Google and Yahoo are sexy. Travel search engines like SideStep and Kayak grab
headlines. Quartering yourself in a series of spin-offs, which
Cendant will do next year, certainly will impact the marketplace.
But airlines' GDS booking fee deals could shake things more than
anything.
Most of the major
U.S. airlines' deals for content with Sabre, Galileo, Amadeus and
Worldspan expire at various times throughout 2006.
Today, the carriers
are said to be paying the GDSs an average of $12 to $14 per
trip.
The widely held
expectation is that these agreements will be renegotiated and
finalized as the expiration deadlines approach.
Then the industry
will know if the airlines dropped out of any GDSs, reduced content
to others or shifted volume to start-ups like ITA Software, G2
SwitchWorks or Farelogix.
But there is
speculation that one or two major airlines could come to terms with
their distributors within the next 90 days, forcing others to match
or stand pat.
The timing would make
sense because the GDS companies usually reveal their pricing plans
before the end of year.
One rumor is that
American Airlines has a deal in place with Galileo for booking fees
of $6 to $8 per trip and that another major airline has a deal on
the table with a GDS for comparable terms. The contracts could be
signed a lot sooner than mid-2006.
Preferential deals
with one GDS versus another -- a dynamic permissible under GDS
deregulation -- and variables regarding the size of inducements, if
any, to travel agencies, could profoundly affect how travel sellers
large and small do business.
However, comments at
the PhoCusWright Executive Conference in Orlando last week by Sam
Katz, who heads Cendant's Travel Distribution Services unit, seem
to give that timetable less credence.
Katz noted that
Galileo's Preferred Fares Select program, unveiled in 2003, is a
three-year arrangement.
In those deals,
airlines locked in "discounted" GDS fees in exchange for
commitments to provide full content, which included Web
fares.
"We intend to get the
full benefit of those agreements," Katz said, meaning Galileo
intends to let those contracts run the full duration.
The prevailing
airline-GDS-agency business model has the airlines paying large
booking fees and agency incentives to the GDSs, and the GDSs
passing along some of those incentives to travel
agencies.
Katz warned that
dramatic changes in the business model would take revenue away from
travel agencies.
Katz's problem with
Preferred Fares Select and Sam Gilliland's dilemma with Sabre's
Direct Connect Availability 3-Year Option program is that those
pricing deals are now looking, well, pretty pricey to most
airlines.
One guy who knows the
airline business from various vantages is Derek Lewitton, ITA
Software's vice president of sales since April.
Before ITA, Lewitton
was United's director of distribution strategy. He was one of the
United officials who summoned large agencies and corporations to
the airline's Chicago headquarters early this year.
United urged them to
use alternative distributors that charge bargain-basement booking
fees in exchange for $5 inducements from the airline.
Lewitton said last
week that Sabre, Galileo and Amadeus are approaching the airlines
with two basic business models.
One plan would offer
airlines a pricing structure where they don't pay agency
inducements, and agencies would have to decide if they want to opt
in to that arrangement.
The airlines would
have to establish their own incentive deals with agencies under
that structure, and perhaps one of the lures would be premium
content.
The other model would
resemble today's traditional model, in which the GDSs pass along a
portion of the airline booking fees in the form of agency
incentives.
ITA plans to charge
airlines $1.50 to $3 per trip when incentives are left to direct
airline-agency negotiations.
Lewitton, though,
said ITA will adjust to airline decisions about incentives and will
be in a solid position even if ITA ends up having to pay incentives
to agencies.
Separately, G2
already has endorsed the incentive model for midsize
agencies.
"Either way we're on
the low end of the cost curve," Lewitton said, arguing that
Galileo's cost per booking is about $5.
The logic there is
that even as the traditional GDSs try to wean themselves off legacy
systems, they are still heavily reliant on them and won't be able
to bring their fixed costs down to ITA's and G2's
levels.
The entire
airline-GDS relationship is fluid, and much will flow from how it
is all decided.
Meanwhile, Expedia
Inc. is looking smart for diversifying its GDS services beyond
Worldspan, with Sabre and a third GDS. If airlines drop out of
Worldspan like AirTran did, Expedia.com can just flip a switch.
Nice
insurance.