[UPDATE, Nov. 28, 2016: The Germany-based distributor with which US Airways tested its Farelogix-powered direct connection was consolidator Aerticket, according to case testimony. US Airways was disappointed with the volume of bookings processed this way.]
New York — According to court testimony, US Airways six years ago prepared to pay travel agencies as much as $4 per ticket issued through a new direct connection. It was ready to opt out of the prevailing discount program and pay Sabre’s “rack rates” on remaining GDS bookings if Sabre dropped a prohibition against direct connections. US Airways had tested such a connection in Germany, where its Sabre agreement did not apply.
American Airlines (on behalf of US Airways, which it bought in 2013) and Sabre are arguing their respective cases here in federal court about who bullied whom in their 2006 and 2011 negotiations. As they do, the rest of us benefit from learning previously untold stories. Loads of confidential information about airline distribution is surfacing.
For travel management companies and corporate travel buyers, it’s instructive to learn just how close airlines have come to going direct. While there is relative peace right now in airline-GDS land, at least in the United States, the case is a reminder of its fragility.
AA’s attorneys and witnesses are trying to prove that Sabre forced US Airways to sign a full content agreement. They’re trying to prove that this unreasonably restrained trade and caused the airline harm. They’re also trying to demonstrate a conspiracy among GDS companies.
They have produced evidence of US Airways’ short-lived plan for an alternative distribution reality using Farelogix technology. They said data processing for a usairways.com booking circa 2012 cost just under 50 cents per ticket, versus nearly $9 for a booking through Sabre.
A so-called direct connection to a travel agency would be about $3, in the estimation of witness John Gustafson, a longtime airline distribution leader who now is American Airlines VP for digital channels.
Add to that the maximum $4 payment as an incentive for agencies to use the direct connection, and you have an expense which is a couple dollars shy of the Sabre cost.
Asked why the airline would make such an offer, AA SVP Andrew Nocella testified that US Airways thought it needed to “make up” some of what GDSs pay travel agencies in incentives.
Nocella said the airline’s goal was to have its own “pipe” to travel agencies.
As had been the case since their 2006 deal, though, the “full content” agreement Sabre sought and eventually secured prohibited the airline from offering discount fares or better benefits on its website, surcharging GDS bookings (as Lufthansa now does) or establishing a direct connect program.
The US Airways story also helps illustrate a possible (some say likely) path forward in airline distribution. Already we have programs like Concur’s TripLink and Lufthansa’s direct connect. AA and others have enabled significant GDS bypass on the leisure side with the likes of Priceline.
If airline attorneys convince this jury that US Airways was unlawfully forced into accepting terms including a ban on direct connections, Sabre and other GDSs will be hard-pressed to insist on such deals in the future.
Not commenting on this case, ARC CEO and president Mike Premo this month at ARC’s TravelConnect conference outlined a few possible outcomes in the United States.
There’s an “evolutionary” scenario, he said, in which “the distribution landscape a few years from now looks a lot like today.” Airlines and GDSs would make “modest” progress in using NDC to “close the content gap” between agencies and airline sites on ancillary services.
At the other extreme, Premo suggested, is “the full Lufthansa.” Here, a major carrier adds a big fee for bookings in indirect channels, weathers the furor and shifts “a material number of customers” to direct channels, Premo said. In this storyline, other major carriers follow that model as their GDS contracts expire and big agencies take to the direct connects. That would halve ARC and GDS activity, resulting in “significant” changes in costs for remaining participants in those channels, said Premo.
Premo is betting on a hybrid of those: a “chunky, cherry-picking scenario” in which “the continued divergence of content creates enough friction or commercial effects that larger, more technically capable players sit down with major airlines and cut some deals.”
“In this scenario,” Premo said, “some of the large online travel agencies, Concur and perhaps KDS establish deep NDC links into the carriers and offer practically every product for several major carriers with added efficiencies from the reduction of debit memos and other servicing enhancements. This, in turn, puts pressure on TMCs in particular to keep up. If airline fulfillment processes instead of GDS/ARC processes were utilized here, GDS and ARC volumes could fall by 15 percent to 25 percent, pushing up costs for those remaining in the current methodology.”
In a followup email to The Company Dime, Premo wrote that people “underestimate” the pressures on airlines and their interest in reworking distribution. There are “meaningful” incentives for major airlines, through incremental revenue and “potentially cost savings,” Premo added. “If one carrier starts moving the needle away from today’s model, it’s going to make the pressures that much stronger — and create competitive challenges within the various agency verticals.”