21 February 2010

The Great GDS Unbundling - Not Pretty.

Taking a leaf out of their customers' book - the GDS have started to slowly but surely unbundle their pricing. The old one size fits everything model is clearly on the way out.

So let's get the reasons out the way first as to why they are doing this - and why now?

It is simple. The standard GDS model is broken. I realize this may be a shocking revelation to many people - both inside and outside the Travel Distribution arena, but sometimes you have to call it like it is. It is broken because the amount of money (revenue) coming into the GDS via the traditional segment fee model is not sufficient to support the outgoings (especially in Travel Agent Incentives). Further - the legacy GDS companies have a significant technology investment expenditure facing them to significantly change their systems from being EDIFACT based to being XML based. The change in architecture is not just skin deep - it will require radical changes in core architecture to finally kill off the legacy nature of their business.

From the customer side the standard legacy network carrier model is also broken. The vastly better commercial proposition of the LCC airline model has resulted in the emergency of the Hybrid Value Carrier model that I have been writing about for more than 3 years. Legacy carriers going unbundled and LCCs going mainstream

However the biggest issue is not the technology, rather it is the commercial model. For this reason - the conflicts in the various different pricing schemes have finally brought the old legacy segment fee model to its knees.

So is this the Professor just ranting or is there some evidence to support this?
Ehem... plenty!

Two recent articles in The Beat confirm this. Amadeus has formally announced its unbundling. Commenting on this - Amadeus VP Ian Wheeler said:

"Airlines can choose to buy or choose not to buy those, giving more transparency and flexibility in the contract compared with the participating carrier agreement. It's an unbundling of our previously packaged offer. The more complex, scheduled carriers tend to take more of the options."

Amadeus has several models out there already. It has classified its carriers into Pure Altea hosted - pure GDS only and then a host of hybrid options. For example Virgin Blue Navitaire hosted airlines pay Amadeus a fee for routing their GDS traffic through the Amadeus Community Link. Paradoxically the low cost carriers are many times paying higher distribution fees than the traditional carriers.

For quite some time now Travelport has been offering a number of different connection options. Begining in 2008 they aggressively targeted the LCCs by offering almost "free" distribution via their desktop system Go! This was expanded recently to include Galileo offerings. The next generation application agent workstation system - Universal Desktop - will continue this offering. Given their recent IPO failure - they will be under a lot of pressure to boost their revenues and make things look better for the inevitable repeat. Since they have to a large extent (like the other GDSs) mortgaged their future with this low cost GDS deals and high inventive agent arrangements. The ONLY outcome is a difference.

Not to be outdone, in another article in The Beat Sabre is also offering unbundled services. Stung by the loss of their anchor customer American Airlines and the announcement that AA will sunset EDIFACT as the preferred protocol for external distribution communication - The Texas based GDS has announced its first XML connected airline. Easyjet. Commencing April Sabre will launch its new FlexConnect (Not to be confused with the common nomenclature of Farelogix - FLX), service and interestingly it will not be the cheapest of connections.

But the unbundling doesn't stop there. Sabre is currently offering developers its wonderful new contract. And for a mere $1 per booking in support fees - it will allow connection to the Sabre system. This has been met with somewhat of a less than enthusiastic response by the developer community.

Finally the line between Airline IT and GDS which used to be pretty finite has now become blurred. For Amadeus the ascendant player in Airline IT - they are now leveraging lower GDS fees if the airline pumps more GDS based transactions and signs up for the full Altea suite. Thus perpetuating the effective economic DIS-incentive for airlines to move their distribution to direct. In the early days of the web, Amadeus hosted (both pure and System User) airlines actually had to pay MORE money for direct distribution than via the GDS. Airlines are effectively caught between a rock and several hard places with these new unbundling deals.

We have even had one airline group come and explain that while their hosting fees were minimal with their current provider, the cost of providing that link via the GDS distribution channel made the cost prohibitive. To the tune of $8-10 per booking. Thus far outweighing the cost differential in hosting fees. (And BTW that is not the highest cost per GDS hosted booking - we have seen MUCH higher instances).

If the regulators were truly paying attention to what was going on - they would see that the bundling/un-bundling/re-bundling of the Airline IT and GDS services were discriminatory. It would make Microsoft's bundling of Internet Explorer with Windows see tame in comparison.

So the world is changing. The airline bean counters are going to have to pay a lot closer attention to what is going on. The Lawyers too. So what does this do to the airlines who have signed long term contracts? They should start looking deeply at their contracts and will see that there are a LOT of loopholes. I have told our Airline customers that the time for contract words is over. Let's see the invoice first and then we can talk about the terms!!!

And I will leave you with a further thought. If the distribution channel thinks they are immune from the imposition of fees as a result of this unbundling - think again. We have numerous examples of agencies seeing all their incentives eaten up in "charges and fees" - and then some.

You have been warned.


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