With Airlines such as AA moving away from the GDS-dependent distribution model to Direct Connections with Agencies and TMC’s some say this will finally establish a foundation for innovation in travel distribution; for the first time since almost half a century there would be a serious alternative to the GDSs while creating an incentive for TMCs to accelerate the development of their software. Economically the GDSs behavior in the last years is easy to understand:
Why would anyone spend millions of dollars on R&D of new technology when you get the money anyway? If direct connections to airlines and public battles between airlines and GDSs became the “new normal” as anticipated in a podium with Jim Davidson and Michael Strauss at an event at the PASS Performance Center in Frankfurt, GDSs would constantly have to upgrade their technology in order to remain competitive.
So in this way direct connections can serve as a means to pressuring the GDSs and guaranteeing permanent competition. As a result airlines can increase their overall revenues through the complete display of ancillary revenues, TMCs can concentrate on adding business value for their customers and assuming that GDS will adapt, they will still be making money as technology must manage it all. They would need to shift from their role as a distributor who controls the distribution to a “stable” technology provider – while the current technology providers and new entrants can be the “creative” ones. There is no doubt that there is enough room for everybody in travel technology – and enough value-add can be created and be paid for. Nobody had believed that technology will create so many opportunities.
Offering a personalized service
The new distribution model has some obvious advantages for the seller (airlines) and the buyer (passenger): First of all, by shortening the sales chain costs can be reduced (See: Value Creation in Travel Distribution), because passengers won’t have to pay higher airline ticket fees anymore, partly spend on GDS fees which then get in part distributed to agencies. In addition airlines know who is asking and thus can personalize their service. The passenger is in control if he or she wants consulting services from an agency (and pay for it) or not. In case they decline, they are obviously on their own on the trip.
With ancillary services such as reserved seats, extra legroom etc. airlines can personalize their offers, create value for their customers and in the end increase their overall revenues. The same goes for TMCs and agencies. They are able to differentiate themselves by offering unique content and specializing in specific areas such as winter tourism, nautical tourism or cultural tourism. In business travel there could be specializations for different industries.
Some people say it’s very hard to achieve this kind of differentiation using the GDSs. Although, industry standards, like airport codes, are important and have their place, there is always one disadvantage of standardization: It limits flexibility. And the GDS’s desire to have standards may be part of the reason why it took GDSs so long to start implementing ancillary revenues. Other players, such as Farelogix, claim that the GDSs focus on negotiating and forcing airlines and partners into restrictive contracts instead of innovating and meeting their customers’ demands. Per definition GDSs should not be involved in the sales process at all. Just like you don’t want FedEx to decide how much you pay and which items you receive. GDSs should concentrate on Inventory Management and “logistics” and not on marketing and sales. And as mentioned earlier apart from governmental regulations the only option to achieve innovation triggered by real competition is to create real alternatives, i.e. to establish direct connections.
Playing not to lose
So the question is not if direct connections are going to be widely implemented in the future, but rather when and how. As TMCs and Agencies are concerned that direct connections could come together with additional costs, work inefficiencies and service challenges devaluing their business, many of them may not be willing to implement direct connections with airlines soon. But this is exactly one of the main issues: The TMCs and Agencies have been “playing not to lose” for so long and now they are afraid of change. I think there are two major rules for a TMC today: 1. their technology must be independent from a controlling supplier 2. their contracts must allow them to choose the best vendor at any time. Nobody should be locked into a single distribution model for years while the rest of the world moves on.
However, one of the most frequently voiced objections to direct connections is that airlines won’t be able to create truly personalized offers for their clients. Since the majority of travelers isn’t usually loyal to one airline but rather switches carriers according to the best offer, it will be difficult for airlines to obtain enough relevant information that is needed to create personalized offers. This is actually a domain of the indirect channel, namely the GDSs, since they are able to collect all data of all flights no matter which airline. It would be great to have the best of both worlds, e.g. direct connections through the GDSs. But again, this is only possible, if the GDSs focus on their role as distributors and allow other players to establish connections wherever needed.
With AA pulling their content off Orbitz things have started to shift and it remains to be seen how this “fight” ends, if there will be a winner at the end and if it will be the customer. What we do not need is a “chess game” between the market players where the only goal is to improve one’s position in the market and one’s revenues. I truly believe that we should concentrate on improving the travel experience of our customers. But this is only possible if we work together as an industry.
Aside from AA and Orbitz, these days we are all observing Google’s acquisition of ITA which is strongly opposed by Fairsearch – an initiative founded by major travel companies such as Expedia, Kayak and Sabre. Of course, Google already responded to the accusations made by Fairsearch. Google argues that its acquisition of ITA will create significant value for the customer and that Fairsearch’s members only fear Google’s competition.
But even in case this acquisition is stopped by the government, it still serves as an example of what will happen, if we keep on waiting and “playing it safe”: Others will enter the market and do what we hesitated to do. So what are we waiting for? How many wake-up calls do we need to finally start to renew our value chain, let technology proof what it is capable of doing and let the market decide which solution is the best.
With XML and numerous other application programming interfaces (APIs), the technology is waiting to clean up the mess created by political greed and eagerness for power. Now we need large organizations like AA and HRG to take action and implement innovation.
Image by Giulio_Fornasar