It has become an interesting conundrum that the GDS market for airline segments has been seeing cuts that outpaced the capacity and traffic cuts from the airlines.
Some of this is obvious but some is subtle and not being noticed. What is more interesting is that the GDSs should be seeing pretty significant reductions in airline based gross revenues.
So I won't focus on the obvious points that reductions in traffic should result in reductions of GDS bookings and hence corresponding reductions in revenues.
Well they are not – quite. Bear with me. There is a point I will get to.
The changing profile of traffic has resulted in more leisure bookings in proportion to those of GDS staple which tends towards corporate traffic.
This shift has also resulted in an a proportional move to LCCs and also to harder searching on the OTA sites.
A greater usage of airline direct services such as airline.com and call center services is part of this shift.
Scott McCartney of the Wall Street Journal opined last week that the capacity reductions will mean less convenience and more crowded planes.
I can personally attest to this. I have seen some markets where the planes are absolutely full (like this weekend on Qantas from the US to Australia).
So what we are seeing is a move away from GDS based bookings. I believe this is going to be a permanent move - ie this is a leakage of bookings that will not return to the GDS when the market picks up.
However those who follow airlines tend to look at headline financial numbers and herein lies the core of the coming battle when GDSs and airlines start their PCA renegotiations starting in 2010.
The GDS reductions in gross revenues are in fact less than the reductions in airline segment transactions. Thus one can conclude that the GDSs have not kept their part of the social contract that was extant in the last lot of PCA negotiations.
The social contract in 2006 (the last major PCA negotiation period) was a simple one. Full content from the airlines in return for capping and hopefully a reduction in GDS costs.
In fact, as many of my airline friends tell me, this is not the case. Indeed many airlines are seeing consistently higher total costs from the GDSs since 2006. Where the costs of the GDS have not kept pace with the reduction in traffic, indeed the opposite has occurred.
Thus they can conclude that the GDS segment fee may have been static but that the GDSs (ironically taking a leaf out the airlines unbundled/ancillary revenue playbook) have found ways to charge for things that were previously bundled. This is evidenced in Travelport’s numbers.
Note that since there is no public information on the airlines' GDS costs you have to look the other direction - ie you have to examine the GDSs based on whether the transactions are rising or falling and revenues from airlines are rising or falling.
If you examine the last four quarters of Travelport’s financials, for example, you can see that airline based revenues have indeed risen in proportion to the transaction count.
At the same time there has not been a noticeable reduction in GDS to agency incentives.
This is buried in the footnotes. Anecdotally in some of my discussions with some intermediary clients they are confirming this trend. I am afraid I am not able to quote numbers as this is a closely guarded secret.
Intermediaries are still largely dependent on GDS segment fees.
If we look at the OTAs we can see that since they cut customer transaction fees on both airlines (and in some cases) hotel bookings, their revenue mix has to be dependent on GDS incentives. In fact it might be rising not falling.
So my friends there is a battle royal coming. It will be a poker game lasting about 18 months. The airlines on one side of the house and the GDSs on the other. Someone has to blink. There is a huge pot of cash in the game.
We estimate that pot to be in the range globally of approximately $5 billion annually. The GDSs realize that they must maintain the ability to leverage their significant power over the airlines or they will lose huge chunks of this revenue.
As the proportion of GDS based bookings falls there is logically a tipping point where the GDSs lose that leverage. The trick will be to understand if that tipping point will occur sooner or later.
That my friends is a subject of another post.