Direct connect: Appetite for disruption

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American Airlines' Direct Connect concept has shaken up the distribution industry, but it remains to be seen if the carrier's bold move will be a genuine game changer or just a Trojan horse aimed at stirring up the status quo

Disruption means throwing something into confusion or disorder. And in the world of airline distribution, the disruptive force is undoubtedly American Airlines with its controversial AA Direct Connect concept. But not all industry stakeholders are welcoming this shift, fuelling hot debate at the recent Airline Business Innovation in Airline Distribution 2011 conference.

"No one wants things to change, apart from the airlines," said former Air Canada chief executive Montie Brewer, opening the conference by video link. "Airlines find themselves in a unique position, where change is not welcome upstream and downstream, so they are stuck. They are not going to get much help from the suppliers or the customer."

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 VIDEO: watch the video interview with Montie Brewer which opened the Innovation in Airline Distribution conference

 

But do direct connect systems really signal the advent of a new era for airline distribution, or is the concept just a Trojan horse aimed at stirring up the status quo? Through the system, airlines can link directly with travel agents, bypassing global distribution systems and avoiding pricey fees. It also uses XML messaging technology, so carriers can showcase their full product range, including all-important ancillaries. But American Airlines is not looking to turn its back on the GDSs completely; those systems still remain a major channel for the airline. Direct connect is an alternative way to market.

"No good bit of innovation goes unpunished," American Airlines director of distribution strategy Cory Garner told delegates at the conference. "As Montie [Brewer] says, there are people out there who are happy with the status quo, but it is prohibitively expensive for the airlines. They [travel agents and GDSs] all think it works fine, but the airlines are the ones who are paying for it."

But although there has been a huge amount of hyperbole around direct connect lately, it is not a new phenomenon. "If anything, American Airlines is a follower," says Garner. "From our perspective, this has been around since 2006 and we have been developing, testing and building it out with our two technology partners, Farelogix and ITA. American is not the only airline working with Farelogix."

"We already have five or six direct connects today, but these are not mainline carriers," confirms Bill Brindle, group distribution and technology director at corporate travel specialist Hogg Robinson Group.

Nevertheless, direct connect is not a mainstream booking tool either. What American Airlines has done is to force direct connect into the limelight, becoming the first carrier with real global muscle to throw its weight behind this technology.

The crux of the issue is that Garner believes airlines are at risk of becoming too dependant on their large technology partners, especially when GDSs are entrenched in the travel agencies, providing all the hardware, software and a nice revenue stream.

Airlines pay GDS fees and the GDSs pass on some of this money to the travel agencies for using their systems. Peter Liney, chief executive at STA Travel, says GDS revenues "are absolutely part of our profit model and if we lose that, we will need to get it from somewhere else". But Brindle says: "Don't think every travel agency out there is bribed and getting money through the back door from the GDSs, because that is simply not the case."

From the travel agents' perspective, Brindle argues that direct connect adds more complexity. But Garner responds: "It need not be more complex for the travel agents. This is not a standalone system - it can be plugged into existing desktops.

"With many agencies, there is no resistance. They have seen this coming for some time and they understand direct connect is here to stay. It is possible for the airlines and travel agencies to create a new type of business relationship using a new type of technology in ways where they both win."

BACK TO SQUARE ONE

Online travel agencies (OTA) have been among the first to pick up on this new channel. "OTAs tend to be more flexible and they have the technological know-how," says Garner. He adds that direct connect will become more appealing when agents realise it offers a more comprehensive product range. Brindle, however, is not convinced. "It takes us back to square one again, back to reinventing GDSs once more. You can't just go bang and stop it; it's not going to happen."

INNOVATING TO STAY AHEAD 

Delegates at this year's conference were treated to demos and pitches of some of the latest technology developments, including Malaysia Airlines' new Facebook booking engine which allows passengers to co-ordinate flight plans and seating assignments with their Facebook friends. "For trip planning it's a no brainer," explains SITA chief technology officer Jim Peters. "It is going to have a meaningful impact on how people travel and communicate their trip plans." SITA LAB also demonstrated a new voice-controlled mobile phone app which can bring up flight options and travel reviews. Other technologies which were displayed included an automated system from Sabre which re-accommodates passengers onto the next available flight and software from IT company Tealeaf which is able to replay individual website visits, flagging up where customers leave airline websites and why.
The panellists argued that in some countries people still misspell Qantas as Quantas, proving that even major airline brands do not travel well. By contrast, GDSs are standardised global systems with worldwide reach.

Liney from STA Travel says: "We have an entire technology suite globally and we don't wish to rebuild it - certainly not based on one airline chasing a commercial opportunity which may or may not be there. That would mean replicating all the work which has already been done. This whole debate looks different on a global basis."

Liney is supported by Brindle, who adds: "As soon as the [direct connect] strategy starts going out of that local level onto a global level, it's not going to work."

The difficulty is that the airline industry cuts across national boundaries, so it is difficult to create a new channel with critical mass. "The problem is when every airline out there implements things in a different way and then tries to force that through with no co-operation from the industry," says David Gross, senior vice-president supplier distribution at Sabre Travel Network. "It could be done a lot more efficiently if we could agree on the standards for the supply chain."

Cormac Whelan, chief executive of Datalex, responds: "Standards are important, but so is leveraging existing technology. I think part of the problem is the massive legacy environment which is a struggle to maintain."

But the GDSs and the travel agencies insist they are adding value for the airlines. The GDSs increase airline brand reach, give access to high-yield passengers and are working hard to meet the airlines' merchandising and ancillary needs. Besides, ancillary extras are often aimed at corporate travellers, so selling them through the GDSs and travel agencies makes sense, they say.

"The airlines should focus on how much they gain, as opposed to focusing on costs," suggests Gross from Sabre. Liney from STA Travel agrees: "If we [travel agencies] don't have a role to play, it won't be 'direct connect', it will be 'no connect' and the whole problem will go away. The real conversation is between us and the GDSs. Travel agencies and the GDSs either add value or they don't. If we do, that's life."

He adds the flight part of a trip is simply not that important to passengers. "If airlines want to go direct, they have to deal with the fact that they will be doing that without owning the real part of trip, which is the destination."

One of the drivers behind direct connect is cost and this is one of American Airlines' motivators. Garner explains: "From a cost perspective, American has to compete with Southwest's $39 fares. We can't just tag on a few dollars to cover our higher distribution costs." His opponents argue that a few dollars saved on distribution will not stop airlines around the world bleeding red ink, but Garner counters: "It doesn't take much money in the airline business to make a difference. For a carrier of our size, there is plenty of opportunity in terms of direct distribution."

But the survival argument does not wash well with the agencies. Liney from STA Travel argues airlines are getting it wrong and trying to pass the buck down the supply chain. "You have travel agents, technology companies and airlines. One of these is not allowed to die, and it is not the travel agencies or the technology companies. The question is, when airlines are not run on a rational basis, should that problem be passed on down the line?"

Fuel and labour rank neck and neck as American's number one cost. Aircraft overheads come next. Then distribution. The top three are largely out of American's hands, so the desire to regain control of distribution is hardly a surprise. This brings up the next attraction of direct connect: control.

"This is not a technology issue, it is about control," says Whelan from Datalex. "Here's a radical thought, the airlines want to own their product and control when, where and how they sell. Airlines want to wrestle back control of their customer from the GDSs. That's what direct connect is about."

Farelogix chief executive Jim Davidson agrees: "You don't want to look like the guy next door, it's about survival. Airlines need product control because of survival not because it's fun and fancy."

Fare distribution is a fundamental part of every carrier's commercial strategy, but since the airlines sold out of the GDSs they have had to pay steep market rates and sign full content deals in return for lower fees.

"We don't force anyone to give us full content," rebuffs David Doctor, who is Amadeus IT Group director airline and travel agency distribution. "Airlines have full control through the GDS. The idea that they have to go direct connect to have control doesn't make sense."

COMMODITY CONCERNS

Airlines are also frustrated their products are commoditised through the GDSs, stifling their ability to stand out at a time when the industry moves towards customised shopping. "Carriers differentiate today. They just don't get their differentiation to the market place as efficiently as they would like," says Brewer.

READ MORE 
 See our earlier analysis about American Airlines and Direct Connect
American Airlines believes direct connect is the solution. "We need a way to respond to customer needs," says Garner. "Direct connect is all about participating in a different way, instead of pushing out prices, we process customer inputs. The airline product is not a commodity. It is based on a full product offering and the technology needs to adapt to what the market is calling for."

Amadeus already provides XML connections to some airlines, says Doctor. "Montie [Brewer] was saying 'I want to be able to show a flat bed on the reservation screen'. With Amadeus, you can do that. It has been available for about 12 months. The world is moving on and we are trying to help with merchandising." He stresses that it is in the GDSs' own interests to be able to offer the full airline product range. "We want to get relevant content for the travel agents and, as more content is developed by the airlines, we have to be able to handle that."

Gross says Sabre offers allocated seating, merchandising and branded fares today. "Our objective as a GDS is to ensure we have full content for our travel agent customers, so, when airlines started unbundling and selling extras outside fares, we went to the airlines and said we want that content. We have spent tens of millions of dollars providing incremental capacity to do that."

But Garner from American responds: "We don't question that the GDSs are fully capable, we question whether they are capable of doing so at a cost which makes sense."

Indeed, he says Amercian Airlines is keen to work with GDSs in direct connect. "This is a message which often gets lost. Discussions continue. At this point, none of them have agreed to integrate and derive the benefits from direct connect," he says.

IF ITS ZERO GAIN, IT WON'T WORK

Mistrust is rife. Liney believes the airlines are simply playing the travel agents and GDSs off against one another, telling both sides not to worry about the other, while the airlines work to achieve their own ends. He adds that if airlines keep pushing their own agenda, with a clear winner and loser, "it's going to be a bloody mess, and it doesn't have to be". He stresses "in a partnership, both parties must gain. If there is zero gain, it won't work".

But this is precisely the problem, say the airlines. Their partnership with the GDSs is flawed because they refuse to recognise the airline as the customer. "It's not really a true partnership. If it were, we wouldn't have come to this," says Cheryl Reynolds, manager - distribution at Virgin America. She says Virgin America itself is too small to make a stand, but it is watching American Airlines' direct connect strategy with interest. "We're hoping they'll makes some headway with that."

Perhaps Chinese firm TravelSky has the right idea. Heralded by IATA for being far cheaper than the western GDSs, TravelSky is the dominant passenger service system and GDS in China. "Although we call ourselves a GDS, we act as an airline partner, we are not a traditional GDS," says Larry Liang, general manager airline business department at TravelSky Technology. "Although the Chinese airlines are big, they are not rich, so they don't have much money to spend on technology."

In truth, the direct connect Trojan horse may have invaded the GDSs' turf and become a big talking point, but very little has really changed. One thing, however, is clear. Whether or not American Airlines has found a winning formula with its direct connect strategy, it has blown a few cobwebs out of the system, disrupted the status quo and triggered a reaction. "We're relevant because we disrupt; because we innovate," says Datalex's Whelan. Maybe this was the intent all along.

For more on airline distribution issue and how social media could be a game-changer, read our guest column from SITA chairman and former British Airways chief information officer Paul Coby