US Airways late last week followed Northwest Airlines' recent precedent of signing Sabre Holdings' global distribution system to a five-year agreement through which it will provide full content, representing the first new Direct Connect Availability agreements in the deregulated U.S. GDS environment.
Although no other major carrier as of press time had followed Northwest and US Airways in signing with any of the four major GDSs, sources said the deals are accelerating contracting efforts. To some the deals are the knell for the end of alternative distribution players' potential relevance to the corporate market at large, although airline executives were quick to differ.
Instead of waiting for the current contract to expire this summer, a Northwest spokesperson said the deal "is effective as soon as it is approved by the bankruptcy court." US Airways last year signed a one-year extension through October 2006
(BTN, Aug. 1, 2005), but said the new deal takes hold immediately.
Northwest, US Airways and Sabre contended the agreements make economic sense for their operations, but sources said in the end the deals would mean higher costs for corporate travel buyers. Tom Wilkinson, senior vice president for Partnership Travel Consulting, said lack of transparency would make such increases hard to assess.
"None of the GDSs have been known to reduce the segment fees they pay agencies," PTC's Wilkinson said. "These costs are going to continue to go up for corporate travel managers even though they stay invisible."
The agreements provide that the carriers will continue to display all published fares in Sabre's global distribution system for an undisclosed transaction fee, but the terms—not disclosed by the carriers and Sabre—also include new partnerships between the carriers and Travelocity.
"There certainly are some aspects of Northwest's and US Airways' Web sites that Travelocity is powering with its own content, but the rest of the aspects of these deals are confidential," Sabre chairman and CEO Sam Gilliland said last week during the company's fourth- quarter earnings call. Travelocity will become US Airways' "exclusive content supplier" for its Web site. Through the US Airways agreement, Sabre also gains for the first time full content from the America West brand, which merged with US Airways last year.
Furthermore, Northwest signed the deal concurrently with the settlement of litigation sparked by airline's unsuccessful 2004 attempt to levy fees on travel agent bookings made through GDSs.
"It's fair to say that the parties wanted to put the litigation behind them. Some of the things in the litigation involved issues relating to our business relationship. It was just a natural effect," said Al Lenza, Northwest vice president of distribution and e-commerce. "Ironically, the fact that the litigation was out there might have played a contributing role in perhaps getting there before other carriers. If you're going to establish a long-term business relationship on terms that we think work for us, then settling disputes is a natural part of entering into that business relationship."
While most airlines as part of their DCA agreements paid GDSs about $10 to $11 per ticket, many industry sources indicated that legacy carriers wanted to see those fees drop to between $6 and $7. "Without giving specifics as to the deal itself, it's our objective to get the cost as low as possible," Lenza said. "Numbers in that range have been bandied about by others. It's our objective to get even lower than that and it's an extended process to get there."
Although US Airways would not say whether the pricing got into the range many airlines were looking for, Scott Kirby, executive vice president of sales and marketing, told BTN, "we are happy with the economics."
Meanwhile, Sabre last week said more than 250 carrier agreements are effective for 2006 pricing—of which non-DCA carriers are providing full content for one-year contract terms. President of Sabre Travel Network and Sabre Airlines Solutions Tom Klein said overall pricing for such carriers had gone up. The company last week also said that total revenue last year jumped 18 percent over 2004 to $2.5 billion and expects another 15 percent increase in 2006.
To some extent, airlines used the threat of such alternative distribution channels as G2 SwitchWorks and ITA Software to help encourage the Amadeus, Galileo, Sabre and Worldspan GDSs to deliver more favorable terms. While airlines maintain that coming to financial arrangements with the GDSs does not preclude GDS alternatives—often called GDS new entrants or GNEs—from being relevant to the broad corporate market, others disagree.
"Since GDSs are paying the agencies to use their product and will have all of the content," Wilkinson said, "to the agency, the price of the GDS is considerably lower than the price of a GNE. It makes the GNEs look like they don't have a whole lot to offer, to be blunt. The airlines, whether they will say it or not, have effectively eviscerated one of the key selling propositions of the GNEs."
However, such carriers as Northwest, Continental and US Airways said they will work with any distribution providers, if the technology and the costs are right.
"It's been our stated objective that if we could get economics that are competitive, then we would want to be in all the distribution channels, so the corporation and the travel agent can choose how they want to purchase tickets on us," Lenza said. "It's our objective to reach as many of those agreements as possible. We now have one with G2, we now have one with Sabre that assures full content. We're very close to ITA and FareLogix and we are talking to the other three GDSs. It's our objective, if we can get to the right business deal, as we did with Sabre, to reach those agreements. Whether we will remains to be seen."
"I don't know that it's bad news for them," said US Airways' Kirby. "It's certainly good news for customers and travel agents and means that G2, ITA and the other GNEs have to compete on the quality of the product and not price."
Continental also said it was committed to its relationships with the alternatives. "Even if we're able to reach an agreement with the major GDSs, and we hope that we'll be able to get there, I still think there is a place for the alternative solutions," said John Slater, Continental managing director of distribution and electronic commerce. "It will be shortsighted for us to ignore them once we've signed these deals because we need more competitors in this marketplace. The angst that's gone into negotiating these deals shows the playing field needs to be distributed more evenly. Having too much power in the hands of a few does not lead to very good competitive dynamics."
All the major GDSs and major airlines have indicated they are in the midst of negotiations to forge similar content-for-discount agreements.
Lenza said Northwest continues to work on renewing deals with the other GDSs, which may happen sooner than anticipated. "This announcement has triggered a flurry of activity," Lenza said. "I'm optimistic that things will move along faster than perhaps we thought before and we may be able to do something before the expiration dates."
"We're in productive discussions with the airlines you'd expect us to be talking to at this point, and we're tracking pretty closely to where we wanted to be," said Sabre's Gilliland. "We said we expected we'd get deals done in the late part of 2005 and early into 2006. That's what we're doing, and we continue to work through negotiations with a number of other carriers. The other thing I would say is, we're being patient. We're interested in getting to a good place with each of these airlines, that they feel good about the model that we're pushing forward."
While sources expect all major carriers and GDSs to follow suit, it is unclear what shape the deals will take, how long terms will last or what financial terms will be involved. Given the deregulated environment, the terms of carriers' deals will vary.
"I don't know that it's a slam-dunk that everybody's going to do the same thing," said Continental's Slater. "The DCA3s may have had differences, but from things that I saw afterwards it looked like they were pretty close to one another. The thing here is that deals will be different."
Chris Kroeger, Sabre senior vice president of North America, told BTN late last year that the new deals could foster new relationship models. "DCA three-year agreements obviously have terms to them and as those expire, we are in conversations with each of those airlines as we speak," Kroeger said. "There are lots of things we consider, whether it's value-based pricing elements or this holistic view, there's lots of different things we can consider with those airlines and we're confident we can establish the relationships with those airlines as these agreements come up."
David Falter, newly appointed Galileo Americas president
(see story), said, "We're very active. Months away is going to be here tomorrow. We've been in active conversations with all of our major suppliers and feel very good about how those are going. Maybe the timetables are even going to change. The Sabre announcement really surprised us a little bit, but it's a good thing for both companies."
Yet, Continental said it would take its time to secure the right deals, with the right distribution channels. "When you see how much the distribution playing field has changed over the past three years, imagine how much more it's going to change over the next five," Continental's Slater said. "So you had better get a good deal going in because you're going to have to live with it."