American Airlines fight could redefine air travel again
American is trying to rewrite the rules on ticket sales through global distribution systems and the travel agencies they support. If American can slash commissions paid to the middleman and drive more consumers to its website, it could net hundreds of millions of dollars in new revenue and savings. And you can bet that other airlines would follow.
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American Airlines may be playing the spoiler again.
In early 2008, American shook up the travel industry by jacking up fees on everything from checked bags to phone reservations. Consumers squawked, but the charges stuck, and fees have become a crucial revenue source for almost every carrier.
Now American is trying to rewrite the rules on ticket sales through global distribution systems and the travel agencies they support. If American can slash commissions paid to the middleman and drive more consumers to its website, it could net hundreds of millions of dollars in new revenue and savings. And you can bet that other airlines would follow.
American's CEO Gerard Arpey once said that he could imagine a day when ticket-selling companies would pay American to supply the inventory, rather than the other way around.
"Maybe I'm dreaming here," Arpey said in April 2009, adding that such a change might not happen in his working lifetime.
Fast-forward to the present, and that notion no longer seems so far-fetched. In recent weeks, American has been clashing with Expedia and Orbitz in a high-profile dispute that has locked American out of the two giant websites.
Go to Expedia and Orbitz to buy a nonstop ticket from Dallas/Fort Worth Airport to Boston or Burbank, Calif., and there are zero offerings. That's because American is the only carrier that flies the routes.
Those tickets are still being sold at many other sites, including American's AA.com. And American officials said that sales are trending ahead of last year since Dec. 21, when its schedules were removed from Orbitz. Expedia's block started on Jan. 1.
On its most basic level, this is a contract dispute, and it could end quietly if the sides can agree on a lower price. But it also has the potential to inch toward Arpey's dream scenario — converting distribution into a revenue generator.
"This is a stick of lit dynamite in the travel distribution world," said Jay Sorensen, an airline consultant in Milwaukee. "Will it explode, or will it be defused? This could lead to a systemic change, and not just for the airlines."
American isn't trying to charge travel agencies to carry its flights, at least not yet. It wants them to use its new Direct Connect service to get pricing, schedules and other offers — and it's available for free.
Most travel agencies get that data through a global distribution system, or GDS, such as the one operated by Sabre Holdings in Southlake, Texas. In that model, the airlines pay the GDS to process the information, and the GDS splits the revenue with the travel agency.
This has been a sweet deal for travel companies, because they get both a commission and new technology, and the airlines pay for it. That's how the system was set up decades ago, when airlines created the GDS to funnel corporate business their way.
Sabre was created by American, and American was among the five airlines that provided startup funds for Orbitz. American ended up netting a small fortune on both investments.
Today, GDS operators are independent companies, and the airlines have their own high-powered websites, which require hefty investments. American spent $853 million on commissions, booking fees and credit card expenses in 2009, with two-thirds going to travel agencies and GDS companies.
If the GDS is indispensable to travel agencies, it seems logical that they should be footing the bill.
"Everybody should pay for what they value," said Cory Garner, director of distribution strategy at American Airlines.
That's been the mantra at American for a while. The company once made a splash by offering more legroom in coach, only to learn that customers would not pay extra for it. So American reconfigured cabins to squeeze in more seats.
With its higher fees, only customers who check bags or change a ticket end up paying more. If American reshapes the distribution system, travel agencies and GDS companies will take the hit, and the stock prices of Expedia and Orbitz have already suffered.
"This is destructive to the travel industry, and nobody wants it," said Kevin Mitchell of the Business Travel Coalition, a group funded by corporate travel managers and travel agencies.
In a survey, most members said that American was trying to redirect online traffic to its website — a threatening prospect. American could boost revenue by selling seat upgrades, priority boarding and other options. And it could pick up hotel and car rental bookings, further eating into travel agency business.
Mitchell said that consumers would end up paying more, because fares and schedules could not be compared easily. But online shoppers adapt fast, and many travel websites already cull airline data.
Southwest Airlines doesn't even sell tickets through online travel agencies, and it's managed to become the largest domestic carrier. It does use agents for corporate accounts, but Southwest does not pay high GDS fees.
American sees itself as a premium brand, so it also makes sense to promote upgrades online and try to get out of the commodity game.
"If airlines offer unique products and compete on more than the base fare and schedule, is that a bad thing?" asks Garner.
Maybe for travel agents and GDS operators. For the rest of us, that sounds like progress.