The major network airlines' recent decisions to join the Sabre Direct Connect Availability Three-Year Option encapsulated a new course for airline distribution cost-savings strategy, renewed relevancy of global distribution systems and partially solved the contentious issue of access to supplier content that for years has plagued corporate travel managers.
Sabre's program—which trades discounts on fees paid by airlines for full content in the GDS, including what had been Web-only fares—not only better positioned the company against airline-owned sites and Expedia, but also swayed airline thinking. Considering the guaranteed GDS discounts—also available through a Galileo program similar to Sabre DCA—as well as a chronic inability to raise fare levels, major carriers have surrendered some big weaponry in their channel-shift battle.
"We have created more equilibrium in the marketplace, which translates to a dampened channel shift, because the airlines would be less incented to think of one channel as higher cost, irrespective of the fact that it is higher yield, than other channels," said Sabre Holdings chairman and CEO Bill Hannigan.
The direct connect concept, however, is far from dead, as evidenced by the success and recent expansion of Southwest Airlines' Swabiz corporate booking portal—admittedly offered by a different breed of airline—and Carlson Wagonlit Travel's announcement earlier this month that it is offering direct connections with American, Continental, Delta and United airlines.
American late last month became the last of the Big Six to sign up for Sabre DCA. Continental, Delta and Northwest each enrolled earlier in July. United joined in April, following US Airways, which helped craft the program last year
(BTN, Oct. 28, 2002)."It is a beautiful thing," said Marilyn Townsend, corporate travel manager at Belo, a Dallas-based media firm. "It will be nice to get all those fares in there and to have American onboard."
The DCA program also has several implications for Sabre and its travel agency subscribers. For starters, Sabre will take in less revenue, as participating DCA carriers—which now represent more than 40 percent of the company's direct global bookings—get a discount of roughly 12.5 percent off the fees they pay to the GDS for the three-year term of the contracts, Sabre said. In a Securities & Exchange Commission filing, Sabre said Delta's participation in calendar year 2003 will impact revenues by $7.5 million.
Decreased revenue calls for lower booking incentives paid to travel agencies, Hannigan said. "These deals will require us to be very aggressive in how we think about all our costs," he said. "Incentives per booking are no longer growing at 30 percent year over year as they were a couple years ago, but they're still in the low to mid-teens and that has to change."
A recent General Accounting Office report found the average amount paid by GDS companies to travel agencies rose 900 percent between 1995 and 2002.
"When you look at the manual approach and the real processing costs of doing things the old way—Web fares, hiding fares, etc.—I am confident the tradeoff in incentives for agencies will be more than made up," said Sabre chief marketing officer Eric Speck. "We have taken this risk of putting it all out there. There is no disputing that the revenue point just went down and there is no disputing that the agency gets a benefit."
Despite the revenue hit, analysts who follow Sabre generally like the stability generated by these three-year airline participation agreements, particularly as GDS companies face the uncertainty of regulatory changes by the U.S. Department of Transportation.
In the SEC filing, Sabre left open the possibility of "changes to the booking fee pricing model for airlines that do not participate" in the DCA Three-Year program. The filing also said American, which uses Sabre for more than half of its GDS bookings, "will continue to provide marketing support for the Sabre Travel Network products." As for a lawsuit regarding American's GDS participation agreement, an airline spokesperson said, "we resolved our differences."
For its part, Galileo International essentially dropped its Momentum program that required participating agencies to contribute to the savings shared with participating carriers
(BTN, Feb. 10). According to a spokesperson, Aloha, Continental and United will join US Airways in offering all Galileo agencies full fare content. Unlike in Momentum, agencies are not required to give up incentive fees as a condition of participation in the program, known as Preferred Fares Select. It offers participating carriers percentage savings roughly in the mid-teens.
Many now await a competitive response from Worldspan, which as of last week had not announced its planned new pricing model. "A broader inventory offering means less to Worldspan than the others. A big portion of its business is from Expedia, Orbitz and Priceline," said Legg Mason analyst Tom Underwood.
"We have strongly encouraged both Worldspan and Amadeus to talk to the carriers that have signed up for the other two programs," said Dee Runyan, WorldTravel BTI executive vice president. "Most corporations do not care what is inside the res tool—Sabre or Worldspan—but the expectation is that that agency puts in place a tool with the most access. We cannot allow this disparity to go on too long."
"Worldspan has been at an impasse to make changes and proceed," added Bobbi Huber, manager of corporate travel services for Cincinnati-based Federated Department Stores, an ARC-accredited Corporate Travel Department and Worldspan client. "Now that the change in ownership has been finalized, I hope those changes will occur."
Even without a competing Worldspan program, the marketplace has evolved far enough for American to partially retreat from its EveryFare strategy, which dangled Web fare access only to travel agencies willing to take on an increasing portion of the airline's distribution costs
(BTN, Oct. 7, 2002). An airline spokesperson last month said Sabre-connected agencies that enrolled in EveryFare would receive an addendum that allows them to cancel their EveryFare contracts. "EveryFare was and is a big success in terms of reducing our distribution costs," she added.
"My expectation is we'll continue to support Sabre and will absolve ourselves of the responsibility for settling American's GDS payments," said Jack O'Neill, CEO of TQ3 Travel Solutions Americas, the only mega travel agency to say it had adopted EveryFare. "But there is a question in that in EveryFare, there are some fare classes that American was discounting. Our clients want to know what will happen to the selective discounting that was a real benefit of EveryFare."
American late last week said it "cannot speculate on future fare activities."
In an SEC filing, American said it will maintain the EveryFare program as "an attractive option for those travel agencies with a majority of their bookings on non-Sabre GDSs."
Northwest took a similar measure. The same day it announced it had agreed to participate in the Sabre DCA program, the carrier added another wrinkle to distribution evolution by announcing its own program for non-Sabre agencies. Dubbed Northwest/KLM All Fares, the new program provides full fare content in exchange for a $1 per segment booking fee, capped at $3 per ticket, to help offset the $4.40 average per segment fee that Northwest said it incurs through GDS channels.
Northwest's All Fares program conceptually is similar to American's EveryFare in that a portion of the GDS cost burden is passed on to the agency essentially as a trade-off for access to the airlines' Web fares, previously unavailable in the traditional agency channel. Unlike EveryFare, Northwest/ KLM All Fares is not based on a fee schedule gradually calling for agencies to absorb more of the airlines' GDS costs, nor does it require a lengthy commitment. The program is based only on a 30-day commitment.
"For a lot of companies, the $1 fee is very little money in the grand scheme of things to get rid of all the search engines and have all content in one place," said Al Lenza, Northwest vice president of distribution and e-commerce. "There was a mixed reaction as to whether that was the right number but we made it very simple and very easy to terminate the agreement if an agency does not believe it is getting its money's worth."
"It is a cost that large corporate clients know is out there," said John Smith, president of Tower Travel in Chicago. "They are becoming more aware and are very willing to have dialogue. Smaller corporations, under the $100,000 level, won't ever be there. The price-sensitive market simply will demand full access to all fares at no additional cost."
In a broader sense, airlines have moved away from using their Web sites as outlets for exclusive fare content as the economics of segmenting inventory has not worked as heavily in their favor as first assumed. "You are diluting revenue if you focus on channel shift," said Lee Macenczak, Delta senior vice president for sales and distribution. "The dynamics of the market have changed."
"Airlines have come to understand the yield implications: With Web fares, they have been giving up more on yield than they ever would save on distribution costs," added Sabre's Speck. "It does take some work for airlines to sort through these issues. It is a rethinking of their distribution policies."
"It just is a recognition that we all want as much revenue as we can get," Lenza said. "We saw our distribution costs go up 7 percent each year, and we found something that worked to get relief."
Nevertheless, Lenza added that recent announcements do not signal a philosophical shift away from airline-direct channels, which still serve as strong marketing tools and engender brand loyalty by offering such traveler-friendly perks as frequent flyer mileage bonuses.
Northwest, for example, made available the All Fares program to non-Sabre agencies that choose not to access the airline's Web fares through WorldAgent Direct, a dedicated agency site. Northwest said more than 5,500 travel agencies since October 2002
(BTN, Oct. 7, 2002) have registered on the WorldAgent Direct site, which pays agencies a $5 per booking incentive. "It is fair to say volumes are respectable," Lenza said. "It is not hundreds of millions of dollars, but it is growing."
Delta, too, said participation in Sabre DCA does not signal a lack of support for Orbitz and the carrier's own direct online channels, including the Online Agency Service Center for travel agencies and the Exclusive Discount Program for corporate clients. "We still see people moving online because it is more of a convenience for customers," Macenczak said, "but not everybody wants to come through delta.com. If they still choose to book through a travel agency, we want to make sure that transaction is cost-effective for Delta."
Sabre in an SEC filing summed up the current state of airline distribution: "American's participation in the [DCA] program, as well as that of the other participants, will play a role in diminishing the shift of bookings away from the Sabre GDS to airline-controlled outlets. The [DCA] agreement should solve the major content issue for offline and online travel agencies."
According to GAO's analysis of data provided by the major U.S. airlines and "an online travel site," 37 percent of U.S. major airline tickets in 2002 were processed without a GDS—in other words, through Orbitz's direct connection or the airlines' own Web sites or call centers—versus 29 percent in 1999.
The flurry of distribution-related announcements this summer may bring a degree of relief to beleaguered travel managers trying internally to validate managed travel programs.
"All these developments will force normalization and a thinner band of fares available," suggested WorldTravel's Runyan. "It really gets us toward rate integrity, which has been driven by the desire of corporations that have been paying the higher fares."
Yet, the latest moves do not completely put the issue to bed since none of the major carriers is providing Web fares to all four of the primary GDSs, and low-cost carriers as a group generally do not participate at all in the GDS channel. As a result, third-party fare aggregators still serve a purpose.
"We are continuing to evaluate whether it makes sense to use a third party and pay the fees," said Pete Buchheit, Black & Decker director of travel and meetings services. "We will see how this stuff shakes out in the next six months. We need access to all the fares, not just from a few of the airlines. It is a continuing issue."
Southwest Pushes Web Bookings, Dives Deeper Into Corporate RealmAs usual, Southwest Airlines has gone in the opposite direction of the Big Six. As its competitors jettison for the time being the strategy of providing unique pricing content on their Web sites, the maverick low-fare carrier today is expected to unveil enhancements to its Swabiz corporate booking tool, available only on its Web site, and launch a corresponding sales initiative targeting new corporate clients. Combined with a much larger presence at this week's National Business Travel Association conference in its hometown of Dallas, these developments represent a conscious push by Southwest into the corporate travel realm—a segment it previously had been happy to attract without expending much effort.
"Initially, Swabiz targeted the small and medium-size companies, but we found interest in the largest ones as well," said Richard Sweet, Southwest senior director of marketing and sales. "We have made inroads in places where we never anticipated."
The airline is training nine sales reps who during the next few months will focus solely on Swabiz, which is completely free for corporate users. They are the first to be dedicated to the more than three-year-old product
(BTN, May 15, 2000)."Other online tools that charge for their services set the stage for what is needed," Sweet explained, referring to Sabre-backed online booking systems, the only others that can access Southwest's fares. "The difference is there is no set-up fee and no transaction fees."
The Swabiz system now provides real-time flight status, including updated arrival and departure information, accessible online or sent via text messaging. New account set-up functions allow travelers, based on frequent flyer numbers, to configure the system with their personal information, credit card information and specific travel preferences. Meanwhile, a new payment option permits travelers to use a ghost card once their companies input corporate card information. Swabiz users now also can modify reservations and reuse funds from previously canceled reservations. Southwest, true to form, said it will not add features that cost too much to develop and maintain but will continue to evaluate all client suggestions.
Southwest is selling at least 53 percent of all tickets through its Web site.
Others Still Exploring GDS BypassWhile Southwest's Swabiz is the most successful example of an airline bypassing GDSs for bookings by corporate accounts, its competitors are exploring other avenues. Not only is Orbitz continuing to develop direct connections—as of July, America West, American, Continental and Northwest collectively were receiving 70 percent of their Orbitz bookings directly, according to the GAO report—but travel management firms also are setting up systems to book without a GDS.
Some agencies are using Web site aggregator tools for this purpose, but Carlson Wagonlit Travel has enlisted the DirectNet booking channel from Accenture subsidiary Navitaire to make Web-based bookings in the airlines' res systems. An initiative whose origins lie in Andersen Consulting's failed Via World Network
(BTN, Sept. 16, 1996), the Accenture direct connection service has the same client list as it did back then: itself.
"It's hard for customers to get their hands around direct connections," said Management Alternatives consultant John Heilner. "With everything else that's going on, this seems too complicated right now."
Nevertheless, CWT can say it has an answer to accessing Web-only fares—even if many are heading to GDSs anyway. In addition to automated refund and exchange capability, officials said a benefit of CWT's direct connections could be incentives from the carriers.
"Incentives are not in our commercial arrangements with the carriers, but our hope is that airlines will reward clients who use it," said CWT global CIO Loren Brown. Officials were less than clear when asked where fares that are available both directly and in the GDS would be booked: "How much we use the GDSs in the future depends on their efficiency and their ability to deliver content," said CWT president Robin Schleien. "If our customer needs access to something that is not on a GDS, we can deliver it. It should be directed to the most efficient channel. For example, the way Symphonie uses a GDS today is more efficient than other tools.
"We're not trying to put anyone out of business," he added. "The goal is not to take transactions away from the GDS. Relative to revenues we've seen traditionally from the GDSs, we have very important strategic relationships with them worldwide that will continue."
Accenture wouldn't comment in detail on its use of its subsidiary's system.
"Through this new partnership with Carlson Wagonlit Travel, we will give our customers added flexibility, choice and convenience through broader multi-channel access to Delta's published and Web-only fares," said Delta's Macenczak in a prepared statement. "The program also allows Delta to further reduce distribution costs."