Q: I understand that the present full-content agreement between American Airlines and Sabre runs out at the end of August. AA's plan is to roll out Direct Connect, market it to agencies on a broad basis as soon as its agreement with Sabre allows it and charge agencies a fee of $5.50 per segment for Sabre (and probably Apollo, Worldspan and Amadeus) bookings. If this plan is put into effect, does it have a chance of succeeding?
A: The basic concept of giving travel agencies full access to booking ancillary services is a good one. It is just that AA is going about it the wrong way, and I do not see how AA can possibly succeed.
No one except AA knows for certain whether the Direct Connect strategy is just a negotiating tactic to wring fee concessions from the GDS vendors, or whether AA is really planning to try to get travel agencies to use Direct Connect. Mike Premo, the incoming president of ARC, bravely stuck his neck out and told an industry conference in early May that his personal bet is that AA's plan is for real, so let us assume that he is right.
The Achilles' heel of Direct Connect is AA's misguided use of a stick instead of a carrot. In order to get away with charging $5.50 per segment, which means a $22 fee for a roundtrip with a connection each way, AA's big competitors -- Delta, United, US Airways and Southwest -- would need to do likewise.
The insurmountable problem for AA is that the GDS vendors have already made peace with United, Delta and US Airways. They have all signed new, full-content agreements effectively discouraging direct connections and surely prohibiting surcharges for GDS bookings.
Although Southwest probably has no agreement with the GDS vendors prohibiting direct connections, it is hardly likely Southwest would start charging travel agencies a big fee for GDS bookings. Most agency bookings on Southwest already bypass the GDS, and Southwest takes pride in not matching AA's initiative on just about anything.
With no major allies, AA runs a huge risk that agencies will book away from AA. Although history shows that no matter how badly one airline treats agencies, it does not lose market share, the reason for agencies' failure to shift share is that they fully expect the other airlines to match the punishment after a short interval.
The several airline commission cuts are now known as "rounds of commission cuts" because all the major airlines did the same thing to travel agencies within a month or so. Here, however, no major U.S. carrier is going to match, which means that agencies will behave differently from before.
AA is correct when it predicts that it will not lose its most loyal customers or even most of its other customers. However, it will lose at least a small percentage, which will be enough to make the economics of Direct Connect backfire, as I will show in my next column.
Apparently, it has never occurred to AA to incentivize agencies to use Direct Connect. A successful incentive would not only fully compensate for the agencies' loss of GDS incentives but would also subsidize the additional cost of data integration into the agencies' front-, mid- and back-office systems.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email Pestronk at email@example.com.