08 July 2011

HRG's David Radcliffe Weighs In On GDS vs Airlines

In a recent article in ABTN - Air and Business Travel News, HRG's David Radcliffe was interviewed on a number of topics.

He had some choice things to say on a wide variety of topics. On the issue of Distribution he was quite sanguine. The specifics were the questions posed by the newsletter on the topic of the dispute between the airlines and the GDSs. He was empathetic to both sides. He did not think the agency community should be worried but rather aware and tuned into the debate. He took the long view - also shared by the Professor that there was something quite natural in the debate. He was clear that there was something wrong that needed to be addressed. Walking the fine line between the two warring parties he focused on the principle of the debate.

".....and you just look at the principal of what the airlines are trying to do... They’re not trying to do anything different to any other manufacturer or service industry, or anyone that supplies a product. What they’re trying to do is distribute that product in the way that they want to distribute it." He further expanded the comment "but ultimately if you look at what they’re trying to do it’s quite simple. They want the ability to distribute their products and not be commoditised by a single distribution point. I have sympathy with that."

This makes the debate more rational. And kudos to Mr Radcliffe for taking this position. If we go back a little in time - we have had other heads of TMC based agencies be less than forthright about some of these issues. Amex for example was famous for stating that they felt the low cost carriers were actually disrupting the smooth flow of the Agency's operations and that therefore the company would discourage its customer's from booking them.

At the moment we have the big 4 Global TMCs taking tentative steps on the subject. CWT has come out clearly against it and imposed what amounts to a financial penalty to anyone booking AA via the direct connect. Thus they are trying to preserve their model of conformity gets rewarded and exceptions get punished. In my view they have not been paying attention to what is going on elsewhere in other product categories in distribution.

Returning to Mr Radcliffe (no relation to the actor who plays Harry Potter), he reminded us all how we got to this point. Describing the growth, "Historically, the airlines were part of building up the GDSs, they even used to own them at one time. Some of them still do. So they built this monster, which they now want to change."

For the TMCs there has been a rational approach to the market of how they hook into the supply chain. They have developed a profitable model by working on cost plus and then removing from the equation the benefit packages of incentives from the supply side.

Early TMC contracts were built on a cost plus model and most of this continues to this day. TMCs are incentivized by their corporate customers to save them money, PROVIDED that they agency never loses sight of its role as a full service provider. To do this transparency exists largely in the dealings between the agency and its clients. All financial benefits from the supply side are passed to the corporation who in turn is charged transaction fees by the agency. Thus a corporate customer can see the goings on by the agency. But there are a large number of variations in arrangements. Some agents have held back the GDS benefits and kept them. Some GDSs have decided to contract directly with the company for GDS services. While this is a normal behaviour it can cause conflict and make the agency more vulnerable to shifting opinions by the corporation.

In a top of the hat to the GDSs he didn't want the GDS to think that they would leave the stage empty handed. The ubiquity model of today's one size fits everything of the legacy GDS is attractive to HRG. As MD he could clearly state "I also have sympathy with the GDSs’ point of view, from the simple philosophy that they are probably still the most efficient distribution method that there is."

But HRG was very aggressive in working with their technology platform. While some of their competitors have been focused on tuning the model, HRG has invested heavily in an open design to ensure that they can accommodate both the Low Cost Carrier Model (in Europe where approx 20% of all lift is on non-network airlines) and the independent supply chain products and services such as direct connect. He describes the capability that has been developed in Aldershot as follows: "to make sure as a company that we are capable of adding our value in the new distribution chain. I’ve been quite open to anyone who has asked me that we adopted a philosophy many years ago where we held on and developed our own technology. We do have the capability of direct connecting if that is the best path." Bill Brindle is the point man for this delivery at HRG. His heritage is GDS but he has focused on building a neutral and independent platform.

As Brindle's boss, Radcliffe wanted the readership of ABTN (who are largely UK and corporate travel management people) to understand what HRG's capabilities and vision are: ".... Our role is to keep the client informed of what the best options are moving through this and to make sure as a company that we are capable of adding our value in the new distribution chain. I’ve been quite open to anyone who has asked me that we adopted a philosophy many years ago where we held on and developed our own technology. We do have the capability of direct connecting if that is the best path."

That was a nice job of fence sitting and maintaining independence, which in his position is a very prgamatic point of view. In the Innovation in Distribution conference in March of 2011, HRG confirmed the capability: "We already have five or six direct connects today, but these are not mainline carriers," confirmed Bill Brindle speaking at the conference.

HRG is not waiting for someone to declare a winner - they are ready now for the changing nature of the supply chain system in Travel. Perhaps some of their competitors need to adopt a more open approach that mirrors this capability - or risk being left in the dust. The bigger tech players who come from the OTA world clearly have the technology to directly connect. Whether they choose to embrace it as Expedia has or actively work against it as Orbitz and 48% owner Travelport have comes down to a punt on the future. For American Express who has quietly mothballed its long time project of Travelbahn and others who are players in this space follow the open platform path or the closed traditional dependence on the legacy GDS will likely define their future success.

Corporate customers don't necessarily see the issue as being as essential as the agency community does. They know ultimately they will be picking up the tab. Their focus is on serving the traveller. For most corporations - the debate of limited ubiquity of the one-size fits everything GDS vs the pragmatism of offering a comprehensive and open supply chain to service the customer is interesting academically. While the finance departments may be concerned with operating efficiencies the fundamental role of a full service operation trumps any operational cost savings that might accrue from just using a GDS as the sole source.

Perhaps the most telling of the situation was Radcliffe's comment of how he views the war between the legacy GDSs and the airlines. "...But, clearly, something is broken between the two of them."

Images from FT.com and TTU.