Bob Crandall, the recently retired chairman of American Airlines,
once said he was prepared to offer a pretty good deal to an
intermediary that would "buy" his seats and take the risk if they
weren't sold. The idea may have been academic at the time, but it
isn't anymore.
American Express now "owns" seats on flights between several
U.S. points and London in a one-year deal with Continental, which
owned the space under a code-share arrangement with Virgin
Atlantic. The seats are being offered at an undisclosed discount
off full coach and are refundable and endorsable in the event of a
flight cancellation.
Before entering into this arrangement, American Express talked
with its corporate clients to ensure that it would be able to sell
a substantial portion of the seats.
This preselling effort was essential, says Richard Eastman of
the Eastman Group, a leading industry software developer. He notes
that the inventory risk that American Express has assumed was taken
"against a known corporate buying level, one that allows American
Express to manage the risk with a high degree of security." He
points out that "few travel agencies can afford such risk without
the guarantee of corporate backers."
So who will do it other than American Express and a couple of
other mega-agencies? In Eastman's view, the other risk takers will
be "buying groups" comprising those that lack the capital to do it
on their own. "These midsize companies will band together and form
a 'risk-taking' buying group with which to approach the airlines
with committed volume."
Eastman believes that assumption of inventory risk is inevitable
in the airline distribution system. "At the present time, the
airlines assume total risk on their 'manufactured' product -- a
seat. They inventory the product on the CRSs. They distribute the
product through the GDSs to agents. The agents are agents of the
airlines, as a function of their right to issue tickets under ARC
authorization.
"ARC, the settlement solution, is also owned by the airlines.
Essentially, the airline distribution loop is an extension of the
manufacturing process ... and is entirely owned by the
airlines."
Not for long, says Eastman.
"The airline industry is the only major commodity product
producer that does not share risk through the distribution channel.
Whether it's food, household hardware or even medical services, all
other commodity products have shared risk throughout the
distribution channel."
If Eastman's correct, it may be not be long before many
corporations and their travel agents aren't just "booking" seats.
They'll be "owning" them.