American Airlines and Travelport this month escalated a
conflict that represents the latest flashpoint in airline distribution, a legal
and commercial battle that highlights such key airline distribution components
as full-content agreements, global distribution system economics, the sale of
ancillary services and direct connections.
A Cook County, Ill., circuit judge on Nov. 20 approved a
temporary restraining order preventing American Airlines from terminating deals
with Orbitz Worldwide on Dec. 1, but the ruling, which AA said would "temporarily
delay" the move, serves only as the beginning of an extensive negotiating
and legal process.
Travelport, which owns 48 percent of Orbitz Worldwide, on
Dec. 20 will "dramatically" increase booking fees charged to American
"in many international points of sale," according to the airline. AA
said that "as a result," it would levy fees on Travelport's non-U.S.
and non-Caribbean subscribers. Travelport deputy group CEO Gordon Wilson in a
Nov. 17 memo did not mention higher GDS fees for AA, but said the company "will
continue to take appropriate actions in response to any measures AA initiates
that discriminate against our customers." Wilson said AA's surcharge on
Travelport subscribers "will effectively be borne by consumers."
In the United States, where the dispute had not by press
time triggered any new surcharges from either camp, managed travel programs won't
see any immediate impact—unless their travel agency is Orbitz for Business and
the restraining order against AA is lifted. But the reverberations may be felt
throughout the distribution chain, through travel management companies and down
to corporate buyers. Or, this conflict may burn out, much in the way the
bluster in 2006 about "new entrant" distributors and the raging
debate in 2003 on Web fares ultimately amounted only to noisy, public
negotiations that ended in relatively full-content agreements between airlines
and GDSs.
Of course, if an organization's agency is Orbitz for
Business, its travel program could face serious challenges absent a resolution
between the parties, especially in situations where AA is a major supplier.
AA fired the first shots in the latest episode by conveying
plans to terminate "a number of agreements between American and Orbitz,"
effective Dec. 1, according to AA court documents. The temporary restraining
order prevents AA from making such a move before the court determines each
party's rights.
Why would AA make such a move? As part of a strategy
discussed publicly for more than a year, the airline is attempting to persuade
travel agencies to use direct connects, including technology from Farelogix,
that would bypass traditional GDS connections and economics. The airline wants
to cut costs and get closer to customers by tailoring offers.
"Airlines are limited in their ability to receive and
consider customer insight through the current messaging process of the travel
agency/GDS channel," AA wrote on its blog. "Airlines have been
successful in personalizing the customer experience through their Web sites and
other direct channels. Now is the time to extend these benefits out through
travel agencies that represent more than half of airline tickets sold in the
U.S. today. For example, the agency may know that the customer is flying to a
destination for a meeting that starts shortly after the scheduled arrival. With
this information the agency can request that the airline provide an offer that
includes a seat in the front of the cabin and priority baggage handling so that
the customer can quickly move from the flight to their meeting."
AA claimed in another blog post: "The modern direct
connect technology we have proposed would only make Orbitz's existing direct
connection with American easier to maintain and more content-rich for
consumers. We hope that Orbitz will agree to join the growing list of travel
agencies who are committed to deliver the lowest fares and most relevant
optional service offers from American." AA on several occasions has
refused to name any agency users of its direct-connect model.
"Airlines want to make sure they sold the right product
to the right customer in the right place at the right time," said
consultant Al Lenza, a former airline executive involved in prominent
distribution matters. "GDSs and OTAs have not shown that they can actually
sell the products the way the airlines want to sell them."
Marc Rosenberg, a former Air Canada executive who is
president of his own consulting practice, added that "carriers have
finally understood the richness of what the new technologies can deliver:
actual dollars from ancillary selling, the advantage of competitiveness when
other carriers don't have the same offerings. If the GDSs could deliver this
right away, there would not be issues. The fact is, they can't. The airlines
simply don't want to wait anymore."
The Travelport
Argument
In its filing with the Illinois court, Travelport also
lodged a complaint for declaratory judgment. "If AA terminates Orbitz,
then AA will have breached its contract with Travelport, including by depriving
Travelport's affiliates of full content," Travelport argued. "AA is
coercing Orbitz into changing its existing business model."
According to the filing, Orbitz "generates more airline
revenues for Travelport than any other travel agent." Travelport CEO Jeff
Clarke told analysts that Orbitz accounts for around 14 percent of Travelport's
segments.
Of a direct-connect approach that would require a multitude
of individual connections between airlines and agencies, Clarke said, "Most
of our travel agent customers—at least every single one we've spoken to—would
prefer to deal with one connection into the GDS than, in this case, 500
connections to the airlines. It just doesn't make economic sense."
Orbitz Worldwide CEO Barney Harford said AA "is
attempting to limit travelers' choices where they can least afford it."
Travelport also is circulating a memo that offers "myth-busting"
on AA's direct-connect initiative. For example, Travelport wrote that it is a
myth that "direct connect makes the best economic sense for agencies"
because any "short-term incentives" given by AA to agencies won't overcome
"the 100 percent long-term loss of an agency's financial assistance
through the GDS for all of its AA bookings." It also insisted that its
systems would be able to handle "the customization AA is talking about"
if only AA was willing to cooperate.
According to Lenza, "It's as much economic as anything.
[GDSs] are looking to preserve historic revenue streams and create new ones
along the same lines for these new [ancillary services]."
Meanwhile, in a memo reacting to AA's new surcharges on some
Travelport subscribers, Wilson wrote that "the true cost of booking AA
will need to be shown to consumers at the point where a buying decision is made
so that consumers can make an informed choice about which carrier to fly.
Through this action, AA is penalizing the very people who deliver valuable
revenue to AA in markets outside the USA and the Caribbean."
Regarding AA's decision to end its Orbitz agreements,
Amadeus CEO David Jones, speaking with analysts this month, said, "We are
a bit puzzled, because [AA] has had a direct-connect agreement in place with
Orbitz for years. This looks like a bit of a hardball negotiating ploy. We have
had plenty of them over the years."
Sabre Travel Network vice president of marketing Chris
Kroeger would not comment.
AA 'Not Unique' Among
Airlines
American more than a year ago decided to take its arguments
for direct connectivity into the public realm. Though other U.S. carriers have
been quiet, aside from a Delta Air Lines September filing to the U.S.
Department of Transportation expressing similar sentiments, several industry
observers are presuming that other airlines share AA's views.
"American is not unique in its desire to renegotiate
distribution terms," according to UBS analyst Kevin Crissey. "Other
airlines will likely be aggressive in pursuing this strategy as well."
Lenza had the same expectation. "This same direction
permeates throughout other airlines," he said, adding that the urgency may
be greatest for American, which in 2011 faces the expiration of all three major
GDS contracts.
Added Rosenberg: "Whether [other carriers] choose to
follow the same model as American is yet to be determined, and whether they
choose to approach their client base in the same style as American is yet to be
determined."
Many also suspect that AA isn't only targeting Orbitz. For
one thing, AA CEO Gerard Arpey in April 2009 shared now-infamous comments
suggesting that intermediaries should "pay for access to our product
rather than us paying them to distribute our product." Though AA would
like to cultivate its direct-connect strategy among all types of agencies,
including traditional corporate travel management companies, the online travel agencies
as a group may be the first targets.
Crissey offered several reasons why: OTA bookings generally
are lower-yield, they "cannibalize" airline websites and they
generally don't "upsell" customers into higher-priced seats.
Orbitz's Harford this month told analysts that American's
decision to terminate its relationship with Orbitz represents the "first
salvo" in a "broad attack ... on the travel distribution landscape,"
including global distribution systems and "agencies in general."
When asked by e-mail if AA has made decisions similar to the
Orbitz move that affect other distributors, AA manager of merchandising
strategy Cory Garner wouldn't say.
What's Next
Still in doubt are AA's success with its direct-connect
initiative, any further back-and-forth retaliatory actions by the airline and
Travelport, and the ultimate outcome of the next wave of GDS-airline
negotiations. Meanwhile, both the AA and the Orbitz/Travelport side said they
are working to resolve their dispute.
"I get the sense that the parties have very hardened
positions," Lenza said. "No one is going to want to fold on this one;
it will be aggressively fought. I doubt that Dec. 1 will be the end game."
Without knowing the specifics of contracts between the companies, Lenza added, "I
would be quite surprised if the GDS has any leg to stand on, because these
arrangements tend to be structured between the OTA and the airline. First and
foremost, [Orbitz] is a travel agent governed by ARC rules. An airline can
arbitrarily amend how it appoints and maintains relationships with agents."
Rosenberg said AA's move "is not discriminatory against
a particular GDS; American has not said, 'anybody on the Travelport system has
to go direct connect, I am pulling content.' This is targeted specifically to
one retailer. It is a very different play than in the past."
Rosenberg said ceding ground to AA "would cause a major
change in Travelport's view and a precedent that I am not sure they can live
with right now."
Crissey of UBS, however, predicted AA and Orbitz by year-end
would settle, adding that "American is likely to receive better financial
terms."
According to a blog post by former managing director of HRG
UK Mike Platt, GDSs "want to be sure that they preserve their near
monopoly over unbiased content within the business travel sector, and they are
prepared to pay to do so.
"It was not that long ago that airlines around the
world seemed to see these OTAs as the answer to combat TMCs," Platt wrote.
"They persuaded themselves that it was just what corporations wanted, and
expected vast volumes of business to transfer over to these new players. It
simply did not and will not happen. Something has to happen, as these airlines
cannot go on paying this level of fees to the GDS indefinitely" while
alternative mechanisms develop.
"GDS cost," Platt predicted, "will be taken
away, or at least significantly reduced, but will pop up again elsewhere until
it finally rests with the customer and their employers."
This report appears in
the Nov. 29 issue of Business Travel News.