NB: This is a guest article by Evan Konwiser, co-founder of FlightCaster.
News flash: The travel distribution model is broken. In 2011, it just doesn’t make sense anymore. American Airlines's Direct-Connect is a fundamentally better way to distribute and the industry should read the writing on wall and adapt.
Suppliers pay distributors to make products more easily available, but will continue to do so only so long as that service is valuable. General Mills needs distributors because delivering cereal boxes to every supermarket is challenging and costly.
For airlines in the 20th century, outsourced distribution also made sense, as it was technologically prohibitive to easily distribute inventory to thousands of agencies worldwide.
But the world has changed (actually it changed a decade ago, but I digress…). The current business model of travel distribution is now obsolete.
With the evolution of APIs, airlines are paying GDSs to do something they can just as easily do themselves. In fact, it’s the agencies that are benefiting by easy access to airline fares and bookings.
In a more rational industry, agencies might be paying airlines for the right to book on their systems. I’m not (yet) proposing that, but it’s an interesting lens from which to examine this issue.
Beyond the obsolescence of the GDS in distribution, the other big issues are price flexibility and transparency. Again, we have a business model problem. The GDSs are forcing restrictions on the airlines that both reduce the airlines’ ability to merchandise and enable hyper-competition between carriers.
So now the airlines are paying for something they don’t need that is damaging their ability to grow revenue and compete sustainably. That’s a triple whammy, and it should surprise nobody that they’re trying to change it.
Direct-Connect is a no-brainer for airlines. While we should be wary of any move that is good for one player and bad for the rest of the industry, I don’t believe that is the case here.
Open Allies For Airfare Transparency (OAFAT?) would have you believe that comparison-shopping is impossible without the GDS. That is just absurd.
The market has already proven its capability in creating price transparency through the success of meta-search engines. Kayak searches many disparate places for airfare data and then displays them easily for consumers, and OTAs and TMCs are capable of doing the same.
In fact, Kayak and Priceline appear to be doing a fine job with American fares today (Disclosure: I once worked for Kayak). Direct-Connect simply wants you to ask American Airlines directly about fares, but doesn’t care how or where you display them. As a comparison, this is not nearly the same level of restriction as we see with Southwest today, where you actually have to visit their web site.
In the Direct-Connect world, there is still a need for data aggregation to easily compare fares. However, GDSs are unwilling to put their fees at risk to become these aggregators. It’s shortsighted strategic decisions like this that will eventually lose to innovation.
Note the failure of Blockbuster, which was unwilling to sacrifice its core retail business by going through mail and online. And like Blockbuster, which is now in bankruptcy thanks to the upstart Netflix, GDSs will find themselves in trouble, getting beat most likely by ITA, Farelogix, and other technology players. The companies that innovate even when it compromises their core model are the ones that survive disruption, not the companies that resist and form defensive alliances.
Finally, there has been concern about the implementation of personalized fares that are enabled by Direct-Connect. Some would cite this is as an anti-consumer tactic. Nothing could be further from the truth.
Personalized fares offer just as many ways to offer ancillary freebies or discounts as they do to beef up fares for the price insensitive. Airlines are still subject to the laws of supply and demand.
The invention of fare classes enabled airlines to differentiate business from leisure fares. Overall, that was a great innovation for the industry. It enabled the cheap-enough leisure fares to engage the public in air travel, and asked those willing to pay more for better service or fewer restrictions to do so.
The airlines understand that even business travel has a supply and demand curve – trust me, they’ve felt it pretty hard these past few years. We in the travel industry should embrace fare personalization to deliver better products to more people at more relevant prices, not fight it because we’re wary about disruption.
With Americans Airline’s initiative, the status quo has been disrupted. But putting up walls to innovation, creating alliances to lobby deaf ears, protecting a legacy business model at all costs --- these are recipes for disaster.
You may hold on a little bit longer, but someone is going to come along and destroy you, and for that onslaught I’d look westward, perhaps towards Mountain View, California (home of Google) and the one big player who has yet to comment on this issue.
NB: This is a guest article by Evan Konwiser, co-founder of FlightCaster. Follow him on Twitter or read his blog.