Let’s talk airfare and distribution


Given today’s announcement that American Airlines and Expedia have reached a deal putting AA’s inventory back online I figured it was finally time to finish up this post I’ve been working on related to direct versus indirect distribution for airlines and travel agents.

There has been a lot of noise recently on this topic. Most visible has been the tiff between American Airlines and some of the bigger names in online travel agents. But they aren’t the only carrier fighting this fight. Even when the airlines agree to new distribution agreements with the Global Distribution Systems ("GDS") operators there can be fallout based on the associated press releases. There’s a pretty large industry group, Open AXIS Group, that represents a number of the the airlines in this battle. They happened to be having their annual conference last month and their twitter account was pushing the associated propaganda out. I happened to engage with them, disputing some of their blanket claims. After a couple rounds back and forth we took the discussion off-line, eventually resulting in me having a conversation with Jim Young, the Executive Director of the organization. The call was quick but quite informative. I’m still not completely convinced of their claims, but there are some possible upsides worth at least considering.

In the past dozen or so years the balance of airfare sales has shifted dramatically towards the airline selling direct to consumers. What used to be a relatively small portion of tickets sold is now up around half. That’s a huge shift. And the travel agents that used to be selling those other seats are feeling the pinch. They no longer get commissions on most air tickets so there are pain points there. At the same time, the cost to the airlines of providing all the data out to the GDSes is high and is prone to errors in data entry and other problems. Another pain point.

But most significant is that the GDSes have essentially commoditized the travel industry. Whether this is good or bad probably depends on your point of view but it is certainly an indisputable fact.

With the recent, rapidly developing trend of breaking out services that were traditionally included as part of the airfare into ancillary fees the booking process has become significantly more complex. It is not possible to easily compare the total costs for a trip across multiple carriers now; the GDS doesn’t know that I have elite status in Star Alliance and not in SkyTeam, for example, so it doesn’t know which of those extra fees I’ll be paying. It also doesn’t know what those fees are because the GDS systems were built in an era before such things existed and getting them integrated into those legacy systems is a tremendous battle. The new systems that Open AXIS is promoting solve those problems.

Somewhat more telling, however, is that the airlines seem to not really want to publish those ancillary fee datasets out into the GDS systems. Those fees are the last bastion of hope the airlines appear to have in terms of a high margin revenue stream and they really do not want to see it commoditized like the base fare costs have been. They are also trying to protect that revenue stream from commissions and other impacts that publishing it would potentially bring about. While I certainly understand this from the airlines’ point of view, as a customer this is not particularly good for me.

The goal of the Open AXIS Group is to help facilitate a new type of airfare pricing transaction engine. Rather than a 3rd party consolidating the fare, inventory and rule systems and manufacturing a fare to display to the anonymous consumer the airlines want to leverage their huge CRM systems, their ancillary fees options and other proprietary information to make what they believe is the best offer to a consumer that they know and have a relationship with. Or, to quote Mr. Young, "We want to know who’s buying because we can create a cognitive or attractive offer to the customer."

And that’s where things get potentially sticky. If the airline knows that you regularly buy a refundable ticket for your mid-week work travels then maybe they won’t offer you as great a deal on the weekend trip. After all, if you’re used to paying so much all the time then a small discount off of that might be enough to get you to buy even though someone else might get an even cheaper offer because they aren’t used to the higher fares all the time. That’s incremental revenue right to the airline that the customer might never know they were paying extra on.

Instead of making everything better for the consumer what about documented situations where the airlines skew things to be worse for certain customers? Don’t believe it? You should, because it happens and the airlines have admitted it. In one of Scott McCartney’s recent columns in the Wall Street Journal there was some discussion of Delta‘s SkyMiles redemption pricing.

"We differentiate the exchange rate based on customer type," said Jeff Robertson, Delta’s vice president over the SkyMiles program. A diamond-level frequent flier, Delta’s highest level, with a fancy American Express SkyMiles card can get triple the buying power out of each mile than a regular frequent flier without the co-branded credit card, he said.

In this case, holding a specific credit card gets you a better deal, even if you aren’t as loyal a customer. But it is OK; we can trust the airlines. They are always going to offer us the best value directly, unless it doesn’t suit them to do so.

There are certainly some nice upsides to the systems, particularly for the corporate travel agencies. Doing things like giving all corporate customers one free checked bag as part of a negotiated deal can really only be accomplished if the airline knows who you are when you buy the ticket. Integrating contracted discounts and back-end rebates absolutely requires that knowledge. That’s great for the business traveler (no extra charge for the checked bag), the accounting department (single transaction on the expense report instead of several) and the travel agent. There is definitely potential there. But it is not always so clear.

Plenty of examples on both sides of the ledger in this debate. But as a consumer who desperately wants to have as much information as possible before making an airfare purchase (often to the point of paralysis), anything that obfuscates the data makes it harder to get the best deal possible. Is it possible to have a fully transparent system through the GDSes? Not today, but that doesn’t mean that the general concept is the wrong one.

Despite the profits reported in 2010 there is no doubt that the airline industry faces a unique set of challenges in its pricing and competition structure. The conversion of their product to a commodity has resulted in a race to the bottom nearly across the board in terms of service and offerings. That’s not necessarily a good thing for the consumer. But neither is not knowing all the options available for pricing. When the airlines start to manipulate those things based on who you are and your prior purchase habits there is a lot of potential for the customer to lose badly.

To read more from the OpenAxis side of the argument check out their White Paper on airfare distribution. And if you want to read more about the GDS v Direct models from a couple other perspectives check out these:

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Seth Miller

I'm Seth, also known as the Wandering Aramean. I was bit by the travel bug 30 years ago and there's no sign of a cure. I fly ~200,000 miles annually; these are my stories. You can connect with me on Twitter, Facebook, and LinkedIn.

8 Comments

  1. I would hate to see the airlines moving towards the car rental type distribution systems, which are very opaque. Many, many discount offers (some personalized, some more general), all sounding very attractive, all discounting off an unknown number and all producing different prices, often higher than the original anonymous quote using stealth mode in my browser. Indeed, as a Hertz #1 Club Presidents Circle member, I find it beneficial to log in after the quote as, if I do so before obtaining a quote, the price goes up.

    If airlines move towards that sort of system for non-business customers, they will grab significantly more pricing power at the expense of the consumer.

    1. Indeed, NB, this is the type of model that the airlines appear to be pushing. I cannot fault them – obfuscating the pricing means they can realize higher margins and they’re in business to make money, not to operate as charities. But the misleading fluff that they keep pushing out is terribly frustrating, more so because no one seems to be calling them on it.

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