United Airlines said three travel management companies in late April began accessing inventory and booking tickets through ITA Software's new distribution platform. The airline expects volumes to build significantly in the coming months as corporate clients and other end-users migrate to new economic models.
At the same time, G2 SwitchWorks, another emerging name in deregulated travel distribution, identified Carlson Wagonlit Travel and WorldTravel BTI among its first travel agency customers and said it added AirTran and JetBlue to its list of accessible carriers. No parties involved in these developments would clarify commercial terms or pinpoint transaction levels flowing through new-entrant systems. However, it is clear that airline action, beyond rhetoric, to more closely control product distribution is underway.
In recent industry dialogue, operators of traditional global distribution systems maintained their commitments to secure comprehensive content and offer suppliers an improved value proposition in the face of new competition. "This is a continuing extension of the posturing by airlines in the marketplace to continue to put pressure on other players," said Chris Kroeger, senior vice president for Sabre Travel Network in North America, speaking at the recent TravelCom Expo in New York. "There is a perception in the market that there is exclusivity on new technology and that is simply not the case. At Sabre, the transition from traditional systems to new systems is well underway."
The airlines, however, view use of new entrants as more of an economic strategy, at least for now, and may soon start using specialized content to favor those systems. Because large travel management companies have to assure corporate clients they will have access to complete and, in some cases, preferential pricing and inventory, some have at least given the appearance of working with ITA and G2. The extent to which these TMCs and their corporate clients gravitate to such channels, however, still is unclear.
"It is not 100 percent of the marketplace but it is enough where adoption will happen very quickly among a significant proportion of the marketplace," said Scott Brandt, United managing director of worldwide sales strategy.
He would not discuss specific arrangements with nor identify the three TMCs, "but I will say our gain-sharing program is out there in the marketplace. We fully intend to share up to $5 on a per-ticket basis with early adopters
(BTN, Feb. 7). This is a live program."
Brandt similarly would not divulge potential incentives for corporate clients using cheaper distribution channels and said such lures won't be made available until those channels are more mature. "We believe the industry is going to a content-for-economics model and the preferential content will be available in the lowest-cost channel," he said, "but to do that on a large scale, there needs to be more alternatives working in the marketplace. Otherwise, it would be disruptive to our best customers."
Should they chose to do so, airlines could soon float new offers to corporations, including additional discounts and more comprehensive access to inventory. Such enticements may be viewed in a more positive light than new fees levied—and promptly retracted—last summer by Northwest Airlines on GDS-processed tickets
(BTNonline, Aug. 24, 2004)."At United, it became rapidly clear to us as we read through the full content agreements [with GDS operators] that there was plenty of opportunity for us to differentiate content tomorrow," said Derek Lewitton, recently appointed vice president of sales for ITA Software and a former United distribution strategist, this month at an Association of Corporate Travel Executives conference (see story, page 1). "Nothing stops the airlines from tomorrow saying that if you have a corporate volume agreement with us, you have a $10 better discount in this channel or every third ticket has a $40 better discount in this channel than in that channel."
United, which has built into its financial plan the cost reductions expected from shifting volume off traditional GDSs, also expects certain travel management companies "in a matter of weeks" to begin booking United tickets through G2 SwitchWorks' new system as volumes grow through ITA Software. Like American Airlines
(BTNonline, April 27), United said short-term benefits are strictly economic, namely cost savings derived from new distribution competition, though longer-term technological advancements are expected.
"This next-generation technology is going to enable more automation of things like exchanges and refunds, and produce additional merchandising capabilities for airlines," Brandt explained. "We are excited when we talk to folks like ITA about using their technology to come up with opportunities for United that simply won't be available with the technology and data architecture of the existing players."
As discussions between airlines and GDS operators begin to shape the next wave of distribution arrangements, some travel management companies are preparing for potential fallout and positioning themselves as primary content aggregators.
"We would have been fools not to hear airline shots across the bow," said Dee Runyan, executive vice president at WorldTravel BTI, also speaking at the ACTE conference.
Runyan last week added that WorldTravel is in midst of rebuilding its transactional infrastructure and therefore is reliant on such third parties as Outtask and TRX to connect with the likes of G2.
CWT, meanwhile, also is working to integrate G2's system but has not yet begun shifting volume. CWT already has direct-connect technology in place thanks in part to an arrangement with Navitaire
(BTN, Sept. 20, 2004), which also provides technology to G2.
"This is a low-risk solution from our technology perspective," said CWT CIO Loren Brown. "G2 gives us enhancements we do not have today by making our technology more robust and international."
WorldTravel's Runyan concurred, stating "G2 is making Navitaire better. Suppliers like that because it gets solutions to market quicker."
In addition to direct connections to more carriers, G2 would give CWT and WorldTravel customers automation for such items as ticket exchanges and improved shopping capabilities via G2's integration of ITA's faring solution.
Brown said moves toward any new distribution system—CWT said it is keeping all options open to counter potential content fragmentation—should be transparent to corporate customers. The only change, he said, would be greater access to content and easier processes for booking carriers choosing to avoid traditional GDS systems.
G2's claims of efficiency go well beyond the actual transaction fee paid by airlines to GDSs, which G2 CEO Alex Zoghlin described as only 20 percent of the total cost of distribution. Another 20 percent, he said, is derived from credit card fees. G2 said its product includes a credit card "solution," but Zoghlin would not elaborate nor identify any users. He attributed the remaining 60 percent of distribution costs to "huge inefficiencies created by the traditional GDSs themselves." Zoghlin also would not identify some "early-adopting" corporate travel managers who have chosen to work directly with G2 because "automation can lower the bar in terms of making [ARC-accredited corporate travel departs] work."
The recent marketing hype generated by new-entrant distribution systems has created new tensions around the industry and even on Wall Street. Standard & Poor's Equity Research, for example, last month reiterated a 'hold' rating on Expedia parent InterActiveCorp, noting that the likes of G2 could steal share from GDS owners and online travel agencies.
Meanwhile, the Business Travel Coalition and the American Society of Travel Agents separately sent letters to the U.S. Departments of Justice and Transportation asking federal authorities to examine recent airline agreements with G2 that could lead to a degree of ownership. Both BTC and ASTA noted that DOT, when it deregulated the GDS sector, suggested airline ownership of distribution systems could present competitive concerns. DOT had said, "We will pay particularly close attention to any airline efforts to establish control over a system
(BTNonline, Jan. 5, 2004)."
G2 last week called ASTA's claims "baseless" and said any airline choosing to "hold a very small collective equity stake" would not designate anyone to G2's board, nor "direct G2's strategic planning or day-to-day operations."
In advocating new systems, major carriers won't entirely shun traditional GDS channels. They want to keep a broad range of product offerings in front of higher-yielding corporate customers who, for now, still favor online booking systems and/or agent-assisted transactions processed through Amadeus, Galileo, Sabre or Worldspan.
"If you have a network like American or United, can you afford to not be in the GDS channel?" asked Seabury Group analyst and managing director Scott Gibson, speaking at the TravelCom Expo. "The answer is no. You can't shut it off and survive tomorrow."
Carriers will try to use the threat of new entrants to influence new GDS deals dictating cheaper transactions fees.
"If GDSs wait until [existing content-for-discount] deals expire, G2 will be a bigger weapon," said Thomas Weisel Partners analyst Jake Fuller. "If they make a deal, it would retard development of G2 and ITA. You will see something in the $6 or $7 range from Sabre on fees before the end of '05." Industry sources have pegged current per-ticket GDS fees between $9 and $13.
"The GDSs were in a regulated environment for so long. You get a lot of economic distortions that go along with a regulated environment," said Dave Cush, American Airlines vice president and general sales manager, referring to incentives paid by GDS operators to TMCs. "And now, hopefully in a quick manner, we will unwind those economic distortions. Whether corporations think part of the incentive should go to them will be less an issue than whether incentives should even exist."