AA to keep pushing direct connect

By Jay Campbell

American Airlines said this week it has no plans to change its direct-connect program in light of parent AMR Corp.'s Chapter 11 filing.

"Our distribution plans will continue," said a spokesman. "We intend to restructure the company in a manner that makes the strongest company and competitor as possible, and using technology is an important part of that formula.

"As we have said before, direct connect is not only less expensive, it provides a more flexible and capable platform for distributing our product to our customers via our travel agent partners. Our customers are at the core of all of our investments, and travel technology should be no different."

The program has resulted in contract disputes and litigation related to negotiations with GDS providers. There are bigger wild cards in the overall distribution game than AA's bankruptcy, including those lawsuits, an apparently ongoing Justice Department investigation into GDSs and the Department of Transportation's plans for a rule governing the inclusion of ancillary services in GDSs.

But inasmuch as AA is the direct connect flag-bearer, GDS supporters may hope a strategy shift would result from bankruptcy or a consequential management shakeup.

Former American CEO Gerard Arpey was very public in his criticism of distribution costs, particularly the expense of online travel agencies, and his replacement, Tom Horton, also has argued that distribution needs to change in order to accommodate new revenue streams.

"Traditionally, GDSs, for a fee that we pay them, have distributed our fares to travel agents who in turn make them available to their own customers, including many corporate customers," Horton wrote in a July commentary in The Beat. "Now, however, we have the technology to deliver our products and services — not just our fares but our optional services, as well — directly to travel agents.

"In fact, we have been successful in signing agreements with such online agencies as Expedia.com, Priceline and Vegas.com, as well as traditional agencies, to deliver our content to them using our direct connection."

AA announced additional management changes this week, though none particularly related to sales, marketing or distribution outside of, arguably, the replacement of the airline's chief information officer, Monte Ford, by Maya Leibman, president of American's loyalty program.

Observers largely expect AA to continue its direct-connect push during reorganization.

Consultant Steve Reynolds and PlaneBusiness Banter publisher Holly Hegeman last week at a BTN Group conference in Dallas actually speculated that bankruptcy will accelerate AA's direct-connect program. Also in attendance, a Sabre executive declined to comment.

According to Hegeman, "I don't think we really know what will happen, but my hunch is if they go through bankruptcy right, they will put more resources behind it and will become more dedicated in pushing it down everyone's throat."

Reynolds said AA would be even more emboldened because "you're no longer worried about the stock price and the earnings plan."

A fight with the GDSs still represents a lot of revenue, he acknowledged, but "the implications of that aren't that dire when you see your stock price go from $10 to $1. I still think they will stay in the GDS, but maybe they can better afford the revenue blip" resulting from conflict.

One dissenter was Dahlman, Rose & Co. analyst Helane Becker: "AA thinks that they were seeing a huge decline in traffic from the Sabre network booking away from them, so I'm not inclined to think they will continue to push their war. They need to seek high-yielding business traffic."

AA is attempting to build toward "a future in which customers can customize their travel experience," Horton wrote in July. "This will give customers more choices and allow us to differentiate our products and services versus competitors and generate more revenue in the process."

Two other Wall Street analysts expected no change in AA's strategy.

"I come back to AA being focused on reducing costs and improving revenues, and to the extent the changes they perceive with GDSs and OTAs would do both, you would think they would push ahead," said Mike Derchin of CRT Capital Group. "If the thinking is that AA is taking their eye off the ball on this direct-connect issue, I don't think that's the case at all. The people who were involved are quite involved.

"Clearly, they are focused on returning to profitability, and doing whatever it takes. Initially that's on labor and pensions, and getting rid of the obsolete planes, but AA also has indicated over a long period that they felt their distribution costs were on the high side, and that part of the problem was the GDS as it has evolved."

"Bankruptcy gives you the opportunity to force contracts into renegotiation if it isn't already time to do it," said Avondale Partners' Bob McAdoo, noting that these GDS contracts already were in renegotiation. "I don't see they have picked up any meaningful new leverage they didn't have before, so I don't think the Chapter 11 thing will change their stance on that one way or the other."

This report appeared Wednesday in The Beat.

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