NB: This is a guest article by Michael Miller, vice president of strategy for the American Aviation Institute (on behalf of Take Travel Forward).
Today, airlines distribute and sell their products in two ways: through their websites/call centers (direct channel) or through travel agents and online travel sites (indirect channel).
Of the one billion or so airline tickets sold globally each year, it is estimated that more than 60% are sold through the airline indirect channel.
In the vast majority of the world, Sabre, Amadeus, and Travelport control the distribution of the airline product for the indirect channel.
The GDSs charge the airlines for each ticket sold through their systems, with the average charge being in the $12 per ticket range.
Multiply that $12 by 600,000,000 tickets per year and you get about $7 billion dollars. From these funds, the GDS pay the travel agency or online travel site a financial assistance incentive.
As a general comparison, it costs airlines about $2 to $3 per ticket to sell through their own websites or using new direct connect technology available to them, their travel agency customers and even to the GDS.
This provides an estimated 80% savings over the cost of the indirect channel. If the airline is paying $10 more per ticket to sell through the indirect channel, ultimately it’s the consumer that pays for that higher cost.
To quote leading business analyst Zvi Bar:
“…any resulting changes to the current GDS business model should lower prices to consumers and/or streamline the industry… The long term result should likely be a net positive for consumers.”
Clearly, the GDS companies are critical pieces of the travel supply chain and it is foolish to suggest they go away.
However, it is also fair to advocate for use of lower cost technologies and modernized business models that can lower costs across the board, including for consumers at the proverbial ticket counter.
This infographic simplifies the argument:
NB: This is a guest article by Michael Miller, vice president of strategy for the American Aviation Institute (on behalf of Take Travel Forward).
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The above is so true and change has been a long time coming. The GDS model was needed in the past, before computers were a common household machinery, and now with the the whole world being online it is crazy to think that this model could and should continue as is. It’s time for a major shake up, and I for one can’t wait.
However I doubt the savings will ever be seen by the consumer, I don’t remember seeing prices go down after airlines stopped paying commissions.
It is true that the industry needs to provide improved technology and drive down costs, the corporate buyers have a large voice. For us, bookings via travel management companies remain mandatory for vital Duty of Care directives. Converely, the resultant booking fees are highly resented by the traveller trying to reduce his department budget spend. Airlines need to come up with some new booking mechanisms that could provide modern Procurement directors with viable data and integrate with our risk management objectives. A tough call, but moving to a win-win result.
Nice article, Michael. Thanks for sharing your views.
I fully agree with you and the other people’s views above that it’s time other technology providers come forward and provide alternate and more economical distribution alternatives. The market really need a major “disruption” at this stage. Monopoly in distribution is effecting both the airlines (suppliers) and the consumers equally. The airlines struggle to reduce fares because of these costs and consumers travel (leisure) less and less in response. Only the fat middle man is getting fatter every day.
Sorry, not meant to start a sales pitch here but just for your information, my company is very actively working in this area and with some key partnerships we are offering alternate solutions already. Please see http://www.openjawtech.com/news/openjaw-technologies-announces-partnership-with-vayant/ for more details. This is initially for the airline’s direct channel but the capabilities are there (access to worldwide fares plus worldwide multi carrier inventory) already to extend this to the agency/OTA (multi carrier) model and we are working on it. So the disruption have already started and we are seeing good response from the market for all the known reasons you have mentioned before.
On the stats you have supplied above, the $12 per ticket GDS charge (also called GDS segment fees) would be true for the small to medium size carriers but as far as I know (correct me if I am wrong though), the big carriers have negotiated it down to around $3 to $4 dollar per segment (i.e. around $6 per ticket). But for sure it’s still very high and not sustainable for long considering the current economic turmoil and the ever fluctuating fuel costs.
Good analysis of the existing distribution model and its problems. However, the direct connect model currently being advocated by the airlines misses a key point. The GDSs provide many of the travel agents with a user interface to connect to their systems. While the OTAs may be able to use an API to connect, an API is of no value to the small travel agent. So, as well as a direct connect API, the airlines need to provide a direct connect user interface to the trade. So, a trade portal where the travel agents go to make their bookings. Even better than individual airline portals would be a central portal in which all of the airlines can have a presence.
John McQuillan– look up the history of the GDS:
http://en.wikipedia.org/wiki/Computer_reservations_system
Back when they started, a GDS fit your description (almost) exactly: “So, a trade portal where the travel agents go to make their bookings. Even better than individual airline portals would be a central portal in which all of the airlines can have a presence.”
Consumers, travel agents, metasearch engines and others will bombard this portal with search queries — what is the cost of the hardware, software, bandwidth and human capital to keep this portal running? What is the cost to upgrade the portal’s functionality, hardware and network every year?
Who will bear the cost of operating this portal? Consumers? Airlines? Government?
Michelle says, “I don’t remember seeing prices go down after airlines stopped paying commissions.”
Martin Jacobs agrees with her, “let’s all not line up & buy the herring on GDS cost savings. Remember, airlines already cut around $35 billion in distribution savings out of the model by ending travel agency commissions in the late 90s. Then the 2000s came, and they were all back to losing money again. They didn’t pass that $35 billion back to consumers. Don’t blindly assume that if every airline distribution savings wish came true, that they’d pass this $ 7b along to consumers either.”
Timothy O’Neil-Dunne attempts to rebuff these arguments by saying that fares didn’t rise in “real” dollar terms, they came down.
Let’s shove all of the pro-GDS and anti-GDS rhetoric away for a moment and ask the only questions that matter — What will it cost the airlines to build and maintain an alternative to the GDS? If it is so much cheaper, why don’t they build it and run it?
The debate about airline distribution costs is filled with disingenuous propaganda — that distribution costs are the ball and chain preventing airline profits from rising permanently into the stratosphere. The infographic above suggests that $7 billion goes from the hands of poor consumers straight into the net profit of the GDS companies. It makes no mention of the enormous costs of operating a global system with almost zero downtime and subsecond response times at massive scale.
None of this anti-GDS propaganda has ever, ever suggested what an effective replacement for the GDS looks like. And that’s because no one has a better or cheaper solution.
Every industry in the world has distribution costs. The sooner airline executives are disabused of their illusion that they should have no distribution costs, the better.
Sorry ignore my $6 per ticket calculation. I have rechecked my numbers and I think your $12 per ticket sounds quite right. For bigger carriers, it’s somewhat between $7.5 to $10 per ticket ($3 – $4 per segment as I mentioned before).
I believe that John McQuillan has a point. The industry does need to have a neutral technology platform for agency distribution in particular the small agencies.
There are several moves afoot to provide this. However I caution anyone thinking that this is purely a technology problem. It is not. All FCA – Full Content Agreement – contracts currently expressly prohibit distribution from those airlines who have signed them – engaging in such activity. Whether these are legal is a matter for legal experts and as we have seen, the courts to decide. Whether these are fair to any member of the value chain IE the airlines, the agencies, the technology players, the consumer or anyone who dares to challenge these 3 legacy GDS companies in my view is no longer a matter of conjecture.
Transparency of true cost is becoming the issue of concern. The DoT is proposing new regulations that will force disclosure by the airlines of incentives to travel agents. However the DoT should be also looking at the issue of GDS incentives to the agency community and what that does not just in adding cost – but in promoting inefficiency, ultimately harming the consumer.
If there was a free market for neutral distribution, I believe that there would be greater efficiencies and resulting lowering of cost of distribution. In my view it is highly possible to get the costs down to some very low numbers with even the current state of concentional open technology rather than the restrictive GDS monolithic distribution model. In the future those efficiencies can be realized when driven by technology. Sadly this is not the case.
Don’t get me wrong. I am a huge believer in the value of the agent in the equation. Provided it is done in a legal and fair manner.
As I said earlier, it would be so much easier if it was just a technology problem.
Cheers
In response to John McQuillan’s comment.
Agree fully and the concept of an open modern trade booking portal is brilliant, elegant, and innovative. We’re in when you can get the big three in.
I have a question in mind : When Airlines sell flight directly on their website, does it go throught the gds flow as well ?
Ok, answer is in the post, i read too fast
I’d like to hear more folks speaking from the corporate travel / TMC perspective on this in addition to the good comment from Mary above. Any others?
Good write-up and good presentation of the anti-GDS argument in the info graphic. But… How do you propose that, in the absence of a GDS, travelers and agencies can find and compare the fares and options from the 300 major airlines in a single place? How do you propose, in the absence of a single reservations system for the 300 airlines, that corporations who buy millions of dollars in airline tickets per year can manage corporate discounts and keep employees efficient while managing ticket cancellations and exchanges, unused ticket applications, safety and security reporting, and customer service while traveling?
I don’t disagree with the dynamics presented in this diagram but also don’t see a solution here to the very real challenges that the absence of GDS present. In fact, the counter argument to the cost-being-passed-to-consumers argument is that, in the absence of a GDS, the costs are just as high — in lost productivity and in the devil-in-the-details challenges of losing a central booking/changing/cancellation/management reporting channel for 300 disparate airlines.
Thanks for the good discussion!
A little bit of irony is that the GDS also provide PSS to airlines that include direct channel tech such as b2c/b2b booking engines.
Though in my view the B2B web engines are designed to be no serious challenge the GDS/TMC tie-up. Yet the airline are locked in to use them.
That seems ironic because airlines willingly lock themselves into the status quo which seems to dovetail nicely with the GDS strayegy.
I find somewhat dubious, bordering on insulting, the notion that without GDS fees “paid by the consumer” as part of the airline distribution chain, airlines would be selling tickets for lower prices. Does anyone really believe that an airline pays $ 12 a booking for a $ 250 ticket, but really WANTS to be paying $ 1 and selling that ticket for $ 11 less, or $ 239, so that they can- goshdarnit- pass that savings on to the customer?
Nonsense. What they’d like is to be collecting that $ 250, and paying $ 1 to get it, not $ 12, and therefore saving $ 11 per booking. Lower costs, higher margins, more profit….all without the consumer saving a fat nickel.
Unbundling fares makes relative sense. Take a $ 250 fare, remove the “baggage cost” and incentivize people to not bring more bags than they need by charging them, so you lower your fuel costs a bit and raise your revenues a lot by charging for those bags that people do bring.
Only, that $ 250 ticket with 2 free bags from 5 years ago didn’t become a $ 200 with two $ 25 bag fees for those people that needed to bring 2 bags, it became (due to reduced capacity and the resulting higher fares) a $ 275 ticket, with two $ 25 bag fees, so that $ 250 fare is now running you $ 325. The only thing that got unbundled there was your wallet, when they were taking cash out of it.
GDS savings are all well & good. Getting the industry out of 1960s technology is nice, reducing the travel agent knowledge barrier to entry is good, etc.
But, please, let’s all not line up & buy the herring on GDS cost savings. Remember, airlines already cut around $ 35 billion in distribution savings out of the model by ending travel agency commissions in the late 90s. Then the 2000s came, and they were all back to losing money again. They didn’t pass that $ 35 billion back to consumers. Don’t blindly assume that if every airline distribution savings wish came true, that they’d pass this $ 7b along to consumers either.
Southwest makes money when other lose it not just because of distribution savings (though it does admittedly help), but because they have proven to be a smarter airline that makes better decisions.
All while….wait for it….not even charging for bags! Or change fees!
I will take that challenge.
I agree with you that the airlines cut costs during this time. Whether the number is $35 billion or $10 billion – i absolutely agree that the costs were eliminated from the channel. 1995 is seen as the seminal year ;as that February Delta capped commissions for the first time. The rest we know is history. HOWEVER during this time the average price of an airline ticket fell and continued to fall. I recall (dont quote me – see below for the actual links!) that the average ticket price in real dollars for the USA was $350 in that year. By 2008 that number had fallen to below $300 again in real dollars. Therefore one could argue that the consumer did indeed benefit that the price fell during that time. However we all know that the price of the airline ticket was not in synchronicity with the costs of the airlines. And that has been part of the point.
Excluding ancillaries, which have indeed risen to I believe something in the range of $30 per ticket, the average US airfare price has also risen dramatically in recent years.
However the point that the GDS fees are costs for the airlines remains true. Reducing them will keep the costs to the airlines down and therefore they are either able to make savings to the consumer or they are going to make more profit. I think we all know that it will actually be a bit of both.
For full details on this – go to the US DoT official stats. http://www.bts.gov/xml/atpi/src/index.xml
I will just make one comment. I actually think the number $7bn is too low. GDSs collectively make more from the airlines. Just like the airlines they have learned that unbundling their fee structure allowed them to make more money from the airlines than before. Just look at Amadeus’s yield for example (its public data http://www.investors.amadeus.com/english/quartely_financial_info.aspx as is Travelport’s http://www.travelport.com/investor.aspx. Sabre’s is not. We should also be including Travelsky but their fees are much lower than the other 3 GDSs. Sometime in the next 2-3 years they will pass Amadeus in size IE number of transactions.
While the infographic is nice and illustrative – I would caution anyone on using this as hard data. Average number of segments per ticket vary wildly across markets.
I hope this adds to the conversation
Cheers
Let’s approach this fairly.
* What was the value or amount of distribution cost incurred by airlines in 1990? What was the same value in 2010?
* What was the profit or loss of the airlines in 1990? * What was the same value in 2010?
Values should be adjusted for inflation and airline capacity changes.
The bottom lines of the airlines should have moved upward by the amount of distribution cost that went out of the industry thanks to removing agency commissions, growth of the direct channel etc.
I am willing to bet that we will not find that airline bottom lines went up by at least exactly the amount of distribution cost that went out of the system.
Distribution cost is every airline exec’s favourite red herring, but the truth is that it is a very small portion of what causes airlines to lose money. The real costs are the cost of overcapacity, labour and oil. Take any airline’s cost components apart and distribution costs will appear positively minuscule compared to these three costs.
Baloney! If airlines don’t have to pay agent commissions, GDS fees, settlement fees, etc. by selling their own flights from their own websites, then WHY AREN’T *ALL* AIRLINE FARES CHEAPER when one buys then from their websites? Why does the airline get to pocket their cost savings instead of passing them on to consumers?
hey Tony – the last time I looked it was delta.com not delta.org
airlines are not a (not for profit) organisation. (although you wouldn’t know it given the balance sheets of many).
If there are no seats to sell there is no GDS. So I think it’s a matter of balancing the ROI on each channel and its any business’s right to move more inventory through those channels that give the best ROI.
That way the .com stays on the URL instead of .org
Oh really steve? Try Southwest and check out their web only Wanna Get Away fares, Don’ t they sell those cheaper that any fare bookable through a GDS? That’s a good example of savings from direct distribution savings passed on to consumers. I’ll give you another example. Head on to Cathay Pacific’s website. Check out economy fares to Southeast Asia. Then check the fares from your GDS. You’ll see that Cathay Pacific sells their online fares 10% cheaper (before adding tax). Yet another example of an airline passing the commission/gds savings to consumers. Next time Steve, check your real world data before writing irrelevant stuff.
Re: Hrush’s argument above… forgive me for putting it separately but I will be spanning several of the arguments.
So no rhetoric one way or the other. Let me focus on the issue of building an alternative to the GDS. I realize this is sensitive ground so I will attempt to be as objective and neutral about the issue as possible.
I have a fair level of experience in building and managing large scale reservation systems with high performance – sub-second response times etc etc. I believe therefore I speak from experience. Both inside and outside the current legacy based GDS systems.
There is no possible way to deliver that type of performance without making some kind of compromise. I have written frequently that the ability to provide the appropriate answer to the consumer is a freekin’ hard thing to do. Thus many compromises have to be made. At the back of the systems are a series of disparate latency issues which will mean that the results that we see are at least several seconds old – frequently they are hours old.
In the original design of the GDSs the latency and various other discrepancy issues were resolved using a contractual basis. IE to cover all the sins – the airline gave to the GDSs a blanket agreement that whatever they produced – if it was autopriced then the reservation is guaranteed. So the problems of invalid data, slow recs, no recs etc are all swept under the carpet. In the days before internet transparency this was a very good thing.
In the original designs that was a great way to address the latency issues. However it does promote inefficiency. Further it also means that the airlines and the GDSs have different but accurate prices. It is the latter problem that confounds search today. Because effectively we have about 5-6 different BUT GUARANTEED prices. This promotes additional and in my view unnecessary searching.
If we are to create a system where there is verified pricing as determined by the owners of the pricing – then we would eliminate at a stroke a significant amount of wasteful activity that is driving massive volumes of unnecessary traffic. I have proposed such a design several times. Both the airlines and the GDSs seem to be against this idea for differing reasons I wont go into here. However – from a purist perspective – a verifiable single source of pricing (note I did not say fares) would be of immense value to the market and increase customer trust.. The Low Cost Carriers do this and don’t have a problem with controlling their pricing.
The article here was about the issue of how much the GDS fees are excessive. I believe that this is but part of the conundrum of distribution. Are they good at what they do? Of course they are! Is this the best way to distribute airline product neutrally? I believe the answer is no. And besides… it would require ubiquity and neutrality. After playing with reservations systems for the better part of 30 years I can assure you that this is not the case.
Sadly until this issue of verifiable pricing is resolved we will continue to have these conversations and discussions with a certain degree of vested interests on all sides. In my view the way out of here is a standardized form of pricing. If we had that – the world could move to truly dynamic based market fares. The game of search would be simplified. And the consumer would be able to choose based on real pricing rather than the rather fake pictures we have today.
Till then – issues of whether the traditional GDSs have a good solution or not will remain unresolved.
However I do hope that there is no one out there who believes that the GDSs are the solution for search based on their technology design. The fact is that they work efficiently. Whether the fare is right or not seems to be lost in this debate.
Cheers.
Timothy
So, what is the right “price” for a replacement to the GDS system? And why don’t the airlines simply build a GDS replacement under shared ownership and shared costs?
Just like ATPCO is owned by the airlines, the replacement GDS can also be owned by the airlines. They can control everything–their pricing, their inventory, their direct and indirect channels and whatever else they want to control.
Why don’t they just do it?
What’s that? They already tried that before? The original GDSes were all airline owned? Orbitz was airline owned? Opodo was airline owned?
Those who ignore history are doomed to repeat it. We’ve seen this movie before, twice before — first with the GDSes, next with the airline-owned OTAs.
There are many, many business and technology problems in airline distribution. “Distribution costs” may be the airlines’ favourite whipping boy, but that’s all. Put the posturing and the rhetoric aside and everyone can see that distribution costs do not make it to even the top three problems that airlines face today.
Tony – they are good examples and I agree with you; that it’s good brand building for airlines to pass on these savings. My point being it’s the airlines commercial perogative to decide the level of savings that are passed on.
I think these examples are still driven by the Airlines desire to maximize ROI on their direct channels. But perhaps ROI should be measured over the longer term relationship with that customer rather than a single transaction.
Basically the article is correct. I don’t want to go into details for the exact amount of segment payments as they are called, since they vary from airline to airline and from fare to fare. There are some fares that are not eligible for segment payments.
As a member TMC of the RADIUS network I would like to point out one more thing. This is about transparency. Bottom line it makes no difference if corporations are charged with a somewhat lower transaction fee because of the segment payment, or that they would end up with a higher fee when segment payments are lacking.
With a vast majority of our customers we make a complete and transparent calculation of operational costs, overhead and income streams like commissions, overrides and segment payments. Leave alone mark-ups on fares. Once our industry refrains from being so intransparent, it really makes no difference. It the end it is only about added value to the customer and wether or not he is willing to pay for services rendered.
If we feel we have the right of existence because we can continue to cheat on our customers, we re dead wrong.
To address one of the elephants in the room, why if its only 3% are airlines focused on GDS costs?
I was hoping we would have an airline address the question but it seems there are none who want to step up to the plate.
Consider the big 3 costs.
Fuel
Labour
Capital Equipment
Then consider the other major costs for an airline such as Airport charges. (As a frame of reference look at the top 50 debtors in AA’ss bankruptcy filiing).
These are all fixed and non-controllable.
When you then ask the question a little differently to wit:
What are the largest non-fixed costs that are (or should be) within an airline’s control, then distribution costs bubble up to the top!
Of these costs there are two – Credit cards charges and GDS fees, both of which are rising.
However while this is a cost issue I don’t believe it actually matters whether its a large or small percentage. Mind you $7 billion – which I think is a low estimate – is nothing to be sniffed at as other’s have pointed out). The real issue is one of control. That fact that the airlines are not in control of a significant part of their distribution and it goes through a channel controlled by someone else is the bigger issue.
Some airlines are OK with this. Some are adamant that they do not wish to pay for that. Lccs as a class are in the latter category.. None are enthusiastic about it and clearly most are very unhappy about the situation.
I do hope an airline will step up and comment on this topic. Oh wait maybe they cannot because they are gagged by GDS NDAs… hmmmm that’s an interesting thought. With Sabre employing more than 100 lawyers to protect their position in their battle with AA, it would seem that there is one heck of a lot the GDSs don’t want the rest of us to know about.
Cheers
And now try to imagine situation in China, where is only one GDS
Interesting discussion happening here.
It’s so true that distribution cost doesn’t top the airlines total cost. It’s obviously the fuel that comprises 30% of cost. But distribution cost cannot be ignored seeing the 7 billion dollar cost reported in this article. While a GDS alternative is a viable option theoretically, I see GDS not going away at least in next 5 years.