Orbitz
One by one, airlines are waking up to the sobering reality of the modern Global Distribution System (GDS) model, which they created decades ago. Two carriers have now taken legal action, and this is only the beginning. If more airlines want to see changes and lower costs, they should join forces instead of watching from the sidelines.
Judge Miriam Goldman Cedarbaum of the United States District Court for the Southern District of New York is about to become an expert on airline data distribution — in the 82nd year of her life. You can see her name stamped on a complaint (pictured above) filed last week by US Airways against Sabre, the largest GDS in the United States.
Sabre should take this lawsuit very seriously. Cedarbaum is not just any judge, and she is certainly not to be trifled with. One of the many high-profile cases she has overseen was against would-be Times Square bomber Faisal Shahzad, who was sentenced to life in prison without parole in October.
The most important reason for Sabre to prepare for a serious fight is the actual merit of the US Airways complaint, which the GDS predictably dismissed in a press release after the court filing. The airline accuses Sabre of monopoly, unfair practices and stifling competition by “locking travel agents” into using the GDS, so they “effectively become unable and unwilling to provide their customers with alternative, more efficient” booking channels.
“Rather than compete on the merits, Sabre has used its massive power over airlines such as US Airways to entrench its antiquated and inefficient technological systems, to preserve its supra-competitive booking fees, and to harm competition,” the carrier wrote in its complaint.
“Sabre’s technology has hardly changed from your grandfather’s distribution system, and was long ago left in the dust by new, innovative solutions that are web-based and take advantage of the networked economy,” it added. “These new offerings, however, have been stifled by the GDSs’ grasp over travel agencies and the exercise of their market power over airlines.”
The airline is referring to the technology I’ve written about before, known as a “Direct Connect” model, which allows carriers to host their data and make bookings independently of a GDS. Airlines prefer that model because it lets them control their data and offer non-airfare products, and it also saves them lots of money.
As I explained in February, about 60 percent of the roughly 1 billion tickets issued worldwide each year are sold through a GDS, according to Farelogix, a technology company mentioned in the US Airways filing. The average GDS fee paid by the airlines is about $12 per ticket, or more than $7 billion a year in distribution costs, Farelogix CEO Jim Davidson told me. In contrast, Farelogix’s “Direct Connect” allows carriers to spend only between $2 and $3 per ticket, saving about 80 percent of the current costs.
In its court filing, US Airways said that 35 percent of its revenue, “amounting to
over $3.5 billion annually, is booked through Sabre.” That’s exactly why no airline wants to be taken off a GDS — whether Sabre, Travelport or Amadeus. That’s also the reason why US Airways is only the second carrier — after American Airlines — to stand up to a GDS.
Having just written about a hybrid model that would make it possible for GDS portals to provide access to a carrier’s “Direct Connect” channel, I was surprised when US Airways signed a new agreement with Sabre several weeks ago. Instead of joining in America’s efforts to change the GDS model, US Airways is simply caving in, I thought.
Earlier this month, American reached an agreement with Expedia to implement a hybrid model, and then sued Travelport and Orbitz, claiming violation of antitrust laws. Online travel agencies like Expedia and Orbitz rely almost exclusively on GDS use, and some of them are owned by GDS companies.
Now US Airways has reconsidered and decided in favor of a fight. In its complaint, it says that Sabre forced it into their latest contract with “numerous oppressive and
anti-competitive terms.” The carrier “had no choice but to sign the agreement, which it did under protest, or face a complete shut off from Sabre’s network,” it said.
One of the most draconian clauses is that US Airways is banned from offering fares on its website unless it also makes them available to Sabre. In addition, Sabre penalizes travel agents who book tickets through any other channel.
As my record in this column shows, I’m a frequent critic of the airlines. But their complaints against the GDS companies are legitimate and need to be addressed. What the GDS management teams are doing is nothing short of business bullying. Worse yet, they pretend to be victims, trying to trick consumers into supporting them by falsely claiming that their model is the only way to ensure comparison-shopping.
Instead, they should be less greedy and let go of their unrealistic dreams of enormous and easy profits. Resisting inevitable change as a result of advanced technology is a recipe for extinction, not prosperity and longevity. The sooner the GDS companies realize that, the better for all parties in the air travel system, including consumers.
For their part, airlines should unite in their opposition to the current GDS model if they want to see results they like. They shouldn’t leave it to American and US Airways to fight their battle alone and then benefit from the outcome — and I’m sure the outcome will ultimately be more favorable for the airlines than the present state of data distribution.
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The new airline data distribution model I predicted in February has just become a reality. Expedia, the most popular online travel agency, agreed this week to carry American Airlines data hosted by the carrier’s “Direct Connect” channel. Expedia’s consolation prize is that it will use Global Distribution System (GDS) aggregation technology.
Since Dec. 31, when its contract with American expired and it decided not to renew it, Expedia had been resisting the airline’s attempts to move to a direct channel. Why? Because it wanted to continue to receive sizable kickbacks from Sabre, the GDS it uses to display and book flights.
American insists on “Direct Connect” for two reasons. First, the channel allows it to control how the data is displayed and offer customized options to travelers, such as priority check-in and boarding, which will increase revenue. Second, the cost of “Direct Connect” is much lower than the GDS fees American used to pay Sabre, which has its own quarrel with American.
After a January visit at Farelogix, a Miami-based technology company that is building direct data-hosting and distribution channels for about a dozen airlines, I suggested that a solution to the dispute between American and Expedia (as well as Orbitz) may be a hybrid model.
As Farelogix CEO Jim Davidson told me, the GDS system is not going anywhere, and it provides the best and fastest data distribution. No airline is disputing that or trying to make the GDS model obsolete. But there is a way to integrate “Direct Connect” in a GDS. All three GDS companies — Sabre, Amadeus and Travelport — have been bad-mouthing “Direct Connect” because they stand to lose lots of money.
Now Expedia has realized that a hybrid model is the future of airline data distribution. Instead of fighting it, the GDS companies should get over the past and help to improve the new model, so consumers have the best possible information when comparing prices across airlines.
Until the new system is in place, Expedia will use the existing GDS model to display and book American flights.
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Don’t be afraid — this is the message I have for travelers who may be concerned about losing the ability for comparison-shopping because of the war between American Airlines and online travel agencies. The longtime Global Distribution Systems (GDS) model is about to change, and many people stand to lose lots of money. That’s why they are trying to scare you.
For decades, the GDS model has been the norm for distributing airline data and booking flights, which has given the three main GDS companies in the world — Sabre, Amadeus and Travelport — enormous power.
You might have heard that American was on Sabre and United on Apollo, which is now part of Traveport. That means that the respective GDS hosts the airline’s data and controls its content, delivery, display, and most of its sales. The airline gives the GDS its data in parts, but it’s the GDS that in effect manufactures the airline’s product.
When an airline is so much dependent on a GDS, it ends up paying a high price. With all the money the industry has been losing in recent years, it was no surprise that airline executives began looking for ways to lower distribution costs.
In the meantime, technology companies like Farelogix and Datalex were hard at work trying to build channels through which airlines could distribute and sell their products directly to buyers — a capability that would free them from the grip of their GDS and significantly reduce costs.
In late January, I visited Farelogix’s main office in Miami to learn more about the company’s game-changing products. Jim Davidson, the president and CEO, told me that a dozen airlines now use a “Direct Connect” channel, including American, United, US Airways, Air Canada, Lufthansa, Emirates and Singapore Airlines. So far, that direct channel has been implemented on the carriers’ websites and in their reservations departments.
However, that’s not where the majority of airline tickets are sold. According to Farelogix, about 60 percent of the roughly 1 billion tickets issued worldwide each year are sold through indirect channels, and virtually all of them use a GDS. The average GDS fee paid by the airlines is about $12 per ticket, or more than $7 billion a year in distribution costs, Davidson said. In contrast, Farelogix’s “Direct Connect” offers a carrier the opportunity to spend only between $2 and $3 per ticket, saving about 80 percent of the current costs.
Does it then surprise anyone that American wants to expand usage of its direct channel to third-party providers, such as traditional and online travel agencies? The direct model offers more benefits than cost-saving. It allows the carrier to control the search results when you look for a flight, and to display extra products like priority check-in and boarding, which bring in hundreds of millions of dollars in annual ancillary revenue.
“American’s approach will allow travel agencies the freedom to communicate reservation data directly with the airline, in the same way that many agencies work with hotel and car rental companies today,” the carrier said about “Direct Connect” on its website in December 2010. It advised customers to use sites like Kayak, which shows flight data but doesn’t have booking capabilities, to compare fares and then book a ticket on the carrier’s website.
The biggest irony in this saga so far has been the January announcement by Sabre, the GDS American created more than four decades ago and the host of its data until recently, that it intended to drop American data from its offering later in the year. Litigation followed, but later the two companies agreed to cool it off and negotiate.
Farelogix’s Davidson predicted that the future standard will probably be a hybrid model, because the GDS system is not going anywhere, and airlines need that system’s capability to reach the vast and lucrative business market.
But the carriers don’t need to outsource the “manufacturing of their products” to a GDS anymore, Davidson said. They can host their own data, do all the packaging, and deliver their final product to the GDS, which can just display and sell it. Farelogix calls “Direct Connect” an airline’s “merchandising engine.” The carriers will still have to pay GDS fees, but they would be much smaller than $12 per ticket, because the GDS function would be much more limited.
Orbitz and Expedia are resisting American’s attempts to move to a direct channel, which have proven successful with Priceline and other sites, due to financial considerations. Although not publicly known, the revenue they get from their GDS kickbacks is most likely higher than what American has offered them for flight displays and bookings through “Direct Connect.”
Why are the GDS companies resisting the direct model? Obviously, because they would lose billions of dollars in revenues. In fact, “Direct Connect” can be easily integrated into a GDS, Davidson said, with some airlines taking advantage of all current GDS functionalities, and others using only the ones they need. Not only have the GDS companies rejected that, but they have began penalizing travel agencies and other providers that use direct channels in addition to their GDS. In turn, American has started imposing fees on GDS bookings.
The GDS companies and other supporters of the current system have been crying fowl about American’s demands, accusing the airline of trying to suppress data transparency and make comparison-shopping more difficult for consumers.
But is that a fair criticism? If you examine the direct model closely and see how it works, which I’ve done, you might disagree with the status-quo advocates. Integrating “Direct Connect” properly with or in a GDS would do nothing to prevent comparison-shopping. Actually, there would be an added benefit for travelers, because they would be able to see not only airfares but any extra fees and charges, as well as products like preferred seating and priority boarding.
There is only one thing about “Direct Connect” that concerns me a bit. In October, I wrote about airlines finding new ways to overcharge unsuspecting fliers by using sophisticated software designed to increase prices based on customers’ “willingness to pay.” One of the direct model’s features is that it allows carriers to display search results based on “who’s asking,” as Farelogix puts it. I fear that when they have full control of their product-making and distribution, the airlines might come up with even more ways to “maximize revenue.”
If that happens, we’ll have to become more knowledgeable and sophisticated travelers to make sure we aren’t taken for a ride.
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If you are a frequent flier, you know there is a war raging between American Airlines and third-party travel providers, such as online agencies and Global Distribution Systems (GDS). It appears things might get worse before they get better, leaving millions utterly confused. So I’ve created a new addition to the “On the Fly” curriculum to help you through the hard times.
The two-hour live seminar, FLY 203: The travel-booking war and the future of airline data distribution, will be first offered in Miami and Honolulu next week, and in Washington, San Juan and San Francisco next month, followed by other cities around the country. If you are not in any of those cities, you can join in from anywhere for an hour-long webinar version, FLY 115: Weathering the travel-booking storm, on Feb. 10.
I’m not advocating any particular position in the current dispute, and my only goal is to give you all relevant information, so you can make the best decisions when it comes to booking your travel.
The new seminar offers a detailed description and explanation of the current airline data distribution model and the fundamentals of today’s booking system. It also looks at the events of the last several weeks and provides a factual rundown of the arguments and positions of all sides involved in the dispute.
Most importantly, the session examines how the current conflict affects travel agencies, companies and individual travelers. It offers specific advice on what they can do to avoid being caught in the crossfire, and to make sure they don’t increase costs and sacrifice convenience and comfort.
Late last year, American banned Orbitz from booking seats on its flights. Earlier this month, Expedia stopped selling American tickets. Meanwhile, Delta removed its data from eight less popular sites. Sabre, the GDS American created more than four decades ago and current owner of Travelocity, announced its intention to drop American data later in the year. In response, American sued, and last week it won a court order temporarily blocking Sabre’s move.
Thus began the very public war — and possibly the start of a new trend in the distribution and sales of air travel products. Airlines incur significant costs by having their flights booked on a GDS, which also prevents them from selling additional products, such as preferred seating, priority boarding and doubling or tripling your frequent-flier miles for a fee. American wants both online and traditional travel agencies to use its DirectConnect channel to lower costs and increase revenue.
The significance of American’s move is much bigger than a dispute with a couple of third-party sites. It seeks to shake up the longtime airline data distribution system, including the GDS model. Travel agents haven’t received airline commissions for years, except for the largest agencies, though a part of the GDS fees airlines pay goes back to agents. American wants to reduce or scrap those fees.
In an indication of where things are going, American CEO Gerard Arpey said in 2009 that third parties should be paying the airlines for access to their data, “rather than us paying them to distribute our product.”
American has imposed “booking source premium” fees on some GDS users. Those fees will have to be either absorbed by travel agencies or passed on to passengers. Critics accuse American of trying to suppress transparency and deny consumers the opportunity to compare various airlines’ fares on the same screen, potentially forcing them to pay higher prices. But American points out that a change in the GDS model — establishing direct channels with airlines — would secure customers’ continued comparison-shopping ability.
So it’s messy out there, and the new seminar will try to make it less so in your mind by giving you specific tools that will help you follow the best booking process for you.
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Long before the current American Airlines campaign to shake up the data distribution system, airline agents often refused to change tickets issued by travel agencies and third-party websites, such as Expedia and Orbitz. Dealing with those companies’ agents can be frustrating, and many fliers call the airlines for help directly, only to be sent back to the “original booking source.” Why?
Because once the airline takes control of the ticket, it effectively releases the original booking source from its responsibilities as the issuing agent — and when the booking source loses control of the ticket, it will no longer keep track of your reservation.
So if there is a schedule change, that source won’t alert you, because it won’t know itself that a change has affected you. In other words, the link between the booking source and the airline will be broken, and the source won’t act as your agent. Instead, the airline will have to assume responsibility not only for notifying you of any changes, but also for rebooking you and reissuing your ticket.
Airlines don’t want that responsibility. The reasoning they offer customers usually is that the issuing agency may not have transmitted the passenger’s correct and full contact information, and they don’t want to be blamed in case you weren’t informed of any changes. That can be easily taken care of when the customer calls to voluntarily change a ticket, but there is a more serious reason, which airline agents almost never mention.
It comes down to money. Here is the airlines’ argument: They will be happy to keep track of your reservation, notify you of schedule changes (whether they actually do is another issue), rebook you and make any other changes, if the particular fare allows them. But if this is what you want, you should book your ticket directly with them. They pay web travel agencies to display their flights. If you booked your Delta ticket on Orbitz, why should Delta, which is paying Orbitz, have to bear the labor and other costs of changing your ticket?
Now, Delta will charge you the $150 or $250 change fee either way, depending on your fare rules, but that’s a different issue. This is about spending the time of a reservations agent — and possibly other airline employees. Delta prefers to use those employees’ time and effort to help direct Delta customers, not those booking through a middleman.
So don’t be surprised if an airline agent declines to deal with your reservation and sends you back to Travelocity or Priceline — or wherever you booked your ticket. That other agent may not be as well-trained as an airline employee and may have a limited capacity to help you, but you should think about that before you buy a ticket.
When might an airline agent agree to help you? Most likely, after travel has begun or if you are affected by severe weather and the airline has issued a change-fee waiver. Some agents may take mercy on you if you’ve been battling in vain with an online agency’s outsourced customer-service representatives in India or other overseas locations. It’s fashionable to pick on India, but did you know that Expedia has an English-speaking call center in Egypt?
As with any exceptions you want made for you, your chances of succeeding are much higher if you are an elite member of the airline’s loyalty program. Just ask politely — not as if you are entitled — and ensure the agent that you understand it’s your responsibility to check your reservation’s status from time for time and stay informed about any schedule or other changes.
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