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Friday, August 12, 2011

Outcome of the battle looking like 2006?





Today, fresh from a week in Cape Coral, Florida on holiday with my family, I started catching up on my email and came across my issue of The Beat (a subscription newsletter that you should check out if you follow the travel industry).   It contained an interview with industry attorney, Mark Pestronk.

Mark made a statement in his interview with David Jonas that in the current battle between the airlines and the GDS (with poster child AA leading the charge for the industry), that a likely outcome would look like the 2006 GDS contract battles:

"Most likely, there is going to be a 2006-type outcome where American Airlines and most majors get a break on their GDS fees, leading to lower net agency incentives," Pestronk said, adding that major airlines in that case would remain in GDSs. That, he said, would lead to "another hit for travel agencies eventually," either in the form of lower net incentives, a higher full-content fee or, more likely in Pestronk's view, a new fee. "In general, it is a fact that all standard GDS contracts in effect today [with travel agencies] do allow incentive cuts, new fees and higher fees," he explained, though he encouraged agents to check their contracts.


I think agencies need to do more than just check their contracts.  This is an issue of proving their value, not to the GDSs, but with the airlines themselves.

This is not a battle about technology, but one about business models and efficient, variable cost distribution.

Brick and mortar agencies bring in over $6.5 billion in domestic ticket sales per quarter and another $7.4 billion in international sales.  I separate out the domestic sales, because by and large, agencies are no longer receiving a commission on these sales.   And as a reminder, it is a variable cost channel, as they don't pay anything (to the GDS or the agency) unless a sale is made.

I for one believe that this is actually at the heart of the matter and that when one party does something for another, that getting compensated for that value is not unreasonable. 

When the airline rep shows up or calls your agency or corporate travel department about doing a direct connect deal, you need to clearly know your value to that airline and be armed with your average ticket values in each category so you know where you fit versus the norm. 

The aggregate numbers from ARC are very clear and each agency should know their own value to the airlines.  Here is the domestic picture (as of 1Q2011), followed by the international sales stats.
















Remember that your real value comes on the international side of the equation, as the brick and mortar to online differential is substantial.   

You also need to have a clear view of what any change in your distribution equation (e.g. the technologies that you use in your agency to deliver the total services needed for your customer base) will cost you.  Integration of a direct connection into a supplier is not a trivial matter to most agencies. 

Hear me out.  I am not opposed to direct connect as a model for suppliers to gain control of their distribution costs.  I am not opposed to the companies providing the technology.  Anyone that knows me will know that I am a huge fan of entrepreneurs and the innovation that comes from that camp and I have been a supporter of Farelogix since their inception. 

Direct connect is NOT new.  Pegasus proved this model to the hospitality community in the late 80s and early 90s when they created a "switch" to allow hoteliers to focus on putting heads in beds, versus keeping up with all the changes needed to connect to a half a dozen distribution system companies worldwide. 

I just believe that a channel that is delivering $14 billion in sales in a single quarter should not have to "take a hit" when their suppliers have a beef with their distribution technology company(ies).

It's time to stand up for yourselves rather than taking what is handed to you.
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