This past weekend, I found myself immersed in the messy divorce between airlines and the Global Distribution Systems (GDS) that used to be their “partners”.
In this case, I was looking at complaints filed by American Airlines and US Airways against Sabre and related companies, and then Sabre’s and Travelport’s complaints against American Airlines. Readers know that I believe this is one of the more transformational events in the industry and I finally found the time to read in detail each party’s take on an increasingly tense situation.
In coming weeks, this fight is likely to again come to the fore. The story is about monopolies and not market power.
There is no elevator speech on this topic. Within the industry, it’s all inside baseball. To the outsider, it’s incredibly obscure. But here’s the crux of the matter: American, US Airways and other airlines are trying to retake their inventory from the GDSs that have for years listed their flights and taken a piece of the ticket price.
What the airline’s want, in other words, is broader competition through an alternative mechanism to sell airplane seats and other travel related products – not to eliminate the GDSs.
After all, airlines understand competition. Airlines understand fragmented markets. Airlines understand pricing dictated by competition and macro economics, and monopolies and duopolies of vendor industries. There is no global airline company with more than a 7 percent market share. Even the top 10 airlines in the world together have less than a 40 percent share of global capacity.
But when it comes to the GDSs, it is a different story. Sixty percent of airline tickets are sold through travel agents and it is this sector of the industry that is ripe for competition. According to MIDT data today, three players dominate the field in the U.S.: Sabre with 58% of the market; Travelport with 33%; and Amadeus with 10%.
Travel agents make money by using the GDSs. The contracts between the vendor and the agent impose such significant switching costs that the financial penalty is too steep for most agents to consider an alternative booking channel.
As US Airways wrote in its complaint, the American Society of Travel Agents confirms the industry’s dependence on the legacy GDSs. As of the end of 2009, 85.7 percent of travel agencies use only one GDS. 94.9 percent of travel agents using a GDS have not changed their GDS provider in the last two years and a remarkable 86.7 percent of agents are using the same primary GDS that they were seven years ago when the GDS industry was deregulated.
As a business model, the GDSs are more about suppressing competition than spurring innovation. Seven years after deregulation, barriers to entry in the GDS space have blocked all new competition. Contrast that with the domestic aviation market where low cost carriers now fly more than 31 percent of ASMs flown.
Market power is a seller's ability to exercise some control over the price it charges. In our economy, few firms see perfectly elastic demand. All products have a differentiation, whether due to consumer tastes, seller reputation, or location, as with airlines that convey upon a seller some degree of pricing power. Thus, a small degree of market power is common and understood not to warrant antitrust intervention.
Market power and monopoly power are related but not the same. The Supreme Court has defined market power as "the ability to raise prices above those that would be charged in a competitive market," and monopoly power as "the power to control prices or exclude competition." In many markets, but not all, airlines do have market power in that they are able to set revenue in excess of marginal cost. The last thing they are is monopolists as they have no ability to control prices or exclude competition.
In its complaint against American, Sabre makes a feeble and even laughable attempt to point to American’s monopoly power over certain routes at Dallas/Ft. Worth, Chicago O’Hare and Miami. Sabre goes so far as to name non-hub cities like Abilene,TX; Augusta, GA; Brownsville, TX; Champaign, IL; and Dubuque, IA as city pair markets where American has monopoly power. But it is simply wrong to suggest these cities are examples of monopolies, when each is blessed (given their population and underlying demographics) to have entry into the nation’s air transportation grid and each faces some direct or indirect competition. It is just as wrong to suggest that American has no competition on its Augusta GA to Dallas/Ft. Worth route when Delta flies those skies multiple times a day.
This is a network business and American Airlines holds a 15.2 percent share and US Airways 9.6 percent of capacity in the domestic network market. In fact, the top five airline competitors hold an 80 percent market share in the U.S. domestic market, with the largest carrier, Delta, garnering a 20.1 percent share of ASMs. This is a far cry from Sabre’s 58 percent share of the U.S. GDS market and that three firms have 100 percent of the U.S. domestic market.
To read the GDS’ complaints, you would think that we’re back in 1978 when schedule and price were the only consumer consideration. Thirty-three years later the GDSs still force the airlines to compete only on two factors; schedule and price. By limiting how airlines compete, the product is the definition of a pure commodity.
After all, Southwest does not turn its inventory over to the GDSs. How can you have a discussion on price and service without Southwest – which now competes in markets that account for 95% of domestic demand – as part of the dialogue?
GDS advocate Kevin Mitchell, Chairman of the Business Travel Coalition (BTC) has a questionable take on the issue. In Sabre’s complaint, Mitchell says: “The stakes in this conflict are clear: either an improved airline industry and distribution marketplace centered around the consumer, or one that subordinates consumer interests to the self-serving motivations of individual airlines endeavoring to shift costs and impose their wills on consumers and the other participants in the travel industry.”
He’s right on one point: the stakes are clear. This is a battle about an improved airline industry – one that is sustainable over the long term; and a distribution marketplace centered on the consumer. But that’s only going to happen when the airlines have control over their own inventory. Only when airlines have the ability to package their product based on their knowledge of consumer behavior will it become all about the consumer. To protect and advocate for the GDSs in fact subordinates consumer interests because this legacy distribution vehicle does nothing but thwart competition and stifle innovation.
Perhaps it is OK with the GDSs and the BTC that shifting (cutting) labor costs in bankruptcy was an appropriate strategy as long as the annuity from the airlines to the GDSs to the travel agents was not affected. But that assumes an annuity in perpetuity, and fewer and fewer of those exist in today’s airline business. The business of the GDSs can be done cheaper and better by those with technology younger than 1960. What the GDSs and the BTC claim is an entitlement is anti-competitive at its core.
Mitchell also proclaims to be a consumer advocate. Remember it was he and Kate Hanni who teamed to advocate for the three hour tarmac delay rule which, with the help of the gullible Secretary of Transportation Ray LaHood, purported to “protect the rights” of some fraction of one percent of all passengers. Today he supports a monopoly making its money off of 60 percent of air travel consumers. Now it is Mitchell who rails against what he calls “Hidden Fees” like seat upgrades, baggage fees, and charges for pillows and blankets to name a few of the 16 specific revenue items the Department of Transportation wants the airlines to report.
This, keep in mind, is an industry that earned a scant two cents on every dollar in 2010 and yet the government wants to dig further into the file cabinets of every airline in the country in a misguided attempt to account for the money those fees are bringing in. In case you have been living under a rock, the genesis of ancillary fees has been among the most covered and scrutinized stories since 2008. In 2010, US airlines generated $3.4 billion in baggage fees and another $2.3 billion in reservation change fees for a total of $5.7 billion. What about the fact that the industry’s fuel bill in 2010 was $6.5 billion higher than in 2009? The Air Transport Association forecasts that the industry’s fuel bill in 2011 will be $14 billion more in 2011 than it was in 2010. Remember, it was the rising cost of fuel in 2008 that served as the catalyst to unbundle the airline product in the first place.
The airline industry already pays more than its share of taxes and fees. But if it is transparency of “hidden fees” that the regulators (and Mitchell) want, then I as a passenger also want to know how much of my ticket price goes to the GDSs just as I want to know how taxes on my airline ticket are disseminated to various government agencies.
To me GDS fees and taxes are similar as they both support legacy interests/ideals – some might argue outmoded models -- without any meaningful return to the airlines. That said, there remains an ongoing need for GDSs, particularly with respect to the support they provide to the thousands of travel agencies worldwide and to their international reach.
Today, the GDS industry earns $7 billion in revenue with no product other than the airlines own schedules and prices. Is that innovation? Some estimate that the work of the legacy GDSs could be done for 20 cents on the dollar. That’s a lot of money spent on something that belies innovation.
The GDS role was relevant until about 2002 when market share was the name of the game. Now the industry is focused on profits. In fact, this is an industry that would have lost money in 2010 if not for the fees that Mitchell decries. The GDSs need time to develop the software necessary for it to “up sell” better seats on US Airways. Imagine how long it will take for the legacy GDS systems to account for 16 fee buckets as defined by the Department of Transportation (a potential new regulatory requirement).
But Mitchell bangs the consumer drum while advocating for an industry serving the airline industry that has monopoly powers over the very companies it calls customers.
According to the U.S. Department of Justice (DOJ), “U.S. antitrust laws reflect a national commitment to the use of free markets to allocate resources efficiently and to spur the innovation that is the principal source of economic growth.” Today’s GDS industry, circa 1960, represents anything but free markets or innovation. Rather is about protecting a monopoly revenue stream at the expense of allowing the consumer to customize the travel experience depending on their wants and needs.
According to the US Airways complaint, the DOT made four assumptions when the GDS industry was deregulated:
1) Airline divestiture of their interests in the GDSs made it less likely that a GDS would favor one airline over another;
2) Forthcoming technological changes – including online, direct-to-consumer ticket sales – would operate as a check on the market power of the GDSs;
3) Airlines’ ability to control access to their own content, including webfares and other discounts offered through an airline’s own website or select distribution channels – would reduce the GDSs market power; and
4) Vigorous anti-trust enforcement would help ensure competitive markets.
No matter how well-meaning those assumptions, they haven’t held water largely because of the power of the legacy GDS industry. So perhaps it is high time that the DOJ file suit against the GDS industry. Why is it OK that Amazon.com is able to offer recommended products to consumers based on past purchase behavior and the airlines cannot? Why can the consumer pick from a variety of offerings when picking a cable television or cellular phone plan but is so limited in options for air travel purchases?
Today, all the consumer can do when buying from a travel agent is to make the purchase decision based on service and price. Limiting indeed.
We desperately need an industry correction that allows a natural evolution in business practices so the free market can work. A DOJ suit may achieve that. Free competition will spur the innovation that anti-trust laws are designed to promote. A DOJ suit may do that. When competition wins, the consumer wins. When innovation is allowed, the consumer wins. Don’t be fooled by the GDS industry and its supporters hiding behind hidden fees; the consumer has no idea how much it already pays to an industry that stifles competition each and every day. The biggest thing hidden there is the opportunity cost imposed by the GDS industry that would rather direct consumer’s attention elsewhere.