Low-Cost Carriers Raise GDS Presence

Chances are that few U.S.-based corporate travelers have heard of Fly540, a self-proclaimed low-cost carrier whose network of turboprops extends to only a handful of East African countries. Yet, the carrier in March joined scores of others that in recent years have embraced GDS distribution, making their fares available through corporate channels for the first time. Thanks to reduced costs of distributing through the GDS, a need to cultivate new business outside of home markets and the opportunity to put their fares in front of higher-yielding passengers, carriers that once shunned distribution outside of direct channels increasingly have brought their content to the global distribution systems.

"Low-cost carriers continue to adopt the GDS channel," Travelport CEO Jeff Clarke told investors during a quarterly earnings call last month, naming Fly540 as one of the most recent to join the "now 60 LCCs that book with our GDS." Clarke said that category of airlines "is now 5 percent of air segments from really about zero a few years ago."

Amadeus executive vice president of commercial Philippe Chérèque during the Masters Program in Washington, D.C., earlier this year similarly said such growth since has been pronounced.

"Three years ago, if you looked at Amadeus, we had close to no low-cost carriers in the GDS," he said. "If you look at 2010, more than 70 percent of the content of the low-cost carriers will be sellable in the GDSs."

Whether or not "low-cost carrier" is appropriately applied nomenclature, many carriers that industry participants lump into that category, including EasyJet, AirTran, JetBlue, Air Berlin, Virgin Blue, GOL and WestJet have embraced the GDS channel in some form. "If you look at the 10 or so largest airlines that would fall in that category, nine of them participate in Sabre in some form or fashion," said Chris Wilding, Sabre Travel Network vice president of airline distribution marketing.

Wilding was quick to note "a lot of ambiguity as to the definition of an LCC," and identified direct distribution as one key attribute of the low-cost model, along with point-to-point flying, few or no amenities, a single cabin class and a single aircraft type. "Airlines may start out that way, but once they get a little bit bigger and more complexity enters their model, a lot of the core tenets of an LCC get compromised because they need to grow," Wilding said.

GDS distribution is simply part of that "maturity cycle," he added. "For good reasons, new carriers focus largely on their direct channel. They have a couple of routes close to their home base, and it's a good way to get their feet in the ground and build their brand in their home market, but they pretty quickly realize that limits their growth potential and that they need partners to help them distribute."

Amadeus director of airline distribution strategy Robert Buckman also cited a shift in the pricing model to what he called "value pricing,"—also called home-and-away pricing—has attracted more new GDS entrant carriers. Under such economic terms, GDSs charge carriers less for fares booked within home markets where their direct distribution presence is likely to be stronger.

Lured by reduced GDS fees from redrawn economics forged between network carriers and distributors, once direct-only JetBlue re-entered the GDS in 2006. Then-CEO David Neeleman said the benefits of GDS distribution finally outweighed the costs. JetBlue quickly saw the benefit of that channel, boasting higher yields through the GDS—fares that were $35 higher per segment—and finding that about two-thirds of that business was new to the carrier, not just a more expensive cannibalization of web bookings.

JetBlue executive vice president and chief commercial officer Robin Hayes said it wasn't clear if that premium still was there. Though GDS fare yields from traditional, brick-and-mortar travel agencies were higher than those through direct channels, he said, the online-originating agencies are another, more complicated story. "As we look at our business with the online agents compared with what we see through jetblue.com, we're not seeing a yield premium. Secondly, a lot of that traffic is just replacing what we'd get through jetblue.com. That area of online agencies is an area we need to spend more time looking at."

JetBlue this year continues to see an increase in GDS bookings, Hayes said, thanks in part to better connectivity through a new reservations system, which has taken share from direct channels. "It's important to us that we do remain fundamentally a direct-booked airline, and we're going to be focused on which channels of distribution add value to us and those that maybe replace what we get today and make some adjustments," he said.

Though growing, the penetration of "low-cost carriers" in the GDS remains disproportional to their overall market presence. Worldwide, Travelport's Clarke said LCCs "represent 20 percent of airline capacity by seats," but only "5 percent of our GDS segments in 2009." Buckman said such airlines represent roughly one-third of U.S. and European air travel, but only a fraction of that traffic is booked through the GDS. Part of that is attributed to carriers that simply don't participate—Ryanair is an example—others that offer only minimal content through the GDS, like Southwest, and others that have installed barriers to book through the GDS, such as EasyJet's GDS booking fee.

"How they operate and distribute their product matters," Buckman said. "We have seen carriers that have taken a low-cost approach to distributing their products through the GDS. That low-cost approach and those less-technical approaches will yield lesser results. But where carriers invest in harmonizing their product offering with the procurement process that is widely adopted by corporations and travel agencies, they have seen tremendous growth—more in line with legacy carriers and more in line with their overall marketshare."

Even with those gaps, there is more LCC content through the GDS now than ever, GDSs said. Some see the fare availability issue as largely resolved. Doug Debaltzo, Bank of America senior vice president and corporate travel supplier manager, said, "What I'm hearing from my traveler base now is not so much about airfare content and our travelers being able to find low-fare content elsewhere. I am hearing increasing noise in the hotel space."

GDS executives agreed that, once in, carriers rarely leave the GDS. "They continue to see the value and we continue to have some hard negotiations with some of them, frankly," Sabre's Wilding said. "There are discussions about economics and price points, but you don't see big carriers pull away from the GDS."