Article analysis for Wednesday, 5th 2011

Since the end of December 2010, a big controversy has surged concerning American Airline's move to distribute its own fares through its new distribution system, cutting out intermediaries. This article explains what the real impacts for this decision are and what is actually at stakes on the short-term and long-term.

On the short-term, this conflict is seen as a price battle, a fight over the commission fees. Indeed, in the past, air companies relied on intermediaries - OTA & GDS - to sell their air tickets. In exchange for their agreement to pay a fee for the intermediaries' services, the intermediaries accepted to reduce their fee structures. While the contracts between the different parties is to be renewed between 2011 and 2013, one of the biggest airline company, American Airline, decided to pull its fares from the OTA Orbitz.com in December 2010, affirming its will to no longer submit to the high fees practiced bu the intermediaries. Instead, it would like all intermediaries to connect directly to its sites to obtain customized information. This decision resulted in Expedia supporting its direct competitor. The famous OTA indeed decided to refuse showing the AA fares on its website. The last wave on this affair was the decision on January 1st 2011 by Sabre GDS to terminate its contract with AA, one month earlier, and to make it more difficult to find AA fares as well as the end of the discounts on the fees applied for the airline company.

At the moment, the air travel industry hopes for a negociation between the parties because they still need each other and a new design of the air ticket distribution would have serious impacts on the market.

On the long-term, we understand thanks to this article that the real aim of the airline companies is to control the air fares research. We are passing from a fare and schedule-led selling to merchandising. In brief, it means that AA does not accept the current system proposed by OTA and GDS that only take into account fares and availibility as research criteria. AA wants to offer tailored services as well to provide better propositions to its guests. Thus, AA would become more a product marketer... What does it have to do with AA's direct platform?

Actually, when guests are looking for fares on OTA, they can only access fares and availibility and the air companies have little say about what is displayed on these sites. They cannot control or justify the prices. Thanks to a direct platform on the airline company's website, they could rebundle, customized and merchandise their products and so, have a better control on what they sell and how they sell.

Still, in spite of a likely inclination to follow the move, air companies will surely not be able to work without intermediaries so soon... Here are 9 issues to watch that are central to the evolution of air companies distribution:

• Airlines readiness= not all airlines are ready to work without intermediaries and to offer an easy to use website for their guests
• the commercial model for merchandising= who will pay for the connection system to the airline companies? Will the ROI worth the high cost?
• consumers= even if they are generally overlooked, they are the final desion makers and what they need is the cheapest fare to go from A to B. The capacity to adapt products and services while providing the best fares and being the most competitive are the key issues.
• comparability and travelers' rights= the new system will make it difficult for intermediaries and guests to compare the competitive fares. In addition, with the rebundling and merchandising practices, it will be hard to compare products as they will not be similar.
• regulatory= the Department of Travel will have to regulate on the merchandising practices to make sure it is not a camouflage for unfair fares.
• technology= if it will undoubtely be a good thing for innovation, the new model will cause problems to GDS, OTA and ITA software to gather information, establish comparison, control fares etc.
• GDS= the GDS have always adapted to the distribution changes and even if they are often considered costly, slow and legacy, they are not going to disappear soon as they are still very powerful.
• Google and ITA purchase= This event could totally redefined the distribution model if it happened.

Comments:

We know that today, companies are trying to lower their distribution fees by reducing the importance of the intermediaries and working on direct booking instead. Revenue management optimization is an issue faced by the hospitality sector (hotels, travel companies) and some solutions are offered by the new technology. For instance, companies can offer customized services and easy online booking and create a stronger link with their guests via smartphone app, website design, blog, social network etc.

Still, the battle does not end there. Companies want to control the whole distribution process. While AA may lose traffic at the begining, it is almost sure that it will be joined soon by other companies and eventually, it is Expedia and all the GDS and OTA that will be in trouble and may not survive...Delta already removed its fare information from 3 small OTA and it is probably the begining of a new trend. If an agreement is not reached soon between the parties, the first to be penalized will of course be the guests, as they will have less possibilities to compare fares and less points of reference because of the merchandising system. Transparency will no longer be possible. This conflict as only at its begining and should be watched very carefully, particularly since the Google claim to purchase ITA. We may also wonder whether it will influence the hotel industry, which I believe will.