One of the more transformational events taking place in the airline industry today is the increasingly tense situation between airlines and the Global Distribution Systems that are their "partners" in selling tickets.

It began when American Airlines, US Airways and other airlines decided to retake their inventory from the GDSs that have listed their flights and claimed a share of the ticket price for decades. The airlines do not want to eliminate the GDSs, but they do want broader competition, in part through an alternative mechanism to sell their seats and other services directly to customers. After all, airlines understand competition. They have to. None of them enjoy more than a 7% market share, and the top 10 airlines in the world together have less than a 40% share of global capacity.

However, when it comes to the GDSs it is a different story. A total of 60% of airline tickets are sold through travel agents and this sector of the industry is ripe for competition. Today, three players dominate the US field: Sabre with 58% of the market, Travelport with 33%, and Amadeus the rest.

As a business model, the GDSs do more to suppress competition than spur innovation. Seven years after deregulation, barriers to entry in the GDS space have blocked all new competition. Contrast that with domestic aviation, where low-cost carriers now account for more than 31% of airline service.

In 1978, consumers pretty much considered only schedules and prices when they booked flights. More than 30 years later, the GDSs still force the airlines to compete only on those factors.

GDS advocate Kevin Mitchell, chairman of the Business Travel Coalition, insists the system protects consumers. "The stakes in this conflict are clear," he says. "Either an improved airline industry and distribution marketplace centred around the consumer, or one that subordinates consumer interests to the self-serving motivations of individual airlines endeavouring to shift costs and impose their wills on consumers and the other participants in the travel industry."

Mitchell is right on one point: the stakes are clear. However, he's wrong on the bigger issue. This is a battle to create a better airline industry - one that is sustainable over the long term and where airlines compete freely. That is only going to happen when the airlines can control their own inventory. And that means airlines must be able to package their product based on their extensive knowledge of consumer behaviour as a way to best meet consumers' needs.

Consumers should be able to tailor travel to meet their needs. To name a few, the air-travel consumer can purchase only those items deemed to add value, such as upgrade a seat, pay to board early or buy a day pass to the airline's club if they have a long layover ahead. This is what airlines can offer with the new technology available today.

The GDSs - an old-school, outdated distribution vehicle - do just the opposite by thwarting new competition and stifling innovation.

Mitchell also rails against what he calls "hidden fees" such as seat upgrades, baggage fees, and charges for pillows and blankets among 16 revenue items the US Department of Transportation now wants airlines to report.

This, bear in mind, is an industry that earned a scant two cents on every dollar in 2010. Yet the government wants to further regulate airlines in a misguided attempt to tally those fees.

The airline industry already pays more than its share of taxes and fees. So those advocating more transparency in ticket pricing should also demand the GDSs disclose their take, as well as how the government is spending its share.

The US Department of Justice defines one goal of antitrust laws as reflecting a commitment to the "use of free markets to allocate resources efficiently and spur the innovation that is the principal source of economic growth". The GDS industry, born circa 1960, represents anything but free markets or innovation. Rather it protects a monopoly revenue stream at the expense of true consumer choice.

In deregulating the GDS industry, the US DoT puts its faith in vigorous anti-trust enforcement among other things that would help ensure competitive markets - but that has not happened. No matter how well-meaning those assumptions they have not held water, largely because of the power of the legacy GDS industry. So perhaps it is high time the DoJ file suit against the GDS monopolists.

The airline industry desperately needs a correction to free it from the choke-hold of the GDS and spur the innovation anti-trust laws are designed to promote.

Source: Airline Business