02 December 2011

The Good Lord Giveth, And He Taketh Away. Travelport Introduces Fees For Agency Subscribers to Green Screens

With declining revenues from airlines and a falling marketshare the legacy GDS model has been under threat from a number of sources of late.

In many markets around the world the agency community has benefited from increased user incentive fees driven higher by competition and by legacy GDSs who fear their model is under fundamental attack.

While some of the GDSs make reasonable amounts of money from the subscribers - in general the model has been to pass on significant cash from the airline segment fees to the agents in the form of these incentives. But this effort has angered the airlines who resent seeing a large part of their distribution fees used in this fashion.

Each of the 3 legacy GDS companies derives its revenue in increasingly different ways. Amadeus for example has offloaded its Hospitality and OTA businesses. Of the 4 lines of traditional revenue only Sabre now plays fully in each:

Airline IT

Travelport divested itself of its GTA Hospitality business to Kuoni early this year leaving it with essentially only the distribution revenue stream.

Travelport now has the lowest yields of all the three companies and has struggled with a very high debt load. It also pays out the highest rates of agency incentives.

For some time Travelport has been hinting that it will be relying increasingly on technology as opposed to paying additional incentives. Read Gordon Wilson's interview here.

At the same time with two failed IPO attempts behind it - there has been a continued rumour that the company is gearing up again for another run at the public markets. Some have said as early as 18 months time if not sooner.

Now Travelport has introduced a new fee structure that includes charging the agents for the use of green screens. (Actually in the case of Travelport these are mostly blue!).

With such a large number of screens still in existance (even with the move to more API/XML based links), the company is clearly hoping to make up for the shortfall in revenues that it has suffered in recent months by slapping a tax on the long suffering agents.

The revenue shortfall that has to be made up comes from another part of the business. My analysis shows that this is to make up for the loss of their few remaining airline IT revenue streams. United Airlines will terminate its hosting agreement at the end of March 2012 and Delta is moving its online fares and pricing to another provider. (Being the only major North American carrier who is not using Google/ITA for online search/shopping, that choice would be rather obvious).

However there is considerable risk in this strategy. Taxing the screen using agents with an annual fee of $300/screen might not seem to be that much. Should agents choose to use this manoeuvre to exit the business (as many are already doing), reduce the number of screens or move to another GDS - in my estimation a loss of between 5-10% of screens would not be unrealistic. However losing that same amount of revenue generating capacity could easily come back and bite Travelport badly. Such a loss of revenue would more than wipe out the advantages of this new agent tax. Especially when considered that the larger agents have negotiation ability and will likely not be hit as hard as the smaller agents.

Travelport may have shot itself in the foot. Taxing the smaller agents in this manner will clearly not win them any favours in the vocal agency communities. As all three Travelport brands have a higher proportion of smaller agencies in their portfolios - this will affect the smaller agents disproportionally in my view.

While there is upside for Travelport in its quest for the IPO gold ring, this is not an automatic win and comes with a very high potential cost. This could end up being a pyrrhic victory for the company.

Time will tell.


1 comment:

Roberg said...

Travelport also has announced they are now charging for passive segments over some arbitrary limit that they set. This is clearly a move to try to generate revenue from agents that use passive segments for bookings confirmed outside the GDS. The issue is that no one knows what these limits are until it's too late, which makes it difficult to control costs.