Global distribution system providers are competing outside of their traditional geographic comfort zones, raising the overall level of inducement compensation and jockeying for position before the next rounds of negotiations with travel management companies and airlines.
GDSs assert the diversification of product and service offerings are today's differentiators. However, inducements still are an important part of the overall economic model, as they enable a relatively balanced sharing of the costs between travel suppliers and buyers.
Travelport during its second-quarter earnings call last month noted inducements paid to travel agencies and commissions paid to national distribution companies increased 2 percent. On a unit basis, inducements were up 7 percent, with one-third attributed to "unfavorable currency," according to executive vice president and CFO Mike Rescoe.
Travelport CEO Jeff Clarke added, "Most of these inducement increases are the year-over-year impact of contracts that were signed a year ago, particularly in the online space. One of our competitors, in winning a large online travel agency, significantly changed the dynamics of OTA business and there was a significant increase in inducements in that segment as a result. That became the new market clearing price. It collapsed the margins of that segment of the industry and it moved share for them, as such that it is now the clearing price for other OTAs. That is effectively what happened. That increase on a per-unit basis is very much tied to a specific case of very large OTAs."
A Travelport official later confirmed that the "competitor" Clarke referred to is Sabre and the online travel agency is Expedia.
Meanwhile, several travel management company sources have indicated that the ante is being raised in the corporate travel space as Amadeus works to garner a stronger foothold in the United States, where Sabre has enjoyed historical marketshare dominance.
Amadeus recently expanded its U.S. infrastructure, with the development of a centralized Chicago-based operation led by IBM veteran Dwayne Ingram
(BTNonline, Aug. 11).When asked if Amadeus was showing particular aggressiveness in the region, Amadeus North America president and CEO Kay Urban said, "We're pretty much on par with what I see in North America. We do competitively respond and there is a very competitive attitude with regard to winning share in North America these days, or retaining share in the case of some players. While we continue to see and are very aware of the desire for downward pressure on agency incentives, despite the last several years, when there has been a lot of pressure in this direction, it is still at least a component in agencies' selection of IT partners."
Sabre Holdings chairman and CEO Sam Gilliland said there was no spike in inducements, but there has been an upward historic trend. "Certainly, we have heard that Amadeus is placing some more emphasis here," he said. "Travelport already had a large presence in the U.S. just by virtue of the combination of Galileo and Worldspan. We feel quite good in terms of our competitive position and we will compete aggressively in this marketplace to maintain that position."
Noting Sabre's North American marketshare is at its highest ever, Sabre senior vice president of North America Chris Kroeger said, "It's a marketplace where we historically have had a leadership position and competitors both traditional and new have been aggressive in trying to tap into the market."
Amadeus' Urban, however, said inducements are not a magic bullet. "While I spend all my time looking at growing in North America, I do not bank on or believe in incentives as the way to do it. I have to accept that they are part of the commercial arena that we operate in, but to me, what else I bring for the longer term is much more important. But we will respond in kind and in fact we do. That is the absolute truth."
Amadeus isn't alone in its global pursuits. While they've been pointed at for North American aggression, other GDSs are working harder to gain share in markets Amadeus historically dominated. "Beyond North America, I see very competitive attitudes with regard to all the GDS companies," Urban said. "There are very aggressive stances in particular areas on incentives. That's tied to where companies wish to grow."
"All of these guys are trying to even out their portfolios," said BCD Travel executive vice president of products, technology and supplier relations Dee Runyan. "All are talking about being global because that mitigates a risk with airline negotiations because those negotiations are with global airlines. They want to make sure that they have leverage during those discussions."
The mega TMCs, which use multiple GDSs, said there have been no recent changes in their economic model, as they are in the middle of multiyear contracts and GDS inducements paid to agencies still are an important pillar.
"We expect to be paid for the value that we create for the GDSs," said American Express Business Travel senior vice president of global supplier relations Andrew Winterton. "Nothing has substantially changed for that dynamic. We don't anticipate any material change in how much we spend with them and how much they spend with us."
What has changed are the agreements surrounding the complex integration of multiple GDSs, technology products and services, as the GDS providers position themselves as total travel technology suppliers.
While many TMC-GDS contracts have staggered expiration dates, unlike the major U.S. airlines, inducements' weight in the TMC revenue model differ. Most of those deals range between 1 percent and 3 percent of total revenues.
In the next round of U.S. GDS-airline negotiations and the fallout of potential GDS deregulation in Europe, a shift in inducements could see prices rise again for some travel buyers, much like in 2006.
"There is more risk related to GDS economics than there has been in the past," said Carlson Wagonlit Travel executive vice president of global supplier management Mike Koetting. "TMC margins are small enough that almost any disruption to our revenues ultimately impacts our ability to service, or requires a cost increase to, our customers."