Back in 2006, the major airlines were able to squeeze lower distribution costs from global distribution system providers Amadeus, Galileo, Sabre and Worldspan. In turn, the GDSs reduced incentives back to travel management companies, and the TMCs turned to their corporate customers to replace those revenues--raising ticketing fees dramatically and raising the ire of corporate travel managers around the globe. The airlines collectively pulled off a coup by passing costs previously borne by them to the end user, the corporate traveler. Will there be more of the same resulting from the negotiations beginning now?
Most of the agreements between the GDSs and the major U.S. airlines expire in 2011. United Airlines already has extended its agreement with Sabre until 2013, and Delta Air Lines' contracts run until 2013, but the rest of the carriers and GDSs are just beginning to negotiate their contracts.
Obviously, the world is a different place now than in 2006. For one thing, there is one less GDS now that Worldspan has been absorbed into Travelport. Clearly, the economic climate is radically different--business travel (which represents the majority of travel booked via the GDS) is in freefall with little recovery expected in 2010. Airlines also don't have the threat of adopting an alternative distribution system like they did the last go-round, now that GDS competitor G2 Switchworks has been shut down and auctioned off to none other than Travelport.
As to be expected, the major airlines are out to further reduce their costs in this next series of upcoming negotiations. Two major airline CEOs (from American Airlines and Delta) both commented during their Wall Street analyst calls in April that GDS fees were a future cost-savings area of interest. Both notably suggested that travel agencies should actually pay them for content rather than the reverse equation currently in place. Posturing? Maybe, but in an industry battling costs largely out of their own control, distribution is an obvious target.
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Meanwhile, precedent may have been set in Europe, where easyJet levies fees on bookings through GDSs as a way to subsidize its participation in such channels. Lufthansa used a similar approach as it negotiated with GDSs. Those GDS operators that played ball were able to protect their agency subscribers from new fees charged by Lufthansa. In the case of Sabre, the GDS struck a deal that provides its agency subscribers with access to all of Lufthansa's fares provided those agencies participate in a new Sabre program that levies a €1 per segment fee.
The GDSs are obviously looking to prevent further erosion of their pricing models, particularly when overall business travel, long their bread and butter, is down. Moreover, they must ensure their systems can accommodate airline strategies to unbundle products and drive incremental revenue through fees on such traveler options as checked baggage and preferred seats.
Meanwhile, the TMCs are also probably not in a position to absorb further changes to their economic models without replacing lost revenues from some other source.
Clearly, distribution costs may have to become part of the equation during contract negotiations with the major airlines. Preventing or mitigating another fee pass-along down to corporations should be paramount in any travel buyer's thinking. Hoteliers may get into the act as well, as this was another sector from which the GDSs sought to replace lost airline revenue. Hotels have seen their GDS segment fees rise as the airlines' have fallen.
For airfares and room rates purchased via GDSs, corporations require not only the lowest-cost options, but also the ability to compare prices and products across all relevant suppliers, audit their purchases and the available inventory in the market, and create comprehensive reporting.
For all these reasons, corporate travel managers and procurement specialists will need to follow these negotiations closely as they unfold, carrier by carrier and GDS by GDS.
Tom Botts is a partner with strategic advisory firm Hudson Crossing.