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The flip side of American Airlines’ plans to change distribution models, halving costs

13-Apr-2010

Farelogix President and CEO Jim Davidson said the Direct Connect programme being deployed at American Airlines and ten other airlines has the potential to reduce distribution costs by 40-60%. However, Davidson told the Centre for Asia Pacific Aviation (CAPA), it also offers the opportunity for everyone to make a lot more money.

American’s deployment of Farelogix’s Direct Connect has sparked a firestorm of controversy in the travel distribution industry chronicled in Friday’s edition of America Airline Daily and led by the Business Travel Coalition (BTC).

See original report: American Airlines takes on GDS charges with a new distribution model – and intermediaries fight back

“It is not unreasonable to suggest that distribution costs could go down 40-60%,” Davidson said. “We like to say if you pay a GDS USD10 per booking, you can do it with us for USD2. However, there will be transitional costs associated with that, so I don’t think you can capture an 80% reduction in costs. But the bigger story is that by doing that, you have also created this enabler to bring all the things you can do on web site to a wider audience so everyone can sell more services and provide better customer services. More importantly still is the fact that if the travel industry doesn’t get onboard, they risk losing even more to those who will work with Direct Connect.”

He noted that 15 years ago predictions were made that the advent of the web would change the industry and indicated that 50% of the transaction went away. “We don’t want to see another 50% lost,” he said.

Davidson explained that mobile technology is a greater threat to TMCs and GDSs since it is far ahead of the travel industry and that has the potential of completely bypassing travel agents, corporations, GDSs and travel management companies.

“Mobile is already offering flight status, so you can check on whether the flight is on time,” explained Davidson. “Now they want to go beyond that and are saying 'hey, if the flight is late, why don’t we offer a pass to the club or a meal to our most valued customers'. If a GDS is unable to offer that, then they will be bypassed.”

American is working with Farelogix in deploying the new system which basically expands the complete functionality of an airline’s web site to everyone in the distribution stream. Davidson said Direct Connect has been deployed worldwide and there is no additional charge to gain access to an airline’s web content as suggested last week by the Business Travel Coalition.

“There is going to be negotiations,” he said. “GDSs pay different levels of financial incentive to agencies based on their production and loyalty. And agencies charge varying levels of service fees to their customers based on the same thing. Why can’t airlines do the same for their customers? The airlines don’t want to recreate a path of support and service to travel agencies. This is real opportunity for travel agents and GDSs to sell more to the passenger in more creative ways and that is a win-win.

“Direct Connect is a new take on an old connection into the airline reservations system,” he continued “GDSs already direct connect to an airline reservations system but they are using older technology. The new Direct Connect is the same thing only we use a connection to the airline’s computer reservations system and convert that to XML. That allows airlines to control their product better. They can control their distribution and can differentiate themselves with this technology which goes far beyond schedule and pricing for differentiation. Now the GDS creates the price and the ticket and advises the airline they have sold a ticket. But the airlines want to control pricing, ticketing, ancillary revenues. They want to then deploy that to GDSs which is what most airlines want to do, or to an individual travel agency or corporate clients. They are just saying we want to control how we price and how the product is delivered out there. It is just changing the way airlines are distributing through the same channels. Everyone is already doing it but I guess it just becomes a bigger deal when American is doing it.”

Davidson said Direct Connect allows airlines to tailor their product depending on who is asking. “It is only an agency or GDS bypass if the technology can’t handle it,” he said. “GDS systems and travel selling intermediaries are fundamental to the airline business model. For this reason, most airlines investing in Direct Connect will still embrace a multi-channel strategy, in which GDSs and other intermediaries are granted access to a newer, improved airline product. Looking ahead, I have no doubt that we have reached a point where the airline product, and the channels that sell it, are changing for the better. Travelers have unprecedented levels of control and choice that can improve the trip experience and for corporations, bolster travel programs. New self-service and mobile entrants are changing the competitive landscape for post-booking reservation servicing and ancillary product opportunities. For that reason, these are technology improvements GDSs, TMCs, corporations are going to have to do anyway especially given the fact that mobile technology is so far ahead of them.”

He called BTC’s contention that the lack of standards will harm productivity. “Most travel technology intermediaries who intend to remain competitive in this age of mobile technology and lightning-speed innovation are far more interested in how they can capitalize on and add value to the ancillary revenue movement, and improve the experience for their travelers, as opposed to stonewalling and procrastinating until all the standards are worked out,” said Davidson. “For example, did all the bookstores and publishers in the world agree on all the bits and bytes before Amazon and Apple invested in e-books and related devices? If they had, would the iPad have ever seen the light of day?”

Davidson said the Farelogix system is less expensive owing to the fact that it takes advantage of technology that has been rolled out in the past decade or so and it is not burdened with legacy systems. In addition, it is using lower cost services.

Innovation needed - Davidson

He concluded by saying that Direct Connect is the market innovation the industry has been looking for and characterised BTC’s contention it will ruin the travel management industry as little more than fearmongering that will stifle innovation if it succeeds.

“The promise of new direct connect technologies coupled with the revolutionary impact of ancillary services is far too great to be defeated by fear-based manipulation,” he said in a column he wrote for TNOOZ. “Direct Connect as nothing more than an airline choosing to use a different software technology or ‘language’ (XML) to access its core reservation system. The new technology gives the airline more opportunities to differentiate and control its product in a way that is easier and less expensive than [traditional] connections. American Airlines, clearly the target of BTC’s message, is actually one of several airlines investing in a Direct Connect strategy for these very reasons and the fact that it makes it much easier for third parties to connect directly to the airline.

“Finally, after years of being demoted to a commodity level and forced into a lowest fare comparison, airlines have found a way to differentiate their product and service, and control what is offered and to whom,” he continued. “At last, airline distribution executives are gaining the capability that so many other industries already have: the ability to leverage CRM data, customer demographics, psychographics, frequent traveler status, and of course corporate account information all before the airline has to decide what will be made available and for what price. Even more exciting, thanks to new mobile technologies, airlines can finely hone their offers based on the stage in the trip lifecycle, trip status, and other variables such as available inventory or lounge utilization. Three cheers! Product and channel marketing have arrived in the airline universe – and all players in the supply chain can benefit from this new added value and capability.”

The holy grail seems to be an airline’s ability to do what other retailers are already doing, tailoring the product to the customer in order to maximize the benefit for the airline. That is not unreasonable. But for many, the big issue seems to be maintaining the functionality travel managers require to keep track of everything.


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