21 January 2010

Are The GDSs Buying Business?

I have been doing a straw poll among some of our clients and friends to see what their segment incentive fees are from the GDSs. A disclaimer here is that this is from a non-representative sample of agencies. However I don't think they are atypical. The sample size was from a mixture of major and non-major travel markets worldwide. The reason for doing the poll was because an associate quoted a number of one of his clients to me that I thought was somewhat high. Boy was I wrong.

Without disclosing confidential details I can assure you of two things.

1. The Segment Incentive Fees are rising - markets across the globe report this.
2. The Airlines are supposedly signing deals that should either cap the segment fees or eliminate them altogether.

I was shocked to hear that in the last quarter in many markets the segment fees quoted by our clients and friends exceeded an average of $3 per segment. These companies are not all mega agencies or OTAs and these numbers were not isolated examples they were average numbers. In several cases in 3 markets the amounts quoted by these people as being paid were $4 and above. I had to speak to more than one agency to make sure it was not a clear single aberration for "strategic" reasons.

If one follows that the average GDS fee collected from the airline (using publicly available data from Travelport as the base) of $6 (rough average), then something is not right.

So one can conclude that with the sudden rise in these incentive fees can be tied into either a war between the GDSs or some other reason like making the numbers look good prior to an IPO. Further one can conclude that to pay for these increased segment fees that the GDSs are either becoming more efficient in extracting cost from their businesses or they have found ways to increase revenue - my analysis of the Travelport data would indicate that the benefits of the integration have now been fully washed out. So I have to conclude that there is a strong possibility of the legacy GDSs buying business. (As an aside - my friends at Travelport get unhappy when I use data from their financials. So I want to be clear the reason I am using Travelport's numbers is that they are the only comprehensive public information sources that are out there).

All this in a year that saw significant declines in transactions.

I am sure that writing this piece is like poking a hornets nest. But in my travels around - I find it hard to comprehend why this raising of the incentive fees is occurring at a time when it should be decreasing. Indeed perhaps the core question to be asked "Is this sustainable?"

This is welcome news for agencies who have come to depend on the GDS segment fee as a critical part of their revenue mix. However it probably wont be so welcomed by agencies who are not getting these numbers or the airlines who ultimately have to pay the freight.

Am I missing something here or is something rotten in the State of Denmark? Is this an series of unnatural acts? Someone will have to pay the piper (I love mixed metaphors). Let's just hope the Singapore Government and other institutional investors who are looking at the coming IPOs do their sums right and due diligence.

Cheers - I think I had better look under my car tonight when I drive home....

1 comment:

Anonymous said...

LOL @ "Am I missing something here or is something rotten in the State of Denmark? Is this an series of unnatural acts? Someone will have to pay the piper (I love mixed metaphors)" You Sir are a Renaissance Man. I am glad to see from your latest post that you are still alive and well.