04 September 2009

Airlines Vs GDSs - The Sequel.

The long running battle over distribution control is akin to the Harry Potter saga. It goes on and on, a long drawn out affair with as many plot twists and turns as J K Rowling's Historic Novels. The current phase (at least as far as the movies are concerned) of teenage angst for the three heroes has broad similarities in the airlines separation of their dependency on the GDS. Thus the Three GDSs do rather look like instruments of He-Who-Must-Not-Be-Named.

Finding out who is the one (or ones) who has gone over to the Dark Side draws analogies that could fill volumes.

A recent piece in BTN entitled "GDS CEOs Assess Changed Airline Negotiating Dynamics" has brought a light onto the battle lines that are being drawn.

To some - there is a desire that says they wish the whole issue would go away so that the players could quietly negotiate in peace. Over time they could come out with a solution that is acceptable to the protagonists that evokes images of epic battles of the forces of Good vs those of the Dark Lord. In that way the seemingly innocent bystanders - which is how the agencies cast themselves - could carry on without interruption and changes on their side.

However - this is all somewhat wishful thinking. The facts of the matter demand a change in the status quo. Earlier this year at the height of the recession with bad news resounding in everyone's ears - the top two US airlines CEOs both came out in favour of radical change in the model.

"...maybe I'm dreaming here," American CEO Gerard Arpey said envisioning a future "where those folks who are the intermediary between us and our customer have to pay for access to our product rather than us paying them to distribute our product." Arpey called that shift a "long-term vision," rather than a near-term reality. Within days Delta CEO Richard Anderson followed with a similar statement saying, "Over time, the industry has to evolve to the model of other industries, where people pay us for our content rather than us paying them to take our content."

Over on the other side of the pond the model for the next round of negotiations was quietly being rolled out by arguably one of the more successful of the legacy carriers - Lufthansa. LH, itself an Amadeus owner, was able to to turn the GDS model on its head and control the GDS radically reducing its both core and marketing costs and in some cases turning its GDS expense into a profit center.

Sitting in the USA market and watching Southwest become more and more like a Full Network Carrier, it is easy to assume that the contrarian airlines (LCCs) have little impact. However again over in Europe the share and importance of the Low Cost Carriers particularly Ryanair and Easyjet have changed the dynamics of airline product distribution forever. Multi-source access is not a luxury or even just a competitive differentiator, now its an absolute necessity.

The GDSs have clearly failed to live up to their premise of universal supply chain providorship. The rapid rise in and now significant cost of maintaining independent links to direct airlines and indirect GDSs indeed the rise of all the IT costs for an agency/intermediary make the GDS just one of many - while still important - channels of distribution. For which they now have to justify themselves with better product in service models. In a conventional market - a world described above by Messrs Arpey and Anderson, this should promote a drive to excellence and passion for better products and services. However at this time the GDSs are struggling with lower transaction counts and demands for more product functionality. All at a time when they have paired both their operating services and their R&D to the lowest level possible.

It is against this backdrop that the first airlines will start to see their PCAs - participating carrier agreements open for re-negotiation starting in 2010.

Will it end in tears? Will there be peace and harmony across the land? Will they all end up in a master race lovefest?

Stay tuned - this is a battle for the long term hearts and minds of the user community, both the airlines and the intermediaries. To my point of view the current model represents an unnatural act - rather a series of them. To me it is unsustainable and demands reformation if not revolution.

For the first time real options are emerging not just from within (Like Galileo's Universal Desktop product acquired from G2 and Amadeus One) but also from the independent technology market - like Booking Builder and Farelogix. These applications represent both an unbundling of the GDS product but also new cheaper forms of commercial models that deliver the capabilities faster than the GDS have traditionally been capable.

This is a story that will run long and hard!


1 comment:

tentofortysix said...

So what's your point about it being "unnatural?" Do you think that airlines should own the cost of distributing their own content, or that it's fair for a GDS to work as a non-profit organization, or something?

You forgot to mention that GDS distribution is highly valuable to airlines; witness the LCCs accepting the GDS channel in recent years like jetBlue and even SouthWest. You also forgot to mention that GDS distribution is less than 2% of the cost of an average airline's boarded passenger fully-loaded cost ... so this is kind of an overwraught issue altogether.