In 2008, Delta announced its long awaited marriage to Northwest Airlines. In doing so it started in motion a chain of events that continues to define the market for the distribution of air products.
This is not just in the US, but also across the planet.¬†This had the effect to reduce the supply side equation by removing one of the most competitive players.
So, why mention this?
But there may be people inside both the Department of Transportation and the Department of Justice in the US who are going back and looking at the market and realizing that there has been a reduction in competition, with a resulting higher set of prices across the system that cannot be blamed on fuel prices alone.
Some background: the pinnacle of the conventional travel market was arguably around 1995/96 when the number of US agencies peaked at 55,000. Today there are fewer than 14,000 retail outlets (ARC figures).
The shutting off by different airlines of peripheral third party channels ‚Äď e.g. Delta’s cutting off AwardWallet and others, is also part of the same trend.
These factors point to real underlying shift. the market is now supply side, and no longer a demand side.
According to Airbus’s global market study, the US domestic capacity has fallen every year for the past four. This reduction in capacity is continuing with the latest winter 2012 schedule. Worse still for the consumer is Southwest’s decision not to add capacity, meaning there is no major disrupter on the supply willing to make the market more competitive.
The average ticket price is rising at a higher rate than the price of oil. And, indeed, when fuel is only one part of the equation and the shedding of jobs continues, you can see why some US carriers are now more profitable than they have ever been.
And now the airlines are slowly tightening the channels of distribution – the market power they have as a group has improved enormously.
So what about the consumer?
He or she can hardly tell if there is a specific channel – they just know it is complicated and get tired of looking. Please, just ask a consumer!
They doubt the results from websites because the results are seemingly all correct, but all different (so-called fare guarantees and the various caches that exist make for vastly different results at any one time).
The big issue here is that the consumer doesn’t really tell the difference from Expedia¬†or Kayak, they both do effectively the same thing as each other. ie you can complete a travel transaction. or search for a lead for one – the consumer probably¬†doesn’t¬†care if the fulfilment is on an airline’s site or that of an intermediary.
This, therefore, is a good time to jump in to the media search game for priceline. I suspect, however, the timing is driven by a number of factors.
- The apparent “win” by American Airlines over Sabre (and an earlier termination of the action involving Travelport) is a significant blow to conventional distribution.
- That the conventional ota market has seen several players decline (Orbitz and Travelocity are not as relevant as they once were).
- Expedia’s stock has risen lately and it is currently trading near an all time high, which means that it could use its stock as a weapon to acquire other businesses.
- The emergence of strong local brands in travel challenges the concept of the monolithic mega brands
- The lack of opportunity for growth and the maturity of the current ota market provides little opportunity for the big four without significant expense.
- Anecdotal evidence points to a move away from CPC and a reduction in CPA values as the airlines gain more power.
The acquisition solution also adds a foil for the airlines versus Google, all the while Kayak continues moving away from using ITA Software as the primary provider of its airfare shopping technology. The airlines have also effectively crippled Google Flight Search by not giving full access to their inventory, in particular Delta and Southwest.
The result is that the airlines are not making it easy for GFS as a product to gain a foothold in the market.
While there might be a lot of high fives in Norwalk, Connecticut, the more sinister (and cynical view) has to be that the price paid here was too high (and don’t expect Hipmunk¬†will be the next one to be snapped up).
But the battleground for the OTAs and the metasearch players on a category basis appears to favour search/metasearch over OTA. The latter (OTA) is arguably more expensive without returning corresponding and significantly higher revenue numbers.
Overall, I think this is a interesting move, albeit an expensive one, for Priceline. It’s a bit of a blow for Expedia, Google and the GDSs. But the real winners here, again are the airlines.
NB: Aircraft taxi¬†image via Shutterstock.