April 22, 2009 - As they report first-quarter losses, airline executives once again are talking up reduced distribution expenses--at least in vague terms.
American Airlines opened the conversation last week, referring to commissions, fees and overrides for "the intermediary between us and our customer." Delta Air Lines and United Airlines this week needled online travel agencies while praising travel management companies and global distribution systems. Still, in Delta CEO Richard Anderson's summary, "GDS costs will continue to decline and ultimately the OTAs should pay for the content."
AA CEO Gerard Arpey had said he was "dreaming" for a day when intermediaries "pay for access to our product rather than us paying them to distribute our product. That would be my long-term vision." A former Air Canada executive said that's been Air Canada's vision for a long time.
These and other comments were "unnerving" for GDSs and travel agents, noted Travel Tech Consulting president Norm Rose. Leisure and small agents howled, and consultant Chicke Fitzgerald and former TMC executive Mike Platt, among others, defended the GDSs. GDS expenses "continuing to decline," in many cases, has meant "shifting to the customer" through TMCs. But at least for now, airline execs are coveting the potential for the higher-yielding
business travel since it all but went away.
According to Delta's Anderson, "The large travel management firms provide a pretty valuable service to our corporate customers and, over time, the GDS model will also change and the costs for bookings will continue to decline. Travel management firms have an important long-term role to play for large corporations in terms of managing their total travel."
He noted that existing GDS contracts with Delta are "still in effect for a few years" and expects "a number of synergies that will also come from combining the GDS and OTA agreements between Northwest and Delta."
United has "made significant progress on our GDS expenses over the last few years, as well as what I would characterize as good initial progress in terms of OTAs," said COO John Tague. "It is difficult to reduce distribution costs during periods of weak demand; however, this gets back to capacity discipline. We've ultimately got to have capacity low enough to be able to have some commercial courage in attacking distribution costs. If we are constantly terrorized by excess capacity, chances of improving the economics around these key cost components in the business are not very high."
"A lot of [this] hinges on the use of technology and the competitive environment," said AA's Arpey. "A lot of those commissions, fees [and] overrides are paid in order to stimulate traffic. As an industry, if we can do a better job keeping the supply of seats in line with demand, it will help us on those fronts."
Tague added, "When you look at OTAs, they tend to offer less value to our most profitable customers. The large TMCs are performing a service that we really can't step in and perform, and one that our most profitable corporate customers have determined are of significant value to them."
According to Rose, a consultant and a United alum, since major airlines started negotiating corporate direct discounts in the mid-1990s, "one might believe AA and the other major carriers have amassed a vast knowledge of corporate travel patterns and thus could project demand more accurately. Sounds good, but this true demand analysis seems not to be in airlines' DNA as most still look at the profitability of a given flight--not overall customer performance when calculating overall demand."
Customer loyalty for OTAs, meanwhile, has been an Achilles' heel.
"I agree that ineffective incentives should not be in place," Rose wrote. "But the reality is that the market strength of the leading TMCs and OTAs forces the airline to play the override game, and, if not, could result in a negative selling campaign against nonpreferred carriers; a situation which has happened many times over the years."
"Of note, Delta stated that 'TMCs have an important role to play' and seemed to imply that their main target was the OTAs, particularly when Delta described the 'value we provide versus others' online," noted Hudson Crossing consultant Tom Botts.
The airline execs had cited their supplier.com sites in explaining their past gumption for such bravado. "The paradigm in the airline business has been that historically we pay our distributors to sell our product; that has been shifting over many years because we have been able to cut domestic commissions, domestic overrides and booking fees," said Arpey. "We have done that for a lot of reasons, not the least of which is that our Web site aa.com has become our largest distribution venue, where our customers can come directly and book their tickets without any intermediary."
Delta's Anderson said 37 percent to 38 percent of tickets are issued on delta.com, while OTAs were in the "30 percent range."
"Direct distribution is not free," argued consultant Fitzgerald. "The GDS aggregates high-yield business. Agencies sell, on average, higher-yield tickets than the Internet/direct distribution channel. Travel agents aren't asked for the cheapest price as the first part of the dialogue, whether for business or for leisure travel. They don't assume 100 percent price sensitivity, like online sites do."
Meanwhile, Southwest Airlines doesn't have to target reduced OTA costs since it neither pays them nor participates in their systems--with the exception of their business travel agency arms.
"We have been pleased with the performance so far of the GDSs that we've joined," said CEO Gary Kelly on Monday. "It is part of a larger strategy to make Southwest Airlines more broadly appealing to business customers and large corporate customers. That strategy is not fully implemented yet. We have got a frequent flyer plan enhancement that is coming, as well as enhancements to southwest.com, just to name a couple. We are adding more destinations to our route network: Back to this whole notion in Chicago--trying to appeal to the corporate Chicago customer--if you don't take them to LaGuardia, sometimes it is hard to get them. I think you have to look at all of these things combined. The distribution in and of itself, by itself, I don't think is a huge contributor, but it certainly is a component of a number of tools that we're trying to package together. We think it is the right thing. We have definitely seen our business go up. The actual number escapes me. We have definitely seen our travel agency business through GDSs go up."
Southwest nevertheless still heavily favors use of its southwest.com and Swabiz online offerings. "We have a lot of releases that will be coming on southwest.com," said CFO Laura Wright. "We have released our first recently, and hopefully you have had a chance to see it. We have huge opportunities to capitalize on that distribution system in place, and it certainly includes being able to sell more hotels and cars and travel-related products. Those will come out over time in several different releases."
When asked about distribution cost savings and OTAs specifically, Continental Airlines CEO Larry Kellner said, "We are very focused on letting people buy the way they want to buy, making sure that we are good partners and that our content is still available to people when they look for our fares."
