AA Lays Out Business As Usual... For Now

As expected American Airlines has petitioned the court in its Chapter 11 pleadings to pay its obligations to the distribution channels.

For now that means its business as usual.

AA is quite far along in building an independent distribution infrastructure that supports direct and indirect distribution services. Rather than relying on a single channel for its revenue management - it is already one of the most diversified of the major network carriers.

It is unlikely that AA is going to change that strategy mid stream. Even with Tom Horton at the controls - the company would be ill advised to place most of its eggs back into the GDS only basket.

The company has invested much time and effort in building a multi-functional and advanced capability network of services. While it still depends 65% (from court filings) on the agency marketplace, the company has built a number of new bridges into the channel.

Many have mistakenly assumed that its drive to Direct Connect was to eliminate the Agency from the mix. Nothing could be farther from the truth. AA has embraced the agency community and is not going to walk away or do anything that will undermine that relationship. However it does not mean that the distribution channel systems can ride on the back of this relationship. AA has made it clear it believes that it needs to control the product offerings and the holistic nature of its pricing.

Many legacy airlines have yet to focus on the issue of consolidated pricing of the air fare products. AA has grasped that nettle and is moving to ensure that it will  deploy the necessary technology to deliver that end. Its new Jetstream reservation system being developed on the HP Agilaire platform will incorporate several ITA Software innovations. Check out the case story of the Boombox implementation.

Anyone who thinks that AA is going to back off from its ultimate goal of controlling its distribution has not understood the animal. In my view the company will emerge stronger and more competitive from Chapter 11. And whatever it takes to ensure that it can deliver its products in a cost efficient manner - it is going to pursue.

After the make nice period is over, we are going to see AA implementing the necessary processes and structures to ensure that it remains competitive. If not why go through this Chapter 11 process.

Cheers

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
Distribution
Hospitality
OTA

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.

Cheers