It has never ceased to surprise me how little time the chain studies its partners, clients and perceived competitors. They are all intertwined in activities right the way from the traveller to the front end supplier yet history demonstrates that they do not understand the people they depend on or those they want to replace.
A good example would be say an airline that wants to replace a TMC or GDS which is quite topical at the moment. Now the black and white capability is there in the shape of enabling technology but the real world is in colour and of different shades and complexity. Technology systems are the beginning of the road not the end of it, an enabler not the solution. But some folks just plough on anyway and seem genuinely shocked at the push back
I am convinced this happens because the players have not set the right priorities into understanding all of the things the other components do. Instead they blindly follow their ‘ideal scenario’ strategy and attempt to bludgeon it into the marketplace. Sometimes this just might work in parts but the risk of fall-out is great with the potential of lasting commercial or competitive damage. They should also realise by now that the other members in the chain are anticipating their moves and building detours and opportunities around them.
These thoughts are not here to try and dissuade the chain from evolving and diversifying, after all that is progress. What I am saying instead is that this industry needs to understand itself and its component parts a lot clearer. For example, has any airline ever taken the time (and at the right level) to examine what it’s ‘partners’ do in detail? To sit down and better evaluate the chain reaction of planned strategy and thereby have answers to the issues that will surely arise? They might even find ways that benefit, or at least soften the blow to the rest of the industry.
The way some current players go about change is simply not savvy. They know what they want and charge at it, usually with disappointing results. A bit more thought, understanding, broader knowledge and early dialogue just might form a better basis for progress. And for heavens sake remember that the world has multi markets, technologies languages and cultures. Head offices in their ‘ivory towers’ in the USA, UK, Germany and The Far East can pontificate and plan as much as they like but to little avail if their decisions simply are unworkable elsewhere. Instead they can do major damage.
So my plea is to stop, think, research a great deal, understand the players/competitors better and look way beyond the first hurdle and towards the end-game. I still maintain that the major industry bodies should be driving this understanding. Perhaps if they had less back slapping, money making, selling type conferences and more distribution, supply chain summits they would make a bigger contribution.
Showing posts with label travel distribution. Show all posts
Showing posts with label travel distribution. Show all posts
A Distribution Prediction
Perhaps if you want to understand some of the practicalities of the airlines planned change over to direct connect you could look at the current hotel booking model and how it does (or does not) work. To me the hotel model is where the airline industry is heading. Let me explain.
Money and strategy matters aside the consolidated ‘one stop shop’ offering provided by the Global Distribution Systems (GDSs) is perfect for customers and intermediaries alike. You do not have to go to numerous different ‘shops’ to buy your airline product. Shops that have different languages, booking methods, rules and reporting. It is all there for you in one common language package with little diversity or complication.
Now hotels are totally different and far more difficult to package. Each location can be independent, owned by a chain, part of a consortium and sometimes a mixture. Each speak a slightly different version of the same language and they very rarely sell their inventory through a GDS because they are too expensive. Instead they do their own thing via many different outlets at many different tariffs. Frankly it is all a bit of a mess if you want a properly managed travel programme, particularly as they use differing technology.
So what is happening with hotels now and how does it compare with the current GDS system? In the main TMCs must have some kind of ‘connection’ (either direct or via third party) with key hotel establishments and chains. Some TMCs have created their own databases to hold inventory and information that then gets linked up to the GDS air booking screen. It ends up all looking like one source but contains numerous connection types that range from online links to manual entry.
The TMC has to create room allocation acquisition and management systems that doubtless include room close-out periods and price variations by customer and intermediary. These need constant adjustment and repopulation to remain current.
Ultimately they end up with their own mini GDS for hotels with numerous information flows coming from a similar number of independent sources.
OK, back to airlines. They are necessarily a selfish bunch. They don’t want to pay for the current excellent consolidated air booking system any more. They just want to sell their seats in a way that gives them more power/control and less cost. They try and dress it up differently by saying it is what the customer wants which of course is laughable if it wasn’t so serious. I wish they would just come out and say the truth which is that they intend to eradicate this cost or pass it elsewhere.
Where might this end up? Some might call it industry evolution but I would call it going backwards. Instead of efficiency and commonality in air travel it will revert back to the hotel model of individual airlines operating at different speeds with different communication methods. They will deal through TMCs who also vary in skill and flexibility. There will be dual pricing and availability depending on which model you book through and which source you use. That is progress?
I am sure the GDS have explored all avenues to find a solution to being considered bad value for money by their airline customers. I have always thought that if they presented and justified their cost more intelligently, reduced prices strategically whilst building in new markets (such as hotels) they might do a lot better for all our sakes Either that or negotiate their wares with corporations/TMCs in a new and different way? After all people will pay if they see a value and surely it is better than the chaotic alternative illustrated by the hotel market?
The smart TMCs have seen this direct connect war coming. In fact you would have had to be blind not to. They have been building what they call ‘super platforms’ and the like in anticipation of it. I predict it is only a matter of time before the mega TMCs connect their ‘pipe’ to the main suppliers in the air and hotel world. In fact it is happening now. What happens then? Are the TMCs going to distribute inventory at no charge? I doubt it. They will most likely become the new GDS of the future but with broader product reach and more control on who the customer uses and at what price.
Perhaps the GDS and airlines need to get there heads together in more harmony or they may end up creating something that compares with Frankenstein’s monster. Built with various industry parts but likely to murder them!
Anonymous Comment:
Brilliant commentary. Mike has REALLY hit upon something important here.
Love the line about airlines wanting more control and less cost, "They try and dress it up differently by saying it is what the customer wants which of course is laughable if it wasn’t so serious. I wish they would just come out and say the truth which is that they intend to eradicate this cost or pass it elsewhere."
Again, brilliant analysis
Anonymous Comment
As ever Mike hits the nail on the head whilst other so called industry experts have a tendancy to hit their thumb with an oversize hammer. What is being described as more than likely to happen within the industry is in fact already work in progress; and perhaps further down the line than many (on all sides of the equation) would care to admit.
Money and strategy matters aside the consolidated ‘one stop shop’ offering provided by the Global Distribution Systems (GDSs) is perfect for customers and intermediaries alike. You do not have to go to numerous different ‘shops’ to buy your airline product. Shops that have different languages, booking methods, rules and reporting. It is all there for you in one common language package with little diversity or complication.
Now hotels are totally different and far more difficult to package. Each location can be independent, owned by a chain, part of a consortium and sometimes a mixture. Each speak a slightly different version of the same language and they very rarely sell their inventory through a GDS because they are too expensive. Instead they do their own thing via many different outlets at many different tariffs. Frankly it is all a bit of a mess if you want a properly managed travel programme, particularly as they use differing technology.
So what is happening with hotels now and how does it compare with the current GDS system? In the main TMCs must have some kind of ‘connection’ (either direct or via third party) with key hotel establishments and chains. Some TMCs have created their own databases to hold inventory and information that then gets linked up to the GDS air booking screen. It ends up all looking like one source but contains numerous connection types that range from online links to manual entry.
The TMC has to create room allocation acquisition and management systems that doubtless include room close-out periods and price variations by customer and intermediary. These need constant adjustment and repopulation to remain current.
Ultimately they end up with their own mini GDS for hotels with numerous information flows coming from a similar number of independent sources.
OK, back to airlines. They are necessarily a selfish bunch. They don’t want to pay for the current excellent consolidated air booking system any more. They just want to sell their seats in a way that gives them more power/control and less cost. They try and dress it up differently by saying it is what the customer wants which of course is laughable if it wasn’t so serious. I wish they would just come out and say the truth which is that they intend to eradicate this cost or pass it elsewhere.
Where might this end up? Some might call it industry evolution but I would call it going backwards. Instead of efficiency and commonality in air travel it will revert back to the hotel model of individual airlines operating at different speeds with different communication methods. They will deal through TMCs who also vary in skill and flexibility. There will be dual pricing and availability depending on which model you book through and which source you use. That is progress?
I am sure the GDS have explored all avenues to find a solution to being considered bad value for money by their airline customers. I have always thought that if they presented and justified their cost more intelligently, reduced prices strategically whilst building in new markets (such as hotels) they might do a lot better for all our sakes Either that or negotiate their wares with corporations/TMCs in a new and different way? After all people will pay if they see a value and surely it is better than the chaotic alternative illustrated by the hotel market?
The smart TMCs have seen this direct connect war coming. In fact you would have had to be blind not to. They have been building what they call ‘super platforms’ and the like in anticipation of it. I predict it is only a matter of time before the mega TMCs connect their ‘pipe’ to the main suppliers in the air and hotel world. In fact it is happening now. What happens then? Are the TMCs going to distribute inventory at no charge? I doubt it. They will most likely become the new GDS of the future but with broader product reach and more control on who the customer uses and at what price.
Perhaps the GDS and airlines need to get there heads together in more harmony or they may end up creating something that compares with Frankenstein’s monster. Built with various industry parts but likely to murder them!
Anonymous Comment:
Brilliant commentary. Mike has REALLY hit upon something important here.
Love the line about airlines wanting more control and less cost, "They try and dress it up differently by saying it is what the customer wants which of course is laughable if it wasn’t so serious. I wish they would just come out and say the truth which is that they intend to eradicate this cost or pass it elsewhere."
Again, brilliant analysis
Anonymous Comment
As ever Mike hits the nail on the head whilst other so called industry experts have a tendancy to hit their thumb with an oversize hammer. What is being described as more than likely to happen within the industry is in fact already work in progress; and perhaps further down the line than many (on all sides of the equation) would care to admit.
Who is the customer around here anyway?
OK, OK, I know. I said I was going to quit corporate travel and disappear into the mists of travel legend…or something like that. But it is so very hard! I am rather like Frank Sinatra was, or Michel Jordan is, where something happens which triggers off a new reason why the lure of starting again becomes too much.
The trigger for me was American Airlines president Tom Horton and a guest article he wrote for ‘The Beat’ on ‘Customizing the Travel Experience’. Right, it was the expected sanitized statement that had no doubt done the rounds of the AA public relations department before release but it made one thing screamingly clear to me. That is, who American Airlines think their customers are.
They are clearly playing their ‘customer’ card. In fact in a smallish statement of circa 800 words they had used the term (and derivatives) at least 15 times before I gave up counting. Reading the words of the article it is also clear that by customer they refer to travellers and the choices AA are offering these individuals. In contrast he used the word ‘corporate’ once (that I saw) and that was referring to ‘travel agents’ customers.
Does this matter? Is it a simple slip? Or does it show a complete lack of recognition, empathy, and understanding with the corporate travel world? After all, do corporations really want their travellers to have all these extra choices at an extra price? Do they want the lack of control that this brings to their travel policy? Do they want the extra expense taken out of their control for potentially both bookings and ancillaries?
Does it matter that the president of AA still thinks of such a key intermediary as a ‘travel agent’ when the corporate service provided is now Travel Management hence the correct and more accurate term TMCs. This may sound like splitting hairs but is it. Or is it more that? Is it AA demonstrating a worldwide apathy amongst airlines to accept that the corporate world is changing around them?
So what is this ‘customizing’ all about? To me it is about the airlines tweaking the evolving business market to their own advantage whilst ignoring the needs/demands of a major sector of their market. Is that such a surprising thing? Probably not but I cannot bear all this sugar coating around what is actually some very unpleasant tablets. Here are some examples:
We don’t want to pay the GDS any more even though it is the medium of choice for those ‘travel agents’ corporate customers. We do not seem to be able to renegotiate a deal with these GDS so let’s provide a direct product. OK it is not what corporates want but hey, think of the savings, the control, the MI and the ancillary selling opportunity.
We have been badly stung by the inroads ‘no frills’ airlines have made in our markets. Fares have gone down and their shares have increased, but hang on, there is an opportunity here. These airlines have reached critical mass to the point where they have to add more charges to maintain growth and survive. They are not the threat they were and we can now use their weapons against them. We too can offer basic core prices and then bolt on all those other ancillaries to mask the true cost.
It seems to me that corporations themselves are helping (or at least not hindering) such strategies. Corporations seem to like unbundling as it works in other spheres of procurement. But does it work in travel? Ah, that is far more complex and has greater ramifications in the supply chain. Cost has a habit of moving, not disappearing.
I suggest corporates need to have a much greater influence in the travel industry. Their associations need visibly shift away from their suppliers who they use to subsidise their costs through sponsorship and advertising. These bodies need to push their way to the table which is totally dominated by the major suppliers. They need to be heard and recognised.
Suppliers need to understand that the world has moved on and that the ‘customer’ in the corporate world is the company itself and not its employees. Those intermediaries such as TMCs are not simply booking travel agents but an outsourced arm of their corporate customer. Only then will we have a successful transition to a new model.
The trigger for me was American Airlines president Tom Horton and a guest article he wrote for ‘The Beat’ on ‘Customizing the Travel Experience’. Right, it was the expected sanitized statement that had no doubt done the rounds of the AA public relations department before release but it made one thing screamingly clear to me. That is, who American Airlines think their customers are.
They are clearly playing their ‘customer’ card. In fact in a smallish statement of circa 800 words they had used the term (and derivatives) at least 15 times before I gave up counting. Reading the words of the article it is also clear that by customer they refer to travellers and the choices AA are offering these individuals. In contrast he used the word ‘corporate’ once (that I saw) and that was referring to ‘travel agents’ customers.
Does this matter? Is it a simple slip? Or does it show a complete lack of recognition, empathy, and understanding with the corporate travel world? After all, do corporations really want their travellers to have all these extra choices at an extra price? Do they want the lack of control that this brings to their travel policy? Do they want the extra expense taken out of their control for potentially both bookings and ancillaries?
Does it matter that the president of AA still thinks of such a key intermediary as a ‘travel agent’ when the corporate service provided is now Travel Management hence the correct and more accurate term TMCs. This may sound like splitting hairs but is it. Or is it more that? Is it AA demonstrating a worldwide apathy amongst airlines to accept that the corporate world is changing around them?
So what is this ‘customizing’ all about? To me it is about the airlines tweaking the evolving business market to their own advantage whilst ignoring the needs/demands of a major sector of their market. Is that such a surprising thing? Probably not but I cannot bear all this sugar coating around what is actually some very unpleasant tablets. Here are some examples:
We don’t want to pay the GDS any more even though it is the medium of choice for those ‘travel agents’ corporate customers. We do not seem to be able to renegotiate a deal with these GDS so let’s provide a direct product. OK it is not what corporates want but hey, think of the savings, the control, the MI and the ancillary selling opportunity.
We have been badly stung by the inroads ‘no frills’ airlines have made in our markets. Fares have gone down and their shares have increased, but hang on, there is an opportunity here. These airlines have reached critical mass to the point where they have to add more charges to maintain growth and survive. They are not the threat they were and we can now use their weapons against them. We too can offer basic core prices and then bolt on all those other ancillaries to mask the true cost.
It seems to me that corporations themselves are helping (or at least not hindering) such strategies. Corporations seem to like unbundling as it works in other spheres of procurement. But does it work in travel? Ah, that is far more complex and has greater ramifications in the supply chain. Cost has a habit of moving, not disappearing.
I suggest corporates need to have a much greater influence in the travel industry. Their associations need visibly shift away from their suppliers who they use to subsidise their costs through sponsorship and advertising. These bodies need to push their way to the table which is totally dominated by the major suppliers. They need to be heard and recognised.
Suppliers need to understand that the world has moved on and that the ‘customer’ in the corporate world is the company itself and not its employees. Those intermediaries such as TMCs are not simply booking travel agents but an outsourced arm of their corporate customer. Only then will we have a successful transition to a new model.
What happens when TMCs become GDS?
It must happen to a greater or lesser extent if American Airlines create a model that succeeds and then gets rolled out across the industry. The only way that TMCs will be able to give their customers what they want will be to direct connect with every key supplier and, as such, become mini specialist GDS in their own right. It will cost them a lot in time, resource and money despite what some AA loyalists say and you can bet your bottom dollar they will want it back with interest.
So how will such an event impact the balance of power in the travel supply chain? I think it will affect it significantly. Obviously the GDS will not simply sit back and let it happen and I am sure there is intense discussion and negotiation going on as I write.
However let us just pause for a minute and reflect on the following statements:
1) Despite airlines best efforts the TMC world still has considerable value to their corporate clients and will be hard to dislodge unless they do all the things TMCs do.
2) TMCs have been preparing their own strategies by building their own booking platforms that can be directed to be very specific on what choices they offer.
3) If airlines direct connect to these platforms they may be stepping out of the frying pan and into the fire as far as power balance is concerned.
The GDS are too darn expensive and working with a defunct, unjustifiable pricing model. I think many of us believe that and I can see why airlines are getting sick of paying sector fees even for cancellations and suchlike. The only thing is that GDS have a value to them and this value may be provided by TMCs in future. If you receive a value you can expect it to cost you as the TMCs will not give such distribution capability away for nothing. On top of that they will have their own platforms overlaying it which will allow dynamic pricing and availability control.
My message to airlines is to look at the broader implications of their actions. Remember how some thought GDS were great to own once. And how ownership, encouragement and support of OTAs were expected to reduce not increase cost. Not a great track record so far so look at your next step very carefully!
So how will such an event impact the balance of power in the travel supply chain? I think it will affect it significantly. Obviously the GDS will not simply sit back and let it happen and I am sure there is intense discussion and negotiation going on as I write.
However let us just pause for a minute and reflect on the following statements:
1) Despite airlines best efforts the TMC world still has considerable value to their corporate clients and will be hard to dislodge unless they do all the things TMCs do.
2) TMCs have been preparing their own strategies by building their own booking platforms that can be directed to be very specific on what choices they offer.
3) If airlines direct connect to these platforms they may be stepping out of the frying pan and into the fire as far as power balance is concerned.
The GDS are too darn expensive and working with a defunct, unjustifiable pricing model. I think many of us believe that and I can see why airlines are getting sick of paying sector fees even for cancellations and suchlike. The only thing is that GDS have a value to them and this value may be provided by TMCs in future. If you receive a value you can expect it to cost you as the TMCs will not give such distribution capability away for nothing. On top of that they will have their own platforms overlaying it which will allow dynamic pricing and availability control.
My message to airlines is to look at the broader implications of their actions. Remember how some thought GDS were great to own once. And how ownership, encouragement and support of OTAs were expected to reduce not increase cost. Not a great track record so far so look at your next step very carefully!
The Evolution of Air Distribution – The Story so Far
Now you are going to need to bear with me on this. Blogs are supposed to be brief and incisive but this one won’t. I just think that perhaps too many people assume that everyone knows about air distribution history and, by extension, fully understands the dynamics in play. I am not sure this is the case (why should they) so here is my understanding of how we got to where we are now.
It would take a book not a blog to go into the full detail and rationale so I will content myself and your patience by picking out the key players and change milestones in what will be a summary of what has happened and who are the movers and shakers. I think the customer needs to know the basics especially as they are ultimately paying unless they can do without at least one of the current cogs in the distribution mechanism.
Initially there was not much of an issue. The airlines worked in concert with each other and their supply chain and basically paid for everything required to distribute their product. They paid merchant fees to card companies, commission to agents (no such things as TMCs then) and fees to the GDS. Having picked up all these tabs they then sold their tickets with these costs built in to their fares. All of them did it so there was no problem Simple and reasonably effective in a well regulated, stable and growing travel market where little true competition existed.
As an example (and it varies hugely by area) airlines paid agents 10% commision and between 3 to 30% override, 1.5-3% card fees and 4% to 6% GDS charges.All of that bundled into the end ticket price.
Then things changed. Airlines expanded their route structures and became far more competitive with each other. The first sign of change was when ticket prices started to diversifyfrom airline to airline. In order to attract increasingly fickle travellers a fare differentiation was required. Carriers moved away from simply discounting their standardised global gross fare pricing and introduced corporate nets, yield managed specials and additional one-off deals.In one class alone you could end up with over a dozen fares each with their own restrictions and availability allocations.
The result was twofold. Firstly the ability to interchange tickets between airlines disappeared and secondly the need to mitigate pricing concessions made them look harder at their costs. Their distribution costs to be precise.
They found themselves in a real dilemma. The need to compete and discount was obviously threatening their profits (what there were) and simultaneously two other things happened. Low cost carriers with a totally different price model arrived who had to worry far less about convenience, timetables, airport locations and service which in turn encouraged corporations to view travel in a far more commoditised way. So, on one side they had to compete with carriers with a considerably lower cost base/tariff and on the other, a customer with a much harder stance towards price.
What became clear was that they could not continue paying the full cost of distributing their products whilst competing with new entrant pricing combined with more savvy buyers.Something had to give and what ‘gave’ was the air distribution model. After all, if you cannot beat the no frills airlines and professional buyers then the only option was to join them and challenge elsewhere in the travel merry-go- round.
I think their objectives were a mixture between the sound and the inevitable. The markets had clearly changed and if the end customer really wanted transparency and a lower cost model then give it to them. Whether they really wanted or needed it in the first place is a discussion for another day. Many of the arguments today are revolving around the desire for commoditisation coming head to head with the necessity for flexibility and uniformity of information and access.
There is another key influencing factor which is technology. Part of the reason why the main airlines feel both desirous and capable of change is that, for the first time there are other potential technology solutions out there. That is to say they are there if, and only if, the end users really do expect them to act individually rather than collectively with other provider’s inventory. Hence the current pressures on the GDS who provide all encompassing booking services and charge a high price for doing so. There is no way any individual airline can provide the diversity and product span that a GDS does.
The airlines (individually and at varying speeds) have called time on paying full distribution costs for all services to all customers. Unfortunately I do not see their goal as eradicating such costs. Their objective is to find what they see is the right home for these costs and then try to ensure the savings are not taken away by having to reduce prices to compensate the travellers, who will undoubtedly have to pay. Unless as I mentioned earlier a cog taken out of the distribution wheel. but which one?
So are there any expendable cogs? In some sectors of the market then probably yes. However, only if people recognise what they want and are prepared to accept the consequences and constraints of such. I think the line will be drawn between those corporations that want a controlled, managed and reported programme and others that choose a more deregulated approach where cheapest flights and few management ‘frills’ are acceptable.
If you want travel management you need knowledge and control. In order to do this you need someone to consolidate travel in all forms and package it into controllable chunks from as few sources as possible. At present this is best done through a GDS booking system, a travel management company and a mandated card programme. You take overall control of your travel, accept the price of doing so and form the right balance between value and all the other broader elements that complement your company ethos. Does anybody with a travel programme really want to run around numerous individual online airline sites and compare them when a GDS already does that in a one-stop environment?
On the other side if you want to maximise trip by trip savings there is no reason why approaching the cheapest distribution source and exploiting it until another one comes along is not the right way. To be frank the cheapest booking cost would be by going to an airline direct either independantly or through a TMC which is why carriers like American Airlines, Lufthansa etc are differentiating pricing and availability dependant on where the booking comes from. It does not by any means guarantee that overall trip price will be lower but the reservations element may be.
What I am begining to see happening is that airlines are finally differentiating between varying corporate needs and handling them individually. This part I applaud even though it has taken a long time and has a way to go. They are beginning to see the contrast between travel management and the very different service provided through Online Booking Agencies (OTAs) which, despite all the hype, focus on a different and smaller market that has a different list of demmands. It is this SME market and the OTAs that service them that are taking the brunt of current airline initiatives. The rest will follow.
Before I conclude let me set out the distribution milestones again as I see them:
1) Airlines have mainly eradicated standard agency commission payments but have failed to stop override and incentive payments. Whilst not totally successful it has enabled them to target better those they want to reward to a greater and more productive effect.
2) Agents responded by passing their new costs to the corporations by changing their contracts to management/transaction fees. End result? Most agencies protected their income and some grew it by ensuring remaining income from the airlines stayed with them and not passed on within their client deals. Airlines were forced to reduce prices to compensate customers.
3) GDS/Airline negotiations became far more aggressive. When you look at what airlines have to pay them, even for passenger cancellations and suchlike it is hardly surprising. Some airlines started charging TMCs for certain bookings to gain compensation. TMCs passed these costs on to the corporations but are still incentivised by GDSs which make airlines pretty mad as it is their fees that are funding them.
4) Various airlines changed some of the remaining IATA regulations regarding payment to shorten credit terms with TMCs and escalate penalties for perceived non compliance. A very much hidden cost that again the customer ended up collecting.I find it quite alarming how much cost comes into the chain via IATA and its interpretation of their own rules.
5) Credit/charge card usage has increased because of 4) as individual countries cut agency credit by 50% or more meaning TMC passed on the casflow deterioration to customers resulting in this migration to plastic . Ironic really as this area is very much a top target for airline cost reduction. Cards, like GDS charge wide and varying merchant fees to suppliers and these will be attacked robustly and very soon.
Where will this evolution take us? Airlines will continue fighting distribution costs. Instead of taking them all and then charging travellers through price they will try to dump them and leave the customer to pay separately. Meanwhile they will compensate by offering lower cost alternatives to those prepared to book direct. The battlefronts will be GDS fees, credit card merchant fees, cost of credit, TMC incentives and service deliverables. The customer will get what they say they want which is transparency and a unit price for everything. Currently I do not believe actual cost will go down. It will simply be realigned and will probably go up. If prices go down any further then there will be less suppliers, less choice and devolution not evolution.
It does not make sense that suppliers should pay for everything and then charge a correspondingly high price. Equally it does not make sense that the traveller gets all the bills and tries to negotiate their way out of them. I expect it is the way of the world and will provide yet newer business opportunities but regrettably the same old regurgitating costs.
It would take a book not a blog to go into the full detail and rationale so I will content myself and your patience by picking out the key players and change milestones in what will be a summary of what has happened and who are the movers and shakers. I think the customer needs to know the basics especially as they are ultimately paying unless they can do without at least one of the current cogs in the distribution mechanism.
Initially there was not much of an issue. The airlines worked in concert with each other and their supply chain and basically paid for everything required to distribute their product. They paid merchant fees to card companies, commission to agents (no such things as TMCs then) and fees to the GDS. Having picked up all these tabs they then sold their tickets with these costs built in to their fares. All of them did it so there was no problem Simple and reasonably effective in a well regulated, stable and growing travel market where little true competition existed.
As an example (and it varies hugely by area) airlines paid agents 10% commision and between 3 to 30% override, 1.5-3% card fees and 4% to 6% GDS charges.All of that bundled into the end ticket price.
Then things changed. Airlines expanded their route structures and became far more competitive with each other. The first sign of change was when ticket prices started to diversifyfrom airline to airline. In order to attract increasingly fickle travellers a fare differentiation was required. Carriers moved away from simply discounting their standardised global gross fare pricing and introduced corporate nets, yield managed specials and additional one-off deals.In one class alone you could end up with over a dozen fares each with their own restrictions and availability allocations.
The result was twofold. Firstly the ability to interchange tickets between airlines disappeared and secondly the need to mitigate pricing concessions made them look harder at their costs. Their distribution costs to be precise.
They found themselves in a real dilemma. The need to compete and discount was obviously threatening their profits (what there were) and simultaneously two other things happened. Low cost carriers with a totally different price model arrived who had to worry far less about convenience, timetables, airport locations and service which in turn encouraged corporations to view travel in a far more commoditised way. So, on one side they had to compete with carriers with a considerably lower cost base/tariff and on the other, a customer with a much harder stance towards price.
What became clear was that they could not continue paying the full cost of distributing their products whilst competing with new entrant pricing combined with more savvy buyers.Something had to give and what ‘gave’ was the air distribution model. After all, if you cannot beat the no frills airlines and professional buyers then the only option was to join them and challenge elsewhere in the travel merry-go- round.
I think their objectives were a mixture between the sound and the inevitable. The markets had clearly changed and if the end customer really wanted transparency and a lower cost model then give it to them. Whether they really wanted or needed it in the first place is a discussion for another day. Many of the arguments today are revolving around the desire for commoditisation coming head to head with the necessity for flexibility and uniformity of information and access.
There is another key influencing factor which is technology. Part of the reason why the main airlines feel both desirous and capable of change is that, for the first time there are other potential technology solutions out there. That is to say they are there if, and only if, the end users really do expect them to act individually rather than collectively with other provider’s inventory. Hence the current pressures on the GDS who provide all encompassing booking services and charge a high price for doing so. There is no way any individual airline can provide the diversity and product span that a GDS does.
The airlines (individually and at varying speeds) have called time on paying full distribution costs for all services to all customers. Unfortunately I do not see their goal as eradicating such costs. Their objective is to find what they see is the right home for these costs and then try to ensure the savings are not taken away by having to reduce prices to compensate the travellers, who will undoubtedly have to pay. Unless as I mentioned earlier a cog taken out of the distribution wheel. but which one?
So are there any expendable cogs? In some sectors of the market then probably yes. However, only if people recognise what they want and are prepared to accept the consequences and constraints of such. I think the line will be drawn between those corporations that want a controlled, managed and reported programme and others that choose a more deregulated approach where cheapest flights and few management ‘frills’ are acceptable.
If you want travel management you need knowledge and control. In order to do this you need someone to consolidate travel in all forms and package it into controllable chunks from as few sources as possible. At present this is best done through a GDS booking system, a travel management company and a mandated card programme. You take overall control of your travel, accept the price of doing so and form the right balance between value and all the other broader elements that complement your company ethos. Does anybody with a travel programme really want to run around numerous individual online airline sites and compare them when a GDS already does that in a one-stop environment?
On the other side if you want to maximise trip by trip savings there is no reason why approaching the cheapest distribution source and exploiting it until another one comes along is not the right way. To be frank the cheapest booking cost would be by going to an airline direct either independantly or through a TMC which is why carriers like American Airlines, Lufthansa etc are differentiating pricing and availability dependant on where the booking comes from. It does not by any means guarantee that overall trip price will be lower but the reservations element may be.
What I am begining to see happening is that airlines are finally differentiating between varying corporate needs and handling them individually. This part I applaud even though it has taken a long time and has a way to go. They are beginning to see the contrast between travel management and the very different service provided through Online Booking Agencies (OTAs) which, despite all the hype, focus on a different and smaller market that has a different list of demmands. It is this SME market and the OTAs that service them that are taking the brunt of current airline initiatives. The rest will follow.
Before I conclude let me set out the distribution milestones again as I see them:
1) Airlines have mainly eradicated standard agency commission payments but have failed to stop override and incentive payments. Whilst not totally successful it has enabled them to target better those they want to reward to a greater and more productive effect.
2) Agents responded by passing their new costs to the corporations by changing their contracts to management/transaction fees. End result? Most agencies protected their income and some grew it by ensuring remaining income from the airlines stayed with them and not passed on within their client deals. Airlines were forced to reduce prices to compensate customers.
3) GDS/Airline negotiations became far more aggressive. When you look at what airlines have to pay them, even for passenger cancellations and suchlike it is hardly surprising. Some airlines started charging TMCs for certain bookings to gain compensation. TMCs passed these costs on to the corporations but are still incentivised by GDSs which make airlines pretty mad as it is their fees that are funding them.
4) Various airlines changed some of the remaining IATA regulations regarding payment to shorten credit terms with TMCs and escalate penalties for perceived non compliance. A very much hidden cost that again the customer ended up collecting.I find it quite alarming how much cost comes into the chain via IATA and its interpretation of their own rules.
5) Credit/charge card usage has increased because of 4) as individual countries cut agency credit by 50% or more meaning TMC passed on the casflow deterioration to customers resulting in this migration to plastic . Ironic really as this area is very much a top target for airline cost reduction. Cards, like GDS charge wide and varying merchant fees to suppliers and these will be attacked robustly and very soon.
Where will this evolution take us? Airlines will continue fighting distribution costs. Instead of taking them all and then charging travellers through price they will try to dump them and leave the customer to pay separately. Meanwhile they will compensate by offering lower cost alternatives to those prepared to book direct. The battlefronts will be GDS fees, credit card merchant fees, cost of credit, TMC incentives and service deliverables. The customer will get what they say they want which is transparency and a unit price for everything. Currently I do not believe actual cost will go down. It will simply be realigned and will probably go up. If prices go down any further then there will be less suppliers, less choice and devolution not evolution.
It does not make sense that suppliers should pay for everything and then charge a correspondingly high price. Equally it does not make sense that the traveller gets all the bills and tries to negotiate their way out of them. I expect it is the way of the world and will provide yet newer business opportunities but regrettably the same old regurgitating costs.
Direct Connect – The first significant skirmish in a long campaign.
Christmas is supposed to be a time of peace and goodwill to all men but it also heralds the onset of a new year and, in turn, leads to encouragement of change. This can be illustrated by American Airlines who gave TMCs and their clients an early Christmas present of new cost and selected online agencies (OTAs) in particular to feel their power. The OTAs have started to respond with Expedia pulling American from their inventory. Obviously a lot more complex than that but you got the drift?
Immediately both sides are claiming victory. AA say their volume is growing and Expedia say they are not losing business. Meanwhile the travel world looks on at this test case. People really want to see if an OTA (or any TMC for that matter) can successfully move business or if airlines really can call all the shots. Whoever is perceived as the winner may set a radical trend in the industry and possibly change it considerably. Certainly if AA succeeds then many will follow after them
The trouble is that in reality this test of strength will prove very little in the business travel arena. Reason being that companies like Expedia hold only a pin prick of the worlds corporate travel market and the little they have is mainly towards the lower end in company size terms. In my personal opinion what American has done is picked a soft target to start with. The giant TMCs with their giant corporate accounts would be a different matter altogether. A smaller entity with a different client-base and business model is much easier quarry but one which they can get much tactical mileage from.
For instance how can anyone state at this very early stage that they are wining this argument? American says they grew in December. Big deal. This cannot be zeroed down to success in this issue. Growth compared to what? Has not economic recovery got more to do with it? How much of American’s corporate market share is Expedia anyway? Yet they sagely point to some meaningless figures.
I do not think there will be any winner in this but I can say with a fair degree of certainty that the argument is a precursor to major industry change. Is that so bad? Probably not but with all change there is pain attached. Pain moves around the supply chain as quickly as cost and usually goes full circle. The airline will add cost and work to the TMC, The TMC will go to their clients, increase their charges and tell them why. The big corporate will go to the airlines and mitigate their increased cost by demanding compensation through their deal. The model has changed. But has it really and to whose benefit?
Like everyone else I will watch with interest and try to read between the lines to see where this will take us. As for the forthcoming figures and rhetoric? I will take them all with a pinch of salt and suggest you do the same.
Immediately both sides are claiming victory. AA say their volume is growing and Expedia say they are not losing business. Meanwhile the travel world looks on at this test case. People really want to see if an OTA (or any TMC for that matter) can successfully move business or if airlines really can call all the shots. Whoever is perceived as the winner may set a radical trend in the industry and possibly change it considerably. Certainly if AA succeeds then many will follow after them
The trouble is that in reality this test of strength will prove very little in the business travel arena. Reason being that companies like Expedia hold only a pin prick of the worlds corporate travel market and the little they have is mainly towards the lower end in company size terms. In my personal opinion what American has done is picked a soft target to start with. The giant TMCs with their giant corporate accounts would be a different matter altogether. A smaller entity with a different client-base and business model is much easier quarry but one which they can get much tactical mileage from.
For instance how can anyone state at this very early stage that they are wining this argument? American says they grew in December. Big deal. This cannot be zeroed down to success in this issue. Growth compared to what? Has not economic recovery got more to do with it? How much of American’s corporate market share is Expedia anyway? Yet they sagely point to some meaningless figures.
I do not think there will be any winner in this but I can say with a fair degree of certainty that the argument is a precursor to major industry change. Is that so bad? Probably not but with all change there is pain attached. Pain moves around the supply chain as quickly as cost and usually goes full circle. The airline will add cost and work to the TMC, The TMC will go to their clients, increase their charges and tell them why. The big corporate will go to the airlines and mitigate their increased cost by demanding compensation through their deal. The model has changed. But has it really and to whose benefit?
Like everyone else I will watch with interest and try to read between the lines to see where this will take us. As for the forthcoming figures and rhetoric? I will take them all with a pinch of salt and suggest you do the same.
A Christmas Tale of Travel Distribution – 2
Cast of Characters:
Air Schizophrenia Services (ASS Air) – A major airline from Never Never Land.
Pass it on Travel (Past Travel) - A neurotic TMC who misses the old days
Scrooge Global Inc (Scroogey Inc) - A global corporation that hates travel budgets
Vera Merchant Fee ( VeraCard) - A credit/charge card that does not add up
Online Travel Agency (Ollie OTA) – Illegitimate love child of Air Schizophrenia.
IATAmania (Colin Cartel) - An airline association that interprets
the rules as they go along.
Globally Dysfunctional (Gordon GDS) – A misunderstood much maligned cog in
the Distribution wheel who nobody wants to pay
(Again, a work of absolute fiction and all the characters are simply a result of my overactive imagination)
It was a quiet peaceful Christmas Eve. It was mainly quiet because half a teaspoonful of snow had landed on the tarmac at London Heathrow causing the entire airport and access road infrastructure to go into meltdown and stop completely.
ASS Air barricaded himself in his office, switched off the passenger information announcements and tried to turn his mind away from the groaning, lamentation and anger coming from those selfish passengers in the departure hall. After all he had given them foil blankets so what were they moaning about?
Finally he decided to think back over the last year and consider what he might do in 2011. He tried to focus on all the fun things and the new friends he had made which lasted about 20 seconds so he then moved onto the progress he was beginning to make on distribution matters. He had quite a busy year in this area but he considered it mere positioning for what was planned for the coming year. He would show those vultures (I mean ‘partners’) a thing or two.
He started ticking off the successes and failures of the past. He congratulated himself for his success in transferring a major chunk of his own selling costs down the line. Who would have thought it could be so easy! Just put the squeeze and expense onto Past Travel and watch them ricochet onwards to Scrooge Inc. Job done! Except Scrooge being a savvy customer had let it happen in order to commoditise and claw back.
He was however beginning to understand Scrooge a lot better. It was difficult to start with but when he realised that old Scroogy played by different rules and was not impressed by his arrogance he found more subtle ways to play him at his own game. He discovered that as long as the up front price made Scrooge look good he could tinker away with the ancillaries rather like those ‘ghastly and common’ No Frills guys do.
It had been a shame about the black sheep of his family. After the wild euphoria of creating his very own online travel agency Ollie OTA had ultimately disappointed him. Now he had to try and undo the damage by putting him down in as humane way as possible. So off he had gone with his ‘content club’ and bludgeoned poor old Ollie as if he was a seal pup. Trouble was Ollie had a tougher infrastructure than he realised. ‘Memo to me’, he thought. Get in touch with Colin Cartel in IATA land and get him to come up with some kind of ‘creative’ rule interpretation to help me. After all good old Colin will do exactly what I say if he knows what is good for him. I am after all his boss.
That left just VeraCard and Gordon GDS to sort out. Both were thorns in his distribution sides but he was beginning to make serious progress. All he had to do was close his eyes to what travellers want and appeal to Scrooges desire for cheap nets and he would be nearly there. Vera would be much easier than Gordon. All he had to do was introduce a premium for using Vera (preferably higher than she cost) and watch old Past Travel do the rest. Scrooge would have to accept, especially if his competitor chums followed suit and they sure would like they always do.
Gordon GDS is another prospect entirely. Yes, Gordon is as anti change as he is and yes, he wants it all his way and yes, Gordon wants to increase his wealth not to diminish it. But like AssAir, Gordon does not appear to be able to come up with any more positive solution than more deep-seated intransigence. “Everything must change”, they cry, but not me! So Gordon hides behind the walls of Fortress Full Content while poor old AssAir tries to bash it down access brick by access brick. Meanwhile Scrooge and Pass It On shout for him to stop before they get hurt by the aftermath..
What a lovely time of the year Ass Air mused as he snuggled deeper into the ego massage machine chair that had been installed behind the double-locked steel door of his airport office. Have those damn passengers stopped snivelling he thought as he eyed the lovely looking ‘humble pie’ his cabin crew had cooked for him. No, he thought, I can always eat that when I absolutely have to and it will be Spring by then.
He reclined his lounger into bed mode and drifted into a blameless sleep.’ Oh what fun I will have next year’ he thought in his last moment of consciousness. But then he had a terrible dream. It involved all his antagonists sitting with him in a room sponsored by corporate travel trade associations and he was being made to cut a deal that would be fair for all and serving to the travel community.
But that really would be a fairy story….
Air Schizophrenia Services (ASS Air) – A major airline from Never Never Land.
Pass it on Travel (Past Travel) - A neurotic TMC who misses the old days
Scrooge Global Inc (Scroogey Inc) - A global corporation that hates travel budgets
Vera Merchant Fee ( VeraCard) - A credit/charge card that does not add up
Online Travel Agency (Ollie OTA) – Illegitimate love child of Air Schizophrenia.
IATAmania (Colin Cartel) - An airline association that interprets
the rules as they go along.
Globally Dysfunctional (Gordon GDS) – A misunderstood much maligned cog in
the Distribution wheel who nobody wants to pay
(Again, a work of absolute fiction and all the characters are simply a result of my overactive imagination)
It was a quiet peaceful Christmas Eve. It was mainly quiet because half a teaspoonful of snow had landed on the tarmac at London Heathrow causing the entire airport and access road infrastructure to go into meltdown and stop completely.
ASS Air barricaded himself in his office, switched off the passenger information announcements and tried to turn his mind away from the groaning, lamentation and anger coming from those selfish passengers in the departure hall. After all he had given them foil blankets so what were they moaning about?
Finally he decided to think back over the last year and consider what he might do in 2011. He tried to focus on all the fun things and the new friends he had made which lasted about 20 seconds so he then moved onto the progress he was beginning to make on distribution matters. He had quite a busy year in this area but he considered it mere positioning for what was planned for the coming year. He would show those vultures (I mean ‘partners’) a thing or two.
He started ticking off the successes and failures of the past. He congratulated himself for his success in transferring a major chunk of his own selling costs down the line. Who would have thought it could be so easy! Just put the squeeze and expense onto Past Travel and watch them ricochet onwards to Scrooge Inc. Job done! Except Scrooge being a savvy customer had let it happen in order to commoditise and claw back.
He was however beginning to understand Scrooge a lot better. It was difficult to start with but when he realised that old Scroogy played by different rules and was not impressed by his arrogance he found more subtle ways to play him at his own game. He discovered that as long as the up front price made Scrooge look good he could tinker away with the ancillaries rather like those ‘ghastly and common’ No Frills guys do.
It had been a shame about the black sheep of his family. After the wild euphoria of creating his very own online travel agency Ollie OTA had ultimately disappointed him. Now he had to try and undo the damage by putting him down in as humane way as possible. So off he had gone with his ‘content club’ and bludgeoned poor old Ollie as if he was a seal pup. Trouble was Ollie had a tougher infrastructure than he realised. ‘Memo to me’, he thought. Get in touch with Colin Cartel in IATA land and get him to come up with some kind of ‘creative’ rule interpretation to help me. After all good old Colin will do exactly what I say if he knows what is good for him. I am after all his boss.
That left just VeraCard and Gordon GDS to sort out. Both were thorns in his distribution sides but he was beginning to make serious progress. All he had to do was close his eyes to what travellers want and appeal to Scrooges desire for cheap nets and he would be nearly there. Vera would be much easier than Gordon. All he had to do was introduce a premium for using Vera (preferably higher than she cost) and watch old Past Travel do the rest. Scrooge would have to accept, especially if his competitor chums followed suit and they sure would like they always do.
Gordon GDS is another prospect entirely. Yes, Gordon is as anti change as he is and yes, he wants it all his way and yes, Gordon wants to increase his wealth not to diminish it. But like AssAir, Gordon does not appear to be able to come up with any more positive solution than more deep-seated intransigence. “Everything must change”, they cry, but not me! So Gordon hides behind the walls of Fortress Full Content while poor old AssAir tries to bash it down access brick by access brick. Meanwhile Scrooge and Pass It On shout for him to stop before they get hurt by the aftermath..
What a lovely time of the year Ass Air mused as he snuggled deeper into the ego massage machine chair that had been installed behind the double-locked steel door of his airport office. Have those damn passengers stopped snivelling he thought as he eyed the lovely looking ‘humble pie’ his cabin crew had cooked for him. No, he thought, I can always eat that when I absolutely have to and it will be Spring by then.
He reclined his lounger into bed mode and drifted into a blameless sleep.’ Oh what fun I will have next year’ he thought in his last moment of consciousness. But then he had a terrible dream. It involved all his antagonists sitting with him in a room sponsored by corporate travel trade associations and he was being made to cut a deal that would be fair for all and serving to the travel community.
But that really would be a fairy story….
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