US Airways last week convinced two global distribution system firms to react aggressively to airline efforts to bypass them.
Sabre and then Cendant subsidiary Galileo International introduced similar three-year programs that commit participating carriers to listing virtually all fares in the GDS in return for 8 percent to 10 percent lower segment fees paid to them—unprecedented developments that cut such charges to year 2000 levels.
A bold response to airline investment in non-GDS channels, it also means Sabre was the first to flinch in its stare-down with some carriers—though it is yet unclear whether the offer is too little or late. Both American and Northwest already indicated they would not participate in the Sabre program, but mega travel agencies American Express, Carlson Wagonlit Travel, Rosenbluth International and WorldTravel BTI each issued statements of support.
Sabre said it would sacrifice about $40 million in 2003 revenues if all eligible carriers participate, a group that includes all U.S. majors except Southwest Airlines. However, Sabre indicated it could raise its overall 2003 pricing, perhaps making up the difference. Even level prices could compel other airlines to participate.
US Airways, the bankrupt major carrier that does not own a part of Orbitz and has a multibillion-dollar information technology agreement with Sabre, originated the idea in general terms and now is the first participant in both the Sabre and Galileo programs.
"We were encouraged to look at this after American came out with EveryFare and after Northwest announced their agent site," said US Airways senior vice president of marketing and planning B. Ben Baldanza. "The proposal we brought to Sabre was less specific than the one we signed with them. We brought the same concept to all GDSs at the same time. Sabre was first to jump, but we still are talking to everyone else and seeing mixed reactions."
Amadeus already said it would not participate "at this time." Worldspan president and CEO Paul Blackney last week said, "it's too early to say. We've looked at that kind of thing and our general take is it's not necessarily the be-all and end-all. We are going to do a yeoman's job in our time of coming up with the right answer. I understand the urgency that some suppliers feel, but we won't react to EveryFare or US Airways/Sabre."
With US Airways onboard, Galileo now is discussing its program with other carriers. "This option addresses airlines' interest in lowering costs and increasing volume, and our interest in restoring valuable inventory to travel agencies to provide consumers greater, unrestricted choice," said Sam Galeotos, president and CEO of Galileo International and head of Cendant's travel distribution services division.
In addition to providing complete content, said senior vice president of enterprise marketing Scott Alvis, the program also boosts the predictability of Sabre's revenue by turning 30-day commitments by airlines to participate at the GDS' highest level into three-year commitments. Sabre and other GDSs also are seeking to lock up travel agencies in longer-term deals.
American's EveryFare program enlists travel agencies to pressure GDSs for lower fees by passing to clients some part of AA's GDS costs
(BTN, Oct. 7).For corporate buyers, unanswered questions include: How much more attractive is US Airways' published or negotiated pricing—if at all—now that it is fully participating in two GDSs? Will AA be more flexible in discounting unrestricted fares to EveryFare participants? How do GDS incentives fit into the program and which of these models most threatens those? In turn, how are agency transaction fees impacted?
While changes in the industry's economics are happening too quickly for buyers to put a foot down, suppliers agree their clients should not be complacent—particularly the ones with large volumes that can sway vendor decisions.
Supplier GDS costs ultimately are paid for by customers, reminded Worldspan's Blackney. "This may not necessarily be an event-driven decision for them, but more a strategy decision," he said. "I don't think travel managers really realize that they're going to be paying for it in the future maybe more directly, and I don't think the travel manager is necessarily powerless." Currently, it is airlines that pay directly. American has said GDSs cost it $400 million annually, while the figure is $350 million for Delta, $300 million for United and $125 million for US Airways.
Initial statements from most megas and the National Business Travel Association were supportive of the new Sabre program. The American Society of Travel Agents also commented favorably, despite Sabre's claim the program will—according to documents shared by Sabre analysts—"dampen" the flow of GDS payments to agencies and give Sabre "more leverage with agencies."
After noting that "we're not saying we're not going to increase prices" charged to suppliers, Sabre chairman, president and CEO Bill Hannigan on a teleconference with Wall Street analysts this month discussed a handful of factors that could impact pricing. He then said GDS incentives to agencies "would have to be throttled. If there's less money in the system, there is less money to be spent." Currently, Sabre said, such payments are running about 5 percent higher year over year.
According to Hal Rosenbluth, "That won't happen for major travel management companies like ourselves. We have a Web fares solution, but a lot of smaller agencies lost their value proposition to Web fares and people booking directly, so they may be willing to shoulder some of" a reduction.
The megas argue that incentives—roughly $1.50 per segment for big agencies, though Sabre said they remain under $1 on average—are bigger when applied to the agency's overall volume, implying that corporates taking on their own GDS contracts would generate less in incentives than their agency can pass through to them.
Further, noted Rosenbluth, "It's a revenue stream that helps agencies offset some of the cost of having low transaction fees. Without them, the transaction fees will go up."
In very similar announcements, both Galileo and Sabre said their programs require participating carriers to provide other special features and promotions available through other GDS and non-GDS distribution channels. The only exception would be "opaque" fares that do not identify the brand before the traveler buys it, à la Priceline.
Some carriers are likely to balk at such requirements, which mean—among other things—that "if we give bonus miles at nwa.com we'd have to give Sabre agents bonus miles," said Al Lenza, Northwest vice president of distribution planning. "We're not interested in what we've seen so far."
Noting that within two days, 1,200 agencies signed up for Northwest's ARC booking site
(BTN, Oct. 7), Lenza said: "I can't imagine why we'd tie up in a world that's changing the way it is. The answer is not to reduce by 8 percent and then ask for more than that back in different ways. We'll watch what our competitors do and we'll never say never, but when airlines study the fine print, I can't imagine that they wouldn't reach the same conclusions."
"I expect additional, more supplier-friendly models to emerge," added Lenza, citing Northwest's new direct connection with Orbitz that saves the carrier $1 per segment.
In return for its commitment, US Airways expects to save $4 million to $5 million annually on its $60 million Sabre bill by paying a segment fee fixed for three years at $3.85 and a cancellation fee set at 14 cents.
Baldanza said the carrier does "not have a sense" of how many more transactions could Sabre gain by listing additional content. That largely depends on whether the carrier rolls back some of the Internet-based discounts it has helped proliferate, now that it must offer all fares to Sabre agencies.
AA may not roll back such fares as it would only be making them available to select agencies that join its program. For example, the carrier this month clarified to buyers that its aa.com-based 5 percent discount off fully unrestricted fares would be available to EveryFare participants—in addition to discounts they already earn.
Meanwhile, Baldanza did not expect participation in the Sabre and Galileo programs would "preclude us from working with TQ3 in an EveryFare-type model." According to TQ3, other carriers responded immediately after AA announced EveryFare, though discussions are ongoing.