GDSs Boost Fees - 2001-01-15

<B>GDSs Boost Fees</B>
<I>Buyer Locks Down Channel-Based Airline Deal</I>

By Jay Campbell

Parker Hannifin has negotiated with two airlines a bigger discount for tickets bought through Sabre BTS than through its own travel agency.

At first glance, observers guessed that airlines are sharing with the Cleveland-based manufacturing firm the $1 savings on GDS fees they have been getting from Sabre for BTS bookings, but travel manager Judy Weber said the discount is much higher than $1 per booking.

In fact, Sabre will drop that channel-based structure starting Feb. 1, a month after Worldspan expanded its own discount program. Also by Feb. 1, all four GDSs will have substantially raised their overall prices.

Parker Hannifin's new tiered structure also is unrelated to the non-GDS connections between suppliers and buyers planned by Sabre subsidiary GetThere, which now manages the Sabre BTS product. That also will prompt airlines to discount more heavily for online bookings. Instead, the Parker Hannifin deal is all about compliance, which surprised many experts. By all accounts, it is a first-of-its-kind arrangement.

In return for the two-tiered discount structure, the company should be able to improve on its 78 percent compliance rate, with partial thanks to biased displays on certain routes, and thus offer the carriers more market share. Furthermore, if and when Parker Hannifin meets the market share goals it has negotiated with all three of its preferreds, the two that offered the two-tiered structure will get the remaining business.

For the preferred airlines, it also helped that Parker Hannifin had dropped to three from four domestic preferred carriers.

With Parker Hannifin's lowest negotiated fares available online, all of the company's groups that were made aware of the scenario, five so far, have or will mandate the use of BTS for domestic travel. A companywide domestic mandate is expected within the next two months, and Parker Hannifin hopes to report 70 percent usage by the end of June.

Already, usage has reached 60 percent following the rollout of the new prices.

"There was a little give and take" between the online- and agency-booked discount levels, Weber said, but she emphasized that the arrangement does improve her company's overall airfare savings. She would not reveal exact terms.

Neither GDS nor agency relationships were changed for the program. Parker Hannifin is a cost center operating on a fee basis with its agency and uses net fares with all three preferred domestic carriers.

Though it was "kind of a headache for everyone," Sabre programmed into its Snap pricing system two distinct tour codes for Parker Hannifin's single pseudo-city code.

To support its commitment to the carriers, Parker Hannifin risked disturbing its travelers by filtering airline choices on 50 routes. "Some travelers are not happy about it," said Weber. "Those routes are places where either the airlines need the business or, say Cleveland-Chicago, where there's no reason to take another carrier and the market is competitive." For Cleveland-Chicago, she said, the system shows just two carriers.

"We had a city pair where we were trying to move share to one of the three carriers, but the fares were higher for that one and the traveler looked into a cheaper connecting flight," said Weber. Cheaper flights would be fine, were it not for market share commitments.

Industry sources were surprised by the deal, but concluded that it makes sense for certain configurations.

"I've heard rumblings that some travel managers have said to the airlines that they can better drive bookings for a negotiated vendor agreement using a booking tool," said Chip Mahan, director of technology sales for American Express. "And some tools will alert you when you've met those contractual targets and will reset for different programs."

Three corporate travel buyers who recently bought the GetThere system--as well as a long-time customer--said they had never heard of such a two-tiered pricing arrangement.

Towson, Md.-based Black & Decker's director of travel and meeting services, Pete Buchheit, was a bit skeptical as to how such a program would fit his needs since his company's compliance already is very high. But Colleen Guhin, global travel manager at ON Semiconductor in Phoenix, said she would approach the airlines about it in an impending round of airline negotiations.

Dorian Stonie, Internet travel technology manager for Hewlett-Packard in Palo Alto, Calif., said, "This is something very new and interesting to hear. I always love to see these creative ideas and programs coming out. Of course, GetThere or any Web-based product by themselves do not move market share--it depends on how you configure them."

A more solid guarantee of market share is the only advantage of such a tiered arrangement for an airline, Mahan said, short of bookings that are not subject to escalating GDS fees.

On that score, Worldspan on Jan. 1 implemented a lower charge to travel vendors of $1.95 for bookings made through any corporate online tool. Called Corporate Online, the program replaced CorporateDirect, in which airlines that helped Worldspan sell the Trip Manager system would be charged lower fees for bookings in it (BTN, Oct. 2, 2000).

Worldspan claimed the Corporate Online program makes it "the first" GDS to answer "a long-standing call for reduced supplier costs and a more transparent pricing model."

The program includes a caveat--the lower fee only applies "where Worldspan is not providing productivity pricing credits or paying other incentives to its users."

Due to that requirement, Worldspan senior vice president and general manager of worldwide e-commerce Sue Powers said very few clients will be able to take advantage of the program right away.

"A lot of corporations and airlines are asking for transparency in pricing," she said. "So we are anticipating that they and the travel management companies that want to change their current business models would be proactive."

GDS incentive agreements, as well as airline deals, often are renegotiated annually, Powers noted. She said such remodeling would "really change the entire cost structure of booking travel," and advised that "now is the time."

According to Cindy Heston, a Worldspan customer and manager of worldwide corporate travel for Thomson Consumer Electronics in Indianapolis, "There's no reason why travel managers can't do the math and consider dropping the productivity credits if the benefit from all vendors outweighs the loss, but be sure the agency is involved."

Cynics called the cut in online bookings a way to mask Worldspan's overall price increase. "The idea might be an attractive way of running the business, but it's tied into a very complicated general price increase," said GDS critic Nick Bredimus, whose Dallas-based Bredimus Systems sells distribution management software to airlines.

Indeed, the Corporate Online announcement came just hours before Worldspan unveiled a restructured matrix of airline pricing for all bookings. Like its competitors, Worldspan raised fees significantly.

Just how much all the GDSs' fees went up depends largely on a given supplier's methods of distribution, but generally prices rose between 6 percent and 9 percent.

Speaking to the complexity of GDS pricing, Bredimus said: "The formulas are ridiculous. This is not supposed to be rocket science."

"It isn't rocket science," said Galileo's Steve Diffley, with no knowledge of Bredimus' comment. "We thought our pricing was very easy," added Diffley, who this month was promoted to vice president of airline sales.

In the end, the pricing hikes are "the highest that I can recall other than when Galileo tried to institute three changes in one year and people didn't go along with them," said Bredimus. "They're very bold about it, and there's no justification. If anything, the underlying technology costs have gone down. The GDSs need to figure out some other way to run those businesses because the only thing they can think of is to raise prices. The airline reaction will be strong."

Northwest vice president of distribution planning Al Lenza said, "It's more greed," referring at the time to Galileo's increase. "We will work 6 percent harder to support Internet direct efforts. It's a vicious cycle and, frankly, we can't continue to absorb increases that are double the rate of inflation."

But the airlines' weapon in the corporate arena, so-called direct connections either with or without an intermediary such as E-Travel or GetThere, are not a very potent threat at the moment.

For GetThere, which announced plans for direct connections last May, there has been no lack of interest among vendors. But, "The first airline probably is a few months out from here," said vice president of product marketing Mark Orttung. "We are doing some testing. It will probably be the car companies that go live first, and we'll firm up their schedule in the next month or so."

Meanwhile, E-Travel has established direct links with Hertz and Pegasus, and work with Continental now is addressing some "back-office issues," said an E-Travel spokesman. Via World Network has several airline links but just one client, its own parent company, Anderson Consulting.

While Sabre's elimination of the BTS incentive for vendors to push online booking might seem like a blow to online booking, Galileo's Diffley said his company will consider something similar when it soon releases the 2.0 version of its booking tool. Also, Worldspan is guaranteeing its incentive for two years.

The airlines clearly remain supportive of the corporate online channel, as evidenced by the Parker Hannifin deal. Still, it remains to be seen how much that channel will save them.