Today, many argue that GDSs simply cannot handle the merchandising of airline content.
This is not a technical issue. The GDSs are quite capable of selling complex ancillary products by building supplemental or doing what the airlines want for distribution with modern languages, like XML. Sabre
, for one, touts its 2012 ranking of No. 26 on the InformationWeek 500
– a list of the top US technology innovators. A third of its transactions are processed using XML, say company sources.
No, it's a commercial issue. The GDSs have lacked the vision, interest, or execution, according to the airlines.
Exhibit A: Air New Zealand's Economy Skycouch
, a product that is sold in a way that GDSs haven't been prepared for: essentially, buy two seats and get a third one free. The airline debuted Skycouch
in spring 2011.
As of today, none of the GDSs sell it. Agents have to go direct to Air New Zealand if they want to purchase the product.
True, we don't know if Air New Zealand was non-cooperative in fulfilling its share of responsibilities in making that product available in the GDSs. But let's assume that the airline did its share of the work fully.
For 20 months now, none of the GDSs have been willing to handle the innovation of three-for-two pricing.
One example doesn't make an argument, of course. But airlines cite other similar examples.
"GDSs have stifled ancillary sales."
This perception appears to be the biggest lightning rod.
A key impetus for the NDC is the billowing of ancillary revenue products. Jay Sorensen, an analyst at Ideaworks, thinks that this year's $32.5 billion revenue in global ancillary sales
could rise to $100 billion in the future, as additional airlines get in on the act.
The real issue is whether the airlines are getting value for money from the GDSs. On that score, the airlines inevitably say no, but is their case more compelling?
GDSs say they're happy to process all airline ancillaries. More than 200 ancillary types have been defined as programming standards.
Yet airlines accuse the GDSs of not training agents on how to use the ancillaries for upselling passengers.
For instance, KLM Economy Comfort
has been available via GDS since 2009 but agents cannot sell it in the US, Asia, South America or Africa because of a lack of GDS investment and agency training
, according to a senior vice president at Air France/KLM.
Another example: Fare families from Air Canada
Back in 2002, Air Canada began trying to compete with its low-cost rivals by offering its services in two packages: unbundled (with passengers able to pay for only what they want such as a bare bones seat and no meals, lie-back seats, or free checked luggage) and bundled (a full service plane ticket, with one big fat ticket price and great value).
Air Canada struggled to get its ala carte products displayed in the GDSs. GDSs weren't very interested in doing the investment to get the product out.
It wasn't until 2010 that GDSs began to display so-called fare families for Air Canada and other carriers, where search results could be grouped in buckets according to similar characteristics such as cabin, refundability, and booking class.
It's true that the supplier must be willing to make the product available in a way the GDSs can use and pay their share of the cost. It takes two to tango, and we don't know what Air Canada brought to the table
now regularly touts its merchandising of Air Canada fare products
as a model of GDS/airline collaboration
Still, eight years is an awfully long time for GDSs to fail to create the infrastructure for selling a product that would be profitable to themselves and their allies, the agents.
Here's another example of how GDSs have been slow to handle ancillaries:
To quote from a presentation
given in December by Eric Leopold, director-passenger for IATA:
GDSs have often said that the reason they are not providing more information is because airlines do not share this data with the GDSs.
But if we look at the example of baggage data, GDSs have access to the data through ATPCO since 2009.
However, as [visiting a major OTA today shows], the consumer is unable to access the baggage data specific to their flight, and instead is presented with generic information.
When it comes to failure to merchandising ancillaries, GDSs need to take the bulk of the blame, though they've made some catch-up progress in the past two years.
Airlines are ready and able to pay for the huge IT project of building a dynamic distribution platform.
It's not encouraging that no dollar or euro figure has been offered by anyone for the cost of moving to "value creation hubs" by 2017. We're guessing the bill will be somewhere between the cost of American Airlines building Direct Connect and the cost of Sabre's annual operatons. That's a big range.
Until now, airlines have borne distribution costs by paying GDS fees and related third-party expenses, such as agent commissions. Yet airlines want to place the burden of distribution costs on the third-parties selling their airfares.
Case in point: revenue sharing. The airlines say the GDSs need to build out to support the NDC, but there has been no conversation about how the GDS’ get paid for that. Most airlines state that ancillary products and services sold through a third party are not commissionable.
Some skeptics even question if the airlines will be willing to invest in their own
IT systems to prepare for next-generation distribution.
Advocates of the NDC counter that the major airlines are
prepared to sink money into this IT project because they are 1) so furious about GDS fees and complacency and 2) financially stabilized after a decade of mergers.
Plus, NDC advocates say the new distribution infrastructure is an investment airlines can afford to make. If the investment enable the airlines to sell profitable ancillaries more effectively and more often, the airlines may be able to quickly recoup its costs.
"Airlines have thought seriously about the role travel agents play in all of this."
For instance, there has been little talk of how airlines will pay for the costs of getting many of the world's 60,000 travel agents to adopt the technology. Beyond the price tag of building the interfaces, there's the cost of day-to-day operations: Will airlines help pay agents to adopt their technology?
For decades, the GDSs have given technology free to agents to encourage them use it, and sometimes even paid them incentives to use the machines.
Will the airlines pay for the agent's technology costs and any training they may need to access an NDC-based fare feed?
How will the costs be borne? Within IATA's membership fee? By volume? Per transaction?
One thing is clear about next-generation airline distribution: It means different things to different people, and everyone expects someone else to pay for it.
"By 2017, traditional GDS bookings will account for just 7% of worldwide airline reservation volume, down from about 50% to 60% today."
A bold prediction!
This prediction comes from Henry Harteveldt's report
, commissioned by IATA. It's echoed by Delta's goal of 60% direct connections, stated by Chris Phillips at October's WorldConnect conference in Monaco.
It is connected to a related prediction that the airlines will make a series of initiatives to de-emphasize their partnerships with GDSs and supplement them with what the report calls "value creation hubs” (VCHs).
Once upon a time, roughly 80% of airline tickets flowed through travel agencies and the GDSs they used, while only 20% were sold directly by airlines. Now in the US that balance is closer to 50/50 and internationally it is 60/40 GDS to direct. The trend is moving away from GDSs worldwide, except possibly in the newly deregulated market of China.
is worth quoting at length:
Value creation hubs will use the new-generation airline commerce technology infrastructure used to power airline CRS/PSS host systems, ecommerce solutions, and more, thus reducing the need for lengthy, costly disruption in a conversion…
Unlike GDSs, which work with individual airlines, VCHs will be developed for each major alliance -- Oneworld, SkyTeam, and Star Alliance.…
Because the VCHs will operate at a “group” rather than single airline level, the VCHs will house a “community link”, similar to Amadeus.Net, which will function as the “hub of the hub”.
This hub will connect to various airline CRS and PSS hosts, virtual hosts, and other systems, and serve as the gateway from and between the airlines that participate in a given VCH.
As long as an airline has the appropriate business agreements with the VCH operator, it will be able to connect to their partner through the appropriate VCH’s community link.
To create itineraries, the community link will extract and integrate airlines’ schedules, inventory, product content, prices, customer data, and more, using industry XML standards developed by groups such as IATA, OpenTravel Alliance, and Open Axis Group, conceptual frameworks such as IATA’s NDC, and EMDs for ancillary product sales.…
To reach the airlines that participate within each VCH, agencies and other intermediaries will subscribe to and connect with the VCH, rather than a GDS.
That's a very broadly painted view. The devil is in the details.
Let's say airlines build a “pipe,” or an open Application Program Interface (API), in which they pour their airfare content “wholesale” in a standardized format that any large distributor—even Amazon, Facebok, Google Flights, or other company—could tap into and sell, as Harteveldt's report and a United presentation suggest.
Fares could be marked-up by these distributors, but their customer experience would be the same on a brand.com (i.e., united.com) site and on a co-branded or partner OTA site, according to a presentation on new distribution tools in practice made in October by Chris Amenechi, VP of merchandising & distribution at United.
Yet if any third party can tap into wholesale inventory and price it, how will airlines be able to assert "ownership" over the customer's personal data?
"It's all about the fees, stupid."
A new survey lends support to this view.
"GDS cost/business model" were the top "concern" of 15 airline marketing, sales, and distribution executives in a December 2012 report by Atmosphere Research Group — a report that IATA commissioned about third-party distribution. (See chart.)
"Airlines spend $7 billion per year on GDS fees…which is greater than industry profits this year."
That statistic is less solid than it first appears.
IATA chief Tony Tyler quoted the $7 billion figure
when he introduced the NDC in October. It comes from a back-of-the-envelope calculation by Monty Brewer, the former CEO of Air Canada.
Mr. Brewer declined to provide Tnooz with the math for his calculation. But he says he it is based on his deep immersion in industry data. He emphasizes that no one has challenged the figure, which implies that it must be reasonable.
Actually, the figure has
been challenged by one of the GDSs, but only off the record. (Sigh
.) It says that $6 billion
in booking fee revenue is a more plausible estimate, but the GDS-that-doth-n0t-speak-its-name wouldn't provide its math to Tnooz, either.
In short: be skeptical of all these numbers.
"GDS fees are extortionate."
The GDSs insist that their booking fees amount to around 2% of the average ticket value in the US.
That 2% compares favourably to much higher commission rates in other travel segments. It also compares favorably with the cut taken by distributors in other, comparable marketplace businesses.
Pressures have kept a lid on legacy airline profits. But GDSs claim that their booking fees for legacy airlines have declined by a multiple of rate drop in profitability of those airlines.
"Airlines can easily take away the corporate travel business from the GDSs."
If the airlines slash their expenditure on GDSs, how much of that money would they pocket? Not much. They would likely have to spend the same amount of money on their own and other third-party distribution systems.
After all, true personalization in shopping and selling requires lots of hardware, lots of software and expensive analysts to ensure the right offer is indeed going to the right consumer, none of which are in place at airlines now.
Yes, airlines already sell tickets directly to consumers through their own websites, many times with personalized offers and ancillary sales. But most of the tickets sold through direct channels are uncomplicated, low-value, leisure travel tickets.
In contrast, GDSs tend to process the bulk of transactions from corporate travel agents and luxury travel agents, which handle the bulk of high-value, complicated-itinerary tickets. The per-ticket IT processing cost of transactions handled by GDSs is much higher. Airlines will have to pay much more than they have had to in the past to serve these corporate customers directly.
"The NDC was drafted by a cabal, with a handful of airlines excluding other stakeholders."
Like drafting legislation in parliament, drafting a major overhaul in distribution is a project best suited to committees that build outward, gradually incorporating more and more feedback from more and more stakeholders as the project takes shape. It has
of all of its outreach efforts.
IATA hurt itself when its initial informal presentation was couched in language that only the airlines saw the GDSs as obstacles. They got so much blowback that they opened it up to other groups.
One reason: When they criticized GDSs, they by extension criticized travel agents, who the airlines need to woo to make the NDC happen.
But personalized offers are a long way off—years beyond 2017—except for airlines' direct sales via their own websites.
It's technologically complicated.