Many travellers - and perhaps many in the industry - must be confused and somewhat bemused by the current arcane disputes over distribution costs.
But to what extent has the GDS model benefited the airline industry and does it continue to do so?
These are, let's admit it, interesting questions.
In examining numbers for 2010 and going back to 2001, we can see that there has been a marked shift in the profile of the tickets issued by the US travel agency sector, for example.
To an airline, saving cost is critical. There is an infamous statement made about the amount of money American Airlines saved when it removed one olive from its salads in first class.
According to the myth, the airline trousered $40,000 per year as a result, so from a cost perspective any controllable expense is vital to any airline.
ARC, the US issuer of neutral tickets, shows in December 2010 the average domestic fare was approximately $350, with international fares at $820.
This translates into a blended rate of about $500. International sales are about one third of total ARC issued tickets. The average GDS cost is approximately $6 per segment (using numbers taken from Travelport’s annual report).
The actual costs vary by airline and can be as high as $9 per segment or, in some extreme cases, even higher.
The average number of segments per ticket are 2.2 for US-issued agency tickets. It is higher for international flights. So if we take the US-issued average ticket price, the average amount per ticket is 2.64%.
However, according to a blog post by the Business Travel Coalition, which has curiously now disappeared from its site: "...blended cost [domestic and international tickets] of GDS services represents about 1% of the price of an average airline ticket for business travelers".
Surely this is a reasonable number? For a regular (non-airline) businesses this might be the case. However for many airlines this is not a good position to be in. For example, for many airlines 7% has been the average yield, thus the cost of the GDS represents a sizeable amount compared to actual profit of an airline.
In short: air fares have continued to decline as traffic has risen, as this chart from the US Bureau of Transportation.
How does this compare with ten years ago? Here are some interesting comparisons between 2001 and 2010.
[table id=1844 /]
What we can see is that for basic domestic fares from A to B the business went direct to the airline. The growth of the low cost airline model meant also that the simplified fares were easily bought on those airlines. Southwest’s market share growth was extensive during this time.
So the diversion of revenue from the traditional network airlines to the LCCs, and from the indirect model to the direct model, accounted for this growth.
The telling stat in this table is the growth of the amount of international revenue that now makes up nearly 50% of ARC’s tickets.
It also shows that there has not been a one-size-fits all model that applies in the US market. While we cannot have an accurate passenger traffic number via the GDS estimates from the airlines and IATA, the total amount of traffic sold via the GDS has now fallen to approximately 45% of all US originating itineraries.
Thus today’s GDSs could be seen as serving an marginalized community. As we see the decline of the traditional travel agent numbers down by 44% (based on all definitions of an agency) the smaller Mom and Pop type operation were the losers.
In recent months we have seen a significant decline in the OTA as a share of the overall agency market. This has been recognized by Expedia and Orbitz (with public numbers), with both companies experiencing a loss of airline ticket sales during the period from October 2010 to April 2011.
As a category, all four OTAs saw their numbers fall, as this chart from ARC illustrates:
So what can we conclude from these numbers?
The world has changed. The flight away from the neutral model to the dealer model is very clear. The need for the GDS has diminished, the threats of doom and gloom in 1996 now making sense. In 2011, the demand for such total neutrality does not make as much sense either.
In 2000, airlines such as PanAm, Eastern and Braniff had disappeared from the skies, but TWA, America West, Aloha, Tower Air, Northwest, Continental (soon to disappear as a standalone brand), independently made up a large percentage of US lift.
Today the percentage of traffic that does not go through a networked or LCC carrier is less than 2%. With the three major alliances, affiliates and two independent LCC airlines (Southwest and Spirit Airlines), less than 1% of all US registered airlines lift is not covered by a network.
Thus, in theory, just four connections could accommodate all the needs of every US originating passenger. Yet the products are not quite there yet. By the third quarter of 2011, for example, all six major north American will be available via the LUTE connection system [see disclosure], while individual airlines can be accommodated via the Farelogix platform.
The complexity can be simplified to create and manage a platform of common access to the airlines. However such technology now exists and is available for travel agent customers in most parts of the globe.
The demands of the airlines to increasingly differentiate their products has also put paid to a common model one size fits all.
There is no law in the free market world economies that demands that all players in a particular industry – regulated or not – are obliged to offer all their products in a common format to a single group of customers that benefits a single monopoly of three or less players.
If it did, there would be an outcry of unfair practices. In the case of airlines, forcing such a model would be unconstitutional at worst and at best impractical - the extent of such regulatory reach, for example, would be questioned by international airlines operating into and out of US.
Whatever happens, business-as-usual is over. The results will be more competition for the consumer and an ability to unbundle the price. Thus creating more complexity, but a chance for lower fares.
NB: Disclosure – O’Neil-Dunne is CTO and deputy CEO of Lute Technologies..