26 December 2010

Do We Really Need A GDS?

In the recent weeks with the controversy of the American Airlines vs Orbitz and Travelocity spilling out into the open warfare we saw in the days before Christmas.

At one of the events when people get around to imbibing of the holiday cheer, I often get asked what I do. My family tends to roll their eyes because that is just a good excuse for me to wax lyrically about how good or bad the Travel Distribution is.

In one of these chats - after I had spent a few minutes explaining what a GDS was - one academic asked me a question that struck to the core.

If you have a concentration of power in the hands of the airlines and the intermediaries do you really need a neutral distribution system?

Well thought I - that's a good question. So as soon as I got home last night I went and looked for market share information. I have to say I was somewhat amazed that I had not considered this issue before.

For markets of scale where there may be many brands but only a few core providers - why do you need to have a fully neutral distribution system. Further what other markets have similar characteristics and what has become the manner in which product is distributed.

The two markets where this made sense was in automobiles and insurance. Both are complicated products and of significant monetary value. Further both employed an independent intermediary network. IE they didn't largely own the intermediary channels which contributed to the majority of their sales.

Thinking about that made me feel that perhaps we have been discussing the wrong perspective.

What if there was no GDS? What if the links to the hosts were facilitated via a network linkage where the supply was aggregated by both the intermediaries and the suppliers but independently.

In this case if this change was to happen - would the prices of the products come down or would they stay the same?

There is a general measurement when considering monopoly/oligopoly behavior. This is the contestable amount of marketshare. The general sense is that if you have an oligopoly/monopoly but with a large contestable market then the competition will be intense. However the reverse is true - if you have a low contestable share of market then pricing will rise and competition will fall. If the tools available are also not fully examining the whole market - then the pricing tends also to rise.

In our business this is no where more visible in the difference between hotels purchased via the web and those booked via GDS powered travel agents which results in a significant differential in pricing to the detriment of the consumer. Over the years the difference has been of the order 20%+.

Thus from a hospitality point of view the GDS has actually raised the pricing to the consumer. Particularly as the market for hotels has been soft and therefore contestable.

For air this is not the case and the amount of contestable market share is limited given high load factors. Worse this is not going to get any better due to the constraints on supply due to the high price of fuel.

If we look at the market share of the 3 major alliances they now occupy more than 50% of total traffic. When you then remove the Low Cost carriers out of the loop as they dont participate in the GDSs the amount of neutral traffic unaligned falls significantly. Perhaps for this reason we see traditional unaligned airlines like Virgin Atlantic starting to evaluate their options seriously.

Bottom line here folks. Yes we should ask what value the GDSs provide and those who support perhaps are doing so because their vested interests are not aligned with providing the best service to the consumer. Indeed I would argue that the GDS has over time restrained competition and indeed cost the consumer more.

Think about it.

I am sure there will be many who disagree. But unnatural acts such as paying your distributors and thereby bribing them to use your channel is one such element that can only mean higher consumer costs.

Open Competition is healthy even in a lightly contested market space. It does drive lower pricing. The trick now is to see how that can be implemented in a logical and convenient way expeditiously.

There will be players who support and others who don't. And as you can expect there will be a myriad of different strategies which in my view will create different friends and enemies. The lines of demarcation will be fluid at best!


1 comment:

Fisherlee said...

Having read through your post, I had to do some research as I was unaware of the American/Orbitz dispute. It then dawned on me why Southwest is advertising the only place to buy their tickets is from their website. Open competition, I believe, is always good, even though it's been under direct attack these past two years. Without it, the "barons" are able to direct the lives of their "serfs" to the baron's wills. If I am able to purchase my ticket without the fee of a middleman, I would do that always. So, I agree with the point you're making--let competition reign; it's partly what made this country so great.