[UPDATE, March 22, 2017: U.S. District Judge Lorna Schofield denied American Airlines’ renewed request for declaratory judgment relief. She wrote that the request was “untimely” and “otherwise inappropriate.” Although American’s negotiations with Sabre for a new contract “may be newly imminent, they are not unexpected,” according to Schofield. “Reconsideration on account of a changed, but entirely expected, circumstance is not warranted.”]
The impact of the US Airways v. Sabre trial remains uncertain as motions fly and an appeal looms. Concerned that the effect of the verdict may be limited, airlines are urging the judge to more broadly define it. American Airlines is looking to bolster its position in talks with Sabre for a content agreement that is due to expire this year, according to court filings. United could be next. Delta has been quieter.
With these matters on the horizon for corporate travel professionals, the foreground features deadlines on International Airline Group’s GDS deals. Multiple sources indicated distribution agreements with IAG airlines including British Airways and Iberia are due to expire in June. Some analysts think the company may establish a surcharging program much like Lufthansa Group’s.
Airline companies can be measured by planes, passengers or revenue. For all intents and purposes, the aforementioned carriers plus Air France/KLM are the world’s biggest. As such, the economics of key airline-GDS relationships over the next year or so are in for an evolution, if not a revolution. What could this mean for travel management companies and their clients? Added cost. Tweaked contracts. Uncertainty. Pressure for alternatives.
The changes will differ depending on location, client profile and competitive positioning. Just because, say, British Airways might surcharge GDS bookings doesn’t mean that’s the best strategy for partner American Airlines. AA has far more exposure to its (far larger) domestic market. From that base and for the global corporate market, it has two serious rivals. AA would be hard-pressed to maintain a surcharge program that goes unmatched, as Lufthansa Group has for a year-and-a-half.
Further differentiation in GDS pricing is the outcome analysts at Morgan Stanley are modeling, at least with regard to the European carriers. The firm’s Feb. 26 research note on Amadeus suggested Lufthansa’s fee may not go unmatched for long.
“We had thought IAG was very unlikely to make a Lufthansa-type surcharging move, but see it as possible now versus very unlikely previously,” according to Morgan Stanley equities analysts led by Adam Wood. Commenting that “we think” IAG’s GDS deals expire next quarter, the analysts put the chance of a surcharge at 40 percent.
Another analyst who follows Amadeus declined to be quoted by name so as to protect the integrity of commentary he sells to investors. According to this expert, an IAG surcharge is “more likely than not.”
IAG executives in November told analysts they had a new distribution strategy that would reduce cost and increase control, according to company transcripts. They said at least parts of the plan will be revealed this year.
“We have aligned all of our GDS contracts — the negotiation is an IAG negotiation,” said IAG CEO Willie Walsh. He continued:
I believe there is a role for the GDS. We have used them. We will, I think, continue to use them where they are relevant to our business. If they are not relevant to our business, and some of their pricing models suggest that they are not relevant to our business, then we will look at alternatives. However, the plan that we will put in place will be a plan that is appropriate to IAG. We are not going to model this on what anyone else has done because we are not the same as Lufthansa, for example. What they have done may have worked for Lufthansa. It is not necessarily what will work for us.
The unnamed equities analyst believes IAG will no go so far as Lufthansa did. This could mean differentiation by market. In a model where any surcharge is added to the fare, airlines can modulate it based on competitive pricing. “This is not about cost-cutting,” said the analyst. “It’s cost reallocation and revenue management.”
A separate airline technology contracts expert also declined to be quoted by name to protect client relationships. He supported the concept of different approaches by market. According to Morgan Stanley, airlines are less interested in paying GDS firms for simple bookings made in their home markets. For complicated trips booked in foreign markets, GDS distribution is more highly valued. What’s in between varies by degree. The concept of stratified pricing isn’t new, but the tech expert thinks it will become “much more complex, because value-add is the key.”
Noting that Air France’s GDS contracts are due next year, Morgan Stanley analysts described the Lufthansa program as a “win-win” for airlines and Amadeus. Airlines have more control over distribution and can sell more ancillary services when travelers come to them directly. Amadeus gets a higher fee for bookings it still processes, as well as software revenue for new technology built for Lufthansa.
But someone is paying. That would be you, employers of those who travel for work.
The tech expert argued that the surcharge model could not happen in the United States largely due to Expedia’s clout but also as a result of competition. “If the airlines all do it together, it will appear as though they have colluded,” he said. Still, he thinks the U.S. market will go through a process of identifying what distribution services the customer is willing to pay for.
That may depend on the outcome of the latest machinations in the US Airways v. Sabre trial. After the jury found for the airline — that is, American Airlines — Sabre asked the court to set aside the verdict or order a new trial. Its arguments remain under consideration, and Sabre has promised an appeal if they fail.
Meanwhile, airlines have filed their own motions in an effort to clarify the effect of the verdict through a legally binding declaration by the court. Sabre has argued the jury’s decision only applies to past contracts.
Sabre ‘Open’ To Dropping Full Content Contract With AA
According to a court filing, American claimed it “currently faces demands from Sabre to renew imminently the same contract provisions that the jury declared unlawful.” These may include prohibitions against surcharges, content discrimination or direct connect programs. In response, Sabre told the court “there have been no such demands.”
“After the verdict, American asked Sabre for a proposal that did not include terms the jury in this case found to be unlawful,” according to AA. “Tellingly, Sabre has failed to respond.”
According to Sabre, “Putting aside that all contract discussions have been preliminary, Sabre has in fact told American … that Sabre would provide American with a variety of commercial models to consider, including a PCA model.” The “PCA model” refers to a non-full-content agreement in which the airline pays more for booked segments but is free to differentiate content in other channels and, potentially, to surcharge GDS bookings. In a separate filing, Sabre’s general counsel affirmed that Sabre “has informed American that Sabre is open to a PCA agreement.”
Sabre pointed out that the court declined a similar September 2015 request by AA for declaratory judgement. The plaintiff “provides no reasonable justification for reconsidering the court’s ruling, and instead simply rehashes the very arguments the court previously (and correctly) rejected,” according to Sabre. Its attorneys claimed that AA’s and Sabre’s 2012 settlement agreement bars litigation between the parties until at least late 2019. But an AA filing argued that this prohibition does not apply to all circumstances.
The current AA-Sabre contract expires “within a matter of months,” according to AA attorneys.
In its own filing, United indicated that it has a “multiyear” Sabre agreement that began in May 2013. Absent changes to the prevailing contract parameters, United’s attorneys wrote, the carrier “will be faced with what it expects will be difficult negotiations with Sabre when the Sabre agreement is up for renewal.”
Half of United’s bookings go through GDSs and about one in four United customers is ticketed through Sabre, the carrier noted. “Sabre has indicated during contract negotiations that it would only enter into an agreement that did not include its full content provisions if United would agree to pay Sabre fees that were so high that Sabre’s proposal was not economically feasible,” according to United.
Along these lines from a European point of view, the Morgan Stanley analysts wrote that they expect GDSs to “maintain their higher price points that they have gained as airlines turn off full-content agreements. The next negotiation with … Lufthansa will be very interesting as at that point it will have made a concerted effort to get as much business as it can direct. What is left on the GDS (which we still expect to be the majority of bookings) is clearly business that Lufthansa has struggled to shift or which it is uneconomical to shift. We question why a GDS would lower its pricing for those bookings.”
Lufthansa Group also filed a court document supporting AA, seeking a judgment that could help its own case against Sabre in a Texas state court over the surcharge program.
Attorneys for Air Canada wrote that the airline’s “current agreement with Sabre includes parity provisions that deny Air Canada the flexibility to work to expand and enhance its partnerships with other, lower-cost GDSs.”
Sabre dismissed the cooperation of these other carriers, arguing that they merely “seek to gain leverage in ongoing business negotiations of distinct issues in separate contracts.” For example, “Air Canada’s contract with Sabre contains no full-content provision, and the airline’s principal complaint appears to be that it made certain concessions (e.g., a higher booking fee and no guarantee of a neutral screen display) in exchange for that freedom.”
AA had said it also expected Alaska Airlines, Virgin America and JetBlue to support its motion.