The Beat Live – Court of Chancery

Wikipedia says that a court of chancery has jurisdiction over the estate of lunatics. Let’s hope Jay wasn’t making a backhanded statement about either party by choosing this particular forum for the airline/GDS debate.

As I see it, there are a number of real issues at the heart of this battle. Content, Technology, Merchandising, Business Model, Connectivity.

I frame it as a battle, because it reminds me somewhat of the parent child battles that emerge when a child gets its independence and leaves home.
The child continues the behaviors taught from the earliest age, both the good and the bad, but the parent tends to it in a whole new light, even fighting what they modeled for years. One example is having a cocktail before dinner and a glass of wine with dinner, then being upset when your kids start drinking in college. Another is being a workaholic and never being there for your kids and then getting upset when they don’t come to visit you. On the good side, it may be attending church or staying fit and eating right.

In this battle, the GDSs for whom I am advocating are the children that earned their independence from the parents, the airlines, represented by my esteemed colleague Mark.

When a child leaves home and goes to college, it costs the parents quite a bit for tuition, books and room and board, not to mention what it cost to raise them.
In this case, the GDS “children” each left home somewhere in their late teens. Their companies went public and/or were purchased by private equity, and in each case, I believe that the airline parents pocketed a substantial amount of money from the transactions.

And in the case of Amadeus, who is still partially owned by several of its founders, the airline owners continue to benefit from that ownership.
With the massive losses of the last few decades in the airline arena, I can’t help but wonder whether the airline parent companies should have sold the airlines and kept the GDS.

Back to the issue at hand. Let’s start with the business model and the alleged “sharing” of a portion of each booking fee with our travel agency customers. Those in the room may remember that when the first “bag man” appeared on the scene, literally with a bag of money. It was the early 1980s and the business cards for the automation staff at that time read American, United, Delta, TWA and Eastern Airlines. The money was not “revenue sharing” on a segment basis, but an incentive to switch systems. Soon the incentives were used to retain business and to offset the cost of equipment. And once commissions were first cut, then eliminated, the incentive was also called “financial assistance”.

The issues are of course intertwined. Prior to the elimination of the CRS rules in 2003, full content was not an issue, as all airlines that had a stake in a GDS had to participate at equal levels between all GDSs. But selling different content through different channels has always been the practice of the airlines – case in point running ads in the newspaper on Sundays that were not available through agencies on Mondays. My position is that the onus is on the GDS to offer a compelling business proposition to the airlines, such as aggregating variable cost demand at a higher average yield. If the GDS cannot do this, then the airlines both can and will sell their products through other channels.

As far as merchandising and legacy systems, the evidence will show that each of the GDS companies can and do offer merchandising of ancillary products for airlines and have made substantial progress in transitioning from legacy systems where it makes business sense to do so, just as the airlines have done in their internal reservations systems and web platforms.

The one issue that actually makes the most sense in this battle is that of connectivity. In the late 1980s, a group of hoteliers formed a consortia known as THISCO, later renamed to Pegasus. Those hotels decided that rather than trying to keep up with connectivity to a growing number of GDS companies, they would instead connect once to Pegasus and let them connect to the GDSs (and later the other internet powered channels that emerged. If American and others desire to connect via Farelogix or other alternative platforms so that they can get out of the connectivity business, this is of course there prerogative, but where the GDS as an industry begin to get concerned is where there is incremental cost for development and additional complexity for our agency customers that may indeed erode the profitability of this valuable channel for the airlines, who as a matter of fact have been our core customers for over 30 years.

We live in a free market economy.

Producers are free to distribute their products using intermediaries or directly or a combination of the two

The channels have to provide compelling reasons to the producers to garner their business

Variable cost channels have a high appeal
The companies that thrive ensure that they drive as much business as possible through the highest yield channel
Those that shift business to the lowest margin channel will not be as profitable and may indeed fail

The issues is really one of points of sale
Value of a collective network of over 50,000 agencies globally selling travel at minimum 5 days a week, 40 hours a week – aggregating high value demand

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