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American Airlines and Sabre face contract expiration in ongoing dispute

23-Aug-2011

With the expiration of the contract between Sabre and American Airlines now only 11 days away, the two remain locked in negotiations. American, however, now has another weapon: the right to gain an injunction against Sabre dropping it from its global distribution system (GDS). Earlier this month, a judge hearing the case said Sabre could not block a request for injunction.

American is poised to file for an injunction against any untoward Sabre actions resulting from the expiration of its contract with the GDS supplier. A state court preliminary hearing is scheduled for 29-Aug-2011 in anticipation of any action, according to American.

In January, Sabre made it harder to find American flights and fares in online searches and increased booking fees on the carrier. This rise in booking fees saw American passing the resulting costs on to agents. However, these actions were lifted once the two recommenced negotiations, setting a 01-Jun deadline to reach an agreement. The lapse of this time frame eventually had their respective lawyers trading court motions.

In a Securities and Exchange Commission filing, American complained Sabre had reimposed the increased booking fees on 8-Jun, seven days after their truce expired. It also said it is at risk should new retaliatory actions be taken by Sabre.

“There’s no secret to the fact that there is enormous revenue at risk here and there are enormous stakes in the outcome of these discussions with the GDSs,” said CEO Gerard Arpey during American's second quarter earnings call. “That is why, candidly, they have wound up in court, because what we’re trying to do is break some of these monopolistic practices. Whether or not we are successful remains to be seen but there’s no doubt there’s a tremendous amount at stake.”

American is suing both Travelport and Sabre in Federal Court on anti-trust grounds, but has already reached an agreement with Travelport to extend their contract into 2012 to allow time to reach a new agreement. Its contract with Travelport's Worldspan GDS would have otherwise expired recently and its contract with Travelport's Galileo GDS was set to terminate on 01-Sept-2011.

The suit cited the termination of Farelogix developer’s agreement by both Sabre and Travelport. Farelogix developed the direct connect program now in contention. The Travelport action occurred just a week after American pulled its content from Travelport online travel agency (OTA) Orbitz and was in retaliation for the development of direct connect. In court documents, American said other software companies have been barred from working with Farelogix of American direct connect by Travelport.

Sabre said the Farelogix termination was prompted by Farelogix’s changing business model, which is based on content fragmentation. It has charged Farelogix with attempting to take a “free ride off our database and systems,” even though it has not prohibited contractors from working with Farelogix. However, American cited Sabre instructions to Pass Consulting saying that it must restrict Farelogix access to Sabre or risk its own developer’s agreement.

Battle's impact is taking shape in American’s favour

While they trade anti-trust barbs across courtrooms, the impact of the GDS battle is taking shape with the various contracts that have been cut between airlines and OTAs, calling for them to use the American/Farelogix platform direct connect. American is still, however, out in front of its peers who are making their own direct connect plans.

These contracts offer an option for consumers booking ancillary services. “When shopping at an online agency with direct connect access, like Priceline or Expedia, consumers would see American’s fares published right next those of its competitors for that route,” American explained to CAPA. “Selecting AA and continue on the booking path as they do today will keep them on the OTA’s site, but there is an opportunity to present additional offers, such as Wi-Fi or PriorityAAccess, that might be attractive to that consumer. It is important to note that direct connect is an infrastructure change, meaning it changes the way the travel agent accesses AA’s flight information – but also provides for the airline to supplement that information with offers or bundles specific to that customer.”

For its part, American has been working with travel agents in anticipation of further Sabre action when the American/Sabre contract expires on 31-Aug-2011 or when the promise Sabre made to the court that it would take no action until 6-Sept-2011 expires. American fears the GDS will again bias against its flights. It told agents recently it expects its full content to continue to be available through Sabre either by reaching an agreement with the GDS or by court order. The airline believes it has a contractual right to continue its Sabre participation adding its service to agents would only be disrupted if Sabre took action against the airline.

“We have already told the market that AA does not intend to remove content from the Sabre GDS even if we do not have another deal in place, and Sabre has said that it expects to continue to display AA’s content,” American told CAPA. “Being removed from Sabre would cause massive disruption and harm to our business, the business of agencies and to Sabre, itself, so we remain hopeful we will not be put in that position. However, in response to Sabre’s announcement in January that it intended to remove American’s fares from its system, American has been visiting with its agency and corporate partners to inform them about options to continue to get American’s content, should Sabre or another GDS disrupt or remove it.”

Sabre in court signalled its desire to reimpose the bias against American when it asked the court to rescind the temporary restraining order won by American at the time. It said it wanted to be able to exercise its contractual rights if need be.

Before the 01-Jun expiration, American also made the rounds saying agents should sign direct connect agreements in order to avoid similar surcharges to those in January.

See related story American prepares for life without Sabre

For its part, Sabre said it is working diligently to reach an agreement with American citing the fact that all parties want “good revenue growth, good customer relations and optimum distribution costs.” It added that it is positioned to help in all three areas.

The US Department of Transportation also weighed in during February, warning against “undisclosed display bias” in GDSs. However, it did not rule such practices unfair or deceptive as long as they are disclosed, according to American in a court submission. Meanwhile, the Department of Justice is currently investigating GDS anti-trust issues.

Sabre/US Airways also remain at odds

Earlier this month, Sabre resubmitted a request for the court to dismiss the anti-trust suit filed by US Airways against the GDS, saying it did not name illegal anti-competitive acts. It charged the airline with trying to renegotiate its contract through the courts. Sabre accounts for 35% of US Airways’ annual revenues. When filing its suit earlier this year, US Airways said Sabre put up barriers to competition to protect its monopoly position.

“The anti-trust laws are not a vehicle for large corporations to renegotiate the terms of their commercial agreements,” Sabre said. “The new agreement contains nearly identical provisions to the contract US Airways signed in 2006 and operated under for five years without complaint.” Sabre has made the same charges against American, saying the airline’s lawsuit is nothing more than a negotiating ploy.

In the meantime, American and HP are current in development of a new internal reservations platform, Jetstream. A formal agreement to develop the new technology was cut in Mar-2010. Interestingly, United has also announced its move to the HP/EDS system.

American, Sabre fight about monopolies, not market power

MIT Research Engineer Bill Swelbar noted the disparity in market power between airlines and GDSs. No global airline has more than a 7% market share; and worldwide, the top 10 airlines only enjoy a 40% share of global capacity. For GDSs, 60% of tickets are sold through travel agents. That concentration calls for competition.

By comparison to the market shares enjoyed by airlines, MIT research shows Sabre has a 58% share of the US market while Travelport and Amadeus have 33% and 10% shares respectively. Additionally, US Airways argued in its suit against Sabre, 85.7% of travel agents used only one GDS in 2009. Sabre and Travelport account for more than 90% of travel agency bookings, a marked contrast to American’s 15.2% domestic share and US Airways' 9.6%. The top five airlines hold an 80% domestic share with Delta at 20.1% of available seat miles (ASMs).

However, travel agents are less likely or cannot switch because of the resulting financial penalty. US Airways pointed out that 86.8% of travel agents are using the same GDS provider they were using seven years ago at the deregulation of the GDS industry. This has developed into a concentrated market since the barriers to entry are so high, said Mr Swelbar.

On the other hand, he pointed out how little market power airlines have given the lack of control over price, especially with 31% of ASMs controlled by low-cost carriers. “The Supreme Court has defined market power as ‘the ability to raise prices above those that would be charged in a competitive market,’ and monopoly power as ‘the power to control prices or exclude competition,’” he said.  

Debate far from over

With so many moving parts, it is hard to definitively grasp the implications. For the most part, CAPA analysis suggests there will be a continuation of the existing infrastructure, albeit with alternate routes to the ultimate ticket and ancillaries.

The one lingering question, however, is whether all the changes announced this year between airlines and OTAs actually lower distribution costs – and on this point no company is talking.

CAPA will examine those changes and all their implications in an article in tomorrow’s edition.


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