Revenue Management @en

The Airlines, Global Distribution Systems and Cheese

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30 April 2012 at 10:00, by

Mouse-of-agate-cheese-of-jasper

"Mouse of agate, cheese of jasper". Flickr.

It’s nothing new. For some time now the airlines have been trying to make off with the “cheese” of the Global Distribution Systems (GDS).  And until now, the GDS have known how to protect their portion of the cheese with considerable success. No question that they had it pretty easy for various decades. Both the airlines and travel agencies were totally dependent on the centralized reservations systems of Sabre, Amadeus and Worldspan/Galileo. Airlines and agencies had to jump through hoops to sell tickets to the end customer. Few businesses have enjoyed so dominant position in the value chain. A privilege, in a word.

On the other hand, it would be grossly unfair not to emphasize the huge technological and financial effort made by the GDS to develop a reliable system of electronic distribution with a global reach in an era in which the Internet, especially its commercial potential as a platform, seemed rather utopian. Over the course of decades the GDS managed to efficiently unite provider, distributor and market. But it is also true that in recent years its comfortable position has undermined its innovative spirit and creative capacity.

The airlines have not stopped making repeated requests for improvements and new developments to the current systems, mainly in connection with the flexibility to apply and manage different tariff rates, as well as to be able to offer additional services, which for the airlines would mean significant additions to their average transaction amounts. That’s not to mention the negotiations over fees, the amount that the GDS charge the airlines for each segment of a flight booked through their systems.  For the large airline companies, this cost can means dozens of millions of euros a year.  Too much to not try to eliminate or at least reduce this component in their cost structures.

And this has been the main motivation that has led to airline companies has to take the role of pioneers and leaders in the use of the Internet as a platform for commercial access directly to the end customer. When processing the reservation on their own system, the airline avoids the services of the GDS and saves the fee.

The next step for the airline companies – and perhaps the most profound in the current structure of ticket distribution – is to also get the travel agents to make reservations for airline tickets on alternative systems managed directly by the company, and not through the GDS.

American Airlines already offers its own booking interface, Direct Connect, to travel agencies. Iberia has just announced an alternative that at first is intended only for travel agencies that are not enrolled in any of the GDS. It is an elegant way of introducing their interface into the market without colliding head-on with the GDS.

Low-cost companies have spent years demonstrating how to sell tickets directly to the end customer. Its competitive advantage in price lies in a tight control of costs, including those related to distribution. Google Flights allows searches of flights between cities in North America that are subsequently linked to the portal of the selected airline to close the transaction. Another piece of the cheese that is getting away from the GDS.

The benefits of cutting out the GDS are obvious to the airlines. But is it of equal value to the agencies? Will this distribution model have long-term success? Can the travel industry dispense with the GDS, as we know them?

At first, the travel agents will be faced with an added and not inconsiderable operational difficulty: If the current process of searching, reserving and issuing a ticket is done through a single interface, which greatly facilitates the entire operational management of the process, the scenario of working with multiple systems in parallel, one for each airline or alliance of airlines, is much harder for the agent, especially the search for alternative routes and schedules and comparative prices. This weakness in the new distribution model pursued by the airlines can give the GDS enough time to loosen their stance in response to the demands of large airlines or even to look for alternative business models.

Interest in the evolution in airfare distribution transcends the limitations of the airports. Given its pioneering role in direct distribution and new business models, the air carriers may once again be indicating to us the direction that the travel sector will take in the not-too-distant future.

At this stage it is still much too early to glimpse the road the airline industry will take with respect to distribution. What can be stated quite categorically, however, is that the airline companies have already begun to make off  with pieces of cheese from the GDS.

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