As expected, after its contract expired on 31-Dec-2010, Expedia dropped American’s fares on Expedia-owned Hotwire and TripAdvisor. However, it retained them on its corporate travel site Egencia. Now comes word that Sabre will drop American prematurely in August, a month before contract expiration. Sabre is also increasing American booking fees by eliminating price discounts that were part of its contract.
Meanwhile the two sides are trading accusations that each is being anti-consumer and discriminatory. American took umbrage at Sabre’s action saying the punitive actions came despite its adherence to its Sabre contract. It also repeated that it wants to work with all three GDSs and OTAs and continue to negotiate.
“The actions, which include biasing its shopping displays, are anti-consumer, anti-competitive and harmful to its subscribing agents,” said American in its statement released late Wednesday. “Sabre's actions are discriminatory and patently inconsistent with both its contractual obligations and its professed goal of ensuring full transparency for the benefit of consumers and travel agents. In contrast, the actions only serve to protect Sabre's market position and attempt to force airlines and travel agencies to rely exclusively on its legacy systems that only lead to higher fares and fewer choices for consumers.
Meanwhile, Sabre said: “Sabre is taking actions to protect its interests and those of its customers by supporting airlines who value the transparency and efficiency of the proven system we provide.”
The wires were burning Wednesday as everyone scrambled to put out their statements. “This development puts to rest that this battle, which began with AA’s unprovoked assault on Orbitz late last year, is not a skirmish between AA and online travel agencies, but rather an all out war for the future of both airline and all travel distribution in the US and around the world,” said Chair Kevin Mitchell in a statement released late Wednesday. Of course, that also means this really is an all-out war to control consumers.”
The biggest impact, according to National Business Travel Association Executive Director and COO Mike McCormick, will be increased costs for business travelers. They will, he said, have to underwrite the costs of marketplace fragmentation.
Expedia said: “American Airlines’ direct connect model of questionable, if any, benefit to travelers, would be costly to build and maintain and would compromise travel agents’ ability to provide travelers with the best selection.” Standard and Poor’s Equity estimates American is less than 2% of Expedia revenues and even less of its earnings.
The Expedia statement drew a quick response from Open AXIS Group -- supported by American Airlines, Delta Air Lines, United Airlines, Continental Airlines, Air Canada Frontier and US Airways --which is pushing the distribution regime change. “For a dominant OTA to suggest that the Open AXIS Group Distribution 2.0 model is of questionable, if any, benefit to travelers is either an intentionally inaccurate statement or a gross misunderstanding of the basis of the standard,” said the group. “Airlines and distributors participating under the Open AXIS Group Distribution 2.0 model will enjoy expanded choices for their customers, more competitive products and services based on a better understanding of the buyer, and a better purchasing and traveling experience.”
The latest skirmish
The Sabre and Expedia moves are only the latest battle between American Airlines and online travel agencies (OTAs) and Global Distribution Systems (GDSs) after the airline took its fares off Orbitz on 21-Dec. But there are any number of ways to find American fares including, said the airline, the low-price guarantee on AA.com.
The mainstream media caught on to the criticality of the issue making the debate less about commercial deals than about consumers. Most consumer advocates decry American’s efforts but then turn around and advise consumers who want complete listings of all airline offerings to use meta-search engines such as Bing and Kayak.com, the latter of which is also being pushed by American which is also pushing Priceline. PhoCusWright estimated Orbitz, Expedia and Priceline were two-thirds of airline revenue -- USD81 billion in 2008. That would definitely impact the OTAs’ bottom lines.
The issue for consumers, is, of course, the loss of the ability to compare fares across a wide spectrum of airlines but consumer advocates advice to look to meta-search engines seems to indicate that consumers can still access to the information they need. If past is prologue then we only have to look at Southwest when it dropped its availability on Travelport at the beginning of the last decade. The agent community developed a work-around.
For airlines, however, the issue is not just about tackling one of the last frontiers in their ability to cut costs, but in enhancing revenue as well. On the cost side, not only are OTAs generating higher costs but they are producing lower yields than either the airline’s own website or off-line agencies, according to UBS analyst Kevin Crissey.
OTA costs account for 3-4% of airline operating costs which include a USD10-12 cost for GDS and incentives compared to the USD2-3 cost on airline.com, according to Mr Crissey in a New York Times article. OTAs generate 17% of the carriers’ total operating revenue while the airlines’ own sites generate 25% of revenues. OTA tickets are generally 45% lower than those sold by off-line agencies -- mega and corporate travel agencies and the 16,000 small travel agencies -- which generate 53% of revenues. Taking that to the end point reveals that American can significantly undercut OTAs’ deepest discount because of the money the airline is saving. But even with a discount that doesn’t contribute much to the bottoms line, American also benefits because it is has the opportunity to up-sell ancillary services and keep the higher yielding revenues which would otherwise be kept by the OTA.
Solutionz Founder and CEO Chicke Fitzgerald wrote in a recent blog on her site that off-line agencies generate much more in sales and concluded American is making a bad move. Looking at the Airline Reporting Corporation data for the first half of 2010, she said, shows that off-line travel agencies represent 66.6% of all tickets issued through the Airline Reporting Corporation and produce 67.3% of all sales. Fitzgerald also reported that brick-and-mortar agencies net the airlines USD42.82 more per domestic ticket and USD66.30 more per international ticket.
“Mega agencies produce a net profit over supplier direct (ticket sold through agency, less commission, less GDS fees, as compared to that same ticket sold through the airline's web site) of USD28.13 domestically and USD771.38 internationally,” she said, adding there are a host of assumptions related to these conclusions which can be found in her blog.
Distribution Channel Gap Analysis as of 1H2010
Fitzgerald urged the warring parties to kiss and make up. “Make friends of those that sell your product at the highest possible price and cost you less than your own channel,” she said. “And if you choose to say goodbye to those who sell a large quantity of your product at a true loss, then so be it.”
Consumer price search expands beyond travel
Free consumer search such as that enjoyed by passengers is now everywhere. Price comparison is becoming a matter of course for consumers largely as a result of apps created for their smart phones, according to Former American Chair and CEO Robert Crandall, who even uses such comparison apps while shopping on the web. Any number of consumer comparison and coupon sites are available through mashable.com. Even Sears, a department store, offers customers the ability to search the Net to compare prices while they are at the store.
“The airlines constitute, collectively, a transportation system in which each is dependent, to some considerable extent, on the presence of the other participants,” Mr Crandall told CAPA. “No one airline or group of airlines can take a traveler everywhere and the product is expensive enough that consumers will insist on having the ability to check price and service options. Cross-retailer, price-check apps are now turning up everywhere, and if the airlines abandon the GDS model, some other service and price-check alternative will appear.”
Dueling web sites
Meanwhile, the issue has caught the attention of the Washington Post, which, while not blatantly opposing the Google/ITA deal, parroted the opposition in a recent editorial by calling on the US Department of Justice, which must approve the deal, to proceed with caution.
The opposition is afraid that Google will manipulate the market in favor of its favored partners or advertisers. They have even developed an anti-Google/ITA web site called FairSearch.org suggesting that the cost to advertise on Google will go up and will drive fare increases. They are also afraid that the consumer data that has already been collected by Google will give it an unfair advantage over its competition and will allow it to manipulate consumers. Forrester Research analyst Henry Harteveldt outlined the problem when he said that we just don’t know what Google will do or how it will present websites within travel results, especially if websites are required to pay for its listing.
But TNooz also revealed an equally troubling Google issue resulting from Google’s new Google Instant which basically reads the mind of the user as they are typing in a search and completes the word before the user does. In an article -- How Google could kill the long tail of travel -- it suggested that it will concentrate the market to benefit the largest players. In a survey done since the introduction of Instant last September, TNooz found that traffic dropped between 30-50% in several different product categories including travel through 31-Dec-2010.
The website said while Instant reduces search time. “The actual usage options on the long tail has dropped and the lazy consumer sees [fewer] options and actual impact (as measured by click throughs) of options on the long tail has dropped significantly,” it said. “And it’s not going to get better. Thus, there is a creeping realization that Google is not necessarily pro-consumer choice. It is Pro-Google and Pro-Consumer Laziness. This should send shivers down the spines of any and everyone in travel. It could mean, in a post-thumbs up world for its acquisition of ITA Software , Google results will be focused on the top tier players.”
The key to its success, however, lies in the accuracy of its search results and whether they can keep up with the fast-changing fare world.
“The options on long haul flights in the past have been restricted by legacy GDS based algorithms. In recent years this has improved, particularly in 2010 with the emergence of new search players such as Everbread,” it said. “That improvement is likely to erode significantly with the fewer options of a shortened search string and a busier first results page. Further there is a persistent appearance of a mediocre user experience of one-size-fits all that has been a hallmark of Google’s products. Good enough is the order of the day.
“In competitive markets, getting results from marginal players will be either very hard or expensive,” it continues. “Either way this disadvantages both the consumer and the smaller players in the long tail. This is also likely to generate a geographic bias towards the US-based results – I have a hunch that this will favour a US airline over a local national carrier. Perhaps Google just handed FairSearch all the ammunition they need to make their case to the DoJ. But this is no slam dunk.”
Google says it will not use ITA ownership to manipulate the market and that it wants to apply innovations that cannot be had through licensing.
Will it be as benign trolling the Net for the lowest price and then directing the consumer to that website, cutting out the middle-man GDS/OTA? Or, will it be manipulative? Clearly the potential is there and anyone with an imagination can rollout all sorts of scenarios including refusing to renew contracts in order to gain more pre-eminence for their partners.
Consequently, the Washington Post is probably right to urge DOJ to consider broader ramifications of the deal, not just the impact in the narrow confines of the travel market. Instead, it said, “Justice should also consider the implications of allowing an already formidable Internet power to continue to expand its reach and consolidate its grip over a range of Internet commerce.”
However, the newspaper did not oppose the acquisition, saying it could bring, much needed innovations that would benefit travel search.
Opposing FairSearch.org is OpenAXIS.org which issued a statement Tuesday. “Not all of the facts are being presented by the distributor community as to the motivations and reasoning behind the actions taken over the last few weeks,” said Executive Director Open AXIS Group Jim Young. “Some of the pundits’ commentary is obviously heavily slanted towards the distributor. Until the ‘distribution gap’ between how airline products and services are sold in direct channels and indirect channels is eliminated, there will be a continual erosion of customer and agency/intermediary satisfaction with the indirect channel. Fortunately, what the airlines are looking for is no different than what Open AXIS Group has implemented.”
Open AXIS is advocating a single, uniform industry airline integration XML standard with which airlines would distribute products to GDA/OTAs because technology limitations imposed by GDSs prevent new and innovative products on third-party distribution channels. The group also suggested, contrary to remarks made by the opposition, that airlines not only want transparency but want the same transparency for all products, fares and options they have on their own websites extended to third-party channels.
“It is the responsibility of the GDS network to ensure that an airline, from which they derive a majority of their revenue, has the ability to market and sell its own product the way the airline wants to, without being forced into a display that ultimately commoditizes the airline’s optional products and services,” said the group. “Although this method of display is easiest on the GDS, this current GDS-centric model inhibits airline product choice, lessens the airline brand, and ultimately limits the consumer’s ability to make his or her own choice.”
It also argued that Direct Connect -- used by several airlines, not just American -- is not a GDS bypass and emphasized the battle is over the commercial terms, just as American has suggested all along.
“All member airlines have communicated to the GDS providers that they would consider selling optional products and services through indirect distribution channels under the right commercial terms,” said the group. But that means the must have the ability to set themselves and their products and services apart and returns to American’s argument that airlines should be entitled to the data collected by the GDSs that would afford the tailored and customized marketing the airlines are looking for. Press reports indicated the priority boarding alone is a USD1 billion addition to American revenues each year.
“What needs to change is the distribution method, which requires a technology and commercial capability that the GDS have been unwilling to provide as it also creates a system that allows an airline to differentiate not only what is sold, but how it is displayed and sold,” said the group. “The Open AXIS Group distribution standard is inclusive to all distribution channels, either direct to an agency or via the GDS network.”
Open AXIS brought us the cookie analogy suggesting that distributors were stifling innovation by blocking the distribution of a new luxury cookie brand. It is significant that it used a luxury product because they are the very buyers airlines covet -- high-end travelers.
Mr Crandall rejected the cookie analogy. “I do not think the cookie analogy is useful, since individual consumers do not have the ability to go to the factory to buy the cookie,” he said. “Airline customers do. Moreover, I am having a hard time determining how the role of the GDS can be replicated. In one way or another, consumers will surely favor whatever purchase option makes it easiest for them to see all products on the same shelf.”
Questioning Google’s motives
Google may be the next generation flight search, despite the fact that heavy weights such as Expedia and Microsoft oppose the deal.
TNooz explained what the acquisition means noting that ITA’s success was in its “faring” applications. Since that is basically a search function, said the travel site, the acquisition makes perfect sense.
“Interestingly,” said TNooz, “Google could just as easily have been keen to buy a GDS. And, to be sure, it would be a GDS, of sorts – if you recalibrate the traditional meaning of GDS to include search as an end in itself within distribution. Google’s tendency is to build efficiencies while it capitalizes on those efficiencies. And so it will end up directing consumer traffic directly to the supplier websites, cutting out costly, less efficient middlemen like the OTAs, while still providing consumers the benefit of pan-supplier flight searches. Google only has to ensure that it is less expensive (ie. more efficient) for both suppliers and consumers than the status quo – not a terribly difficult thing to achieve with the volumes it will be able to broker.”
And being less expensive for suppliers is exactly what the airlines are looking for. Interestingly, Mr Crandall hit on exactly what the airlines would like -- selling the right to display their fares, rather than having to pay GDSs. GDSs could then charge consumers and OTAs the right to look at them. “Thus, consumers and OTAs would have the option of using the GDS displays or going direct,” he said.
Clearly Delta agrees with American considering comments made by Delta Vice President Marketing Glen Hauenstein during the company’s recent investor day. "We look at it very much like an Apple Store vs. Best Buy," Executive Vice President Network and Revenue Management Glen Hauenstein said in explaining changes to Delta.com including a new e-commerce platform to increase merchandising potential and enhance revenues. "You can buy components or Apple products at both, (but) your experience in an Apple Store is obviously quite different than it is at a Best Buy store."
Still, Mr Crandall gets the airlines’ frustration. “The airlines are simply tired of paying the whole cost of distribution while others in the distribution chain make a much higher return on capital and equity than they do,” he told CAPA. “I hope all the airlines follow AA’s example, in which case the airlines will clearly win. What a reversal from years ago. The world changes, and we change with it or get run over.”
This week PhoCusWright indicated that what we are seeing is an evolution not a revolution simply because the ability of airlines to rollout a new system and merchandise it is still too new. In his article Airlines vs the World PhoCusWright Senior Director of Research Douglas Quinby said too many questions still remain unresolved including the development of the back-office functions needed to support the new platforms especially on the razor thin margins of most retail travel agents. He noted despite American assurances that agencies connecting through Direct Connect will be able to access full content, there is no way for agencies to know whether that is correct if it is the airline choosing which offers to display.
Quinby also questioned the technological capability to replace the current system. “Should intermediary-supplier connectivity splinter, there are very important questions about the technical capability needed to serve up effective results and support the current standards for online airfare shopping (ie sorting through billions of possible options across multiple sources and serving up relevant, available results in seconds),” he said. “Definitely an unsexy topic for anybody not directly involved in airfare search and distribution technology, but at the end of the day it is the technology that makes this stuff happen – or not. This creates opportunity for innovation, but it also means the wholesale dissolution of the current distribution system and widespread adoption of direct connects will not happen overnight – if at all.”
Whatever the merits of either side of the argument, this promises to be one of the top issues of 2011. American will continue its lone battle but it is inevitable its competitors will jump on board. About the only thing that could trip it up is whether or not rising oil prices will dampen the economy and reduce demand.
“It is a lot easier for airlines to play hardball with improving demand and record load factors and profitability,” said Quinby. “But there's nothing like a recession, geo-political disaster or oil price surge to send the best intended distribution strategies into a tailspin. Does anyone remember back in 2009 when Delta even offered to turn back the clock and pay commissions to some travel agencies? As the economy improves, and as long as they maintain discipline on capacity additions, airlines' position will only get stronger.”
That is just another indication that the more likely scenario, as has happened in the past, according to Quinby, is GDSs will cave. At the very least they will finally evolve.