Commerce, not distribution? VCH, not GDS?

By Arnie Weissmann
Arnie WeissmannI believe I understand why the airlines want direct connect. While it's true that they would save substantial distribution costs if they sidelined the GDSs, I accept their explanation that their underlying motivation is that they are reinventing themselves and that the reinvention requires changes in marketing that would be accelerated by direct connect.

Their aspirations to become machines of commerce, they say, are too complex for a GDS to handle. They no longer want simple distribution for a (relatively) simple three-class product. Instead, they are offering an expanding variety of services and products in potentially thousands of iterations whose profit potential can be maximized only through sophisticated, personalized marketing initiatives based on a passenger's personal history of preferences and big data analysis.

Saving money on GDS fees would be a welcome benefit, but it's not the prime motivator, they say.

I understand all that, and I believe them. But what confounds me about direct connect is that in a very practical sense, it's a giant leap backward.

If the status quo were that every airline had a separate marketing machine and an individual link to every booking channel, any technologist who developed a GDS-type aggregation tool would be hailed as bringing elegance to a complex system. To introduce scores of parallel but unstandardized channels might make sense from an individual airline's perspective, but it makes life difficult not only for intermediaries but ultimately for customers.

It might well be the collective airline dream that there be no booking channel other than direct and that all middlemen go away, but it's also safe to assume they recognize the value that large travel agencies, particularly corporate agencies, bring to them. And they also understand that the booking and back-office tools provided by GDSs and large agencies actually facilitate sales. Presumably, they recall that they were once in that very business themselves but decided they didn't like doing that and spun off those units.

Given those realities, the airline's underlying marketing approach that inspired direct connect strikes me as sincere but, practically speaking, unrealistic. Discussions of widespread direct-connect interfaces with agents are primarily useful as leverage when negotiating GDS contracts.

However, a proposed new model has emerged that could enable airlines to market in as sophisticated a manner as they desire, provide the aggregated efficiencies that direct connect lacks and maintain the booking and back-office tools that facilitate sales.

Dubbed the Value Creation Hub (VCH), it was outlined in a white paper last month written by industry analyst Henry Harteveldt when he was at Atmosphere Research Group (he is now with Hudson Crossing).

The hubs would enable three key airline strategic initiatives -- personalization, merchandising and retailing -- and would be aggregated by alliance rather than airline. This would streamline the direct-connect mosh pit to just four VCH systems. (In addition to the SkyTeam, Oneworld and Star alliances, Harteveldt envisions an additional one created by low-cost carriers. Any outliers could hook up with airlines with which they have interline or codeshare arrangements.)

These four VCHs would provide marketing and distribution coverage to travel agencies and other channels for 90% of air tickets sold by 2017, Harteveldt predicts.

And who would build the VCHs?

"GDSs and other technology companies such as Farelogix," which currently assists with direct connect, Harteveldt told an audience at the Australia Tourism Summit, where he made a presentation on VCHs this month. "Perhaps even Google."

Could the GDSs maintain channel share under this new model?

Of the 24 airlines with more than $1 billion in sales in 2012, 44% of those bookings came through GDSs, 10% through offline airline-direct channels and the balance through airline websites. In just five years, Harteveldt projects that 59% of bookings will come through airline websites, 30% via VCH, 7% by GDS and 4% through offline airline-direct.

The VCH is not the only big change that Harteveldt predicts. Of that 59% of direct online bookings, 50% will be via a mobile device, he believes.

On first blush, the VCH seems like a more rational solution than direct connect for airlines, intermediaries and customers. But would it be embraced by airlines? That possibility is greatly improved given that the underwriter of Harteveldt's white paper was IATA, the airline-owned international body that governs ticketing policy, among other oversight.

Email Arnie Weissmann at aweissmann@travelweekly.com and follow him on Twitter. 
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