Bottled up

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The much-touted alternatives to Global Distribution Systems promised to uncork savings from the complex world of selling and distributing airline tickets. Have these hopes vanished into thin air or is the industry seeking other routes to new efficiencies?

Just a year ago, the legacy carriers had a new and potentially potent weapon in the battle to bring down their distribution costs: new technology in the form of web-based alternatives to the Global Distribution Systems (GDS). It was technology that would be radically different and radically lower in cost. It would make the GDSs obsolescent and bring this old technology to its knees. The challengers were dubbed “Genies” for GDS New Entrants (GNEs) and grabbed plenty of headlines.

What a difference a year makes. In that time, not surprisingly, the GDSs didn’t sit still. They have signed up new customers, including a growing number from the low-cost sector like AirAsia and AirTran Airways, and announced renewal deals with legacy carriers with increasing frequency. Today the GNEs don’t call themselves by such a grand name anymore but are using such language as “Alternative Content Access Providers”. When chided for the change, they say that the rhetoric was never of their doing; it was the airlines and the media that got carried away.

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The fairest GDS deals are likely to be confined to larger players with strong home markets

So what happened? It would be a classic story to say the GDSs had “reinvented” themselves, but they didn’t. In a sense they already had moved far beyond the old technology that the media and rivals liked to make fun of. In the USA, they had had three years since the signing of the stop-gap DCAs (Direct Connect Agreements) which gave carriers discounts of 15-20% on per segment booking fees. These were meant as transitional pacts to modernise technology, cut payrolls, and focus their business case before this spring. Elsewhere, carriers like British Airways, KLM, Qantas and SAS negotiated deals that slashed GDS fees in home markets in return for giving the distribution giants all of their fares, including the cheapest web fares.

The GDSs have been able to sell the business case to carriers while acknowledging new economic realities. They faced a brutal truth – the potential loss of their airline content lifeblood. And some carriers have threatened to restrict that flow if cheaper distribution deals are not forthcoming, especially for the lower yielding home market bookings.

But the wave of new deals between carriers and GDSs in the USA shows that many there believe the price is more right now than ever. They give their airline customers a lot of flexibility, and as industry insiders at the Airline Distribution 2006 conference in Dublin in March said, the GDSs got as good as they gave and that the airlines got fair deals but didn’t exactly get a free ride (see related story on page 34). The fairest deals, from the carrier point of view, are most likely confined to larger players with strong home markets. Small and medium-sized carriers fear the same old yearly GDS letter with its steep booking fee increase is all they can look forward to. GDSs say carriers need to work with them on selling their other content, such as hotels and hire cars, to create packages to bring booking fees down.

Clearly the GDSs are fighting back. They got tough with the airlines, as evidenced by the extraordinary “content backup” deal between Amadeus and Sabre, a mutual assistance pact that would likely have been illegal in the era of US GDS regulation. They also played tough with US TMCs (travel management companies), hacking away at the incentive payments agents receive for each booking.

So will the arrival of GNEs provide carriers with new leverage? US carriers and the Star Alliance have encouraged them and the first market trials are taking place. But there are still reservations. “We want to get GDS technology at the right price today,” said one airline executive. “We’ve been forced to look at these new technology providers” because the GDSs are still not offering what carriers want at the right price.

Carriers would like to believe GNEs can offer a viable alternative, particularly on opening up a cheaper way to access TMCs, but remain suspicious. GNEs will likely become part of the distribution mix but are less likely to be the new frontier some hoped for.

The next question is perhaps what the next stage of leverage will be. The major airline alliances are starting to use their collective will to encourage the GNEs and some at Airline Distribution were asking – or more accurately wishing aloud – about joining together to press the GDSs further. However this might be an optimistic wish: collective alliance action on costs has only produced limited results so far.

As the past year has shown, it is now an age of tough talk between airlines and GDSs, and the way forward is likely to be determined by individual muscle rather than collective mass.