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Mar292011

« To The GDS's: Either Evolve Or Dissolve -- It's That Simple »

In the March 12 Economics column of The New York Times, University of Chicago economist Richard Thaler correctly titles his piece as it pertains to the airline industry:  “This Data Isn’t Dull. It Improves Lives.” The column then goes on to distort the intentions of the airline industry. 

At the heart of the matter is the relationship of the airline industry to the Global Distribution Systems (GDS).  Every time an air travel consumer works with a travel agency, the information being supplied by the agent is likely provided by a GDS.  The data necessary to enable the agent is supplied by the airlines to the GDS.   

In the early years following deregulation of the airline industry, GDS were largely owned by airlines and used to provide information to intermediaries to sell tickets on particular carriers.  The systems were biased toward the airline(s) providing the technology to the travel industry community.  These massive networks were built using the technology prevalent at the time – prior to the advent of the internet – and GDS were compensated for providing and maintaining vast private networks and for acting as gatekeepers between agents and airlines.

In fairly short order, the government stepped in to regulate the bias.  As a result, the GDS were no longer a distribution tool aiding the airline(s) that invested in the technology directly; rather they became a tool of the travel industry to sell a service.  Today, the airlines pay an intermediary to distribute their product – and they are paying a price much higher than the prevalent transaction costs. The airlines’ costs reflect an outdated model replete with older and more expensive technology as the GDS fight to sustain their large networks and maintain their role as gatekeeper.

But the intermediaries don’t pay the airlines for the airline-created content they use to lure customers to their respective websites so they can sell hotel stays and rental cars.  It makes no sense.

Name a financially successful industry that turns over control of its inventory to an intermediary. I can’t think of one either.

Airline travel is now available for purchase on multiple channels via the internet, including through the airlines’ own websites. Those sites typically provide carriers with the most control over the shopping experience while also being the lowest cost channel for the transaction. It is simply much cheaper and more efficient to use newer, internet –based technology to distribute tickets without the need for a “gatekeeper” between airlines and agents.   

Now the airlines also want to be able to go directly to their customers via their own channel.  Not that the airlines do not value the higher yield business that comes from agencies.  The motive is not, as some detractors have said, because airlines want you only to shop at their sites or not reveal what the cost of a trip is if you check two bags.  Rather, airlines are looking for ways to differentiate themselves by offering additional products and services to their customers that enhance the travel experience. This information is something the GDS cannot provide today without a significant investment in their systems.

Duopolists are typically reluctant to invest new capital unless it is absolutely essential to protect its cash cow

The airlines don’t necessarily want - or need – to drive all transactions to their sites and there is still a role GDS can play in this process. GDS could be content aggregators, allowing customers to easily compare fares. Right now, though, that’s a role GDS seems unwilling to take on perhaps worried about risking their fees.  

There are other factors at play here as well. First, airlines know their particular customers better than the government or the GDS. Plus; the GDS haven’t evolved as the industry has dramatically changed.  

Today’s GDS force the airlines to compete only on two factors; service and price. By limiting areas how airlines compete, the product offered is the definition of pure commodity. This was true in 1983 just as it is today. 

Despite the airline industry’s efforts to remove more than $20 billion in expenses over the past decade, the price of another commodity essential to its business increased more than fourfold – oil.  The airline industry is left with little choice, if it is to ever be a sustainable business, but to begin the process of de-commoditizing its product and finding new revenue sources.  To do so, means fundamentally altering its legacy relationship with the GDS and recapturing control over its inventory.

The airline industry has found new ways to generate revenue by offering customers products they value and are willing to pay for, including seat upgrades, passing through security faster or day passes to airport clubs. Bag fees, now charged by the majority of U.S. carriers, reflect a more accurate way to pay for what you use. In other words, customers that don’t check bags no longer subsidize the cost of those who do.  

Yet the GDS and supporters claim airlines aren’t being “transparent” in their pricing that they do not want to reveal the total cost of trip to a passenger.  Few industries have price transparency like the airline industry – compare it to cell phone contracts – and the majority of customers know exactly what they’re paying for when they travel.

Thaler is right; the data supplied to the GDS is anything but dull and service and price competition have benefited many by making air travel affordable to the masses. This will certainly continue as the competition is as hungry today as ever.

This is not a fight about defending the purity of data or somehow withholding it from those whose only aim is to presumably help customers. No one, including the GDS, can really dispute that this information comes from the airlines.

Despite the rhetoric, it’s also not about protecting customers from an industry desperate to reach more. This is about protecting an outdated mode of operation and stifling innovation.  The GDS duopoly cannot move fast enough for an industry that sells “time saved”.  The GDS doesn’t want its revenue tap turned off. It’s time the GDS recognizes it can’t support interests other than their ultimate customer – the airlines.  The airlines are simply looking to adapt to new economic realities and help their ultimate customer – the person who actually buys a ticket.

Duopolist.  Monopolist.  Neither is accepted in the airline business.  Now the airline business says it is time that vendors servicing the airline industry cannot be duopolists or monopolists either.  It is all part of the evolution of the business that began in 2002. 

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    To The GDS's: Either Evolve Or Dissolve -- It's That Simple - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines
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    To The GDS's: Either Evolve Or Dissolve -- It's That Simple - Aviation Articles and Commentary - Swelblog / Swelbar on Airlines

Reader Comments (5)

Evolve, dissolve or be outflanked by increasingly agile and successful withering, direct connect initiatives.

03.29.2011 | Unregistered CommenterAirBoss

Philosophy is all well and good, but from a personal standpoint, I no longer fly American, because they are no longer in Orbitz. It's as if they no longer exist. Customers want to select from the fares being offered by all carriers in one convenient location, and anybody who isn't a participant is going to miss out. Who else besides me no longer books American because theyir flights are no longer listed on the GDS sites? That will determine American's success in taking the distribution of their product back in-house.

03.31.2011 | Unregistered CommenterGSB

“Name a financially successful industry that turns over control of its inventory to an intermediary.”


Yes, there is at least one successful industry that has to turn over its inventory to an intermediary. Alcohol distillers cannot sell directly to retailers and must use a broker. We consumers know of these brokers as distributors but they are undoubtedly middlemen. The last time I looked, alcohol distilling was a profitable business with better margins than any airline I know of.

Alcohol distributors are given more power than the distillers themselves have. A broker has absolute control over a product. They can place and market it at major retailers or back shelf a product at a Mom and Pop liquor store.

Brokers get rich for… well, being in the middle. Nevertheless, Johnny Walker is raking in even bigger bucks, which does take some ouch out of Government mandates.

One might get the feeling from this that our Government looks on air travel as a vice, after all, the tax an average airline passenger pays Uncle Sam is a sin and jet engines can be run on ethanol.

Maybe Jim Beam should buy and airline. The infrastructure is already in place and when we run out of oil, we can run airplanes on Bourbon.

04.1.2011 | Unregistered CommenterJR

I assume Mr. GSB doesn't fly on Southwest either. Southwest is one of the few airlines that doesn't use a GDS and yet they carry more passengers than any other US airline domestically. One reason for this is the myth Southwest has created in the traveling public's mind. "We have the cheapest fares". A lot of the time they are more expensive, and you can't compare their fares on travel sites like orbitz. With the internet Airline can much better control their inventory and not have to pay a "middleman" to sell their tickets. In my opinion, the GDS's are on their way out.

04.1.2011 | Unregistered CommenterBob Ina

Yes, the GDSes need to evolve. But that's not the only thing that must happen. The airlines are pretending that this is all about providing the best value to the customer and that simply isn't the case. They talk about making "cognitive" decisions based on knowing the buyer and insist that will be best for us. But then you get a guy from Delta acknowledging that they absolutely have some customers who are better than others. And the better customers get better deals. That's great if you're the better customer but if you aren't - and more to the point if you do not know that - then you run the very real risk of getting screwed.

I love the concept of complete transparency and the ability to integrate all the ancillary charges that come with travel into a single view that can compare the real price of travel rather than just the ticket price. And it would be great to have that information in a single search screen based on knowing who I am as a customer. But you have to trust that the airlines really are going to make you the best offer, not just the offer they think you're willing to accept. Without the ability to see what the other offers are - true transparency - it is hard to trust the airlines. Especially given their history, both long term and recent, of questionable actions that screw consumers.

http://boardingarea.com/blogs/thewanderingaramean/2011/04/lets-talk-airfare-and-distribution/

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