue among all four primary GDS operators. They also suggested suppliers would choose from a menu of other services, ranging from marketing tools, merchandising programs and distribution through online channels to consumer Web site hosting, yield-management modules and other airline IT products.
Kroeger also suggested GDSs would consider arrangements that reward suppliers for growing their volume of transactions in a given system. "It is something that has taken place in almost every other industry except ours, until deregulation," he said.
Kroeger said the idea of biasing still may have merit, even as some airlines, agencies and end-user corporate buyers view such developments with skepticism. "There is an opportunity for us as a GDS working with suppliers to make suggestions to buyers of travel on those certain suppliers that could benefit the buyer," he explained. "It could involve a unique offering or unique economics around that offering."
"Some airlines actually are intrigued by the concept of changing the display, as are some agencies," added Cendant's Esterow. "The view on display is not universal, and you may have different displays for different channels."
The consensus and preference among GDS companies is for multidimensional commercial arrangements with suppliers—notably airlines—with pricing variations based on that concept.
"You need to go to the airlines with a panoply of services," said Ron Nelson, Cendant president and CFO, during an analysts' conference this summer, referring to lower-priced transactions available through Cendant's Orbitz Suppler Link technology and higher-priced GDS services.
It is unclear when airlines and GDS companies will agree to new deals, though Sabre chairman Sam Gilliland suggested more favorable terms for early adopters
(BTN, June 20). "There is a financial advantage for us in going early, and for the GDSs, the longer they wait, the more angst it causes within their subscriber base," said Continental's Slater. "There is collateral damage in not being able to say you have secured long-term deals with key suppliers."
Meanwhile, Southwest Airlines—an increasingly important supplier to the corporate travel market—soon may tweak its own distribution strategy, according to J.P. Morgan Securities analyst Jamie Baker. "We question whether Southwest would reconsider some form of GDS participation, particularly as it penetrates ever-larger markets such as LaGuardia, through its ATA codeshare where www.southwest.com is unlikely to initially resonate with travelers, in the way that it does in, say, Texas," he said in a research note last month. "We would not be surprised if within a year's time, Southwest re-started some limited form of GDS participation."
Southwest's only current global distribution system presence is limited participation in the Sabre system.
New entrants will play a role, both in directly processing some corporate bookings and indirectly influencing GDS-airline negotiations. Carriers, either overtly or behind the scenes, are promoting the likes of G2, ITA and FareLogix to their corporate clients and TMC partners. "We are involved in very engaging discussions with multiple TMCs and we are seeing more corporations put pressure on TMCs to do something," UAL's Brandt explained. "The 'What's-in-it-for-me' message is pretty clear: protection from GDS pass-through actions, protection from content wars and increased automation that should allow TMCs to reduce costs and share in the benefits."
Sources also continue to suggest that carriers may offer improved contractual terms for both agencies and corporate clients that migrate bookings to alternative systems and/or use alternative forms of payment. One source described "a menu of options" that would enable travel managers to select those channels that work best for their companies.
GDS executives highlighted the overall value proposition they bring to all players in the distribution chain, even if they are unwilling to publicly concede that carriers are insisting on lower average booking fees.
"By being sponsors and supporters of these limited distributors, carriers effectively have said, 'We can live with a smaller set of services,' " Chacko said, adding Worldspan intends to be the low-cost provider when comparing "like-to-like services."
On a global level, at least one airline partnership has undertaken a uniform distribution strategy. United's Brandt confirmed that a Star Alliance request for information was issued June 30 to "a broad base of candidate vendors," including new entrants and incumbent GDS operators. "The idea is to leverage existing Star infrastructure to develop a lower-cost solution," he said. "The selection criteria are price, scalability, speed to market and functionality."
Star previously said it would select one or more distribution partners by year-end
(BTNonline, June 2).Meanwhile, corporate travel management companies also will play an important role in shaping the next wave of travel distribution partnerships. Not only are some beginning to process tickets through new entrants, but they also are being asked to consider GDS economic models in which they forego a portion of their incentives in exchange for full and/or preferential content.
Such concepts already have come to fruition in such markets as Australia, Canada and the United Kingdom, and sources suggested that distribution evolution would push domestic U.S. agencies in a similar direction.
"It is a hard question because there are three, if not four, legs of the stool—agency, airline, distributor and corporation," said Cendant's Esterow. "The environment will not change unilaterally. There will be a lot of solutions, which will vary across the board, just as airline incentive agreements with agencies vary."
Other TMC models could alter the flow of funds between the players, as have new arrangements between Sabre and at least one large corporate and one large leisure agency, according to Sabre's Kroeger.
"The technology links and the capabilities are essentially the same," he said, without identifying the agencies, "but the applicability of such models is defined between the agency and supplier in terms of what works for both of them."
Meanwhile, sources for months have suggested that operators of traditional GDSs, or perhaps other large travel distribution companies, are considering acquisitions of new entrants. Cendant's Nelson confirmed as much, telling analysts that alternate distribution systems may become "tuck-in acquisitions" for the likes of Cendant.
"Over time, the technology will evolve and alternate GDSs would handle more costly and complicated itineraries that now require a legacy GDS," Nelson said. "That is why we would make investments in alternate GDSs—to provide service in the most cost-effective way we can for airlines."
In Europe, the European Commission is considering GDS deregulation and could announce specifics in the coming months. The decision will follow an imminent leveraged buy-out of Madrid-based Amadeus, operator of the world's second-largest GDS by market share. Amadeus owners Air France, Lufthansa and Iberia are expected to maintain stakes in the company, prompting regulators to maintain certain rules.
Meanwhile, some airlines are preparing new distribution strategies, regardless of the EC's timetable. United's Brandt said European Star Alliance members "want alternatives in place so when the time comes, a switch is flipped and they can act on it."
In a status report on European GDS deregulation issued in June, the Association of Corporate Travel Executives suggested corporate buyers closely monitor arrangements between airlines, GDSs and other distributors, "particularly incentive-based pricing schemes that promise certain fares in exchange for lower distribution costs." ACTE also said buyers should take steps to ensure their companies maintain access to comprehensive content while also protecting data privacy.
Any changes to the GDS code of conduct, however, are not likely for another year.
The real issue for stateside corporate buyers—as it is for their European counterparts—continues to be access to complete content. "The marketplace is not going to allow for inefficient fragmentation to happen again," Kroeger predicted. "Corporate travel managers, TMCs and suppliers will demand an efficient way of selling travel."
"Corporations are not interested in building technology pipes to individual airlines," Chacko added. "As much as they believe they can strike a fantastic deal with one or two airlines, they do not trust those arrangements enough to give up the ability to shop on the spot market. They always want to shop to see what is available in the market."
Yet fragmentation is a distinct possibility. Carriers, for example, may seek to maintain agreements with GDSs and also promote alternatives by selectively placing special fares, corporate discounts and certain inventory in some but not all channels.
"In an environment where parties are looking out for the best interests of their shareholders and customers, players in the industry will come to a rational conclusion to the question about content," predicted Cendant's Esterow. "The question is, at what point does the desire to reduce distribution costs get offset by an potential loss of turnover or sales?"
"If, in a year, we have 5 percent of the total distribution going through GDSs shifted to alternatives, that would be a lot," concluded Travel Tech's Rose, "but even a small change in distribution can have a major impact. It is a marathon and the gun just sounded."