American just took a significant plunge, ordering 460 planes from Beoing and Airbus. While having the youngest and the most fuel-efficient fleet in the industry would seem to be a laudable goal, if you can’t fill them with high-yield passengers, the numbers may not make sense.
Sabre, which used to be a division of AMR before its IPO in 1996, is the largest global distribution system (GDS) player in the US and is a significant player globally as well, holding the #1 or #2 position in many key markets globally.
There is currently a dispute between AA and Sabre over the distribution of American’s products to travel agencies (both brick and mortar and online agencies). AA pays a volume related segment fee to Sabre for all airline seats booked by its agencies. This is a variable cost to AA, as they only pay the fee if the agency indeed sells its seats.
According to the Airline Reporting Corporation, the average ticket price of a domestic ticket sold via the brick and mortar agency channel is $413.62. The international ticket price is $930.11.
When AA sells tickets direct, their average ticket price sold through AA.com would look more like the average ticket value sold through the Online Travel Agencies OTA (Expedia, Priceline, Orbitz, Travelocity). That rate is $329.77 domestically and $681.18 internationally.
So even though the booking fee (and a commission if they still pay the agency) would presumably be a higher cost than selling direct, the yield from the agency channel more than makes up for the difference.
And this isn’t just about travel agents. It is about the Travel Management Companies that service corporate travelers. For them, the average domestic ticket is $420.73 and the average international ticket is $1,680.46.
For more details on this, see my blog “Don’t be fooled. Direct Distribution is not free.”
It is a dangerous game of chicken to pull out of your highest yield, variable cost channel. AMR should think twice about this strategy — as the stock price can plunge further.
I for one am glad that when I left Sabre in 1992, I sold my options for $77. Perhaps AMR should have sold the airline, instead of Sabre.