01 October 2011

What Happens When Exclusivity Clauses Collide. The Impact of Exclusivity Clauses on Competition and Consumers

This is a musing on the impact of the Air Asia and Malaysian Airlines agreement with an extension into the overall issue of exclusivity clauses and the impact on the consumer.

Air Asia and Malaysian Air System (MAS) have entered into a cross shareholding agreement. In this agreement - the two airlines will cooperate essentially to carve up the market for Malaysian based traffic. IE traffic INTO and OUT of Malaysia. Effectively the airlines will avoid direct competition where feasible. This will result in a certain reduction in competitive services for consumers. Thus prices will undoubtedly rise in certain thinner markets. 

This is to be expected and will cause a number of people to complain and moan about it. Fair enough. But there is ANOTHER agreement that has some serious impact on the consumer. That is the exclusive agreement between Expedia and the Air Asia Group. In this agreement Expedia and the JVs between Air Asia and Expedia are the EXCLUSIVE distributors of content from these two parent organizations.For intermediaries who may have happily been distributing MAS product in some cases for many many years and in others exclusively, all of a sudden their product has been pulled out from under them when MAS abandons routes in favour of Air Asia. And they will lose their rights.

I raise this issue because JVs and exclusivity has become a new staple of the airline and GDS worlds. Thus creating restrictions on open commercial agreements. So let's dive into that a bit deeper.

Full Content (FCA) GDS agreements are very restrictive. As such FCA contracts will have an overriding pressure to raise prices and reduce consumer choice. An airline who signs the standard FCA agreements will find that it cannot distribute its own content when and where it pleases. This is a relatively new consideration and that has only just started to dawn on the airlines who have signed these agreements. While the original intent of the FCA agreements was to prevent competitors from entering the market for GDS type services - what we are now seeing is an unintended consequence - at least from the airlines sides. The ultimate loser in all of this is the consumer. Less choice = less competition = higher prices. As the legacy GDSs love to trumpet to the vendor community -the highest yielding channels are the GDS based ones. Now perhaps it should dawn on everyone concerned that this results in higher prices for the consumer.

That normally should be positive for the airlines and hotels. However as they have seen the real end result is that they have not only delegated their pricing capability but now also delegated channel management control to the GDSs. And in whose interest do the GDS operate?

Think about it, I wonder if the regulators have been thinking about this problem. What started out as an equal agreement to reduce cost of distribution and ensure wide distribution of airline content has in fact has an opposite effect.

Good or Bad? that depends. Today it means that scaling the fortress tower is going to be that much harder. Believe me when I tell you that this is not a happy realization for a whole host of parties.


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