Op-Ed: Buyers Beware: Global Distribution Systems Are In Crisis

Carriers and other suppliers show increasing distaste for the conventional global distribution system model. It is inflexible, old architecture, that is too costly and out of step with more direct relationships.

Even with lower segment fees for full content under contracts expiring in late 2005 or early 2006, airlines are grumbling and their actions show loss of confidence in the traditional GDS channel. Legacy global distribution systems are confronting new freedom along with novel threats to their survival.

Here are examples of GDS bypass:

•One legacy carrier charges for GDS bookings, but backs off, at least for now, after being hammered by customers, agencies and GDSs.

Was this a violation of the full content agreement, or merely a reduction in GDS rebates, which are still being paid in the hundreds of millions of dollars throughout the industry? Either way, companies saw a perfidious increase in travel costs.

•Another carrier announces a new "direct connect" deal with a major GDS. This appeared to be another step in cannibalizing the conventional distribution model, suggesting this revenue stream may not have much real future. What is direct connect? Is it actually GDS access to multi-carrier inventory with marketing information data transfer and cost structure and assuming full supplier participation worldwide? Each new pipe takes new carrier-by-carrier investment risks regarding common data collection. It appears to boil down to the costs and fees suppliers pay for the value they perceive when their lowest cost channel is and will continue to be their own Web sites. Suppliers understandably want to be everywhere, but not at exorbitant GDS fees. It always seemed absurd that it would cost $10 to $12 to issue a $70 ticket through the GDS.

•Carriers are posturing to offer exclusive discounts, possibly as an inventory shift, to self-booking companies owned or affiliated with GDSs. However, no one should bet on a lot of cost reductions being passed through to corporations. On direct-connect deals, the companies "benefiting" did not see a pass through of cost reductions achieved by suppliers from the travel management company, although there could be benefits on leveraging suppliers. When suppliers shift costs to the TMC, the TMC moves in a nanosecond to pass that back directly, as they have for card fees when the merchant model changes. This is a reality. Everyone is scrambling for net returns.

If costs drive too many carriers away from GDS distribution, the GDSs have less content to sell. Their challenge is to change their model radically and quickly to a strategy that allows them to remain the best single source of content, even if it means cannibalizing their traditional revenue stream.

The new strategy probably is not rebating segment fees. Buyers producing the largest volume of segments want and expect these back on their tickets, like overrides or commissions when they were a revenue stream for agencies. Suppliers saw commission rebates to corporations as proof agencies really didn't need them.

It remains to be seen how much of a haircut travel agencies will take on incentives, but they may be bald soon.

Discriminatory use of inventory and selective participation could be a real burden for companies and their travelers who need quick, easy and accurate access to full content, regardless of channel. Will a repriced model with less content result in higher user costs? Users have little nostalgia over the global distribution system. It simply must be the best outlet for low-cost offerings and full content, or it will be replaced.

Will low-cost carriers jump into the GDS game? It is a tall order for a GDS to prove that value equals cost, especially when other options proliferate. It may come down to whether the legacy GDSs can get close to shelf space for a wider audience than low-cost carriers attract on their own at their web sites or via other channels.

There is an industry crisis on distribution. Practical solutions are needed in next few months, not at the end of the interim full content deal in 12 to 18 months. Companies need to press their TMCs for their strategies for full content. They should demand contractual assurances from their preferred suppliers that their lowest rates will be available through a distribution model that makes sense. Suppliers ignoring customers will suffer, as recent events confirm. The best and only solution is to work through issues of pricing and access transparently and fairly for all users.

The last result a company can tolerate is content that is "now you see it, now you don't," based on short-term battles over GDS pricing. TMCs offer "infomediary" value in helping both parties and getting paid by the customer only for real value. Clearly, all this is hard work, and we had better be up to the challenges.

John Caldwell, an attorney, is principal of Washington, D.C.-based travel management consulting firm Caldwell & Associates.