For the first time, airlines are negotiating GDS agreements unfettered by government regulation. But some complain that the deck still is stacked against them.

US deregulation of the global distribution systems market in 2004 had all the immediate impact of a whisper in the woods. At the time, most of the US Major airlines already were locked into three-year, "full-content" direct connect agreements with GDS providers that guaranteed the status quo would linger regardless of the Dept. of Transportation's decision to let the CRS rules expire (ATW, 4/04, p. 33).

Carriers long had derided the basic business model in which the owners of the distribution technology charged them ever-increasing segment fees while paying travel agencies ever-increasing inducements to use their systems. Today, the DCA-3 agreements are expiring and the true effects of deregulation are unfolding. Yet some airlines are decidedly unimpressed with what they've seen so far.

Continental Airlines is among those that have signed new long-term agreements with Worldspan, but that doesn't mean it is satisfied with the pace of change. "We were sold a bill a goods," says CO MD-Distribution and E-commerce John Slater. The promise of increased competition "hasn't played out. Not a great deal has changed." He believes the GDS companies are attempting to maintain the current pricing structure and want to continue to extract "inflated" prices from airlines to fund travel agency incentives.

On the other side of the table, GDSs talk change but not revolution. "We are committed to the integrity of the current business model, but the economics do need to adjust. I think it is essential that we reduce incentives to agencies," Sabre Travel Network COO Hugh Jones told ATW earlier this year. "I don't think there's a question of the value that the GDS provides, or the efficiency and effectiveness of the service . . . I think the question is whether it's the right price." He says Sabre has taken out "approximately $400 million in costs" since 2000 "in order to facilitate changing the model, and as we roll forward we certainly understand airlines asking us for additional discounts beyond the DCA-3 discounts," which he said averaged 12%.

One thing is clear: The old 30-day GDS agreements of the regulated era have faded into history. Says Jones, "The ask on our part is for long-term for industry stability, full content and [non discrimination]. In exchange, we provide to airlines what I would term attractive economics." New agreements signed by STN with Northwest Airlines, United Airlines and US Airways are five years in duration, while Delta Air Lines signed a seven-year deal. Likewise, Worldspan agreements with Continental, American and United are for five years, as is Galileo's tie-up with United.

Some observers say it is easy enough for a carrier to sign a five-year deal with Worldspan because they don't believe it will exist in its present form in 2011. Such speculation is fueled by the potential for erosion of its dominance in the online arena. Expedia has said it will divert some bookings to Sabre and Amadeus; Orbitz is likely to shift its business to Galileo, a sister company, as soon as it legally can, and Site59 is making the expected transition to its sister Sabre.

But the uncertainty of its future may have lit a fire under Worldspan. "It was clearly the most vulnerable," says Northwest Airlines VP-Distribution and E-Commerce Al Lenza. "Maybe it was a bit more motivated to get a couple of carriers into new agreements." And, he adds, "Worldspan has an interesting concept on how to change the business model."

One of the side effects of deregulation is the heavier cloak of secrecy thrown over the airline-GDS agreements, so little has been revealed about the specifics of the new Worldspan pacts. The GDS also has said that the deals were struck "in conjunction" with two new optional products that will be introduced to the marketplace.

Worldspan and the airlines that have signed the agreements are not forthcoming on the nature of those products. But Slater describes the GDS's strategy as "bold and aggressive," adding that it "was willing to break ranks" with its competitors. "It offers sustainable economics," he says.

There is wide speculation that the "optional" items are "opt-in" products with which agencies will be required to forfeit some of their GDS incentive payments in exchange for access to full airline content. If that is the case, sooner or later "they will have to have discussions with travel agencies," says Peter von Moltke, senior VP-Airline Business Group at Amadeus North America. He goes a step further and says that if everyone is serious about building a new business model, the discussions ought to involve all three parties: GDS companies, airlines and agencies. "Everybody's sick of all these discussions about incentives and segment fees. We're all frustrated with the pace of progress and how long it's been taking to make the shift to a new model." Such discussions would require careful attention to management, governance and legal guidance, he says, "but I am convinced that it can be done."

Shrinking Market

It has not gone unnoticed that all the attention being paid to the new deals and the potential for new business models concerns a distribution channel that is much smaller than it was 10 years ago. Currently, an estimated 51% of tickets sold in North America go through GDSs, down perhaps 30-35 percentage points over the last decade. At the end of 1995, the year in which Delta initiated the commission cuts that eventually would lead to elimination of all base travel agency commissions, there were 46,765 full-service and satellite ticket printer locations accredited by the Airlines Reporting Corp. in the US. As of March 31, there were 21,754.

Elimination of commissions put the mom-and-pop agencies out of business and led to consolidation of the larger travel management companies. The huge surviving entities actually wield more power with the GDS companies, and incentive payments remain hotly competitive.

In March, Amadeus and Sabre took the unusual step of forming a sort of "I'll watch your back if you watch mine" alliance. As GDS-airline negotiations progressed, carriers held out the possibility that they might drop out of one or more GDSs if they couldn't get terms they liked. AirTran, in fact, did drop out of its own hometown GDS, Worldspan, in October. Three months later it was back, but its move was a sharp reminder to the GDS companies that they no longer could assume airlines were married to participation.

Under the Amadeus-Sabre agreement, "in the unlikely event" that a currently participating US carrier drops out of one GDS, that GDS can go to the other and request access to the carrier's content. "We wanted to bring some sort of stability to the marketplace and provide some comfort to travel agencies," von Moltke says. Chris Kroeger, senior VP of STN North America, adds, "We fully expect to have full content from all the airlines. We believe we are in the best position to provide that value." Nevertheless, he says, "we think it is prudent to have a backup plan."

Firestorm

The deal set off a firestorm among airlines. American immediately issued a statement saying its GDS contracts "prohibit redistributing and remarketing [its] content among those systems." It vowed to protect its content vigorously to the fullest extent under applicable contracts and law. David Cush, VP and general sales manager, expressed concern that the deal might "mislead travel agencies and professionals into falsely believing that the content issue facing the GDSs is solved by this arrangement." He followed up with a letter to travel agencies warning that AA might ask them to foot a portion of the bill if they chose to book the carrier's flights through a "more expensive distribution channel."

Kroeger counters, "We looked thoroughly at our agreements with our airline customers and these types of arrangements are allowable and valid." Continental also advised agencies to consider other sources of its "content" in order to be prepared in the event the airline dropped out of a GDS. In Slater's eyes, Sabre and Amadeus are "using their collective muscle [to] squash the bargaining process so that the ultimate threat of pulling out could be throttled as a result. I think it tries to limit a carrier's ability to take action."

Airlines also are concerned with how their data would be handled in such an arrangement. There could be "unintended consequences," Lenza says. Are those "other sources" of content viable? Eighteen months ago, the "GDS new entrants" or GNEs were getting a lot of attention with the promise of better technology and lower costs. But the two main players, G2 SwitchWorks and ITA Software, have failed to gain much traction in the marketplace. And while there are various means of direct connections and the potential for many more, there are good reasons for not viewing direct connect as the Holy Grail of distribution."

It's rearranging the deck chairs on the Titanic," says Timothy O'Neil-Dunne, managing partner of T2 Impact. "It doesn't take costs out of the system; it just moves them around." He says that whenever a travel agency needs to connect to direct or indirect sources, it has to put in a second line and manage where the PNRs are built. Then the agent has to remember where all its airline seats are purchased. "All in all, that means an agency has to have its own switch and its own PNR manager in order to connect to a universal gateway. It doesn't matter whether it's two sources or 50 sources; as soon as it's more than one, I need to provision that capability."

In most agencies, there is "no such thing as their own service model," he adds. "They rely on a GDS for PNR storage and supply chain access." The problem with introducing fragmentation into airline distribution "is that there is not enough money in the system" to make the required radical adaptations in agencies, which still manage so much high-end business travel that airlines have an interest in their welfare.

One area of the industry where direct connections might make better sense is the online environment. Expedia, Travelocity and Orbitz all have some sort of direct-connect technology but the economics of the current business model work against their using it. The online agencies, like their offline brethren, get incentive payments from the GDS companies. There would be little point in giving them up in this stage of the game.

Airlines still believe GNEs have strong potential. Northwest has developed its own dedicated online booking site for agencies and has gone to some lengths trying to get them to push some business that way. But Lenza recognizes that it isn't feasible for agencies to go to a dozen different places to book flights. And just as the airlines of the 1970s came to believe that a reservations system should include as many carriers as possible in order to be valuable to agencies, an Internet-based system should as well.

Lenza believes G2's product has that potential, even though it has been slow getting off the mark. "G2 has a five-year agreement with us for full content," he says. "We've got two large agencies doing business through them for several hundred tickets a month. They're clearly not there yet, but they are gaining ground fast."

There is still debate over whether the GNEs have a technological advantage over the legacy GDSs. Kroeger acknowledges that they have brought some new technology into the equation, "but that technology is available to everyone."

Technology Lag

Ivan Bekkers, president of AgentWare, whose major product puts GDS and non-GDS content onto agencies' desktops side by side, notes that some marketing innovations still cannot be implemented in the legacy systems. Northwest's experiment with selling exit row and some far-forward aisle seats for an additional $15 can't be done in a GDS, for example. Air Canada faces a similar problem in selling its branded fare products. "We're seeing more differentiation of inventory," Bekkers says. "It will be very hard for a traditional distribution method to display these possibilities in a user-friendly way."

The GNEs also have introduced a net ticket pricing model that airlines prefer to the traditional segment fee pricing. "The one-time transaction fee covers all changes to the PNR from the original booking until the customer flies," Slater says. This "eliminates unproductive expense inherent in the pay-by-the-booking structure that the legacy GDS systems have in place today."

Ultimately, Slater would like to see the GDSs "get out of the way of the relationship" between suppliers and agencies and "do what they do best: Provide technology." In what he calls the wholesale model, agencies assume the expense for their distribution technology in exchange for an agreed transaction fee and content commitment from the supplier. "Agencies are warming to this concept because it gives more control and it eliminates the risk of being caught in a dispute between a supplier and a technology provider," he says.

There is another group of airlines watching how the GDS industry evolves in a deregulated environment: The low-cost carriers whose participation in traditional distribution systems has been minimal or nonexistent. So far, they haven't seen anything to change their minds. "But our opinion might change," Southwest Airlines VP-Interactive Marketing Kevin Krone says. "It's encouraging that there seems to be a lot more flexibility out there."

For Southwest, the GDS issue is not just about price; the carrier has been zealous in its insistence on maintaining control over how its product is displayed and distributed in various media. The GDS companies touch base with Southwest from time to time and "they always approach us on the price issue. They forget the control issue," Krone says. He believes GDSs could be a lot more creative on that score. "Somewhere out there in the universe is a deal we could like, but we haven't seen it yet."