The US majors have finally managed to wrestle their selling costs down after a series of landmark agreements with the global distribution systems that sees the much-hated travel agent incentive fee fading away

The long duel between the airlines and the technology companies that get their product out into the marketplace - the global distribution systems (GDS) - has entered a new stage. It is one where the carriers have rewritten the basic structure and dynamics of their relationship broadly in their favour.

© Gareth Burgess

Just three years after the GDSs were deregulated in the USA, the carriers, beneficiaries of more than a quarter of a century of deregulation, reaffirmed their balance of power - for the time being. The timetable for the change came about as the transitional or bridging agreements signed at GDS deregulation, the so-called DCA3 or direct connect access three-year pacts, expired.

These deals set out the criteria for both players for longer-term relationships, acceptable economics for the airlines and so-called full-­content access for the distributors. The latter is important as the GDSs crave all of a carrier's fares, including its lowest and web-only offers. At the renewal talks that have taken place this year, the airlines and distributors each took dramatic steps to alter the basic economics of travel distribution.

These had to change, for airlines believed they were paying too much both for what some felt was a commodity product, and for the reviled incentives, which airlines effectively paid, made to travel agents to book via the GDS. The new deals came into force in September, with Sabre, Travelport and Worldspan, with a few exceptions, signing multi-year full content agreements with all of the US majors.

The deals feature an "opt-in" arrangement where travel agents choose to work with the GDS. In return, and for access to an airline's fares held by the GDS, the agent is not liable to pay a $3.50 per segment charge. If the agent chooses to "opt out" it pays. Northwest tried to unilaterally impose this system in 2004 but failed to make it stick. This time around the airlines have universally taken this path, and their collective muscle has paid off.

However, while the airlines may be able to claim the upper hand at present, the corporate travel industry is not standing still. Faced with threats of Draconian economic penalties crafted by the carriers to drive the agents to those intermediaries of their choice, corporate travel businesses have responded with an ad hoc coalition of their own. This protective alliance insulates the agents for the time being from the extra fees. In the longer term it is poised to spur the development of new technologies to lower costs. And the increased clout of the agents stands to alter the balance of power again.

Indeed, mega travel agencies are turning to alternatives such as the Farelogix fare-integrator or are already developing their own in-house technologies that will give them more power to gather or aggregate fares data. American Express Travel, for one, says it will increasingly rely on its proprietary TravelBahn network and avoid the GDSs when it can. Meanwhile, Carlson Wagonlit Travel is touting its own Symphonie direct channel and is predicting rapid consolidation. Kevin Mitchell of the Business Travel Coalition, a US travel industry lobby group, says: "These developments are probably more important to airline distribution than any development in a decade, including the commission cuts of the 1990s", when airlines ended payments to agencies based on a percentage of a ticket price.

There were few who believed the wave of DCA3 deals in 2003 were anything other than interim measures. With mounting cost pressures carriers have used every opportunity to work around or bypass the GDSs. American Airlines, for example, was spending $285 million a quarter on distribution.

This approach used both technology and economic incentives to make it easier, more inviting and cheaper for customers to go directly to the airline's own distribution systems, their websites. The airlines that were the most successful at getting people into their own websites were low-fare airlines such as AirTran, JetBlue and Southwest Airlines.

Then the airlines courted entrepreneurs such as Orbitz founder Alex Zoghlin, who created a new web-based, low-cost booking technology called G2 SwitchWorks, and Jeremy Wertheimer, the brains behind ITA Software, a G2 rival. These technologies reached their high-water mark as the airlines' renewal negotiations progressed slowly, and as customers as large as the Star Alliance (as well as many of its individual members) endorsed them.

But nothing changed the basics: the airlines still needed the GDS. The new technology, for a while dubbed global new entrants (GNE) or "Genies", would not change the world. They have yet to move beyond limited adoption, perhaps confirming the sceptical analysis of some that the airlines used the GNEs as a competitive tool to keep their hand strong in the GDS renewal negotiations. Even the most ardent GNE supporters changed their language and began talking about them as "limited content providers" rather than as "the answer".

So it was back to basics, but the basics had changed, as the up-and-down American-Sabre relationship demonstrates. Once conjoined under the ownership of AMR Corp, the largest US-based distribution technology provider became a publicly traded firm in 2000, grabbing travel agency market share with the aggressive use of tactics such as volume discounts, override and loyalty commissions and an attractive online presence through its Travelocity unit, which has courted corporate and business accounts as eagerly as it has taken leisure market share.

But these negotiations, the largest and most significant in North America, became bogged down, and all other parties manoeuvred as they watched what American calls "the most spoken-about, but least-visible, negotiations" in years.

And each side took steps that would reshape the business. American, in what Forrester analyst Henry Harteveldt called a "transforming" step, told the agencies that it would add the stunning $3.50 per flight segment surcharge on any booking made through a distribution channel other those it preferred. The other majors were to fall in line.

Sabre, though, had its counter-proposal, dubbed EAS or the Efficient Access Solution. EAS is simple: if an agency signs a preferred relationship with Sabre, Sabre would protect them from the new airline fees - for a charge. The payment of about 80¢ a segment-booking to the GDS is a tectonic shift in an industry in which incentive fees that agents earned for bookings were often a major source of profit. In the case of large agencies or corporate accounts that have retained individual agreements, EAS means they subtract the 80¢ from an agreed incentive fee, which is still a drastic decrease in revenues. Sabre says: "Our customers knew that things had to change. The EAS brings stability and predictability," as well as full-content access.

Access all fares

The importance of full-content access cannot be overestimated, says Michael Koetting, executive vice-­president of Carlson Wagonlit. Without it, corporate agencies and departments, which are often the same in this era of outsourcing, cannot do their jobs and, as importantly, lose control of employee spending and adherence to corporate travel policies, he adds. In fact, access to all fares, including so-called web-only, private and promotional fares, was instrumental in the formation of the DCA3 deals, says Sabre.

It notes that full content is "crucial to an agency's ability to fulfil their mandates to manage all travel, to take full advantage of their accounting, tracking and their expensive back-office infrastructure". And since the terror scares of August, it has become all the more important for corporate travel managers to be able to locate, track and communicate with all a company's travellers on the road.

Within weeks of American's preferred access plan, other majors had come up with their own versions of the scheme, although the $3.50 per segment element was common to all. To get full access to all airline fares and seats without having to pay the extra $3.50 airline fee, agencies would have to agree to plans like EAS and start paying the companies which had long been paying them.

Still all eyes were upon Texas, home of both American and Sabre, and by evening on the last business day of August, they came to an agreement. American says: "We more or less got the economics we wanted we are much closer to the cost structure of the low-fare carriers." Meanwhile, Sabre got deals with all big six US carriers, while leaving most agencies reliant on the new EAS scheme and its death knell for incentives.

The American-Sabre pact may have prompted an "industry-wide sigh of relief", says PhoCusWright consultant Norm Rose. "The basic dynamic of the distribution network has changed," says Jay Campbell of, an authoritative analyst of the industry. Whether travel managers actually write cheques to the GDS or simply lose incentive revenues and take a closer haircut, and whether some agencies start to impose a service charge, as some have, the issue has become more than a debate about costs. Instead it is about control: who controls content and who controls cost.

As Tony D'Astolfo, vice-president of travel services at Rearden Commerce an online services marketplace, asked at a webcast seminar organised by the Business Travel Coalition: "How much do you control in this debate?" Mitchell says: "Now that travel managers are going to be writing cheques, they want a seat at the table. The GDSs probably didn't think of this when they were coming up with the programmes."

As Koetting of Carlson Wagonlit put it, travel managers must decide if distribution choices "are something they want to participate in - or cede to another party". Mitchell says the developments should be a cautionary lesson to the European Commission as it mulls full deregulation of the GDSs in Europe. "The potential for abuse, for misuse of market dominance and power, should be apparent," he says.


What about Amadeus?

The leading European GDS, Amadeus, has largely stayed out of the US fray, having unsuccessfully tried litigation against the US carriers as it considers its next move. With a US market share of under 10%, it is the odd man out, as it is the only one of the big four GDSs to face the $3.50 segment fee.

When Delta Air Lines moved at the start of September to impose the fees, Amadeus North America executives called the move "extremely disappointing", and said Amadeus would temporarily reimburse agencies for the $3.50 fees while negotiating with the US carriers. ■

Source: Airline Business