Worldspan's ultimatum this month to US Airways—provide full fare content including Web fares or get booted from the global distribution system—was greeted with skepticism from analysts and consternation from buyers who disfavor fragmentation of the booking channel. Though Worldspan late last week backed off a Nov. 15 deadline, the conflict heralds a new level of gamesmanship among various players entangled in a complex web of ownership, marketing and sales relationships.
US Airways executives first characterized Worldspan's threat—demanding precisely what the carrier provides Galileo and Sabre
(BTN, Oct. 28) but with no distribution savings in return—as "consumer-unfriendly and unfortunate." Several corporate travel managers agreed.
In a joint statement issued Thursday, the companies said, "Worldspan and US Airways are currently discussing resolving their differences. Both parties hope the dispute can be resolved amicably. Because those discussions are ongoing, Worldspan will not suspend US Airways' participation on Nov. 15 as previously stated, but both parties reserve all rights to pursue all available legal remedies."
In an earlier statement, Worldspan said, "Suspending service would be a difficult step that carries serious consequences for both of us, but we're looking to enforce the contract. Worldspan cannot condone US Airways' actions, which are clearly harmful to Worldspan: withholding fares from Worldspan and its customers while providing them to our competitors."
Clearly, if Worldspan were to toss US Airways, the impact on both parties would be immense. Expedia and Orbitz now depend on Worldspan for nearly all airfares, including US Airways bookings, as do Worldspan agency and corporate subscribers.
Addressing the possibility of being pulled from Web sites that rely on Worldspan, US Airways senior vice president of marketing and planning B. Ben Baldanza said the carrier expects to connect directly to Orbitz by year-end and to Expedia "at some point." The carrier had no answer for Worldspan's bricks-and-mortar agencies. "It's unfortunate for Worldspan agencies to be caught in the middle," said US Airways vice president of sales Steve Tracas.
According to BTN's CT 100 research
(BTN, Aug. 26), Worldspan's corporate clients include a handful of the largest U.S. travel buyers, such as DaimlerChrysler, Dow Chemical, Ford, General Motors, McKesson, Medtronic and Procter & Gamble. "US Airways is not big in our program, but this seems to imply that Worldspan can influence my contracts. And I have a real problem with a third party stepping in between me and any preferred contracts I choose to have," said Gerry Williams, Medtronic director of travel and expense reporting. "I am not saying this will force us to change our relationship with Worldspan, but dictating never works." Williams added that he and other corporate buyers must be creative in developing alternatives "if Corporate America is going to be held hostage in terms of who we deal with." He also stressed the importance of a single outlet for all fares. "If there are exclusive agreements, the product must be accessible," he said. "I need one refrigerator in which to look for my food."
"It's about a simplistic solution," agreed Cindy Heston, corporate travel manager worldwide at Thomson Multimedia. "It's not about money."
GDSs pass some of the fees that airlines are seeking to reduce on to agencies, which sometimes pass through the revenue to their corporate clients. "Incentives will come down, as you pressure them," said New York-based CIBC World Markets' GDS analyst Paul Keung. "It will mean a price increase for the customer and it raises a lot of questions about the agencies' business models."
Navigant International—which told one analyst that it is "difficult" to identify what percentage of total revenues are represented by GDS incentives—agreed that it is fair to say that customers "are not particularly interested in further push-through of distribution costs."
These costs pale in comparison to opportunities lost, however, when low airfares are not available to buyers.
Travel managers whose companies are not Worldspan clients also are concerned by the implications of such developments on their preferred airline agreements. "From a corporate standpoint, we all want viable partners, but this nonsense has to end," said Tom Barrett, global strategic sourcing director at American Standard Cos. in Piscataway, N.J. "Don't hold me accountable to the larger distribution war, because that needs to be fought in a larger venue. But now, we are caught in the middle."
One US Airways client added that this give and take between GDSs and airlines could impact his decision on which self-booking tool to use.
Following years of limited success in airline development of GDS alternatives
(BTN, May 7, 2001)—particularly for business travel—American Airlines proposed to redesign the distribution structure with its EveryFare program
(BTN, Oct. 7). Some other major U.S. airlines, while encouraged by movement in the market, thus far have not floated programs to restructure GDS economics. Continental Airlines stands "dead in the middle," according to Bill Brunger, the carrier's vice president of distribution planning and revenue decision support, "but we are at a breakthrough point."
"Directionally, both the stabilizing and lowering of GDS fees is a good thing," Brunger added, referring to the US Airways initiative with both Sabre and Galileo that prompted the Worldspan response. "But I would generally characterize it as too little."
Some GDS analysts were shocked by Worldspan's initial threat and were not convinced it would come to fruition. "I have a feeling that it's all just posturing and US Airways will not be cut out of Worldspan. If that does occur, it will be temporary," said Tom Underwood of Legg Mason in Baltimore.
"Worldspan is a small player. They are going to get pressure from their users at the end of the day," Keung added. "The success of any distribution model is predicated on not having channel conflict. They are jeopardizing themselves."
"This speaks to the power that the GDSs still have over the airlines," said Matt Fassnacht, until recently the GDS analyst at JPMorgan Chase. "Threatening to throw out an airline is a more aggressive tactic for a GDS than raising prices."
Sources generally agreed that Worldspan's move was designed in part to defend Orbitz. All Worldspan owners also own pieces of Orbitz, and Worldspan is Orbitz's GDS provider. American, Continental and Northwest each have established direct connections via Orbitz Supplier Link and, along with the other two airline owners—Delta and United, themselves preparing to launch direct Orbitz connections—continue to fund the Internet portal. Further, some said, US Airways' lower-cost deals with Galileo and Sabre threaten Orbitz's claim to be the lowest cost distribution channel for carriers.
"We want Orbitz to succeed, the economics are very compelling," Continental's Brunger said. "When Orbitz has needed resources, we have responded. It provides the ability to expand the approach in the marketplace, including Supplier Link."
"We take note of the fact Worldspan is the only airline-controlled GDS, but I hope that has nothing to do with this," said US Airways' Baldanza. He said Worldspan's ultimatum was based on "vague" language in its airline-GDS participation agreement that "we don't believe they interpreted properly. We don't believe they have a right to this for free."
US Airways does not own part of Orbitz. Its deal with Sabre, however, may not have been free of such considerations. As part of a multibillion-dollar outsourcing agreement signed with Sabre in late 1997, US Airways owns options on more than 3.4 million shares of Sabre Holdings Corp. According to US Airways' most recent annual report, those options are exercisable for a 10-year period beginning Jan. 2.
"If I have 3 million options in a company, I want to see that company do well and I'm inclined to do things that would benefit that company," Fassnacht said. "It is highly likely that US Airways' options played a part in their inclination to do a deal with Sabre. US Airways is not thinking about long-term strategy—it's near-term survival."
Sabre vigorously denied the connection. Responding to repeated requests for clarification, a Sabre spokesperson said, "We're still trying to confirm if those options are available. To my knowledge, that had nothing to do with" the US Airways deal.