BTC and ASTA Fire Salvo at IATA

Probably not the wisest move on their part but ASTA and BTC have fired a broadside against IATA's NDC "New Distribution Capability".

For your edification I reprint here their entire statement, feel free to comment:

ASTA AND BTC CHALLENGE IATA CLAIM OF TRANSPARENCY REGARDING NEW DISTRIBUTION CAPABILITY
Alexandria, Va., October 17, 2012— The American Society of Travel Agents (ASTA) and Business Travel Coalition (BTC) today sharply disputed claims by Tony Tyler, CEO of the International Air Transport Association (IATA) that the development of the “New Distribution Capability” (NDC) was being conducted in open and transparent collaboration with all segments of the travel industry that would be affected by it. Nothing could be further from the truth.
“ASTA sees nothing in the IATA process to create NDC that resembles full and open transparent collaboration with the travel agency community,” said Nina Meyer, CEO of ASTA.  “ASTA had asked to participate as an observer, with the possibility of posing questions, to the IATA Working Group on NDC in Montreal in late November.  IATA’s response was initially positive, citing a desire to collaborate. ASTA then invited IATA to come to its TRADESHOW in Los Angeles in September to meet with travel agencies and the Business Travel Coalition and respond to questions.  When ASTA later asked for details of its Montreal participation, it was told that neither it nor any other agency associations would have access to the development process for NDC. IATA did express a willingness to meet separate with ASTA, but that is far from the full collaboration and openness that IATA is trumpeting,” Meyer added.
BTC Chairman Kevin Mitchell said, “While we are still conducting due diligence with regard to understanding all the facts and implications flowing from IATA's new distribution initiative, it's reasonable to preliminarily conclude from discussions with and presentations from IATA that there is reason for significant concern over negative impacts to consumers, competition and costs. A disturbing warning sign - that all is not right - is that IATA pointedly talks about an open and collaborative industry process, yet refuses to let organizations that represent travel agents and corporate travel departments have a seat at the table. IATA only welcomes individual travel agents or travel managers who are largely prevented from speaking up for fear of retaliation on their businesses or airline contracts. BTC is among several industry organizations in the U.S. and abroad that requested to be part of the process only to be told no by IATA.”
Nina Meyer added, “The need for complete transparency regarding NDC is illustrated by some of the false premises for NDC that Mr. Tyler stated in his speech before the IATA World Passenger Symposium being held in Abu Dhabi this week.  Mr. Tyler stated that because the majority of air travel is sold by travel agencies relying on Global Distribution System (GDS) technology, “the travel offer is put together outside the airline by third parties… it is impossible for the airline to tailor its offer to the customer via the indirect channel…. this model is focused only on finding the lowest ticket price. This has resulted in the commoditization of air travel…. the travel agent only sees codes – F, J, Y…. There is no way to tell if your “J” product is a flat bed or an economy class seat with an empty seat beside it.”
These remarks essentially blame travel agents for airlines’ commoditization of their product. But it is airlines that have set prices since deregulation and entered into commoditized code share agreements, not travel agents. Agents sell what the airlines offer.  And ASTA rejects categorically the notion that travel agents do not understand what they are selling and are unable to communicate product characteristics to their clients.  If that were true, agents would have disappeared long ago, but instead in the United States alone they sold $68 billion in air transportation in 2011.
Moreover, Mr. Tyler’s remarks cite as current airline innovations such items as “special meals, expedited boarding, roomier seats and access to airport lounges.”  Most of these “innovations” have been around for years. If these products are made available to agents in a transparent and transactable manner, which is entirely possible through GDS technology and the ATPCO OC process, travel agents will sell more of them to consumers to the benefit of consumers and airlines alike. ASTA has seen demonstrations of GDS technology that has these capabilities and more.  Rote repetition of the claim that the GDSs can’t do this does not make the claim any truer.”
About ASTA
The mission of the American Society of Travel Agents (ASTA) is to facilitate the business of selling travel through effective representation, shared knowledge and the enhancement of professionalism. ASTA seeks a retail travel marketplace that is profitable and growing and a rewarding field in which to work, invest and do business.
About BTC
Founded in 1994, the mission of Business Travel Coalition is to interpret industry and government policies and practices and provide a platform so that the managed travel community can influence issues of strategic importance to their organizations.
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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

Travelport Gets A Get Out of Jail Free Card. Probation May Be Rather Costly

Travelport at the 11th hour managed to avoid a pre-packaged Chapter 11 restructuring by getting the approval of all of its Lien Holders on its PIK to allow the $715 million PIK to be repaid by December 2016 instead of March 2012.

However the price is going to be very high. A quick flip through the issues now confronting Travelport Holdings (Parent company to Travelport Inc) are as follows:

1. There is a large group of unhappy bondholders.  A group representing 25% of the bond holders filed on September 23rd a formal complaint to the company which was then submitted in regulatory filings to the SEC.
2. Travelport is now paying a 2011 record interest rate of approx 13% to the lien holders for the revised debt swap however this is a somewhat fictitious amount as the agreement allows the company to use debt rather than cash to pay the dividends.
3. Travelport's ability to raise funds for new activities will now be limited.
4. Travelport may have restructured its immediate debt but it is still creaking under a very heavy debt burden that would discourage any IPO offering.

The level of machinations required to complete the transaction is almost mind-boggling. I have waded through the SEC filings along with analysts briefing on the topic. In my view the long term financial health of the company will be in doubt irrespective of its actual performance. It still has to restructure the overall debt to remain in compliance with the obligations of the different forms of the debt. It has already sounded warning bells of the loss of the United Airlines (Apollo) Hosting contract that must end before April 2012. There are other issues that face the company.

It seems I am not alone in my concern about the [parent company's (Travelport Holdings) health.

The unhappy note holders representing 25% of the outstanding PIK hired Dewey & LeBoeuf to denounce the restructuring. In their September 22nd letter to the company they stated  “The noteholders demand that Holdings (parent company) and its affiliates (presumably including Blackstone)  cease and desist from taking any steps to document or consummate the restructuring,”Their efforts failed. So highly likely there was some smoky backroom deal was made but the resentment is still there. This letter found its way to filings to the SEC the following day.

The initial PIK loan, from the early days of March 2007, was used to finance a dividend to Blackstone and affiliated equity owners, according to the September 22nd letter.  And this has been a pattern all along for Blackstone to cover its own position preferentially at the expense of the other debt holders. Remember that when the original deal to acquire Cendant was done in 2006 - Blackstone was a private company. Today following its IPO it falls under a much tighter regulatory environment.

Travelport Holdings bond values have been falling for some time. Since August the value of the bonds has plummeted over 40 %. Two of the debt rating agencies downgraded the debt first Moody's on 16th August then S&P earlier this month on 13th Sept. This came after the first warning was fired by S&P in February of this year with a caution. By September 23rd the yield on the bonds was 39%, The company’s $247.2 million of 11.875 percent senior unsecured bonds due September 2016 rose 3 cents to 42.5 cents on the dollar that morning and has been very volatile since then. When trading starts again this morning with the immediate debt crisis over - the bonds will likely settle down. That discount shows just how far the debt value has fallen since the notes were first issued in 2007. There is a large amount of this debt out there in the market. There has been a significant amount of trading going on in this debt especially during the last 9 months. 

Long term - this is unhealthy.

Cheers

NOTE Thanks to Bloomberg and the Debt agencies for the information in this story. Thank goodness we have EDGAR to help us navigate the maze of SEC filings.

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.

Cheers

Travelport Exposes Its Financial Weakness

In announcing the restructuring of its upcoming PIK loans – Travelport looked like it had dodged a bullet. In many of these sort of arrangements the loading of junk debt that has been the staple of VCs. In general it has a natural set of consequences IE the VC or PE firm tries to make its money early. That concept has been predicated on the exit of the VC before the big debts become due. Well Travelport was not able to complete its IPO after several attempts and any such future attempt looks like it could be a long way off.

However debt doesn’t just disappear. Someone has to get paid. While in general the stock market's volatility has seen shareholders have their values plummet during crises such as the GFC. Bond holders too have had their fair share of ups and downs.

Bloomberg in reporting the Travelport PIK restructuring headlined with the fact that this was the highest premium being paid thus far in 2011. In the very week when the Federal Reserve Bank moved to lower interest rates Blackstone (ultimate owner of the Travelport businesses) was going the other way. Indeed the debt swap rate has been set at 13% which was certainly an eye opener for many.

At the same time Blackstone made it clear that it would be quite prepared to bankrupt one of the entities probably Travelport Holdings. Blackstone’s complex ownership in Travelport and Orbitz provides effective control funded by the junk bonds and other high risk financial securities. Of course Blackstone itself has minimal risk as it has already withdrawn its own financial outlays in effect meaning that the VC is playing with OPM (Other People’s Money). I want to point out that this is normal behaviour in Wall Street. The formal filing with the SEC can be found here.

In the document the company cited two major reasons for the loss of Market share. The loss of the Expedia business from Worldspan and the loss of the Arab Carrier NDC business that went to Amadeus. Yet in examining the gradual decline in market share – these drops were single one off events. What we actually see is a consistent reduction in transactions Y/Y over the entire period from 2006 through till today. Market share has fallen by 5 points but transactions are now off by nearly one third during this time period according to my analysis of the Travelport filings.

While CEO of the Travelport operating business was gushing in his position and gratitude for the loan restructuring – there is no doubt this will have a long term impact on the company. The glory days of the unlimited cashflow based on minimal investment in R&D are clearly over. Travelport faces significant obstacles at a time when its direct competitors are spending heavily.

The company now has to contend with the fact that they are still supporting 3 core systems – Apollo, Galileo and Worldspan. The cost savings from the merger between Galileo and Worldspan have now effectively ended. Thus there are strong cost pressures as well as revenue pressures.

The company’s direct market share has continued to fall at a time when general GDS global market share as a category is also falling. At the end of the first quarter 2012, United Airlines is scheduled to exit leaving Travelport with no major airline hosting business. Thus a number of synergies will be lost. The roll out of their hoped for blockbuster product - the “almost ready” Universal Desktop is stalled.

Perhaps somewhat interesting is that the company faces a conundrum over its battle in Direct Connect. It has two airline distribution deals that would seem to be supporting the Direct Connect model. Southwest in the USA market and Air Canada in the Canadian market where Travelport connects to the Air Canada host via the Farelogix system. At the same time it is embroiled in a lengthy legal battle with American Airlines (it recently won another round in retaining AA's participation in Orbitz) and is subject - as is Sabre - to a formal investigation by the US Dept of Justice.

With its ability to raise money at all this has to attract funds for hard development. This means that development efforts will be impacted even curtailed as a result of the debt restructuring. Travelport will therefore continue to struggle for the foreseeable future. Something that has not gone unnoticed by Travelport’s competitors and of course their airline suppliers. Travelport’s options don’t look as rosy as they did 5 years ago when the company was effectively formed from the ashes of the now defunct Cendant.

The extent of Travelport's financial weakness comes at a bad time for the company when demands for change and attention to the sea change that Technology is driving are rising rapidly.

These are testing times for the legacy GDS model.

Cheers

The Impact of AA Out Of Expedia and Orbitz

The impact of American Airlines non-participation in Expedia and Orbitz during the period from the end of 2010 until restored by agreement (Expedia) and by a judge's order (Orbitz) was interesting in theory. But what about it in practice?



For the absence of ambiguity. The chart shows share sales and percentage increase/decrease in sales of airline tickets. This is transactions NOT sales dollars so they are a true like for like comparison. The source is ARC Corp. The full chart can be seen here. That bulging green line (downwards) represents a significant loss of airline ticket sales from Expedia and Orbitz. Far greater than I believe most people expected. With air revenue comprising such a small amount of Expedia's gross revenues - this did not adversely affect the Bellevue based company. For Orbitz however that does depend more on US Airline sales the impact as we have seen from the recent financial performance of OWW was significant to their bottom line.

This illustration is pretty dramatic and clear. In my view it shows two things.

1. That a single airline's withdrawal from key players in a specific market sector from one or more players who command 50% of that sector can be dramatic.
2. Even after restoration - the intermediary channels as a whole lose share.

There are other interesting things that can be read from this chart. Share does come back. Albeit slowly, but it does come back. it also shows that the OTA's expectation that the AA share would easily be absorbed by consumers switching to other airlines was false. The dramatic drop in tickets as illustrated by this chart is obviously not reflected in AA's total ticket sales loss.

There are many lessons in this chart. I leave you to draw your own conclusions. If you would like to discuss this directly with the Professor. Please see me after class.

Cheers

Travelport Ends Air Malta Agreement

In a galaxy far far away....

In a former life - I worked for Worldspan. In that job - one of the things we did was to break conventional models for airlines and distribution.

My team built a solution which let an airline have the benefit of a GDS connection in their market without having an onerous GDS contracting scheme to go with it. This solution was delivered outside of all conventional wisdom at effectively zero cost to the airline and no incremental cost to the agency community. Over the years it returned a nice revenue to Worldspan and then Travelport after it.

While this was not the first time that a dual mode terminal had been delivered in a market - it was the first time and as far as I can tell the only version that enabled a cut over of seamless nature in a market at really no cost.

Today's market costs by the GDSs are very different from the agreement that lasted more than 18 years in Malta. Travelport and Air Malta have announced the end of the agreement.

So hats off to all the team who worked on this project, to the airline's management who understood the value and to an era that has long gone replaced by a higher cost structure that ultimately adds cost to the passenger's ticket.

Cheers

Sabre AND Travelport Take Big Steps Outside Air with New Hubs

While Amadeus has been retreating to focus on the air business - the other guys seem to be going the other way.

Sabre announced the major acquisition of Softhotels which will beef up their Hospitality business - already a vibrant component of Sabre and a major force in hospitality.

Travelport - free of the GTA boat anchor business - has now started a new Agent based leisure service for non-air.

Both of these announcements demonstrate the need of the core business to expand. As the GDS component of the Big 3 GDS companies declines and the market moves to a more open model - we can expect this form of behaviour.

However - for those of you who watch the space carefully - will this be a worthy replacement for the standard GDS business?

Well in my view the GDS yields will be hard to find replication for Travelport unless the former sink below 20% which seems to be on the cards. For Sabre this is a complimentary business and looks to help them in their quest to edge Pegasus out of the nest as the central player in Hospitality distribution.

"GDS Also Vigorously Compete" but do they do this fairly?

The team at Travelport have hit back at the American Airlines lawsuit and as expected have asked for a summary dismissal of the action.

A good summary can be read in a wide variety of media. They tend to be biased based on the viewpoint of the media organ involved. So I am not going to do a link to any of them.

In the US Travel Weekly article there is a good quote that ends their piece:

"GDSs also vigorously compete with other distribution channels that now account for a majority of air ticket distribution in the United States. Contrived market definitions cannot mask these contemporary business realities."

Let me translate that for the non-lawyers and non-spinmeisters in the audience.

Fact: GDSs have restrictive contracts for agents and airlines. Having read and advised both agents and airlines on the topic - I believe I am well qualified to make that statement.

Fact: The legacy GDSs now account for less than 50% US market share and that share continues to fall. (Based on ARC transaction numbers).

Fact: GDSs will do anything possible to protect their $9 Billion annual revenue business.

But what the last sentence means is anyone's guess.

Sadly in my view - Travelport still thinks its just about the money. The argument doesn't make much sense however when you see the extent to which they have gone to obfuscate the underlying issue which is about more than mere cash and negotiation.

Yes... there is a clear issue that the GDS charges too much and passes on that money in an unnatural way to the agents to buy business.

However the lack of technology innovation (and I am talking about REAL innovation not just more lipstick on the old pigs) and the lack of enabling a richer consumer experience is what needs to change.

The controlling mechanisms that the legacy GDSs have placed on the market has only one beneficiary over the long term. Google.

Consumers need and want choice. They need innovation to enable that choice. The GDSs with their cost model and antiquated technology have for too long held the market hostage. Now they are being punished for it in the marketplace and it would seem - also now in the courts.

In particular the venture companies that own the US GDSs need to take a hard look at everything. The GDS cash cow operation model with mediocre and antiquated clunky systems are not sustainable.

Time for change. Real change

Cheers

US Travel Q1 2011. Decline in Transactions. OTA Impact

At the Open Travel Advisory meeting in Las Vegas this past week Henry Harteveldt from Forrester showed that Q1 numbers were down 1.6% in terms of transactions.

I have previously shown that the numbers for the OTA's are also off. Yet digging through Expedia's numbers the information basically points to a lowering of the transactions in air for the US domestic market but not the dollar numbers.

With Expedia's market share in the OLTA bookings at about 41% and stable - we can only think that there is some erosion and share shift amongst the other players. Expedia's share of traffic as measured in UVs seems to have declined in Q1 but there are discrepancies between the Comscore and Hitwise numbers. The former showing stability the latter showing a decline.

Thus we can conclude that Orbitz and Travelocity probably experienced a decline while Priceline grew - ditto Kayak.

With Orbitz isolated in that it cannot sell American Airlines product, we can see that the situation for Orbitz will not be pretty when they report their numbers in the next few days - May 5th to be precise. Click here to listen to the Webcast.

Things will be interesting for a while.

Cheers

Is It All Really JUST About The Money? Airlines & GDSs To Duke It Out In Court

Sabre and Travelport - both private companies - have become the target of 2 lawsuits alleging Anti Trust behavior by AMR's American Airlines unit and US Airways. American Airlines is suing Travelport and its affiliate public company Orbitz (OWW). US Airways is suing Sabre. Both suits are similar in nature. At stake is the very nature of airline distribution in not just the USA but around the world. This analysis will hopefully provide the context of the battle. Sabre is controlled by 2 players - TPG and Silverlake Partners. Travelport is largely controlled by Blackstone.

It seems to have been a really busy time in airline distribution lately. We have had many things going on – so perhaps we should consider what is driving some of the changes going on. For many who are in the business – this battle has been a long time coming. However for the rest of the world and many others – this has caused a strong degree of head scratching. Consider this a primer on the core issue of control.

Let's just look at some of the major issues that have surfaces since October. This was the month when AA's battle with Orbitz burst into the open. Soon to be joined by Travelport, Expedia, and Sabre. Just looking at the last few weeks - I don't think we have seen such activity in a long time. Here is a list of some of the news stories over the past few weeks that have seemed to be disconnected. Here is a partial list:

• Expedia settled its battle with AA and committed to a Direct Connect – in doing so Expedia abandoned the GDS only model and agreed to go the direct connect route as well as signing its first LCC for Direct Connect – Air Asia in a far reaching Joint Venture.
• Delta Airlines signs with Farelogix to create alternative distribution services for the nation’s second largest carrier making a clean sweep of all the major North American carriers are now signed up to participate with the Farelogix platform. AC, UA, CO, AA, DL, US. Delta also makes the 13th Airline to have publicly committed to the system.
• The FAA Re-authorization bill passed without the GDS provisions that were defeated 3 times during the passage of the bill.
• The DoT issued new passenger regulations but in issuing this new "Passenger Bill of Rights" it declined to force (for the short term at least) provisions which would have made the airlines display ancillary services via the GDS.
• AA filed suit against Travelport and its affiliate company Orbitz Worldwide (owned 48% by Travelport) alleging anti trust behavior.
• US Airways filed suit against Sabre also alleging anti trust behavior.
• The DoJ after a lengthy evaluation approved the Google/ITA deal – the deal has now closed.


Are these unrelated? I don’t think so. But let me just focus on the 2 lawsuits.

For a minute let's just consider what is driving their thought processes. I am taking this from the perspective of the parties who filed the suits. We have not yet seen the defense other than both parties (Sabre and Travelport) has said they will vigorously defend their position. I have opined before that in my view Travelport’s statements lack some substance and so far have contained some factual inaccuracies but since they have not filed a formal brief – this can be construed as PR spin. . Don’t forget GDSs and Airlines can hire some pretty serious legal firepower. This battle is not new. Don’t think for a minute that the Airlines have not just woken up yesterday and said - "we're bored, let's go after the GDSs". This battle was clearly a very long time coming.

Both lawsuits (AA vs Travelport/OWW and US vs Sabre) are very explicit in what they want and the respective positions. While they appear to be similar - each airline comes from a very different space. The AA lawsuit is somewhat of a pre-position. The US suit is backward facing for the contract it already signed.

The AA lawsuit actually names Sabre several times in its suit against Travelport. AA has made its sentiments known that it feels the GDS model needs to change. Possibly after 9/11 and perhaps we can trace the lineage of the battle to the very moment that Sabre was spun out and AMR (AA's parent) put the resulting cash in its pocket. US Airways however is not quite in the same position. They are the smallest of the big airlines (Now comprising just 5 in the USA). They never owned a GDS. This makes them the least able to apply leverage in the ongoing battles. They also have effectively put themselves up for sale by delivering a message that consolidation is not yet over and that US Airways is ready to be merged into another airline - AA according to analysts - perhaps being the favorite. One could even opine that US is trying to ingratiate itself with AA. I make this point because I believe US Airways thus is not arguing from any position of strength. Ultimately in terms of scale we have to remember that the market share of each of the major American GDSs exceeds that of any airline in the USA market.

The driving forces for the lawsuits are that the airlines believe they asked nicely (well as nicely as an airline can) that the GDS behave differently. IE that the GDSs change their model. The GDSs refused both publicly and privately to budge. Indeed they went on to consider any change should be viewed as a nasty attack on their core business model, for which a vigorous defense needed to be mounted. Were the airlines napping on the job? Perhaps yes they were for a while. They thought they had a deal with the GDSs.

in 2006 the airlines and the GDSs entered into a form of social contract. The background at that time was that the GDSs were scared that the Airlines would provide content on their own websites that could not be seen on the GDSs. Thus moving both the trade as well as the consumer to more favourable content on the airlines own sites. The genesis of the Full Content Agreements was that the Airlines would give the GDSs full content in exchange for reduced fees. (I want to avoid using the term discounts which is how the GDSs saw this). This social contract worked pretty well because essentially all the major legacy carriers signed up for it.

In airline distribution - the traditional basis of the distribution landscape is one for all and all for one. Or as I prefer to characterize it as "one size fits everything." However the GDSs lawyers might have been smarter than the airlines' lawyers. Why? Because the GDSs managed to put in a number of provisions that created a far stricter contractual environment. So the issue of full content tied with a number of other provisions gave the GDSs a distinct edge. At the same time the GDSs started down a path of increased tighter contract provisions with their user community; the travel agents - the subscribers. In doing so they created a Gordian Knot. The airlines were trapped. The subscribers were trapped. The analogy - admittedly somewhat extreme - but humour me here I think you will find the comparison is not that odorous - it could be likened to a drug cartel (aka the GDSs) were able to control distribution.

But let’s not shed too many tears for the airlines. In the early part of the millennium the airlines ceased to provide compensation in the form of standardized sales commissions to the agencies. Thus the agency players and the airlines ceased to have a compensated relationship. They still however retained a contracted relationship either directly or via ARC. The corporate customers of the agencies allowed the water to flow downhill by paying the increased freight of an access fee for use of the agencies' services. Thus these agencies - TMCs - were able to transfer from a supplier paid fee model to a consumer paid fee model - a transition that went remarkably well. Even the leisure agents tried this for a while but this fell apart when Priceline refused to join the fee based model. In recent years the other OTAs - largest players such as Expedia and its fellows abandoned the fee model for leisure bookings. Sadly the independent small agents were not so lucky and this effort drove many of them out of business. From a peak in the mid 1990s to today the number of agency locations has collapsed from 55,000 to now below 20,00 outlets.

Thus there is dissonance in that the travel agents are in many cases not directly compensated for selling airlines product. This somewhat advantaged position works for the airlines because they regard their product as being valuable and that the consumer and their channels should pay to access the product. This conveniently forgets that the agents actually do add value in aggregating content for the creation of neutral offers to their consumers a core value proposition for the consumer.

The GDSs too started playing a number of games. Firstly they had created an artificial MSRP pricing structure and backed it up with the charade of saying they were providing large discounts to the airlines. How much of a charade? Even after allowing for the cut rate prices -Amadeus's margin in 2010 as provided by their annual reports show a margin of 48% on its GDS business alone. The other publicly available information for Travelport shows that its margins declined from a peak of 33% in mid 2009 to the current level of 28%. (Does Amadeus know something that Travelport doesn’t?) We can safely assume that Sabre is in the same ballpark. The average segment fee (net revenue) for each company was as follows:

Travelport – rose from $3.47 in Q1 2007 to $5.83 in Q4 2010.
For Amadeus we only have data from 2009 which shows the revenue per segment rose from (Q1 2009) $3.28 to just under $5. ($4.97 in Q4 2010) when converted from Euros to Dollars.

So despite the social contract between the GDSs and the airlines the actual cost to the airlines rose significantly during this time. NOTE I am using publicly available information and you can find this out for yourself on the websites of Travelport and Amadeus.

Indeed one could argue that the social contract was flawed to begin with but the GDSs (now fully controlled by the money guys in the form of Private Equity/Venture Capitalists) had obligations to increase their margins. How did they do that? They cut costs by slashing payrolls, cutting pure R&D and by changing their agreements.

In the case of Travelport there were significant synergies gained by the merging of the Worldspan and the Galileo businesses. However Travelport was upfront and said it would not bite the big one and merge its (now 3) GDSs into a single code base. In my analysis all the GDSs gained incremental net revenue through two techniques. Through unbundling their core segment fees, long before the airlines became effective at unbundling – the GDSs were doing this and made good money from it. But they also changed the contracts to further tie the airlines. At the other end they were able to generally reduce the cost of the subscriber delivery through cutting back on services. But the one area that they could not cut was in the segment incentive fees (aka as US Airways describes them “Kickbacks”). The competition for smaller pie – i.e. the reduced agent community – meant that the GDSs had to pay ever increasing incentives to the agencies to ensure a reliable user base. What happens is simply the GDSs take a portion of the fee that the airlines pay and kick back this portion to the travel agents.

To examine this - have a look at Travelport's 2007 and 2010 end of year financials.

2007

Cost of revenue.....................................$1,167
Selling, general and administrative......$1,286
Separation and restructuring charges.......$90

2010

Cost of revenue.....................................$1,164
Selling, general and administrative...........$547
Restructuring charges..............................$19

I think you get my point. During this time Travelport's segment count fell from 416.2 Million to 349.4 Million segments (all 2007 vs all 2010).

Rumours abound of the amounts paid not just to get agents to switch but also just to stay in place. These payments are so large in more than one market the asking price for a GDS segment incentive is $4.00. To cover this cost the GDSs must be indeed cross subsidizing the bigger agents (i.e. those with market power) from two places firstly the weaker and smaller agents who tend to be brick and mortar; secondly from those markets where they don’t have to provide incentives due to their market power – which today are very few.

In addition to the core issues above – the airlines feel that the GDSs have not kept up the investment in two key areas. Functionality to support the sale of ancillary and unbundled products (seats, bags credit card charges etc). The other charge is that the GDSs have actually inhibited the ability of the airlines to sell personalized services via the intermediary channels. For whatever reason - the GDSs do not provide these services today except in very few cases.

The core of the arguments that the airlines feel harmed is not just based on cost. But ultimately it is based on the argument of who controls distribution. So these lawsuits are about breaking the Gordian Knot.

Want to read some more?… actually you could have largely done a cut and paste of the law suits by going to a not quite so obscure website and downloading the Airlines comments on the US DoT NPRM concerning the Passengers Protection. Last week the US DoT turned this into law. Curiously only after two events. Event 1 - the Dept of Justice had approved the Google Acquisition of ITA Software. Event 2 – the FAA bill was approved by the US Congress. Coincidence?

The final rule making is here: DOT-OST-2010-0140

For AA’s comments on this rule making go here:
For US’s comments go here:

So now you know – where you sit in the debate should at the very least be powered by the information to hand.

I recommend that you go through the other submissions on the dockets. There is a lot of material in there. Then sit back and think – are these events connected? Yes. Is my answer. However the airlines feel emboldened by the changes coming. What we are seeing is nothing short of a fundamental shift in Airline distribution.

Catch the wave. Open Distribution is with us.

Cheers

Travelport Makes Claims That Sound Too Good To Be True

Sometimes - you see information and then you say to yourself... this can't be right. Such is the case with the Travelport numbers in their latest press release that went out this morning. So with my painstaking efforts and several hours of detective work - here is what I believe is the CORRECT information.

IF I AM WRONG - then can Travelport please correct my numbers or my calculations.

So I read with interest the Press Release from Travelport. You can read the whole release here, I draw your attention to the following section:

“Notes to Editors:
• According to Travelport estimates, only 13% of all airline passengers boarding flights in the United States purchased their tickets through Travelport's GDS travel agent subscribers. These subscribers earned an average distribution fee of (1.2%) less than 2% of the average ticket price. In comparison, the average distribution expense for a US hotel is 1.5 % of the cost of a stay.
• Over the last five years, Travelport estimates that the distribution prices paid by US airlines to Travelport have declined by 18%. On a real or inflation adjusted basis, distribution prices charged to US airlines have declined by 24% over the last five years.”

So I will challenge these statements using Travelport's own numbers:

1. The subscriber fee statement information is in my opinion misleading.

According to the US Dept. of Transportation the average domestic ticket paid in Q3 2010 (latest data from Feb 2011), the price is $340.
Using the average ticket price, the average number of segments (Per ARC Corp is 2.2 segments per ticket) at the average segment fee paid to Travelport (from Q4 2010 Travelport) of $5.71 net revenue – then the average ticket price is comprised of $12.57 or 3.7% of the ticket ON AVERAGE. However using the Travelport percentage of 1.2% then it means that 32.5% of all GDS segment fees are passed on as incentives to “subscribers”.

As an exact example for a family of 4 travelling from West Virginia to Daytona Beach it requires a connection so if the ticket was purchased through a Travelport agency – this family of four would pay (hidden in the ticket price) $91.04 in GDS segment fees.

The statement itself is misleading. Travelport is mixing apples and oranges. The distribution fee is 3.7% but the subscribers get 1.2%. Using a comparison with hotels not irrelevant as total cost to the supply owner for hotel distribution would be many times this and is not a fair comparison.

2. That the Distribution Fees have declined over the past 5 years is misleading and false. In fact the differences are significant with a rise adjusted for inflation of more than half.

Using the information in the Travelport financials – they give us some great data and it’s certifiable. This tells a very different story. Using the two reports which are currently available. Q4 2007 and Q4 2010. I can pull consolidated information from Q4 and Full year 2006 and compare it to the corresponding information for 2010. If we use the numbers correctly according to the logic outlined by Travelport then a total of $648 million in 2010 was paid by Travelport as inducements, segment incentive fees to Travel Agencies. That number, if correct, would be a very large number indeed. For the source of my information and calculations please see the following links.

2010

2006

Overall, The GDS net revenues (as defined by Travelport) actually rose 31.66% despite a significant decline in Segments that went through the Travelport GDSs (namely Apollo, Galileo and Worldspan) down 22.6%. This translates into a net revenue in absolute terms increase per segment of 70.17%. Adjusted for inflation of 8.2% (using this calculator) this means a 56.22% IE more than half increase in GDS charges from 2006 to 2010.

So is the release correct? Is it misleading? You can be the judge. I am happy to share my numbers with bona fide individuals - please email me professorsabena@gmail.com.

Cheers

1 Blind Mouse

Hickdory Dickory Dock, the mouse ran up the clock. The clock struck one and the rest of the industry died in a nuclear holocaust.

OK so its a parody but it hides a very serious message.

I read today the latest missive from the kitchen table in Radnor PA. BTC released yet another of its fine episodes in "as the world turns"

QUOTE:

"For two and one-half years, despite major corporations’ substantial collective purchasing power and their continuing calls for full disclosure of fee data, airlines have refused to provide the travel agency sales channel with this vital information. This refusal is well-defined evidence of a marketplace that is not functioning properly." END QUOTE.

Well this is not the case.

Each airline is obliged by law to explain its pricing and provide that information to the public. It so does - or risks the wrath of every consumer protection and government regulatory body under the sun.

And let me be clear - there have been transgressions in the past.

But in the main the US airlines are good at this. They provide the information to the consumers and to the agency community.

A long time ago - the airlines got tired of using the rather poor legacy GDS vehicles for disclosure of information. Instead they turned to the preferred form of communication that the vast majority of both consumers and travel agents use today - namely the Internet.

C'mon guys. No one owes anyone a living. Comparative shopping COULD have been easily provided in an innovative form by these GDS players but they chose not to. Consequently this is why Google stepped into the game and bought ITA for $700 million. If the GDSs had done their job well and in a time when there was good cooperation with the airlines - then companies like ITA and Everbread etc would not have been able to come into being. So let us not shed a tear for companies who today make between 27% (Travelport 2010 Q4 numbers) to more than 46% profit on their GDS operations. (Amadeus 2010 annual report).

And this continual obfuscation over the real issues is just INSANE.

Everyone should as a matter of course READ the complaint in full. Then make up your mind. There is a lot of information that should give food for thought to a lot of people. Surprisingly I found it very informative as an eye opener onto the issues.

DO NOT DISMISS THE CONTENT & DETAIL. It has relevance for everyone concerned with this debate.

DO NOT JUDGE until you have read the document and the expected responses from Travelport. I hope that the complaint comes to trial early but alas I fear that American justice moves at a slow pace. About the only thing I agree with the Press Release is the following statement:

"Expensive and years-long court proceedings"


Cheers

Travelport Offloads GTA to Kuoni for $720 Million

Travelport has managed to offload one of the albatrosses around its neck with the sale of GTA to Kuoni.

GTA has been a step child in the Travelport organization since the creation of Travelport out of the Ashes of the Cendant empire. The synergies long hoped for never quite materialized.

With Amadeus shedding non-core businesses and now down to the twin pillars of Airline IT and GDS, Travelport finds itself as a one trick pony. Well not quite if you include the bizarre purchase of SPRICE.

GTA has always been a somewhat uncomfortable member of the family. Now it is going to a new home with perhaps an opportunity for Kuoni to restore some lustre to the once high flying traditional brand.

In my view don't look to Sabre to spin out Synxis any time soon. The big 4 GDS companies are still holding onto their cash cow businesses. This divestiture allows the core of the business to be judged on its merits - good or bad of the purity of the GDS model. Then of course there is still that small matter of their 48% shareholding in Orbitz Worldwide.

Cheers

Judge In Travelport vs AA Erred According TW's "Legal Briefs"

Travel Weekly USA has a column entitled Legal Briefs penned by Mark Pestronk - a veteran Travel Agent Advocacy Attorney. In the post dated Jan 27th 2011 he presents the case that the judge erred and he has an interesting conclusion that while "the case will continue, unless American files a motion for summary judgment to get the case thrown out, which will probably succeed, given the court's reasoning so far."

The mysteries of the American Legal System I find always fascinating.

If AA did file - then the case would leave so many unanswered questions that I think all of us would be disappointed.

However so far AA has not filed in this fashion and they seem focused on going through with the case.

Do read the piece - you can reach it by clicking on the link above.

TBD!!!

Cheers

Is There A Bully In The Playground?

or perhaps the statement should be - Bullies In The Playground.

My first encounter with Sabre was in 1979 when I was working for Western Airlines at McCann-Erickson. In those days the whole notion of the power of the CRS (as we called it) was just a convenience nobody thought of the possible power they would wield.

A year later I was in New York working for Mary Wells on the Pan Am account and for the first time saw the unbridled marketing information that Sabre gave to American Airlines. A copy of the sales reports that AA salesmen used to cut deals with Travel Agencies accidentally fell into my lap. It was mind boggling the information that a single airline had on its competitors.

From the other side of the fence - the power of an AMR owned Sabre became a thorn in my side when I ran automation for a large TWA focused travel agency which had PARS in the front and Sabre ADS as its back office. They really didn't like us messing with the system especially after I opened a back door to Sabre.

However I have always had a healthy respect for both AA and Sabre. They were so joined at the hip as to be inseparable even after various government probes into their somewhat dubious market behaviour. Yes they did believe in throwing their weight around.

AA/Sabre at this time was the undisputed market leader and acted as such. In April 1992, American Airlines launched "Value Pricing" -- a radical simplification of the complex pricing structure that had evolved over more than a decade following deregulation of the U.S. domestic airline industry. American expected that the new pricing structure would benefit consumers and restore profitability to both American and the industry as a whole.

Did it work? Nope - within weeks the airline had back-tracked and was back offering normal complex fair structures. But the net impact was not that great and AA emerged unscathed and stronger for understanding the dynamics of the market.

AMR proceeded with the divestiture of Sabre in 2000 - the now named GDS player was the largest Data Processing facility in the world and produced 3 out of 5 airline tickets worldwide. (Source: Annals of Cases on Information Technology By Mehdi Khosrowpou).

However since then the emergence of the Internet and the fragmentation of the distribution system - the dominance of the GDS has declined. Share shifted directly for a lot of reasons.

The emergence of the large OTAs and the decline of the Mom and Pop agency were synonymous. The travel distribution pyramid narrowed. But other factors have emerged. The decline in functionality footprint of the GDS, the emergence of valuable third party applications that made the GDSs work better... I could go on but I think you get my point. The GDSs lost their position as technology leaders. And worse the customer base stopped drinking the CoolAid. But that was compensated by the GDSs shoveling cash at the travel agencies. The bigger the intermediary the more cash you got.

Now we have battle royal. But who is the bully boy(s) ?

It would seem that the numbers make American actually the small player here. With the approx numbers as follows:

50% of all travel is bought online
50% of all travel is bought via supplier direct. Mostly via Airline.com and call centres.

50% of travel distribution in USA via intermediaries is on Sabre. They are a little ahead of Travelport and Amadeus is a small player in the market with approx 10% market share with the various other players making up approx 1%. Note that these numbers are not public so I have to "normalize" them.

In the space of a few weeks in the latter half of 2009 American walked out of Sabre's PSS business See my blog for that event. And then they started their noise about Direct Connect saying that they would make all connections go through their advanced functionality gateway.

AA CEO Gerald Arpey said at the time: "...maybe I'm dreaming here," he said envisioning a future "where those folks who are the intermediary between us and our customer have to pay for access to our product rather than us paying them to distribute our product." Arpey called that shift a "long-term vision," rather than a near-term reality. Within days Delta CEO Richard Anderson followed with a similar statement saying, "Over time, the industry has to evolve to the model of other industries, where people pay us for our content rather than us paying them to take our content."

I am not so sure that those words are coming back to haunt him. With AA controlling no more than 15% of the total air market - they are dwarfed by Sabre and the OTAs.

So who are the Bully Boys in the playground?

It would seem that Sabre (who is still under DoJ investigation for its treatment of Farelogix in 2009) might have now regained its stature as the big Kahuna in the playground. Or this could be the last gasp.

I will still say - be careful what you wish for - if it comes true you might not like the result. After all the Internet so far has become a Bully Free Zone (certain players excepted).



One thing is for certain - all those people who have been arguing for the GDS based neutral model - their bets are looking a good deal shaky right now. The GDS has been shown finally to be not neutral - ditto the agencies especially the OTA players. So the myth of neutrality in a web transparency world has finally been busted.

How smart with the intermediaries be? I think that will rest with the consumer. So far he is showing himself to be a very savvy player. If he feels that the value proposition of the intermediary has been eroded - which early indications seem to demonstrate - then the ease of switching will easily match the difficulty of searching in more than one place. Since the consumer looks in multiple places and buys where he is happiest - these days increasingly direct - then that becomes learned behaviour.

And over in the corner - Google is quietly rubbing his hands going - YES!


Cheers


Cheers

The War From The Side Lines

A pretty good post from Douglas Quimby over at PCW.

Well worth reading.

And thanks to i-Italy for the image.

Cheers

AA "Nothing Special In The Air"

This morning on the CNBC show "Squawk on the Street" Forrester Analyst Henry Harteveldt demonstrated once again his knowledge of the market and a little of history. Click on the link to hear the segment including Henry's call in.

Its been a busy few days for Henry who is Forrester's point man on the Travel Category. he has been on several shows pointing out the issues surrounding the AA battles with Orbitz, Travelport and most recently Expedia.

His final throw away line was a telling one.

"American is nothing special in the air."

This refers to the 1980s AA ad campaign where AA used the tag line in all its advertising. "Something Special In the Air".
IS AA special enough to ride out this storm? As Henry opines it just might not be the case with his statements making the airlines essentially just a commodity product. And this is where I think there is a core and fundamental battle going on. Whether the airlines are truly a differentiated product or not.

So just for the record - since the Professor is a former Ad man and worked on several competing accounts at the time that this campaign appeared I thought it would be good to see a DC10 flying in AA Colours again. Not to mention some really rather outrageous hair styles - think Melanie Griffiths when she was in Working Girl!


So play the video and enjoy a little nostalgia.

Cheers

Forrester's Take on AA et al. Video Link

Our fave analyst - well one of them anyway - Henry Harteveldt - was on Bloomberg TV yesterday.

Check out this video.

Henry explains in good terms the issues. While I dont fully agree with him about these issues - we can say that he does a good job in laying them out.

One key issue he brought out is that AA is ALREADY directly connected to Orbitz. But his analysis of saying that the Direct Connect option is the more expensive one is incorrect one.

Still a good session to watch

Cheers

How To Outsmart Expedia's Ban On AA

Game time everyone - listen up. The Professor's Guide to Buying American Airlines Tickets. A Primer for smart shoppers.

Today's game is how to use Expedia and Orbitz to easily get access to AA in these OTAs. Keep this link however because it will become more useful over time. I will come back and update this page as new changes happen.

Firstly you are already a smart shopper so we are not going to teach you how to suck eggs. We are going to assume that you know a little bit - probably a lot if you read this blog on a regular basis.

The easiest way to book AA is to use those "neutral" sites that have retained AA. For example if you are used to using Orbitz - just click on over to Cheaptickets who still shows AA. (Yes luv its the same engine at the back! so for Orbitz users this will be REALLY familiar)

For example here is a display that (honest 'guv) I just chose at random a route where I know a nonstop would return to me an AA result. Interestingly the AA price was cheaper than the other guys... how about that!!!



But what if you dont want to use any other site than Expedia or Orbitz itself and that despite all that your little inner voice tells you - you REALLY want to use Expedia to see about AA and compare AA's priced. Well you can do that.

Here is how.

Path 1 - see if there is a code share that might cover the route.

AA as with many airlines has code share partners. Unlike United, Continental and US Airways who are clogging our results screens with the same flights - AA has fewer partners. But here is where to get the list:

AA.com's Code Share pages.

Print this page and keep it with you at all times. It is much better for International Flights than domestic. So think of this. For Transatlantic flights look for Iberia, Finnair and British Airways options with flight numbers generally in the 4 digit range. For service in the USA try using Alaska as a preferred airline but caution AS fares on AA tend to be higher than AA itself - often significantly so. Again refer to the list and the links from the AA Codeshare home page above.

Here is an example



Look at the BA 4 digit flight numbers they are the AA flights.

Path 2 - Use a Meta/Real Search Site

For this good sites like Kayak in the USA and Skyscanner in Europe provide a way to see things neutrally and still then go through the task of selecting the flight you want on AA.

For example here is the Kayak display for all sites. To eliminate duplication I only requested nonstops on mainline aircraft but all carriers all sites.



Path 3 - suck it up and figure out where to go to get the right flight data.

To do this you can only use Expedia as neither Orbitz.com not Orbitz for business sites are displaying AA right now - although eBookers and Cheaptickets are.

And of course if all else fails go to AA.com. Well heck you were going to buy there anyway weren't you!

Cheers