Q: In last week's column [Legal Briefs: "Direct Connect is American's new weapon in airline-GDS battle," Feb. 14], you predicted that the GDS vendors would win their battle with American Airlines, chiefly because Delta and United have already made peace with the vendors. If your prediction proves incorrect, how will our GDS contract be affected if American requires or strongly encourages our agency to use Direct Connect in the years ahead?
A: The revenue that you derive from your GDS contract will be reduced, not only in the obvious way of lost segment incentives but also in more subtle ways, depending on the size of your agency and what your contract says.
Smaller agencies typically have a simple contract providing for a segment incentive per booking. Of course, your total incentives would go down if a major carrier can no longer be booked in the GDS, adversely affecting your bottom line.
Even if American's Direct Connect becomes available in the GDS display, as the carrier claims is theoretically possible, clearly the GDS vendors will not pay you segment incentives on those bookings. Since the vendors now pay nothing on Southwest bookings that actually go through the GDS, they will be even less inclined to offer incentives on Direct Connect.
Some small agencies also receive a signing bonus, in return for which they usually have to achieve an annual quota of bookings. If you fail to achieve the quota because of bookings shifted to Direct Connect or any other reason, you will owe a pro rata refund at the end of each contract year.
For example, if you received a $30,000 signing bonus on a three-year contract, and if you would typically just meet your annual quota, then a shift of 20% of your bookings to Direct Connect will require a refund of $2,000 per year ($30,000 divided by three years, times 20%).
Larger agencies typically have a different kind of quota: The contract requires an annual percentage market share quota on their GDS vs. any other GDS that they might use, now or in the future. Fortunately, Direct Connect does not meet the definition of a GDS in the typical contract, so larger agencies would typically not suffer any penalty for failure to meet the quota.
Many agencies, large and small, have segment incentives in tiers; i.e., the higher the number of annual GDS bookings, the higher the incentive per segment. For example, if your agency typically produces 50,000 annual segments, you may get $1.50 for the first 40,000, $1.75 for the next 10,000 and $2 for any segments of growth.
Under some contracts, the incentives in each tier apply not only to the bookings in that tier but also to all bookings, retroactively to the first segment per year. If you have such a contract, then Direct Connect could be an even bigger disaster for you, as you might wind up with lower segment incentives for all of your segments.
Finally, Direct Connect bookings will be a drain on your agents' time, if they must spend time searching two booking systems and integrating Direct Connect bookings into your front-office system, so that they can automatically interface with your back office. To the extent that agents' time is wasted in this way, your staff will have less time to make other GDS bookings, resulting in even more GDS revenue loss.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email Pestronk at [email protected].