Arnie WeissmannThe balance of power between suppliers and distributors is traditionally determined by scale. So because of its reach, Walmart can tell Procter & Gamble exactly how to package products for its shelves. Barnes & Noble can influence several aspects of a book's development, right down to its title.

Likewise if you have a hot product, you can call the shots about how it is distributed. For example, no one can undersell Apple's pricing on an iPad.

In travel, Expedia, No. 1 on the Travel Weekly Power List, has flexed its market muscle at various points, demonstrating that it has sizeable guns. Those guns are currently pointed at American Airlines on behalf of Expedia's competitor, Orbitz.

But airlines have been trying to rewrite the distribution laws regarding scale since the first commission cuts in the mid-1990s, a time when travel agents sold well over 80% of all airline tickets. At the time, it seemed as if Procter & Gamble had decided it could do without Walmart.

I think what prompted airlines to challenge the fundamental laws of distribution back then was the belief that they were in an anomalous economic environment. And they might have had good reason to think that: About five years ago, Travel Weekly put together a historical chart that demonstrated there was absolutely no correlation between growth and profitability for commercial aviation as a whole. As the number of passengers soared in the post-deregulation environment, profitability -- more typically, losses -- seemed unaffected by the rise in demand.

At the time, fragmentation among carriers led to an almost constant state of overcapacity, a circumstance beyond the control of most airline CEOs. With little flexibility on price control, focus shifted to cost and led airlines to do the heretofore unthinkable: They eliminated, or greatly reduced, compensation for the distribution channel that was responsible for the vast majority of their ticket sales.

The environment today, however, is much more normal for airlines, thanks primarily to consolidation among carriers.

Market forces have demonstrated that the airlines were correct in determining that demand for their products wasn't predicated on travel agents selling airline tickets. This may have emboldened them on their current move to direct connections, but taking the GDSs out of the picture might prove to be a much more complex proposition.

I asked Mike Batt, chairman of Travel Leaders, which acquired last week and now represents 30% of all travel agencies, for his take on the situation.

"We're being asked to throw out a trusted and proven global booking system that allows us to add all manner of value-added services in order to save a couple of dollars a segment," Batt said. "How does this make sense against ticket prices that range from $500 to $15,000?"

One of the major differences between 1995, when the airlines began to wean themselves from travel agencies, and today is that not only have airlines consolidated, but so have travel agencies and even GDSs. Today, there are more players of significant scale in all three segments who seem willing to support their brethren, and nobody can dictate terms. Direct connect, the airlines' Holy Grail, will proceed where it can, but it cannot be unilaterally imposed. For the foreseeable future, Procter & Gamble and Walmart need each other.

Email Arnie Weissmann at [email protected] and follow him on Twitter.


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