Op-Ed: Coming To Terms With The New Distribution Reality

A cool breeze swept over much of the country early this month. Maybe it was the collective sigh of relief in the travel industry after hearing that Sabre and American Airlines had come to terms. We don't know the terms, of course, and we suspect that they may not have come to terms on everything, but at least there was a press release, so life can go back to normal.

Travel agents can still look up fares on global distribution systems that only they know how to read. The corporate travel managers who hire them can look their bosses in the eye and swear that they offer almost any fare in the market. What's a promotional fare, anyway?

The only bad news is that travel management companies are increasing transaction fees by about $2 per trip. "No choice, really," TMCs say. "It's the cost of doing business. It's really not too bad, with online fees between $9 and $15, and most agent transactions between $25 and $30. Besides, why waste time and energy on agency fees when the real focus needs to be on airlines?"

Travel managers will struggle to explain why this is happening. Most will just paraphrase the message from their agency. Bottom line: "It's those (expletive) airlines, doing it to us again!" Some will get really incensed and complain to their agencies. Or they may follow advice to bring it up with their trade associations, but economics suggest a different course of action.

I know there are a lot of travel managers who are as smart and tough as I am, but I can be confident that they are having trouble explaining all this because ... it doesn't make any sense!

To understand this, a non-travel-specialist boss needs to know that that the airlines created the GDSs, later spun them off for huge chunks of cash, and now pay them to push their content to travel agencies.

OK so far. In the universe of business, distribution is God. Paying for eye-level shelf space is a time-honored tradition.

Then it gets a little trickier. The GDSs pay the agencies to use their systems. The grocery store analogy falls apart. Now it's like a store paying customers to shop there. Not just free, mind you, better than free, but now we are at last up to the present day.

This year, the airlines were determined to pay the GDSs less than they used to. Quite a bit less, it seems. The conversion from segment fees to trip costs makes it confusing, but most news reports and scurrilous rumors suggest that the carriers decided to pay $4 to $5 (or more) per trip less than they used to.

That is amazing. For nearly two decades, GDSs have had the market power to force annual increases in the prices they charge airlines. These increases have been in the cents-per-segment range, however. All of a sudden, it seems that the carriers have the muscle to blow away more than a decade of these increases.

It's important to understand the fundamental forces that reversed the market so dramatically, because these forces aren't going away.

First: Airlines—like every business—are driven toward cost reductions. If the airlines can find a way to sell their stuff cheaper, they have to exploit it. Global distribution systems used to be the only game in town, but there are cheaper alternatives now, especially given the very expensive business model of the GDSs.

Second is e-commerce. It is much cheaper for airlines—again like most other businesses—to sell stuff over the Web. Once their Web sites are built, travelers do all the work. Tickets in airline res centers are 100 percent touchless because they don't have to do all that messy QC and MIS formatting stuff that we corporates live with.

When they explain all this inside their corporations, travel managers will probably get a couple of questions. "What the heck does this have to do with the fact that my travel agency is raising my price? It's not the airlines, it's not the GDS."

The answer goes back to the fact that the GDSs pay their agency customers to use their services. Now that the airlines have reduced what they pay the GDS, the GDS wants to pass some, or all, of that cut to their agency customers. And the agencies, losing what was a nice bit of revenue, want to get it back from their customers.

And the reply from most non-travel analysts, who maybe aren't used to the way things are done in our world, will usually be: "Bull!" Then they probably will say something about our supply chain being way too long and complicated.

You'll explain that the GDSs are technical marvels and perform the invaluable function of data aggregation for agents who don't have another source of content.

Your critic will respond: "Hey! If the airlines won't pay as much for the GDS, and the agencies don't want to pay for the GDS at all, then maybe we shouldn't either. Economically, it's not worth what it used to be, but that's exactly what happens when we suck up that $2 agency fee increase."

They may ask if there is a more cost-effective (better, faster, cheaper) way to get content. Maybe there is another agency, or another technology supplier that could get us content at a lower price.

So just when we were starting to relax after the Sabre-American press release, we see we have a lot more work to do. Right now, most corporations and most agencies are happy to be finding fares in the traditional way, but over time, corporations should not—and will not—absorb the reduced value of the supply chain. The future belongs to the agencies, independent technologies or even GDSs that find a way to get content for less money. And it's up to corporations to insist that vendors find the solution as quickly as possible.

It's a pain for now, but ultimately, we will all be better off because the industry will create more efficient, lower-cost distribution channels than it had in the past.

TRW Consulting President Tom Wilkinson