Tech Talk: GDSs Seek New Pricing Models

At a time when base commissions have hit zero, amid the undeniable trend pushing the point of sale away from the cryptic global distribution system interfaces and toward the Internet, the next frontier in airline distribution cost reduction appears to be the traditional GDS segment fees, and GDS officials know it.


"Our airline customers have told us they need to reduce costs, though I don't think they should pay nothing," said Flo Lugli, Galileo International senior vice president of global supplier business development. "We agree that the economic model is changing and probably needs to change so that the party gaining the value pays for the value. Maybe it's multiple parties gaining the value-we don't have the answer, but we've been out there talking to people."


"People are experimenting with a variety of approaches," said Jesse Liebman, senior vice president and general manager of worldwide travel supplier services for Worldspan. "You'll read about the one that comes up with a method that is sustainable." Asked how GDSs could get the end-user customer to pay, Liebman said, "That's the $64 million question." Travel buyers should not balk at the possibility of paying for the GDS, because the truth is they already are. After they pay, through the airfare, the money is then "passed around like a second helping of ice cream," said an industry consultant.


According to a sales exec, the average ticket on Continental Airlines generates a $16 to $17 payment to the GDSs. Not to be confused with what many airlines pay GDSs to host their internal reservations systems, these fully loaded, traditional agency segment fees had surpassed the cost of agency commissions months before zero, according to a leading airline analyst.


Airlines for years have complained about fast-rising GDS pricing levels, particularly since much of those funds are used to pay travel management companies to generate more bookings and, in the end, further increasing costs. Sabre in 2000 spent $80 million on agency incentives and warned that might go up. More recently, the hope among GDS shareholders that incentive payments would level off took a blow when Cendant acquired Galileo with a plan to fund agency consolidation to convert non-Galileo agencies. Sabre always has promised to buy the business if its competitors do.


With GDS payments to the travel management community totaling hundreds of millions of dollars annually, GDSs quite overtly are helping to fund the consolidation of agencies. Is that something the airlines-actually, their customers-should be paying for? Considered a different way, GDS incentives also help to subsidize agency transaction fees. "You have to look at two types of revenue streams," said Andy Menkes, chairman and CEO of Partnership Travel Consulting in Princeton, N.J. "The visible and the audible. Visible are the base commissions paid through the Airlines Reporting Corp. The audible are overrides, GDS fees, soft dollars and marketing funds. The playing field is not yet level because all that has been leveled is the base. Clearly, in any travel agency pricing, the agency is factoring in invisible revenues that accrue to them to enable them to offer pricing that, on the surface, appears to be low. When the client can dig in, that by definition will change the agency pricing model."


In much the same way that corporations became more comfortable buying airfares that were net of commissions, saving a bit on the federal ticket tax and paying the agency fees based on a menu of services, some GDSs are thinking that could be how corporate customers deal with them.


Sabre's statement on the matter of breaking out GDS costs from the airfare indicated that it prefers the status quo, though the company did not rule out changes. "We're confident that the value of our services will stand alone, whether or not it's broken out," said a Sabre spokesperson. "But airlines have attempted to do this with fuel and with security, and we feel they could take it a step toward the ridiculous and make it very cumbersome for corporations and agencies."


Perhaps more cumbersome, though, is the fact that corporations and GDSs generally do not contract with one another. Most corporations leave it up to their agencies, largely because, in pooling their usage, companies can share with their agency's other clients the risk of not meeting contractual targets and failing to maximize the GDS incentive payments. Many corporate accounts collect GDS incentives either on their own or shared with their agencies.


But that does not jive with being a cost center.


Sources said a number of new models are being tested on a "very quiet" basis. At least some of them are sure to take a much more public position.