Translate

Wednesday, August 20, 2008

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.

Conclusion
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!


Post a Comment

Subscribe to Distribution Solutionz

Enter your email address:

Delivered by FeedBurner