Behind the headlines and legal wrangling dominating the distribution of airline fare data for nearly a year are two sides that staunchly believe their views should prevail, reflecting the complexity of a brutal conflict that could take years to resolve.

Lawsuits filed against global distribution system giant Sabre by American and US Airways follow a tenuous truce reached about four years ago by some airlines and GDSs to lower fees, but that was prior to fuel cost volatility that erupted in 2008 forcing every carrier to carefully scrutinise costs within their control.

As Atmosphere Research Group co-founder Henry Harteveldt points out, bringing down distribution costs and credit card fees are two areas that are in the bull's eye for airline CFOs. "GDSs are one of the last remaining controllable expenses," he says.

American's combined costs of commissions, booking fees and credit card expense in 2010 was roughly $976 million while selling expenses at US Airways grew 10.3% year-over-year in 2010 to $421 million due to higher credit card fees and an increase in commission expense as the carrier's passenger revenues increased 13%.

A source close to the American Airlines disputes with the Sabre and Travelport GDSs says the discussions regarding direct connect technology and how the GDS models could evolve date back to mid-2009, and notes before headlines emerged this year there were long discussions about co-operative solutions. The long term issues remain unresolved, the source explains.

The direct connect technology at the heart of the controversy largely between American Airlines and GDS companies is far from a new concept as low-cost carriers in the middle of the last decade began pushing for direct connects once they began refining their business models towards a more hybrid concept.

Even some legacy airlines have managed to succeed in creating direct connect pacts with large GDS companies.

In November 2010 just before the distribution controversy erupted full force in the USA, GDS Travelport signed a deal with Air Canada that entailed the GDS interfacing with Air Canada's "ac2u API" direct connect technology.

Travelport heralded the agreement as a "great collaborative relationship between Air Canada and Travelport, including Travelport connecting directly to ac2u, Air Canada's API to allow customers to truly distinguish an airline's entire suite of products".

Air Canada was a pioneer in the product unbundling that has now captivated its North American counterparts. But as former American executive and now Virgin America chief executive David Cush said prior to his jump to the low-fare carrier Air Canada was not a big enough force in the USA to force the technological changes necessary by the GDSs to support merchandising.

But forceful calls by both American and US Airways and to a lesser degree by their legacy competitors during the last year have thrust how to manage merchandising through the distribution chain under the spotlight, creating uncertainty and unrest in the travel management industry.

PhoCusWright analyst Douglas Quinby in his "Airlines vs the World" report concludes the long-term airline strategy is to advance distribution from fare and schedule-led selling to merchandising.

"In short, airlines want to transform themselves from suppliers of commodities to product marketers," says Quinby.

US Airways expects to record a la carte revenues of more than $500 million in 2011, and believes in the future it could net $300 million alone from its "Choice Seats" option "once we can sell through all distribution channels", says carrier President Scott Kirby.

US Airways is publicly pushing GDSs to evolve their technology to support product unbundling and merchandising and at the same time achieve lower costs. Kirby states the carrier is willing to work with those companies "to see those costs come down incrementally and work with our GDS partners as they try to rework their business".

Obviously evolving the GDS model to support merchandising by airlines requires an investment by the GDS companies in creating and expanding technology to support a la carte sales. "No one works for free," says Harteveldt. "GDSs certainly deserve to get paid to develop technology for airlines to sell optional products."

"I think what airlines want in their opinion is something that is fair," remarks Harteveldt, noting it does not cost any more to process a $25 bag fee than a $50 charge.

Sabre stresses that for more than a year it has said it would "not charge airlines any additional fee to help them market and sell their ancillary products in the GDS. Providing this technology is part of the overall value we deliver to the airlines," says company Sabre Travel Network senior vice president of marketing Chris Kroeger..

During the last three years Sabre has supplied airlines and travel agents the ability to sell ancillary products including premium seats and fare families, working with Aeromexico, Qantas, Air New Zealand, United and WestJet, says Kroeger.

"We are leveraging industry standards to enable the integration of ancillary and branded fare content into shopping, pricing and availability displays," he states.

That includes IATA's Electronic Miscellaneous Documents (EMD). Sabre has worked with Air New Zealand to launch the IATA EMD to ensure travel agents and the carrier's customers can shop, book and fulfil merchandising offerings, Kroeger explains. "We are working with two European carriers to do the same. "

But airlines still remain cautious and "want to make sure everyone goes into this with their eyes wide open, that they negotiate agreements that will not allow third parties to suck all the profit out of the product," says Harteveldt.

Both US Airways and American in their respective lawsuits against Sabre argue that no incentive exists for travel agencies using GDSs to innovate given the long-established financial kickbacks agencies receive from the GDS companies that are included in the fees GDS charge to airlines. "The higher the booking fees that GDSs receive from airlines, the more GDSs may be willing to pay travel agents in kickbacks," argues US Airways.

More importantly, contends US Airways, the corporate travel agents handling bookings that represent the lion's share of airline revenues have become fully dependent on the "antiquated technology" of the GDS platforms. To prevent those agents from switching to other distribution technologies to even other GDS systems, "each GDS has built or acquired some of the most crucial peripheral systems these travel agents use, including user interfaces, customer service systems and accounting systems".

Those deep ties between the GDSs and travel agencies leave unanswered many thorny questions as airlines seek to maximise their revenue through merchandising while minimising the selling costs of those products.

"How will agencies be compensated for ancillaries and bundled services? What is the RoI for rewiring existing point-of-sale and mid- and back-office systems to support new types of airline offers," asks Quinby of PhoCusWright. "The absence of a compensation model and a very cloudy path to realising ROI on the necessary technology investments have raised many concerns among the agency community."

Harteveldt warns of an increasingly fragmented distribution industry entailing various suppliers opting for differing distribution strategies, complex technology, and a need to "reassemble" content for booking including PNRs, compliance and expense reporting.

Sabre's Kroeger acknowledges that as distribution evolves over the next decade, large corporate buyers are working through travel policy and expense reporting issues being complicated by the new supplier product and ancillary strategies. "Distribution partners will need to continue to innovate and invest in order to meet the needs of suppliers and buyers."

The company's major concern, says Kroeger, is "a technical solution being proposed that takes the entire travel transaction outside the GDS environment. This causes a variety of technical and operational inefficiencies, destroying the ability to transparently comparison shop the way travel buyers have said is important to them. We do not envision supporting the breakdown of an efficient, transparent marketplace".

Source: Air Transport Intelligence news