Monthly Archives: December 2016

Before We Break, An Appeal

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Jury Finds Sabre’s US Airways Contract Violated Antitrust Law

[UPDATE, March 22, 2017: U.S. District Judge Lorna Schofield denied Sabre’s motion to set aside the verdict against it. She cited case law explaining that such a motion can be granted “only if there exists such a complete absence of evidence supporting the verdict that the jury’s findings could only have been the result of sheer surmise and conjecture, or the evidence in favor of the movant is so overwhelming that reasonable and fair minded [persons] could not arrive at a verdict against.”]

[UPDATE, Feb. 8, 2017: Sabre’s fourth quarter expenses included $41.9 million of litigation costs. The company noted a $32 million accrual for the US Airways case, covering the jury award and estimated attorneys fees. Sabre executives on Feb. 7 reminded investors that the case is not finalized as the company opposes the verdict. “We continue to believe we operated fairly and accurately,” said new Sabre CEO Sean Menke.]

[UPDATE, Jan. 3, 2017: Sabre named Wade Jones interim president of its Travel Network GDS business, replacing newly named Sabre Corp. CEO Sean Menke. Jones joined the division in 2015 as SVP of marketing and strategy. This article has been updated with that information.]

[UPDATE, Dec. 22, 2016: If Sabre is to file a motion to “set aside the verdict,” as its statement indicated it would, it must do so by Jan. 9, 2017, as per court order. Briefs in opposition to that motion would be due by Jan. 25, and replies to those by Feb. 1.]

[UPDATE, Dec. 20, 2016, 5:2o p.m.: This article now includes reaction from American Airlines. We also corrected a typo on the damages figure.]

New York — Jurors for the US Airways v. Sabre antitrust trial here found that American Airlines produced enough evidence to prove Sabre’s power hurt competition in the market for global distribution system services. They ordered Sabre to pay the airline company $5,098,142 in damages. They also determined the airline did not prove a GDS conspiracy.

Officially what the jury concluded was that the 2011 contract between the parties unreasonably restrained trade and caused injury to the airline.

“The jury sorted through a complicated case that involved hypothetical economic theories, intricate technology discussions and months of testimony,” according to a prepared statement from Sabre. “We continue to believe we operated fairly and lawfully in an extremely competitive marketplace as Sabre provides efficient distribution, innovative technology and transparency that benefits suppliers, travel agents and consumers alike. We will continue to defend the interests of consumers who seek transparent and efficient shopping, booking and servicing of travel; we therefore expect to file a motion to set aside the verdict immediately, which would award $5.1 million in single damages to US Airways. To the extent the court declines to grant the motion to set aside the verdict, we will pursue an appeal. Sabre believes it acted lawfully and fairly, and we do not anticipate any impact to existing offerings.”

AA noted that the damages would be trebled and Sabre would cover attorneys’ fees. According to a written statement from the airline, “We are very pleased with the jury’s decision and greatly appreciate the time and effort they expended during the course of this eight-week trial. We have long contended that the contractual provisions at issue — provisions that Sabre has made a condition to participate in its global distribution system — have reinforced Sabre’s market power, stymied competition, and harmed us and the travelers we serve. Now that the jury has agreed with us, we hope to see changes in the way our services are sold, and we expect technology and innovation will create even better and more transparent ways for us to distribute our products.”

Should it hold up, the verdict will not impact clients or travel management companies right away. It may increase leverage for the airline side in any upcoming or ongoing negotiations for content. In theory, this means that the challenged “full content” provisions will be harder for GDS companies to obtain. These include prohibitions on airlines making better rates or benefits available in alternative channels, or surcharging GDS bookings. They also typically include bans on direct connections.

U.S. District Court for the Southern District of New York

Thurgood Marshall
United States Courthouse, Lower Manhattan

While such leverage means something to GDS companies as far as airline rates and terms, it’s not clear that the corporate travel community should worry. The marketplace already seems very different since the days when US Airways filed the lawsuit.

Devastating financial losses were fresh in airline minds then. Now they’re doing pretty well, at least in the United States. A big part of that is ancillary sales, which GDSs increasingly are enabling even with former GDS holdouts.

The jury may have found the AA legal team and its witnesses to be more credible. In closing arguments, lead airline attorney Charles Diamond told the jury its decision would send a message that GDS participation conditioned on full content should not be tolerated.

Sabre attorney Chris Lind had said the airline wants all the benefits of GDS participation without any of the obligations, and “they’re asking you to take away all the benefits” to consumers.

It’s not surprising that the jury found Sabre and the other GDSs had not “knowingly” entered into a conspiracy. The evidence was interesting but unconvincing. Diamond spent not much more than five minutes of his roughly two-hour closing argument on the conspiracy charge. Did the related evidence make Sabre look bad to the jury? Probably.

Much of the trial centered around Sabre’s attitude. Chances are, even that has evolved in the half-decade since the activities in question. Not only would the company likely be more careful with dirty laundry, but also the leadership is set to change with Tom Klein and Greg Webb departing and Sean Menke moving up to CEO. SVP of marketing and strategy Wade Jones replaces Menke as interim president of the Sabre Travel Network GDS business.

Nor did AA come through unscathed. Sabre’s witnesses countered its claims. AA’s CEO looked either uninformed or insincere. Testimony not heard by the jury appeared to show the airline planned to sue Sabre all along — not a legal matter in this case per se but possibly a matter of reputation for some. To be fair, AA may have put on a more thorough defense against those allegations had they been heard in court.

Not An Afterthought

Outside the repercussions for the two parties from damages, it could be that what has the most impact is the dissemination of otherwise private information.

Speaking on the condition of anonymity so they could be unguarded in their thoughts, a handful of corporate travel buyers last week discussed with The Company Dime GDS incentive payments to travel agencies. The trial showed these were substantial, and a good chunk went to the biggest TMCs.

For veterans of the business, this isn’t news. But the newly revealed details on incentives will help corporate buyers pressure TMCs to be straightforward about their own economics.

“When everyone really knows the actual size of the pot of money out there, I would think that there is a chance here for corporations to reduce cost,” said one buyer. “Agencies are being subsidized tremendously and still costs are being passed to the corporation.”

“I rely heavily on incentives to offset the program,” said another, who operates with the ARC CTD model. “There will be a trickle-down. Whichever way [the verdict] goes, it will impact everyone.”

According to a third, “Even though I am not a CTD, I rely on revenue to offset program costs. It’s reminding the industry there’s still lots of stuff under the kimono.”

During the trial, an economist testified that theoretically incentives should disappear, which would cause a significant increase in TMC fees to clients. Another economist said the opposite, and that in fact incentives are the product of healthy competition.

Another lesson from the case is that if there is another model to be explored, it’s likely just a different way to pay for the GDSs’ services rather than a new competitor. It’s clear that what GDS companies do is difficult to replicate. Even they are challenged to reinvent their technology, for example at the agent point of sale.

In closing arguments, Diamond asked where are the entrepreneurs? Where is the better mousetrap? If a competitor does emerge, look for it to first connect the big airlines to the big TMCs. Testimony showed that something like nine in 10 bookings by the largest TMCs go to one of the legacy major airlines. Such concentrated demand could enable a new entrant’s foothold.

Case information showed that GDS companies have considered other models. That’s not so new, either. Southwest forever and Lufthansa more recently have operated without full-content provisions. That does not necessarily mean it’s the right approach for the big U.S. legacy airlines, or in fact any big carriers beyond those two.

As they do with Southwest and others, corporate accounts are likely to absorb the costs of any shift toward non-participation.

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‘Trust But Verify’ Your Hotel Safety Vetting

Most organizations don’t inspect every hotel property they tell travelers to use. They can do some of that with the help of travel management companies and risk specialists, but covering the globe is a tall order. So how do travel management pros really know if properties in their programs are safe? Mostly they’re taking the hotels’ word for it.

When the GBTA Risk Committee sought travel managers to speak about hotel security programs on a November webinar, “it was difficult because so few of the folks out there have a comprehensive hotel security program,” said webinar moderator and Private Jet Service Group CEO Greg Raiff.

There’s a lot to know, and it’s not just about location. “Even if you have three hotels on the same block, the risk profile is going to be different,” said iJet International senior security consultant Edward Clark, also speaking during the webinar.

Many rely on responses to security questions posed in requests for proposals. Self-reported by hotels, those only go so far. But they are a good place to start — especially if buyers actually read them.

It’s helpful when buyers work with security and risk managers to craft questions and review responses. All the better if they can verify that the right hotel personnel answered. Advito senior director Marwan Batrouni said his company works with an increasing number of clients to customize safety and security questions in RFPs.

How questions are worded “is critical,” according to Facebook global travel safety and security manager Erin Wilk. So is communicating repercussions when standards aren’t met.

hotel security

CWT Hotels Solutions Group director Eric Jongeling said hotel responses generally are accurate. There are exceptions. Sometimes hotels rush through, using outdated answers and skipping questions, he said. Follow-ups may be in order.

Travel risk experts said RFP responses cover the basics. They may indicate that chain properties are abiding by brand standards. From the buyer’s perspective, these responses at least help in mitigating liability.

Site inspections, though resource-intensive, fill in the gaps. When companies send lots of people to particular hotels — or send anyone to hotels in risky locations — inspections may be essential.

Security pros know to check on site that staff are well-equipped and trained, and that safety patrols occur regularly.

Travel managers can see some things for themselves.

“I spend a tremendous amount of my time doing site inspections,” said Bonnie Darkey, a veteran travel manager who spoke in September at the Business Meetings Travel Technology Expo in New York. “I have had hotel reps come in, the brochure looks great, the PowerPoint presentation is beautiful, and then I do the site inspection and find out it is in a really crummy neighborhood.”

Also GBTA’s Risk Committee chair, Wilk recommended using both the RFP and in-person visits to collect info. She acknowledged the challenges in doing lots of the latter, but dusted off an old adage: Trust but verify. “Conducting on-site security assessments, or employing those who do,” she added, can be valuable.

Asked about the trustworthiness of hotel safety info, iJet’s Clark in a follow-up email wrote:

“The degree of trust should be based upon the following protocol:

1. Ad hoc or informal assessment
2. Formal (written) self-assessment and reporting
3. Self-assessment with corporate audit
4. Corporate security assessment
5. External security assessment performed by a trusted security professional

The travel manager should only accept security assessments from trusted vendors. Otherwise, treat them with the same level of trust as corporate security assessment.”

Jongeling noted that CWT is considering third-party partnerships for independent safety certifications and accreditation.

That’s something Safehotels Alliance has been doing. It said Carlson Rezidor in late 2014 was the first global hotel group to accept an independent third-party certification. By last summer, Safehotels certified 120 Radisson Blu and Park Inn by Radisson properties.

The company has certified individual properties from several other brands. Safehotels CEO Hans Kanold said he expects “comprehensive” relationships with more major global chains shortly. He also noted growing demand from corporations to directly engage with Safehotels. Work with as yet-unnamed corporate travel agencies, he added, will be announced in 2017.

An industrywide standard, though, doesn’t exist.

Kanold said the demand for one is coming from the travel management profession. For hotels, he argued, independent certification “gives a lot better consistency and more motivation for the hotel to maintain a certain standard.”

You, Me And Google

There are other ways to collect info. Travelers themselves can be a great resource.

“At the end of the day, it’s each one of us walking into that hotel, making site inspections, verifying where the exit is and what to be on alert for,” said Craig Banikowski, global head of travel operations at Amgen, also speaking at BMTTE. “It can’t just be the hotel providing that. We have to expect that from travelers as well.”

International SOS EVP Tim Daniel said traveler feedback, especially for new hotels, is “probably equally important” to RFP responses.

Speaking during the GBTA webinar, Daniel said scanning online hotel reviews might be worthwhile. “It’s anecdotal to be sure, but if you see a pattern of negative reviews referring to incidents or what people perceive as problems, it might give you pause and go back to review what’s on the RFP,” he said. “Also, if you are eating meals at the hotel, the last thing you want to do is get sick. It is harder to vet food handling practices but you may see that mentioned in the reviews.”

Also during the webinar, New York Life corporate vice president of travel Ray Greeve pointed to the utility of Google Maps. Using it recently, he said he saw that one of the company’s hotels in an overseas location was “literally attached” to the U.S. Embassy. “That’s something you want to know before adding it to your program.”

The lay of the land can be critical. Banikowski noted that as civil strife hit Turkey this summer, his company pulled several hotels from the program. “It could be proximity to unrest, to government buildings or to town squares,” he said.

Daniel explained that appropriate security measures vary by country, city or even neighborhood. Is terrorism the primary concern, or is it street crime?

He cited one client’s challenge in Johannesburg. Its office was “not in a particularly great location,” Daniel said, but there was a hotel nearby. Other hotels were in an upscale business district, but putting up travelers there meant possible road travel risks and transit disruptions. “It’s not always a black and white answer,” Daniel said.

Higher Profile, Higher Risk?

Greeve said one employee didn’t want to stay at a preferred, luxury property in London because anyone can walk into the big lobby. The individual wanted to stay at a quiet, boutique hotel.

Many others prefer to stay at big brand-name hotels because they think they are safer. It’s a common perception. Major chain properties usually must meet certain standards to keep their brand flags. They can more easily afford risk managers and top private security.

Common as the perception is, it’s not universal. Banikowski, who once managed travel for Hilton, said he risked hate mail when challenging “the misconception that big brand hotels have security buttoned up.” He shared an anecdote from an unnamed five-star property in London. It’s a property where his current company holds executive leadership meetings. One morning at breakfast he witnessed a “frightening” security incident. An individual “lost their mind” and started throwing food. “The hotel staff did not know what to do,” he said. “At one point, 20 hotel staff were running around like chickens without heads.”

It’s impossible to prevent all such incidents, but guests may expect big hotels to have response protocols.

HospitalityLawyer.com founder Stephen Barth said it’s important to distinguish franchised properties from those controlled by the brand. “If Marriott or Hilton owns and operates it, I think you can expect a higher level of safety and security,” he said. “But if it’s a franchised property, I am not saying that it is not at a higher level of safety and security, but you can’t make that presumption.”

Barth said brand standards typically relate to building codes, occupancy codes and fire safety codes. “But when you get into levels of security, slip-and-fall prevention, training of employees, etc., today that is almost always left to the franchisee operator,” he said. “Brands are hesitant to participate with the franchisees in safety, security and risk matters so that they don’t get caught up in the litigation that might ensue for a breach of the franchisee’s duty of care to their customers.”

IJet’s Clark wrote that travel planners should ask franchises if property owners have safety and security requirements, and whether they’re audited.

These distinctions are worth noting. Regardless of owners and managers, though, a property that is part of a major U.S.-based chain is a more likely “soft” target for terrorists than lesser-known hotels. (Especially if the owner, or namesake, is Donald Trump.)

“It’s a Catch-22,” Barth said. Smaller, independent properties have a lower profile while the larger, branded, owned and operated hotels often employ ex-military and ex-law enforcement personnel “because they can afford it. You’d like to think that means a deeper level of safety and security.”

Wilk pointed out that major chains have “corporate muscle” for appropriate security, but also bureaucracy. “Independent and boutique properties tend to build personal rapport with their clients and listen to their concerns,” she added. “As a result of this and a smaller footprint, they can often make changes at a faster rate.”

Matt Bradley, regional security director for International SOS/Control Risks, also said independents can be just as capable. “In many instances,” he added, “the approach to safety is dictated by a combination of legal requirements and the local environment, with enhancements sometimes linked to the property’s star rating.”

Other Considerations

The profile of an organization’s travelers matters. Are they younger folks more likely to go out at night? Are they women?

“At one point, [previous employer] HSBC decided to remove all 5-star properties from the program to save all this money,” Darkey said. “My argument was, ‘Absolutely not. There are certain cities where you need that security and safety.’ ”

Daniel pointed out that hotels in some regions of the world offer dedicated floors for female travelers.

GBTA webinar speakers provided a bunch of other pointers. For example, Daniel noted that in New South Wales, Australia, hotels aren’t required to have chains or deadbolts on room doors.

That, he said, is “a good reminder” not to assume safety standards are the same, even from one Western country to the next. Travelers may consider bringing a door stop with them in case their hotel room doesn’t have a second locking mechanism.

Cyber security also should be on the radar. As some high-profile incidents have shown, credit card theft is one component. Protecting intellectual property is another. Clark said companies should ask preferred hotels about it. He said travelers should consider leaving devices with IP in safety deposit boxes at front desks, if available. Good thieves, he said, can get into in-room safes.

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Jury Won’t Hear Sabre Argument That US Airways Lured It Into Lawsuit

The US Airways v. Sabre antitrust case now is in the jury’s hands. The evidence it’s considering does not include everything Sabre wanted it to know.

Most notably, the jury didn’t hear about Sabre’s claim that US Airways pursued a “sign-and-sue” strategy. According to the argument, US Airways baited Sabre into rejecting a last-minute request for a deal that did not include certain “full-content” provisions — and then agreed to one that did. It made that request not because it actually wanted a non-full content agreement, according to Sabre attorneys. Rather, it hoped to receive a rejection from Sabre that it thought would help build its case.

US Airways dismissed this argument. U.S. District Judge Lorna Schofield multiple times disallowed it.

In August, Schofield granted a US Airways motion to exclude “evidence and argument” about the timing of the carrier’s decision to sue. At issue in the case, she wrote, was Sabre’s alleged anticompetitive behavior and contract, “not US Airways’ sincerity when it offered alternatives.”

Once the trial began, US Airways witnesses testified that the airline had to accept Sabre’s full-content deal or face financial ruin. Sabre’s lawyers in November argued that it should have been allowed to present to the jury a different explanation. “US Airways made eleventh-hour requests for a non-full-content agreement and signed the contract not out of duress, but as part of an explicit plan to generate evidence for this very lawsuit,” according to Sabre’s attorneys. “US Airways’ agreement to the full-content provisions was not capitulation to Sabre’s market power. It was a setup.”

The court wasn’t swayed.

Sabre v US AirwaysSabre tried again last week. Its lawyers argued in court without the jury present that US Airways “wanted Sabre to say no to a non-full-content deal … to create evidence for this trial” and that whether the contract was a product of coercion would be a central issue.

They said the evidence showed that the airline’s acceptance of the terms was a result of something other than Sabre’s alleged market power. Schofield said, “This sounds fairly persuasive.” She asked the parties to file written arguments.

Sabre’s evidence included handwritten notes by then-US Airways managing director Brett Berman in December 2010. Presented during Berman’s June 2013 deposition, the notes read: “Sabre – sign & sue. Number 1, force Sabre to show that we do not have a rack rate option. Number 2, document that they have forced us to work with Travelocity.” [Travelocity then was part of Sabre.]

During the deposition, Berman said, “I don’t know what I meant by that.”

Asked if he thought it was “a coincidence” that just a few days later US Airways exec John Gustafson pressed Sabre about a rack rate option, Berman said, “I don’t know what a coincidence is.
”

In an emailed response to Gustafson’s inquiry, then-Sabre distribution executive Chris Wilding wrote that he could think of two scenarios in which Sabre would temporarily continue distributing US Airways content after the pre-existing contract expired in January 2011. One would be if US Airways agreed to all “key terms” on a new deal and was working out minor details. The other, US Airways participating at the rack rate, would be contingent on the airline “not adversely changing its participation in Sabre (e.g., pulling content, imposing a surcharge, pulling travel agency plates, etc.).” It also required the airline to continue participating in Travelocity.

In that email string a few hours later, Berman wrote to Gustafson, “That’s a keeper.”

Why did he say that? “I don’t know exactly why I said that,” Berman answered during his deposition. It “could be possible,” Berman added, that he responded that way because “it was shocking to see that our only … options were to be forced to sign the terms as is or to get kicked out of the system unless we provided full content.”

Sabre produced several other emails between US Airways executives in the months before and the days immediately following the March 1, 2011 announcement of the two parties’ new deal. Sabre attorneys said they showed the airline’s intent to pursue litigation.

US Airways lawyers last week argued that nothing happened during the trial to reverse the court’s earlier rulings. They also said it was pretty late in the game to do so. If the evidence had been permitted from the trial’s start, they said, the US Airways legal team would have called different witnesses and had the proper amount of time to respond to the aforementioned evidence with its own.

The airline had “naturally explored legal alternatives,” they told the judge, but “remained hopeful that Sabre would relent, making litigation unnecessary.”

Even if US Airways considered a lawsuit before signing the deal, its lawyers argued, the sign-and-sue defense still didn’t apply.

Sign and sue, they said, might sound “ominous to a lay person,” but the Supreme Court has made clear that “an antitrust plaintiff is free to sign an anticompetitive contract and then sue to be relieved of the contract’s anticompetitive terms.

“The fact remains that Sabre never offered a non-full-content deal and rebuffed US Airways’ requests for one,” they added. “US Airways’ attempt to make the best of a bad situation by signing and then suing does nothing to change that.”

In the end, the federal judge was not persuaded by the defense’s efforts. She was unimpressed that US Airways may have “strategically gathered evidence” for the lawsuit.

She also accepted the airline’s argument that introducing the evidence this late in the trial would be “particularly prejudicial.” On Dec. 12, Schofield adhered to her earlier rulings.

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Defense Rests After Witnesses Rebut US Airways Account Of Sabre’s Strong-Arming

New York – In its lawsuit against Sabre, American Airlines contends that US Airways in 2011 had “no choice” but to accept purportedly onerous terms for participating in the global distribution system. Witnesses for the airline alleged that Sabre insisted on a contract for full content, or else US Airways risked being out of the system altogether. The defense rested its case Monday after calling witnesses including several Sabre officials who delivered a consistent denial of the airline’s story.

Testifying in October, AA’s John Gustafson said that he started talking to Sabre about terms for a new deal 10 months before the January 2011 expiration of the pre-existing one. He claimed he told Sabre the airline would like to remove some of the full content-related restrictions. These included prohibitions on direct connections, content differentiation and surcharges. Gustafson said he was told Sabre would not entertain the notion. He maintained that the airline signed a new contract in February 2011 only grudgingly, after Sabre didn’t budge.

Plaintiffs produced some written proof to support the claim that Sabre refused to agree to a deal that did not contain the full-content provisions, but it was from late in the process. A Jan. 14, 2011 email from US Airways exec Andrew Nocella requested pricing for a non-full content or rack rate deal “on a non-temporary basis.”

Several pieces of evidence presented in the trial indicated that, at least formally and in written documents, the pair through 2010 were considering only a full-content deal. Since they claimed they were working under the assumption of full content all along, witnesses for Sabre called the Nocella email an about-face. A Sabre attorney raised questions about whether marketplace developments at the time caused a change in the airline’s position. In particular, the fee that American Airlines was paying Sabre went public.

“The timing is suspect,” said a Sabre lawyer. He pointed to internal US Airways communications also from January 2011 showing that the carrier’s distribution goals still included full-content GDS deals.

Arguing that it was always clear to Sabre that the airline wanted “relief” from the full-content provisions, an AA attorney instead characterized the Nocella email as a Hail Mary.

Thurgood Marshall United States Courthouse, Lower Manhattan

Thurgood Marshall
United States Courthouse, Lower Manhattan

Seven minutes after Nocella’s email, Sabre’s David Gross replied, “Sabre has no offer that does not involve full content … I am sorry, but I must be clear that full content is an absolute requirement for US participation in Sabre.”

An AA attorney said that email “says it all.” Gross suggested he wrote it in haste.

In testimony last week, Gross claimed that what he intended to communicate was that all the options on the table at that point, based on months of talks, were full-content deals. This was the first time someone from the airline had asked in writing for a non-full-content deal, he said. Gross said he was frustrated because the two companies had been negotiating for many months and then with two weeks to go “we were suddenly talking about fundamental changes.” He thought the airline was just trying to get a better price.

Gross also disputed Gustafson’s testimony about communicating a desire in 2010 for removal of the full-content provisions. Gross said that Nocella at one point told him on the phone, in an agitated way, that he knew “what AA pays.”

Sabre vice chairman Greg Webb last month said he was “shocked” by the Nocella email seeking rack rates. “We never had a conversation about higher rates associated with a non-full-content deal,” Webb testified. “And so it was very surprising — it just felt like all of a sudden we were playing games. But that being said, after thinking about it a little, it felt like perhaps a strategy on their part to negotiate price or something else was going on because we never had a conversation about non-full-content.”

Other Sabre witnesses said much the same.

This week, testifying for a second time, Gustafson said he was frustrated by all that Sabre testimony. He again insisted that US Airways a few times in 2010 did propose a deal without full content. The conflicting views probably relate to two definitions of full content. One encompasses a number of things, including a prohibition on direct connects. Under that definition, US Airways’ proposal that provided it with the freedom to build a direct connect therefore was a proposal without full content. The more narrow definition is only fares and inventory.

He Said, He Said

Sabre also disputed allegations of threats it made in an older deal with US Airways. The plaintiffs presumably introduced the information to show the jury that Sabre was capable of hurting airlines.

When he took the stand in October, former US Airways and AA exec Scott Kirby said Sabre CEO Tom Klein had offered the airline an “ultimatum” when the pair were negotiating back in 2005. Kirby alleged that Klein threatened to bias against US Airways’ listings in the agent display, “zero out” inventory even if there were seats available and disable code sharing.

Evidence brought forth by Sabre showed that Klein did communicate internally about some of these measures with regard specifically to codeshare flights by America West and Southwest (which at the time was sharing codes with ATA Airlines). But Klein said the ideas were never implemented. He said his team told him they were bad ideas.

According to Klein, he never made the alleged threats to Kirby either before the 2006 or the 2011 deals. They would be contrary to Sabre’s goals, he said.

AA’s attorneys have presented other evidence that Sabre was willing to boot US Airways. Among these are internal emails by Gross, one of Sabre’s key decision-makers on the US Airways deal. In response to an article by The Beat in which Gustafson described a plan to directly offer travel agencies the US Airways’ Choice Seats product, Gross on Nov. 23, 2010 emailed colleagues: “They will give us full content and they will give us seats in a way that we can sell or they won’t be participating in Sabre at all.”

“It may be time to tell US Airways that we need a coordinated plan to communicate with agents [that] US Airways may be out,” Gross wrote in January 2011 as the parties remained far apart but their deal was about to expire. “Put the heat on.”

US Airways witnesses testified that they were concerned about a travel agency boycott.

During testimony, Gross said his self-described bravado was cheerleading. Sabre witnesses also explained that travel agencies need to be notified if an airline will be out of the system. That way they can adjust accordingly — perhaps by booking elsewhere so they can minimize the number of trips that need to be serviced outside the GDS.

Meanwhile, evidence showed that US Airways, too, had aggressive thoughts, or perhaps passive-aggressive ones. The airline in October 2010 terminated its agreement with Travelocity, then a Sabre subsidiary, as part of a plan to leave the online travel agency in January 2011. This was despite the fact that Travelocity delivered 20 percent of US Airways’ revenue. The move helped pressure Sabre as the parties worked on their GDS deal.

Sabre’s Chris Wilding testified that he thought a US Airways direct connect proposal submitted in October 2010 was part of a negotiating tactic. Sabre ended up offering the airline a better price for dropping it, he said.

A March 2009 internal US Airways email showed that although America West used it as leverage in the 2006 negotiations, the airline had already planned to “pull the plug” on a travel agent portal because it was “clunky” on the back end. The author noted that at the time of contract negotiations, Sabre thought that the airline’s commitment to shutting down the alternative was a big concession.

Sabre’s attorneys also produced evidence and elicited testimony showing that — just as being out of Sabre would, in Kirby’s term, cripple the airline — Sabre would be devastated by a carrier as large as US Airways leaving the system. Without such an airline, witnesses argued, travel agencies would go to another system and take all their airline bookings with them.

No one disputed that US Airways achieved significant savings from both the 2006 and 2011 contracts, which economist Kevin Murphy testified shows that the GDS business is competitive.

When the trial started, U.S. District Judge Lorna Schofield instructed the jury that to win on both its claims, US Airways needed to provide a preponderance of evidence showing Sabre’s practices unreasonably restrained trade and caused substantial harm to competition in the relevant market as a whole. Also, it had to prove that Sabre knowingly entered into an agreement with its competitors not to compete, unreasonably restraining trade and causing injury.

According to the court schedule, the jury will begin deliberating as early as the end of this week.

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Murphy’s Law: Economist For Sabre Counters American Airlines’ Expert

New York – University of Chicago professor Kevin Murphy is an award-winning economist. His most prestigious honor is the John Bates Clark medal, won in 1997. For economics, it’s up there with the Nobel Prize. Murphy testified last week in the US Airways v. Sabre trial here, dueling with a winner of that other award, Joseph Stiglitz. Stiglitz had testified for the plaintiffs. Speaking in Sabre’s defense, Murphy thoroughly disagreed.

What it means for the trial is unclear beyond the fact that each side spent a lot of money on an expert witness whose testimony may cancel out the other’s. A similar dynamic is underway for testifying accounting experts. They provided contrasting views on how to calculate Sabre’s profitability and may have left the jury calling it a wash.

The economists’ testimony supports why the airline distribution market is so stressful and complicated. Having spent days studying data related to the case, with teams to help them, these brainiacs arrived at opposing conclusions.

Nevertheless, many industry pros will be more convinced by Murphy, in no small part because he’s not interested in diminishing their wallets. The most talked-about information coming out of the case is the evidence of hundreds of millions of dollars in incentive money paid annually to travel agencies by GDSs. Most in the industry knew this practice was common; some have been surprised by its scale.

Kevin Murphy / Image: University of Chicago Becker Friedman Institute

Economist Kevin Murphy / Image: University of Chicago Becker Friedman Institute

Stiglitz called it a bribe. He said that in a competitive market, such an incentive wouldn’t exist. Based on that premise (as well as the existence of a lower rate for Southwest), airline witnesses had calculated what carriers should be paying GDS companies, instead of what they do pay.

But Murphy said Stiglitz made the mistake of not thinking about the GDS market as a “two-sided” one. If the market is considered two-sided, then the dynamics on the travel agency side of the GDS business are essential to considering pricing power, competition and profits on the supplier side, Murphy argued.

Stiglitz had testified that he did not believe this was a two-sided market because in a classic two-sided market, the equivalent of the travel agency incentive would be in place to draw new users. In this case, he said, the users (travel agencies serving corporations) already are there. Stiglitz and other airline witness demonstrated that, particularly at the large end of the corporate market, incentives don’t inspire much switching of GDS vendors. They showed it costs a lot to switch.

However, Murphy provided data on Sabre’s top 30 travel agencies indicating a fair amount of movement among them between GDSs. The incentive money does stimulate competition, he argued. GDS companies sometimes will even subsidize the cost of change in order to win business.

Because of “feedback effects” where each side of the market influences the other, Murphy testified, “to understand what’s happening on one side of the market, you have to think clearly about the other.”

To ignore the incentives, he argued, is “inconsistent with the fundamental economics of this marketplace. So you can’t ignore incentives because they’re a big part of the story.”

Murphy suggested that by focusing on a hypothetical world in which incentives didn’t exist, Stiglitz underestimated the role of competition between airlines — and particularly how the comparison shopping that the GDS/TMC environment offers travelers stimulates competition between the carriers. Transparency of all options for consumers, for example, puts more pressure on carriers to match fare sales.

As such, Murphy posited, the contractual full-content provisions at issue in the case meet consumer demand. The payment structure results from competition, he said.

Murphy argued that such incentives are not as peculiar as Stiglitz had described them. Credit cards, real estate, e-commerce and retailing are other segments where rewards, rebates and commissions commonly flow to and from multiple parties.

Murphy was asked why travel agencies don’t pay for the GDS.

“Travel agencies are the guys who have the most valuable commodity in the marketplace,” he said, according to a transcript. “That’s the customers. The customer is king. Because that travel agency worked so hard to get that customer, that’s where the biggest value is. If someone can help you reach customers, you’re willing to pay for that.”

Murphy earned $1,250 per hour for his work on the case.

Additional info: Click here to download a paper co-authored by Murphy about two-sided markets focusing on the payments business.

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Case Details Alternative Air Distribution Models

New York — Airline-GDS relationships are often contentious, putting corporate clients and travel management companies in the middle. Why hasn’t anyone considered blowing up the model? They have.

Evidence and testimony in the US Airways v. Sabre trial here showed that Sabre, for one, has thought about a number of alternatives to airline segment fee remuneration. At least as of a few years ago, in fact, a big chunk of its bookings were processed using a different scheme altogether.

Traditionally and still for the most part, bookings processed in the GDS result in fees charged to suppliers. Then GDS companies pay TMCs incentives. Case evidence showed that as of several years ago, Sabre paid a per-booking average of $2.65 to American Express Global Business Travel, $2.71 to BCD Travel, $2.44 to Carlson Wagonlit Travel and $2.10 to HRG. That’s many millions annually.

As old as the GDSs themselves, the model is a platform for controversy.

Together with Expedia, those four big TMCs sold tickets that generated 48 percent of Sabre’s revenue. But unlike with the other four, Sabre got its money for the Expedia bookings from Expedia.

Travel distribution pros called this the wholesale model. The airline pays the GDS nothing. It pays the agency one fee that includes a commission for market share performance as well as the distribution cost. And the travel agency pays the GDS a fee.

Greg Webb

Sabre vice chairman Greg Webb

Case evidence showed that in Expedia’s case, several years ago, this “tech fee” was $0.80 per segment. The price partly reflected Expedia’s use of its own fare shopping technology. Sabre Corp. vice chairman Greg Webb testified that shopping is the most significant data processing cost for GDSs.

According to testimony by former US Airways official John Gustafson (now with American Airlines), US Airways around 2011 and 2012 was paying $9.50 per ticket to a “particular” online travel agency — presumably Expedia. Because of competition from online rivals like Google and Kayak, he said, that number has come down to around $3.80. OTA bookings today cost under $4 on average, Gustafson added.

Around 2011, 55 percent of US Airways’ bookings through Sabre utilized the wholesale model. Twenty points of that was with Travelocity, according to internal airline emails.

TMC executives said US Airways did not approach them about the wholesale model. Various witnesses said there was nothing in the airline’s Sabre deal that stopped it. Former American Express GBT and Carlson Wagonlit Travel exec Andrew Winterton in a deposition described a meeting he had with US Airways/AA exec Andrew Nocella. Winterton said Nocella showed no interest in even discussing the wholesale model.

Award-winning economist Kevin Murphy, testifying for Sabre on Thursday, said the cost in the wholesale model to the airline is about the same as in the traditional model when direct commissions (overrides) are included. More than a decade ago, Murphy noted, American Express used the wholesale model when it was concerned about losing access to full content through the GDSs. It called the program TravelBahn DS. Like Expedia more recently, Amex negotiated content commitments with the airlines directly.

Other sources speaking on the condition of anonymity said part of the issue for TMCs is that unlike Expedia, they are not tech companies. [An American Express Global Business Travel official in a deposition said the company had considered using ITA Software for shopping and faring, but decided it would be too costly to implement. This is in contrast to Expedia, which does use a non-GDS faring system in conjunction with GDS bookings.]

Another explanation for why TMCs have not pursued this model is the challenge of change management. In some cases, the traditional GDS incentive fee, or a portion of it, is passed through to corporate accounts. Moving to the wholesale model would require new processes and “upending the apple cart,” said one source. For smaller TMCs especially, the wholesale model isn’t worth the effort.

Another source suggested airlines like having GDS expenses and agency commissions as separate line items.

Other Alternatives

In his testimony, Webb said Sabre has looked at “a number of things” to change the model. But the predominant segment fee model, he said, is preferred for its simplicity. Sabre does have some “value” pricing in airline deals.

Asked whether Sabre had ever considered charging separately for shopping, the most costly data processing component, Webb said yes. But airlines were not interested: “As it is, their costs and revenues are aligned,” he said.

A juror asked if Sabre ever considered a subscription fee. Webb said no, because that would be a set fee for airlines regardless of bookings. Today, he reiterated, they only pay when they sell something.

When it faced competition from G2 Switchworks and other new entrants a decade ago, Sabre considered a “low cost, low price” model. Sabre was concerned the competitors would work with airlines to move the easiest transactions off the GDS. Ultimately, Webb said, the business model didn’t make sense and the plan would have required operating multiple technology environments, so it was rejected.

Some other models do not include full services and content. Lufthansa offers an example. It pays rack rates to GDSs but has the freedom to levy a surcharge.

Spirit Airlines operates differently, as well. According to a 2013 deposition by Spirit Airlines distribution director Richard Lowry, the “ultra low-cost” carrier was paying $3.10 per segment for the “standard” participation level in Sabre. This does not include last-seat availability or the option for agents to process refunds and exchanges.

Spirit lists fares on its website for $5 per segment less than they are in Sabre.

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Teleconference 7: Mobile Technology

Mobile Technology
March 9, 2017

Download the recording here.
Gift the recording here.
Grab the slides here.

It’s everywhere, so what’s next for mobile technology in corporate travel? Our expert panel discussed the status quo, keys to creating a mobile strategy, the possible impact of mobile self-service on jobs and operations, and emerging functions like chatbots.

This episode featured American Express Global Business Travel vice president Evan Konwiser, Festive Road associate Aurélie Krau, head of Sabre Labs Mark McSpadden, BCD Travel VP Will Pinnell and Roadmap CEO and co-founder Jeroen van Velzen.

Find information on other upcoming Teleconference episodes and download previous ones here.

More On Teleconference 7:

Mobile technology is part of everyone’s life. It’s crucial especially for traveling businesspeople. But it feels like it’s still in its infancy. The possibilities seem endless.

tcd-teleconference-featuredOf course, our devices now can handle planning, booking and itinerary management. And they’ll get better at it as providers — incumbents and plenty of new-entrants — fine-tune services. There’s also collaboration among colleagues, engagement between employers and employees, virtual payment applications, trip disruption services, risk management and on and on. It’s not hard to envision phones and tablets playing a role in pretty much every aspect of managed travel programs and an individual’s own travel experience.

When new developments like artificial intelligence and chatbots take hold, they’ll do so via mobile devices.

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‘Seriously, Keep This To Yourself, Tell No One’

New York — U.S. District Judge Lorna Schofield in October told the jury in the US Airways v. Sabre trial here that to prove conspiracy, the plaintiffs must demonstrate Sabre knowingly entered into an agreement not to compete which unreasonably restrained trade and caused injury. In the ensuing weeks, American Airlines attorneys produced several pieces of evidence to that end. Sabre’s team responded to most.

When it takes on the task of determining a verdict, probably at the end of next week, the jury also needs to consider evidence for the claim that the two companies’ 2011 agreement restrained trade. The relevant laws are outlined in the Sherman Antitrust Act.

In support of the conspiracy claim, airline attorneys several times cited a text message conversation between two former Sabre employees. Joelle Cuvelier in 2009 texted Kyle Moore from a conference: “Got competitive info on OC pricing from 1A. Their plan: charge 25 cents per OC shopping or pricing transaction.”

conspiracy

Image: Thinkstock

“OC” represents optional services like paid seats. “1A” is Amadeus.

“Who was it?” asked Moore in response. “RB,” replied Cuvelier. During a deposition three years later, she said “RB” was Robert Buckman, the director of airline distribution strategy for Amadeus.

Moore replied: “I’ve done a little of that with him too. But be very careful.” And then, “Seriously, just keep it to yourself. Tell no one else.”

Appearing uncomfortable in a taped 2012 deposition, Moore was evasive. He said “it’s possible” that RB was Robert Buckman. Asked to confirm that he used a “smiley face” emoticon, he agreed, albeit indirectly: “There’s a colon, and a closed parenthesis.”

According to his LinkedIn profile, Moore left Sabre early last year and now works in the travel and transportation practice at IBM.

Asked during the deposition what she did after hearing this information from Buckman, Cuvelier said she was “shocked” and “stepped away” to report it to her superior, Moore.

Cuvelier said nothing like this happened before or since. According to testimony from other Sabre witnesses, the knowledge of Amadeus’ plans for optional services pricing went nowhere. Cuvelier and Moore were not responsible for negotiating content agreements with airlines, they noted.

The pair appeared again in evidence.

When negotiating in 2010 with US Airways for the 2011 contract that is at issue in this case, Sabre allegedly tried to get together with Amadeus and Travelport against the airline’s wishes. In an email from Moore to John Gustafson, then US Airways’ VP for e-commerce, mobile and distribution, Sabre informed US Airways of plans for a meeting with the other GDSs to discuss distribution of ancillary items.

“I was very surprised,” Gustafson testified in October. He said he told Moore the airline was not interested in having a meeting with all the GDSs. “I didn’t think it was appropriate for them all to be in the same room,” said Gustafson. “I wanted competition.”

US Airways had convened a multi-GDS meeting in Phoenix a couple years earlier, to explore technology to support optional services, according to trial evidence.

A 2010 email presented to the jury showed Moore contacting Sabre’s two main competitors to compare notes on tech solutions. Moore separately indicated in an internal email that he wanted to see if the GDS firms could “kill” any effort by airlines to “play” GDSs “against each other” with regard to distributing ancillaries.

Prodded by Moore to communicate with Amadeus, Cuvelier responded by email: “As you know, we have written instructions from [Gustafson] asking us not to share info with the other GDSs. I am a bit uncomfortable.”

In 2013, Cuvelier said she was not uncomfortable because she was asked to communicate with the competitors. That happens all the time, she said, as it relates to standards. IATA meetings are an example, and typically include legal counsel.

Rather, Cuvelier said, she was uncomfortable because one of Sabre’s big airline customers specifically asked the company not to do that.

Cuvelier said she reluctantly contacted Amadeus to find out if it was successful in getting US Airways to agree to use standards to distribute its Choice Seats product — as opposed to a custom solution, which is what it ultimately implemented with Sabre only. Cuvelier said she did not discuss pricing information or terms with Amadeus.

Multiple Sabre witnesses said discussions with other GDSs were about industry standards.

Cuvelier joined Amadeus in December 2013, according to her LinkedIn profile.

Project Cervantes

If Sabre did not “knowingly” enter into an agreement with the competition via the texting duo, it certainly did through a “content backup plan” announced with Amadeus in 2006.

Labeled Project Cervantes when it was an internal project in 2005, the arrangement called for Amadeus to book through Sabre any airline that stopped providing content to Amadeus — and vice versa.

Former Sabre and US Airways employee Madeleine Gray testified that this was a “big project” including the most senior executives at Sabre. The intent was to remove leverage an airline may have against one GDS by using another, she said.

Gray said she was surprised to be asked to collaborate with Amadeus, and that around 100 Sabre people were involved during the course of about a year. She said the companies created technology to facilitate the sharing of bookings and to mask their source.

Asked about this initiative and whether it violated Sabre’s ethics policies about antitrust law, Sabre vice chairman Greg Webb testified that the company’s general counsel was involved and presumably “comfortable” since he signed the agreement.

Project Cervantes was never used.

Advice From Sages

Airline attorneys also showed the jury evidence of alleged collusion by displaying emails between former Sabre Travel Network president John Stow and Sabre leaders. In a November 2010 message to several Sabre execs including Webb and Tom Klein, then-consultant Stow offered his assessment of a conflict between American Airlines and Travelport.

In response, Sabre’s then-CMO Chris Kroeger wrote, “It’s not a GDS-only issue. It’s not an online travel agency-only issue. It’s a channel issue and all parties should get active.”

A couple hours later, evidence showed, Stow emailed Travelport exec Scott Hyden, formerly of Sabre, to urge him to take action.

In a deposition, Stow said the emails were in response to different market developments.

Along similar lines, former Sabre CEO and chairman Sam Gilliland in a 2012 deposition acknowledged that an email he got from Klein in 2010 described advice received from Greg O’Hara, who was then at One Equity Partners. OEP had invested in Carlson Wagonlit Travel, Travel Leaders and Travelport, among others. Now executive chair of American Express Global Business Travel and a board member for Travel Leaders Group, O’Hara at the time shared a view on Sabre’s dealings with American Airlines. Gilliland testified that O’Hara was speaking as an agency owner, not as a competitor.

Do Not Exploit

In an environment of vigorous competition, the airline attorneys suggested, a GDS company would try to take advantage of a competitor’s misfortunes. They raised questions about certain Sabre behaviors that allegedly illustrate a culture that sanctioned not competing.

Asking Webb about the response to the AA-Travelport issue, AA attorneys showed evidence indicating that Sabre’s people were instructed “not to exploit” their competitor’s challenges. In one email, Kroeger advised colleagues to use phone calls rather than email.

In 2009, according to evidence, Webb similarly told co-workers he did not want Sabre to take advantage of a problem Travelport was having with Alitalia.

AA attorneys also explored whether in a competitive market GDS firms would actively seek exclusive airline content. They asked witnesses if Sabre does so for competitive advantage. The answer was no. They asked AA’s Gustafson whether that surprises him. He said yes.

In a 2009 internal email, Chris Wilding, then Sabre’s VP for airline distribution marketing, played down exclusive deals with airlines. Competing with other GDSs for agency users is “hard enough,” he wrote, making the idea of driving more “competitive framework” into the airline side of the business unappealing.

Webb said Sabre looks at the idea of exclusive content from an industry point of view. He said the company believes its travel agency users would no longer be competitive with airline websites if content parity was not a norm.

In general, he said, the conspiracy claim is “ridiculous.”

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Big Four Got About One-Third Of Total Sabre Incentives

New York — Sabre in 2011 paid a total of $647 million in travel agency incentives, according to evidence in the US Airways v. Sabre trial here. About one-third of that went to four big corporate agencies — American Express Global Business Travel, BCD Travel, Carlson Wagonlit Travel and HRG.

Newly revealed evidence shows specific totals for CWT and GBT (see table below).

Sabre’s 2014 IPO registration statement indicated that 2011 incentives paid were $20 million higher than the prior year, meaning the 2010 figure should have been about $627 million. Case information showed that the big four took in $199 million that year.

Witnesses for the plaintiffs have vilified agency incentives. Economist Joseph Stiglitz, for example, said the payments are “not healthy” because they tie travel agencies to GDSs. Airline override payments to travel agencies, he said, are different because they are like a sales commission and do not reinforce barriers to entry.

Sabre GDS agency incentives

Note the step-down from 2008 to 2009, reflective of the period’s economic recession. Carlson Wagonlit Travel made huge gains in 2007 and beyond, partly as a result of switching to Sabre from Amadeus in France.
* Exact annual figures for BCD Travel and HRG were not disclosed at trial, but the totals for them over the seven-year period were. Annual figures shown for BCD Travel are based on testimony by a BCD executive. The Company Dime used this info to estimate the HRG numbers. As estimates, neither company’s annual figures correctly add up to its seven-year total.
Source: Evidence in US Airways v. Sabre trial

Performance-based, back-end commissions start at about $2 per ticket, according to October testimony by American Airlines VP for digital channels John Gustafson. A mid-2005 US Airways document showed the carrier’s annual distribution costs included about $170 million paid to GDSs, $140 million for credit card companies and $56 million in travel agency override commissions. (For an idea of relative scale, US Airways carried about 42 million total passengers in 2005, according to the U.S. Bureau of Transportation Statistics. Ten years later, American Airlines carried about 146 million.)

An AA attorney pointed out that the incentives represent a far larger portion of Sabre Travel Network’s cost base than its technology expenses. According to the financial filing, STN’s 2011 total cost on $2.9 billion in revenues was $1.58 billion. In addition to the $647 million in upfront and periodic incentive payments, tech expenses were $281 million and labor was $177 million.

Speaking from the stand as the defense’s first witness, Sabre vice chairman Greg Webb last month said the 2011 tech expenses were typical.

A lawyer representing American Airlines asked Webb whether he could think of a technology company that “pays its customers two times what it spends on developing its technology.” Webb said he did not know of any such companies other than Amadeus and Travelport.

Incentives are negotiated, Webb pointed out. He said travel agencies have leverage. Sabre competes with the two GDS rivals “and sometimes others” to maintain relationships and grow the business, Webb said.

Webb said GDS companies compete on incentives but also products and technology, content and customer service.

Deposed in 2013 for the case, BCD Travel executive vice president for global supplier relations and strategic sourcing Rose Stratford said BCD in the seven preceding years earned between $23 million and $35 million annually from Sabre. Airline commissions were “significantly larger,” she said.

Asked what would happen if the GDS payments went away, Stratford said fees charged to clients would increase.

Not So Optional

Travel management professionals, particularly travel agency leaders, will recall a 2006 compromise in which TMCs opted for reduced incentives from Sabre and other global distribution systems to accommodate substantial reductions in segment fees GDSs charged to the airlines. Airlines secured lower GDS fees in exchange for committing to provide full content. But a provision in a 2006 deal between US Airways and Sabre unearthed for the trial shows that the haircut effectively was not optional. Agencies would have been paying either way.

In the summer of 2006, agencies opted in to these programs to access full content and avoid any new booking fees airlines decided to impose on GDS users. Case information shows that the US Airways-Sabre arrangement would have permitted just such a fee if agencies didn’t get on board. The airline agreed to levy a charge of at least $2 but no more than $4 per booking if agencies did not opt in to Sabre’s incentive reduction program.

Even for the airline, levying the fee was less than optional. If it failed to do so, the airline would instead have to pay Sabre’s highest rack rates for booked segments.

There would have been lots of questions about implementing this provision, but it never took effect; almost all agencies opted in. It’s not known whether such a clause appeared in Sabre’s other contracts with airlines, or in the other GDSs’ contracts with carriers including US Airways.

Testifying last week, Sabre CEO Tom Klein said airline leaders thought this was “an elegant solution to a hard problem.” He said Sabre did not fully recoup the reduced revenues resulting from lower airline rates through these savings in agency incentives. A Sabre document presented at the trial showed the tech firm recovered 72 percent of lost revenue after cutting airline fees by as much as 20 percent in 2006.

Even so, Sabre’s operating income climbed after that. How? Webb testified that the company also made significant cuts in technology expenses and headcount.

Reports at the time said the incentive reduction on bookings with participating airlines was as much as 80 cents per segment. The average reduction turned out to be 55 cents per segment for bookings on carriers that signed full-content deals, according to a Sabre document presented as evidence. For all types of bookings, Sabre’s average incentive payment dropped to $1.59 in 2007 from $1.67 in 2006, according to 2013 Sabre information.

Additional info: Incentive growth has stabilized “a little” of late, said Webb, but “it’s still a big part of our costs.” Sabre CFO Rick Simonson during an earnings conference call last month said incentives would grow by “very low-single digit” percentages. During his company’s third-quarter earnings call last month, Travelport CFO Bernard Bot said agency incentives increased by “low-single digit” percentages, “with higher loyalty payments linked to global customer wins.” Amadeus this year noted rising agency incentives but hasn’t quantified that growth.

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As His Company Sued Sabre, Doug Parker Claimed Scant Knowledge About Travel Agencies

New York — Doug Parker is chairman and CEO of American Airlines, which continued the lawsuit against Sabre that his previous company, US Airways, filed more than five years ago. Two months after announcing a merger with American, Parker in an April 2013 taped deposition admitted to a remarkable lack of knowledge about the sales and distribution ends of the business.

Sabre attorneys played a portion of the video for the jury here Monday. The airline veteran of three decades said under oath multiple times that he did not know what travel agents value.

Asked whether agents like having access to as many flights and fares as possible, Parker said he didn’t know. Would it be reasonable for them to have that viewpoint? He didn’t know. Do consumers like to compare airfares? He didn’t know.

Asked whether he understood that one of the valuable services Sabre offered to agents and consumers was the ability to shop among multiple air travel options, Parker said he did not have that understanding. Did he have a view on whether agencies prefer a distribution channel that has more airline content versus less? He did not.

Doug Parker

American Airlines chairman and CEO Doug Parker

Did he know that US Airways paid back-end commissions to travel agencies? He did not. Did he know that US Airways had written contracts with travel agencies? He did not. He struggled to come up with the names of some distribution channels, eventually mentioning Expedia.

More specific to the case, Parker twice said he did not know what content the airline would have held back if it struck a Sabre agreement without a full-content requirement. The suit claims US Airways was forced to sign a deal including such a requirement. Parker said he could not say what the airline would have done if it had the contractual right to market a direct connect option, something his airline’s lawsuit said US Airways wanted.

Did he know that US Airways at one point said it might withdraw from Sabre? “It’s my understanding we made that suggestion,” Parker allowed.

Asked if he could recall any action Sabre had taken to harm US Airways, Parker said he could not.

Parker said he did not try to speak with Sabre about the business dispute before filing the lawsuit. This was despite allegedly having a relationship with Sabre’s then-chairman and CEO Sam Gilliland, which current Sabre CEO Tom Klein mentioned during his testimony Tuesday.

American Airlines provided this statement in response to a question about Parker’s testimony:

“In 2013, Sabre’s attorneys deposed Doug Parker for a full day, and he was under oath and instructed not to speculate about answers he did not know. Several questions inquired about what travel agents value and want. Doug testified truthfully that he was never a travel agent and therefore would be guessing at what they value and want. It’s also important to note that Doug was responsible for managing an airline with over $10 billion in revenue and more than 30,000 employees and destinations around the globe. The questions and answers played by Sabre at the trial on Monday were misleading and unfair, as they represented a small portion of his overall testimony. In that testimony, Doug made clear that he relied upon Scott Kirby (then the president of US Airways), Andrew Nocella and John Gustafson to handle distribution and travel agency relationships for the airline. All three have testified at this trial, and their testimony leaves no doubt that US Airways valued travel agents and had a skilled team of executives overseeing this part of the business.”

Indeed, Scott Kirby was Parker’s right-hand man at US Airways and then AA. This summer he joined United Airlines as president. John Gustafson is the AA company representative at the trial. Gustafson testified early on, as did AA SVP and CMO Nocella.

Almost by definition, CEOs often don’t know the minutiae. They do lots of delegating. According to sources, that seemed to be especially true at US Airways vis-à-vis agency relationships. When Parker assumed control of US Airways in 2005 after it merged with America West Airlines, where he had been CEO, he brought a low-cost ethos with him. That meant travel agencies weren’t as big a priority as they were — and are — for American, Delta and United.

Back to the deposition, did Parker know who at US Airways was responsible for negotiating with Sabre? He said the task was delegated to Kirby’s team, but he did not know who specifically was responsible.

AA managing director for sales operations Brett Berman was involved. He was evasive in a taped June 2013 deposition played Tuesday. A managing director at US Airways who had been with the company for more than 15 years when he joined AA in January 2014, Berman was unable to identify the features and functions global distribution systems provide to travel agencies. He struggled to describe distribution providers that service agencies. “There are ones that exist and ones that could potentially exist,” he said.

Asked about his job, Berman at one point asked his interviewer how he defines the word “role.” The lack of candor at another juncture prompted the Sabre attorney to ask whether Berman knew what “travelers” were. “I think I do, but I could be wrong,” he said.

For depositions or courtroom testimony, witnesses often are advised not to volunteer information.

Even so, it’s either hard to believe or potentially discouraging for travel agents that the incoming head of the world’s largest airline had so little understanding about what they do. Today they book about 40 percent of tickets for big U.S. airlines, according to ARC. According to trial evidence, US Airways around 2011 generated 35.6 percent of its revenue from online and offline agencies using Sabre. Agencies using other GDSs delivered 26.9 percent and the airline’s website and call centers provided 37.5 percent.

In a Tuesday telephone discussion about the testimony, Tower Travel president and CEO John Smith said it’s “beyond shocking” that Parker wouldn’t know about such things, especially given his experience as an airline financial planner. “It sounds like the rough equivalent of pleading the fifth,” Smith said.

While Smith wasn’t alone in expressing surprise, others weren’t as taken aback. US Airways, they said, never was as dependent on travel agencies as its larger competitors.

“US Airways had very few agency programs and they were far from generous,” said now-retired agency exec Jerry Behrens. That said, Behrens thought Parker “should have knowledge of the distribution system and the costs of each channel.”

Testimony ‘Speaks For Itself’

Among the many topics covered in this trial are the services and tools travel agencies use. Throughout the proceedings, Sabre’s attorneys have argued that it is travel agencies, not an airline, that know what’s best for travel agencies. Perhaps showing the Parker deposition was part of that.

Sabre’s lawyers had pressed US Airways witnesses on why the rift with Sabre wasn’t communicated more formally to the CEO or board. Presumably if the jury is convinced that the matter was not taken seriously at the top level, they may question aspects of the plaintiffs’ case. Parker’s comments seem to show he knew very little. Kirby said the issues were discussed verbally. A June 2011 internal US Airways email references the need to discuss GDSs and online travel agencies at a board meeting. Parker was chair.

Saying that the Parker testimony speaks for itself, Sabre declined to comment further on why its attorneys showed the video.

They almost weren’t allowed to do so. Presiding judge Lorna Schofield said she excluded from the record some pre-trial testimony filled with “I don’t know.” In Parker’s case, though, she kept it because it is “probative” — meaning relevant or helpful in establishing proof.

During his deposition, Parker said he was advised to avoid speculation.

“It would be unethical for a lawyer to coach [a witness] to say something that wasn’t true,” said former antitrust lawyer Karen Redlich, now a professional-in-residence at University of New Haven’s Henry C. Lee College of Criminal Justice and Forensic Sciences. “But in depositions you don’t give anything away that wasn’t asked.”

Travel industry lawyer Mark Pestronk said “there is no downside in a deposition to saying ‘I don’t know.’ Parker may have been counseled to answer only if he was absolutely sure. That is very often how witnesses behave in a deposition.”

According to an observer of the trial with a legal background, saying one doesn’t know can help a witness avoid being called to testify in court.

“It is not unusual to see lawyers — ‘hint-hint, wink-wink’ — make clear to their client that there is some benefit to being dumb,” said a former attorney and current law professor who asked not to be identified due to his lack of specific knowledge about this case.

Playing out a likely reaction, the professor said, “This guy is a leader in the industry — how can he possibly not know the answers to these questions? Because litigation has all kinds of risk in it, some people may be willing to take the reputational and PR risk versus whatever might happen if they were called to trial. Some people are willing to take that risk even if it makes them look foolish if the deposition is ever released to the public.”

Additional info: In August, AA COO Robert Isom succeeded Kirby as the airline’s president. He is charged with overseeing operations and assumed “all revenue responsibilities.” The airline also recently made a number of appointments in sales, distribution and marketing. In September, former Starwood Hotels & Resorts Worldwide global sales leader Alison Taylor came on board as senior vice president of global sales. Reporting to Nocella, she is responsible for AA’s sales team, sales and distribution policies and relationships with corporate customers and travel agencies. Also in August, AA’s one-time VP of global sales Kurt Stache became SVP of marketing and loyalty. Also reporting to Nocella, Stache leads marketing efforts “across all channels” and directs customer relationship management and loyalty programs. Reporting to Stache is Bridget Blaise-Shamai, promoted to VP loyalty. A 20-year AA vet who once served as managing director of distribution systems, Blaise-Shamai now is in charge of the AAdvantage program. She also is responsible for AA’s CRM and “all travel and retail mileage partnerships and business solutions.”

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