29 September 2011

Shhhhh! GDS Incentives Are Headed South

While I missed The Beat Live this year - there were still about 130 people who showed up to debate the current market situation.

Writing in Travel Market Report Michele McDonald (who also publishes TTU) has tackled the thorny subject of  the future state of GDS incentive fees. There remains a pervasive view that the battle between the GDSs and the airlines will have consequences. Almost everyone focuses on the issue of cost.

There is a split in the ranks of the intermediaries. Some Agencies advocate pure transparency and provide the information on the incentive fees  to their clients. Others regard it as a perk of the business. However in looking at the holistic view of how much money is paid out - then we have to look at the total significant amounts paid out. My consulting firm has assessed the situation from publicly available documents and we believe that the total amount paid out in direct and indirect incentives by the GDS is a very large amount. $3billion is what we are projecting for 2011. That powers a lot of agencies' revenues. However this largesse is not spread spread equally. The squeaky wheel syndrome favours larger agencies. Further there are clearly geographic differences where highly competitive markets garner higher incentives than other markets where only one GDS may dominate.

There are some dirty little secrets that some agency owners and players tend to ignore. One of which is that legacy GDSs squarely compete with their customers - in more ways than one. We know that all of the GDSs have an interest in one or more agency outlets. EG Travelocity for Business, Travelport and its partners controlling Orbitz, and yes even Amadeus can still be said to have an interest despite having sold its outlet Opodo to a Franco-Spanish combine. One way that they compete in corporate travel is where the GDS contracts directly with the agency customers and passes the fees onto the customer directly.

And interestingly some of the largest incentive fees go from the GDS to (drum roll please) their own subsidiaries/affiliates. One of the lawsuit arguments between AA and Travelport is that the latter (and there is documentation in Travelport filings that illustrate this) is paying a "super" incentive to Orbitz in which there is effective control (by Blackstone companies) of 55%. You can be sure that if the incentives are to be slashed - then these subsidiaries and affiliates will be among the last to feel the cut. Which means that the regular agencies will feel the chill first.  And this is already happening. In several markets today - GDSs cannot pay full incentive fees on all carriers equally. Some airlines simply tack on the GDS fee to the cost of the ticket. Others either prohibit or significantly reduce the payment of incentives in their home markets. Some airlines and GDS contracts have specific clauses in which the payment of fees is expressly prohibited.

In my view there is an inevitability of the axing of GDS inventive fees by the legacy players. However there are broader and bigger issues which are starting to separate the traditional GDSs. The amount of pure R&D is making a difference. Those who are investing will likely see benefits. The cash paid out in incentives is a double edged sword. It has become a drug for quite a few agencies who in turn have to work harder to make the GDSs work for them at a time when the investment in real new technology has declined across the board. The agencies are having to pay more and more for "ameliorating" technology to cover these inadequacies.

The demand for new services are being driven by three factors
  • by the needs of the suppliers 
  • the emergence of new technologies particularly in mobile and social - and of course big data
  • and of course by the changing generational dynamics of the consumers
These changes make functionality and personalization critical. That is not something that these "bribes" (NOTE this is my term and no one else's) can cover.


1 comment:

Tarah said...

Thus, delivering effective employee incentives that drive KPI’s becomes a more formidable challenge. Employer's must also have the so called Customer Loyalty Programs.