Wednesday, August 20, 2008

New paper in the 2008 not-so-white paper series

Are You Reaching The Forgotten Mass Market?

Chicke Fitzgerald,
Founder & CEO,
Solutionz Group
International Inc.


A guide on marketing to the Non-Air Traveler by Chicke Fitzgerald

The high price of airline fuel and news of the airlines cutting their schedules this fall are dominating travel news today. Nearly every newsletter, magazine and even major newspapers such as Wall Street Journal, USA Today and the New York Times, have recently featured articles about these subjects. In fact, airline travelers are the focus of most travel marketing. You would think that air travelers make up the majority of all travel in the US. And you would be wrong. For every trip taken in the US by air, there are ten trips taken by car.

This paper addresses:

  • The size of the road travel market

  • How to market differently to the road traveler

  • How to bridge the inadequacies of today's air focused technologies

  • How to tap into this mass market and stem potential losses to your business due to the projected downturn in air travel in the US

It is the author's contention that the next disruptive application, will be systems that marry trip planning, content, consumer feedback, booking, mapping and routing together.

This paper is a must for every industry executive responsible for travel marketing and distribution, and also provides much needed insight to those that have previously depended on the air traveler for the bulk of revenues.

The Irresistible Pull of Irrational Behavior - Travel Industry Style

I just started reading this book last night. I was immediately struck by the parallels of the stories told by authors Ori and Rom Brafman about various situations where intelligent, normally logical individuals make decisions that make absolutely no sense.

For anyone that follows my musings about distribution on a regular basis, you know that every April 1st, I write a column for Jay Campbell on the Beat that pokes a bit of fun at our industry and how the issues of distribution fall into that category of "irrational behavior". While told tongue in cheek, they ring all too true and are a stark example of how our decision making in this industry gets derailed by looking at what is going on around us.

The key points of the book focus on the things that "derail our decision-making".
  • Loss aversion - tendency to go to great lengths to avoid perceived losses
  • Diagnosis bias - original diagnosis blocks our ability to see subsequent results clearly
  • Chameleon effect - the tendency to take on characteristics that have been arbitrarily assigned to us
Let me do my best to associate these elements within our industry to the irresistible pull away from travel agencies and the GDS channels.

LOSS AVERSION - Customer Loyalty? Or Loss of Profits?

For the first 20 years of my career, airlines sold tickets primarily through the travel agency channel. They competed for business on price and schedule, but mostly on service.

I flew on a particular carrier because they had frequent service out of my home city (not tough to guess who I flew on during my years in Dallas with Sabre and my years in Atlanta when I went to work for Worldspan). Price wasn't such a big issue since the parent companies of my employers were airlines.

I did amass frequent flier miles, and lots of them. That, coupled with the fact that it was actually a pleasure (most of the time) to fly on these carriers, secured my choice. It had nothing to do with the channel that I used to purchase the ticket. In fact, once I formed my own business 12 years ago, sometimes my customers would require that I use their corporate agency or online site to do my bookings, so even if I had wanted to book direct, my client wouldn't have reimbursed me if I did.

Enter the Internet in the mid-late 90s. Suppliers could now attract customers direct and could do so by offering the lowest fare on their own site, versus another. Good strategy guys. That is if the fare is no more than the offset of the commission saved and the GDS booking fee saved. Bad strategy if it is much more......

I see where an airline might think that if I purchase through a channel other than their own that it might actually be more expensive (even though my Agency Distribution - Do the Math blog outlines why this is patently untrue in most circumstances).

If in fact the average ticket sold by a travel agent is substantially higher than through online or direct channels, what other loss could the airlines be avoiding? How then did we get to the place where "control" of the customer and their loyalty was considered inextricably linked to their choice of channel?

I would love comments on this one!

DIAGNOSIS BIAS - The GDS fees are too high. We have to eliminate agency commissions.

I was not an economics major, but I would imagine that if I were, that there would have been an entire class devoted to talking about the merits of variable costs versus fixed costs.

Our industry seems to have wholly missed the nuance of this discussion, due to our own diagnosis bias. Late in the 90s the airlines first capped commissions and then later cut them out as a birthright of a travel agency. Good job guys. That is, if agencies would continue to sell your product with no incentive. It worked for awhile, but over time what happened is that they shifted their sales to international routes where commissions were still by and large intact and to cruise and tour, which had a higher return.

But remember, for every passenger that they used to put on your planes at a totally variable cost of sale (you only paid the commission and the GDS fee if they sold a ticket), you now have to pay to attract those customers directly to you. Your branding costs don't go down if you don't sell. And they don't go down if your other costs go up. You still have to have a web site and a call center, whether or not you sell a single ticket. Can you say fixed costs?

So the sad thing is that other suppliers are falling prey to the Diagnosis Bias - the GDS and travel agency channels are too expensive and we must shift channels at all costs.......

CHAMELEON EFFECT - We take on the characteristic ascribed to us

The most stark example of this one was in the airline/GDS contract negotiations a few years ago. The airlines metaphorically pounded on their chest and said that they were going to shift distribution away from the GDS, either to their direct web sites or to the GNEs (see blog below on that history). The reason - the GDS was too expensive.

If the GDSs had looked at the facts (their average ticket value sold through the agency channel versus that of an airline direct web site, even if you deducted the booking fee and the travel agency commission if they still got one), they would have stood firm and said "Go ahead".

The reality was that the major airlines could not have survived being cut out of even one GDS for a week, let alone permanently. But the GDS companies didn't do it. They took the price cut and passed much of it on to the agencies.

Group dynamics and emotions play a large role in decision making, both personally and professionally. Entire industries play follow the leader in irrational behavior, despite the facts.

Now some airlines and hotels have been successful in having a virtually "GDS free" strategy, but most have seen a very strong return on the investment in that relationship.

I don't call into question the behavior of those travel suppliers that know their channel costs AND their channel profitability. If you can prove to yourselves that you can make up the loss in volume or loyalty, then bravo on your decision to shift business from the high value, variable cost travel agency channel to your own web site.

But if you can't and you are bowing to an irrational fear of loss, a diagnosis bias of something you've read or heard at a an industry event or you suffer from the chameleon effect, then step back, take a big breath and look at the facts.

Make your own decisions that make sense for you. If the travel agent (and the GDS that helps you connect in one fell swoop to a bunch of them) as a variable cost channel helps you get a higher average ticket price, room/cabin rate or daily car rate, then by all means, stand out from the crowd and go for the profits!!

Perhaps you can help SWAY the industry in the other direction!

Tuesday, August 19, 2008

The Distribution Ecosystem - The GNEs, where are they now?

For over 30 years now, the distribution ecosystem has been evolving, providing multiple ways for sellers to reach buyers.

Those that have been around the industry for any amount of time will remember the days when the GDS not only sat in the center of the distribution diagram, but they were synonymous with distribution. That picture has changed over the years.

In the late 90s, the web became a viable tool for suppliers to reach consumers directly and even corporations. Although the Internet nearly always yields a lower profit per transaction, it is the fastest growing distribution channel for suppliers. See my hotel distribution story below and my blog on agency distribution on the Beat ( and do the math for yourself if you are skeptical about this claim.

A few years ago a couple of firms, known as GDS New Entrants or GNEs, burst on the scene with a flurry, promising to totally disrupt the ecosystem, offering an alternative for suppliers and agencies alike. Their focus was on providing a lower cost for the airlines to get their products onto travel agency desktops.

Where are they now?

ITA lead the pack, actually coming on the scene in the mid-90s. The founders were MIT grads that had found a clever way to revolutionize shopping for airfares. VCs, including Battery Ventures, Generaly Catalyst, PAR Capital, Sequoia Capital and Spectrum Equity Investments, believed in them early on and in 2006 they closed a $100m round. They are now focused on revolutionizing airline reservations system technology and the travel agent desktop is no longer the prime battleground.

G2switchworks, funded early on by several major airlines prepaying greatly reduced booking fees, developed technology for the agency desktop that connected directly to the airlines. Their claim to fame was that they would save airlines 81% of the normal GDS booking fees. That technology was recently purchased by Travelport, effectively removing yet another GNE from the fray.

Farelogix is the last one on the GNE horizon, remaining true to their travel agency focus. From the beginning, although they too provided a way for airlines to connect directly to travel agencies, they took a different tack, as middleware, versus replacing the desktop entirely. This has served them well. In January of this year they announced that they were adding access to the ITA airfare shopping and pricing capabilities.

While reducing distribution costs was the original catalyst for the emergence of the GNEs, the challenge they faced was one of penetration on the demand aggregation side of the equation.

Airlines tried to strong arm both agencies and the GDSs during the last round of participation agreements, citing the GNEs as their clear alternative.

What they underestimated, was the power of the incumbent (and the contracts that were in place). Travel agencies had long term agreements with their GDS that often had significant penalties for early termination. The GNEs were very vocal early on about not "buying business" as the GDSs have been doing from each other year after year. Consequently, they weren't successful at penetrating the agency marketplace.

It is one thing to offer suppliers a less expensive way to reach buyers and it is quite another to aggregate enough demand to displace the incumbent.

And when the incumbents are funded by private equity firms that have collectively invested over $16b over the last 36 months, well, the challenge is even greater.

So, the suppliers turn their eyes back to the Internet as their primary battleground.

As I mentioned, the article below shows that for hotels, there is as much as a $31 discrepancy between selling through the agency channel (even with commissions and booking fees). And on my blog on the Beat, assuming that airlines are experiencing a similar average ticket price online as the OTAs, there is a $51 shortfall between the average agency sale and an OTA ticket sale (including commissions and booking fees). It is tough to make up those shortfalls in volume.......

So my question remains "Why is there a battleground at all?".

The agency channel is a strong, variable cost distribution channel. The infrastructure is there to effectively connect buyers and sellers. High yield demand is backed up by statistics, both from Travelclick and from ARC and the increased yield more than covers the cost of that distribution.

What am I missing???????? I welcome your comments.

Chicke Fitzgerald

Wednesday, August 13, 2008

Channel Choice - Hotel Distribution 101

You are standing at a fork in the road. There are no clear signs telling you what to do. Your gut tells you to follow the road most traveled, but is that the right thing to do?

You are a manufacturer of soap - all kinds of soap. You have a choice in how to sell your soap. You can go the road most traveled and sell through Walmart or Target (the 800 lb gorillas), or the road that provides a little more margin for you, but where you sell less product, the grocery and drug store chains (the neighborhood channel).

Or you can go against all odds and open a store of your own (consumer direct). Your brands are strong. They can stand on their own. But is it worth it in the end???

And price and margin are one thing, the cost of opening and operating your own store is yet another. People may not walk in on their own. Or if they do, it may be inconvenient. After all, they have to shop for bread and milk or their cosmetics and perscriptions somewhere else. Is it compelling enough to make another stop for soap?

And what if the neighborhood channel didn't cost you a thing unless they sold your product? No delivery costs, no inventory, nothing. What choice would you make if you had a truly variable cost channel?

Somewhere inside, there is a voice arguing that you need to get the customer all to yourself, to insulate you from competition. But then there is the cost of building, staffing and maintaining the store and there is the advertising to attract consumers.

In another corner of your mind, is the voice that reminds you that for years and years, being merchandised at eye level in the neighborhood store (at full price mind you with no coupons) has served you really well. People chose you because of who you were, of the consistent quality of your product.

The 800lb gorillas are all about price and all about the product being on sale, all day, every day. If your price is low enough, you will be at "eye level" online (e.g. first screen). So I sell more..... but for way less. And I still have to pay for that distribution and whoa... at a pretty hefty price because of their market power.

So getting them to my store is still the best, isn't it???

The travel ecosystem is a complex series of distribution channels and it extends from the individual suppliers with products such as airline seats, hotel beds, cars, cruise cabins, tours, train seats, theatre tickets, theme park entry, etc., down to the consumer, who needs transportation, accommodations, respite, excitement.

As suppliers choose how they will sell their products, the closer that they can get to the motivation of the customer, the better. More on that later in my next blog on Higher Order Marketing™.

As you are presented with choices of how to market your product, it stands to reason that the higher the profits from a channel, the more inventory you would want to push through that channel. Right?

Well, not if you observe the conventional wisdom of the travel industry.

Witness the 1Q08 statistics from my friends at TravelClick about the hotel sector.

The average ADR (average daily room rate) for the travel agent channel is $176.83. The online component is $117.85.

Let's do the math.

$176.83 gross ADR
- 17.63 commission
- 10.00 GDS and Pegasus booking fees/transactions (being generous)
$149.20 net ADR

$117.85 gross online ADR

$31.35 deficit in selling online

So, through the GDS/Agency channel I have to pay a booking fee (which varies depending on participation level) and I have to pay for the switch cost through Pegasus (or develop my own connections to each of the GDS companies), but if they don't sell anything, I don't pay anything incrementally. And the travel agent deals with people who want to travel, all day long, every day. Variable cost at its finest for highly qualified demand aggregation.

But if I sell for $117.85 on average online, with a $31.35 deficit out of the gate, if this is sold through an online 3rd party agent, I have either a commission or the merchant model margin cost. Ouch. So I do need to pay attention to how much I'm devoting of my inventory to those lower margin channels.

If I sell direct, I have the customer in my grasp and don't have the booking fees or the switch costs or the commissions, but I still start with a lower net ADR and still have the cost of maintaining my web site, the call center, driving qualified traffic, advertising, etc. Even if I don't sell a single room through that channel. Whew. I see the fixed cost issue now.

So now, let's look at the channel shift trends. If logic holds true, hoteliers should be doing everything possible to sell through the variable cost travel agency channel (the neighborhood channel), right?


Click on the graphic at the right to see the stats for the major chains in living color.

The picture is clear. Hoteliers are moving headlong toward internet distribution of their products. Whether this is driven by consumer choice or their overt efforts is another story, which I'll talk about another day.

But think about it. If a hotelier has a choice to drive consumers to their own brand sites or to the neighborhood distribution channel (the travel agent), what should they be doing?

Can you make up $31.35 per room night in volume????

I welcome opposing arguments from chains and independents alike. Write to me at or post your comment here.

Chicke Fitzgerald

Monday, August 11, 2008

Marketing to Moms

A trillion dollar market. Who knew?

This book came to me as a gift. I was out of town all last week, so haven't had a chance to read it yet, but if the text on the fly cover of the book is to be believed, we need to stop, look and listen to the mom market.

As you put together your packages, position your press releases, write your ad copy and try to attract new business, ask yourself whether you are focused on this amazing market.

While this isn't an estimate of what this market is worth to the travel industry (after all, our US market is just reaching $800m in value), it is a market that you should learn more about.

Have a super week. I'm off to read my new book!

Chicke Fitzgerald

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