American terminates Orbitz's right to sell AA tickets, and GDSs cry foul

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Long-simmering distribution skirmishes between American Airlines and GDS users last week broke out into open warfare.

According to Orbitz, American launched the first foray. Orbitz CEO Barney Harford told Wall Street analysts last week that the airline had put Orbitz on notice that it intended to "terminate the company's authority to ticket AA flights on the Orbitz.com and Orbitz for Business websites as of Dec. 1."

Harford characterized the move as an attempt to weaken third-party distributors.

In a filing with the Securities and Exchange Commission, Orbitz also reported that American had exercised its right to terminate, with 30 days notice, the Supplier Link Agreement it had entered into with Orbitz in February 2004.

That agreement, which established a direct link between Orbitz.com and American's internal reservations system, required that Orbitz book certain airline tickets through the direct link rather than through a GDS. In return, American paid Orbitz a per-ticket fee.

American contended last week that it was simply trying to offer passengers the most customized booking process possible, as efficiently as possible.

Some analysts and other industry experts speculated that American's tactic might have been little more than a ploy to force a renegotiation of its Supplier Link Agreement with Orbitz.

"It's a private negotiation that has become public," said Jay Sorensen, president of the IdeaWorks consultancy, which publishes the Ancillary Revenue Guide each year. "This type of thing probably happens more than we realize."

Kevin Crissey, a Wall Street analyst with UBS, said he thought American and Orbitz would work out some type of agreement. In a note to investors, he speculated that the cancellation notice could be "leverage for a new deal, perhaps."

Crissey said, "American has been targeting distribution costs for some time now, but this move is interesting."

Indeed, American CEO Gerard Arpey raised hackles among many in the industry about two years ago when he said he dreamed of a day when third-party distributors would pay American for access to its product.

According to the Centre for Asia Pacific Aviation, that's exactly what American proposed in April when it rolled out its America's Direct Connect program, which allows free access to those who go directly to AA.com to search and book. In essence, the center pointedly observed, that move erected a "pay wall" for GDSs, online travel sellers and travel management companies.

When American started the Direct Connect program, Business Travel Coalition Executive Director Kevin Mitchell warned that as GDS contracts ran out, distribution models could revert to the days before computer reservation systems, when agents had to call each airline for fare information and bookings.

The Direct Connect program is a business model that Wall Street likes, the Centre for Asia Pacific Aviation noted, because it cuts down on distribution costs.

American spokeswoman Mary Sanderson denied that the termination notice was a negotiating ploy. The notice, she said, shows that "we are serious."

Orbitz's Harford certainly characterized American's move as a serious matter, and he suggested it had wider implications that could shake the industry.
"This is a broad attack by American on the broad distribution landscape," he told analysts. It's a move, he said, designed to bypass online travel sellers and other distributors and push consumers directly to the airline's website.

Sanderson denied that assertion.

"We are negotiating in good faith with Orbitz to reach a mutually beneficial agreement that provides broad, efficient distribution while also enabling more choices for customers," she wrote in an emailed statement.

The email continued: "Together with our travel partners, we can deliver more customized and relevant products and services to our customers, but we must look beyond the current paradigm to succeed."

Online travel sellers and agents using GDS platforms simply can't deliver the type of customized booking product that American can, Sanderson said.

GDS companies last week agreed with Orbitz about American's intentions.

Travelport, Orbitz's largest investor, said that American "is aggressively trying to persuade agencies to bypass the GDSs by offering agencies short-term incentives to shift AA bookings to a direct connection."

Travelport, a major player in the GDS business, owns the Galileo and Worldspan reservation systems.

"But a successful direct connection will result in the 100% long-term loss of an agency's financial assistance through the GDS for all of its AA bookings," Travelport said in a statement. "Also, even if AA offers an agency an increased incentive for some period, the agency is still left with the inefficiencies of booking most airlines through the GDS, and having to book AA through a direct channel.

"If some additional carriers require the same, then the inefficiencies will be even worse. This just does not make the best economic sense."

Sabre officials said in a statement last week that they're ready to offer the kind of customized product American is touting and that all the GDSs are moving in that direction.

"The GDSs are prepared, from a technology perspective, to help airlines market and sell their products, including targeted marketing to specific passengers," Sabre said. "We all are driving toward the adoption of an industry technology standard so the airlines and GDSs can quickly put into place the merchandising strategies the airlines are continuing to develop."

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