05 January 2011

Is There A Bully In The Playground?

or perhaps the statement should be - Bullies In The Playground.

My first encounter with Sabre was in 1979 when I was working for Western Airlines at McCann-Erickson. In those days the whole notion of the power of the CRS (as we called it) was just a convenience nobody thought of the possible power they would wield.

A year later I was in New York working for Mary Wells on the Pan Am account and for the first time saw the unbridled marketing information that Sabre gave to American Airlines. A copy of the sales reports that AA salesmen used to cut deals with Travel Agencies accidentally fell into my lap. It was mind boggling the information that a single airline had on its competitors.

From the other side of the fence - the power of an AMR owned Sabre became a thorn in my side when I ran automation for a large TWA focused travel agency which had PARS in the front and Sabre ADS as its back office. They really didn't like us messing with the system especially after I opened a back door to Sabre.

However I have always had a healthy respect for both AA and Sabre. They were so joined at the hip as to be inseparable even after various government probes into their somewhat dubious market behaviour. Yes they did believe in throwing their weight around.

AA/Sabre at this time was the undisputed market leader and acted as such. In April 1992, American Airlines launched "Value Pricing" -- a radical simplification of the complex pricing structure that had evolved over more than a decade following deregulation of the U.S. domestic airline industry. American expected that the new pricing structure would benefit consumers and restore profitability to both American and the industry as a whole.

Did it work? Nope - within weeks the airline had back-tracked and was back offering normal complex fair structures. But the net impact was not that great and AA emerged unscathed and stronger for understanding the dynamics of the market.

AMR proceeded with the divestiture of Sabre in 2000 - the now named GDS player was the largest Data Processing facility in the world and produced 3 out of 5 airline tickets worldwide. (Source: Annals of Cases on Information Technology By Mehdi Khosrowpou).

However since then the emergence of the Internet and the fragmentation of the distribution system - the dominance of the GDS has declined. Share shifted directly for a lot of reasons.

The emergence of the large OTAs and the decline of the Mom and Pop agency were synonymous. The travel distribution pyramid narrowed. But other factors have emerged. The decline in functionality footprint of the GDS, the emergence of valuable third party applications that made the GDSs work better... I could go on but I think you get my point. The GDSs lost their position as technology leaders. And worse the customer base stopped drinking the CoolAid. But that was compensated by the GDSs shoveling cash at the travel agencies. The bigger the intermediary the more cash you got.

Now we have battle royal. But who is the bully boy(s) ?

It would seem that the numbers make American actually the small player here. With the approx numbers as follows:

50% of all travel is bought online
50% of all travel is bought via supplier direct. Mostly via Airline.com and call centres.

50% of travel distribution in USA via intermediaries is on Sabre. They are a little ahead of Travelport and Amadeus is a small player in the market with approx 10% market share with the various other players making up approx 1%. Note that these numbers are not public so I have to "normalize" them.

In the space of a few weeks in the latter half of 2009 American walked out of Sabre's PSS business See my blog for that event. And then they started their noise about Direct Connect saying that they would make all connections go through their advanced functionality gateway.

AA CEO Gerald Arpey said at the time: "...maybe I'm dreaming here," he 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."

I am not so sure that those words are coming back to haunt him. With AA controlling no more than 15% of the total air market - they are dwarfed by Sabre and the OTAs.

So who are the Bully Boys in the playground?

It would seem that Sabre (who is still under DoJ investigation for its treatment of Farelogix in 2009) might have now regained its stature as the big Kahuna in the playground. Or this could be the last gasp.

I will still say - be careful what you wish for - if it comes true you might not like the result. After all the Internet so far has become a Bully Free Zone (certain players excepted).

One thing is for certain - all those people who have been arguing for the GDS based neutral model - their bets are looking a good deal shaky right now. The GDS has been shown finally to be not neutral - ditto the agencies especially the OTA players. So the myth of neutrality in a web transparency world has finally been busted.

How smart with the intermediaries be? I think that will rest with the consumer. So far he is showing himself to be a very savvy player. If he feels that the value proposition of the intermediary has been eroded - which early indications seem to demonstrate - then the ease of switching will easily match the difficulty of searching in more than one place. Since the consumer looks in multiple places and buys where he is happiest - these days increasingly direct - then that becomes learned behaviour.

And over in the corner - Google is quietly rubbing his hands going - YES!



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