commentary

Airline distribution reform: Déjà vu all over again?

By Kevin Mitchell

UK airline distribution is set for a rules-change by the end of February, similar in nature to what took place in the U.S. in 2006. The stakes are at least as big, but is there the will to survive?

Airlines seek latitude to put exclusive content on their websites and to shift distribution costs, in a wholesale manner, to travel management companies (TMCs) and their customers. TMCs seek guaranteed full content in the GDSs, with no fees, and guaranteed parity with airline website offerings. And corporate travel managers most of all seek ironclad commitments to full content.

No one is likely to walk away with a complete win but one thing is clear: airlines will get much more of what they seek if stakeholders slumber. For TMCs, now is the time for priority setting and for forceful grassroots advocacy. A reasonably balanced outcome in 2007 is within grasp; however, a successful resolution will be assured only if UK travel Associations, TMCs and corporate travel managers (CTMs) step up their demand for a seat at the negotiations table. 

On 23 January, Paul Allan, Chairman of London-based Guild of Travel Management Companies, told members that the outcome of current GDS-airline negotiations in the UK would likely determine how business travel services will be priced and distributed for all Europe. British Airways (BA) is currently in negotiations with GDSs for new multi-year agreements. As Allan stated, “This industry needs those concerned to get their acts together and sort the issue -– plain and simple!”  

There are three distinctive airline industry characteristics that require stakeholders to proactively engage issues of strategic importance.

First, business travel is simply a big ticket item. Second, buying travel services is more complex than, for example, buying and molding steel for automobile production. Many companies field thousands of business travelers whose safety, privacy and whereabouts are vitally important. Moreover, these travelers usually have a vote when it comes to individual travel purchasing decisions, and as such, must have confidence in the efficacy of managed travel programs. At stake is the productivity of corporations in their quests to drive sales growth and maintain cost-competitive workforces.

Third, is the competitive structure of the airline industry. The industry is prone to competition problems; it's oligopolistic at best, and generally tends toward monopoly. Governments have recognized this, as have airlines.

Industry Self-mutilation
Part of the problem is that some airlines have too narrow a focus. Distribution strategies might appear rational to them, at the firm level. For example, using content as a lever to drive business travelers to airline.com might seem a sure path to ever-lower distribution costs and higher yields as travel policies and comparison shopping are neutralized.

But at the industry level, collateral damage caused by single-minded strategies is substantial and irrational. All other stakeholders’ costs rise, while their productivity levels plummet. 

Consider the average booking fee UK-based airlines pay GDSs is £8 (for complete trip). Moreover, ponder the tremendous benefits for CTMs in having efficient access to comprehensive content, and other critical services. A cost-benefit analysis makes the point clear.

Do the math at £8 per trip vis-à-vis average fares in the following markets: intra UK, £325; intra Europe, £625; UK-transatlantic, £1,900 and UK-Asia, £2,000. When I try to calculate a percentage for these last two markets, it is too small to be displayed. So, why would we risk damaging this highly efficient system? It’s irrational.

What’s remarkable is that BA in particular is the uber-user of complex distribution services, and TMC distribution in particular. A complex connecting network with high-value tickets flowing to and through their dominant hub; customers who are high-end travelers who want lots of pre and post trip services that no airline can provide; and a truly global footprint all mean that BA secures potentially more value from TMC distribution then any airline in the world. It is astonishing that they don't acknowledge this fact and simply try to shift costs to their very best customers and value-added distributors of their products.

Accepting an open-ended distribution cost-transfer places CTMs on a slippery slope; the next transfer might be the cost of credit or pilot pensions. As a matter of principle, customers should not pay twice for any expense already reflected in the price of tickets. However, some concessions may need to be made to get a deal done that produces benefits for all parties. If some added distribution costs are passed through, as they were in the U.S., it is critical that CTMs and TMCs get an iron-clad commitment for full content in return.

The U.S. Experience, Translated
There is insight to be gained from the near-death experience with distribution reform in the U.S. in 2006. The U.S. aviation marketplace has several major airline competitors, none of which can single-handedly dictate distribution system direction.

However, in the UK, one airline dominates; there is not the competitive choice there in is the U.S. This is compounded by the influence this airline has with TMCs and on corporate travel programs. So, where an even more robust engagement by TMCs and CTMs is required for balancing interests, constraining forces could lead to a lopsided outcome.

In the U.S., in 2006, new long-term GDS-airline agreements ushered in major distribution system changes. While there was much anxiety about how reform would ultimately take place, who would bear the costs and what they would receive in return, many CTMs did not sit back and let others dictate the new terms. Instead, they made their views known, and forcefully. These proactive customers succeeded in guiding reasonably balanced changes that protected their corporations’ interests.

There is little time left. UK travel industry stakeholders must become quickly educated on the implications of a failed GDS-airline negotiation and make this issue their top priority. A balanced solution, with full content at the fulcrum, is within reach, but it is only attainable if TMCs and CTMs provide counterweight to airline attempts to launch their disintermediation agenda.  

Republished with permission from Business Travel Executive / askBTE.com.