What user-pay model?

Contrary to assertions from the American Society of Travel Agents and the Business Travel Coalition, American Airlines says it has no intention of charging travel agents, corporations or global distribution systems to access its base fares or optional services.

American Airlines spokesman Stephen Schlachter characterizes such talk about a user-pay model as “urban myth.”

Cory Garner, American’s director of merchandising strategy, outlined plans for American Airlines Direct Connect, which would impact travel agencies and corporations globally.

The airline already distributes a small percentage of its transactions through its XML direct-connect with Farelogix.

This direct-connect has been in place for a couple of years and currently some agencies use it to book flights, but they cannot book American’s ancillary services, including checked bags, lounge access, onboard WiFi, meals, drinks, and pillows and blankets.

Today, in fact, these services can’t be booked on AA.com, and must be purchased at the airport or onboard American’s fleet.

But, Garner says all this will change several months from now when American will start making its optional services — or merchandising capabilities — available to travel agencies and corporations exclusively through the direct-connect.

Garner says agencies and corporations will be able to access American’s fares and optional services from the Farelogix direct-connect through third-party aggregators such as BookingBuilder, AgentWare, TravelFusion, or agencies’ own proprietary-aggregation platforms.

These add-on services, which will be available on AA.com and through the direct-connect, will not initially be available through the GDSs and will be subject to negotiations with the GDSs, which have already begun, Garner says. American’s GDS contracts expire in 2011.

The airline says the GDSs — Sabre, Amadeus and Travelport’s Galileo and Worldspan — have not yet committed to accessing American’s merchandising capabilities through American Airlines Direct Connect. They currently access the airline’s content through EDIFACT connections with American.

Garner says travel agencies and corporations won’t have to pay American or Farelogix, the airline’s direct-connect subcontractor, to access the base fares and ancillary services. Instead, the agencies’ aggregation tool of choice merely would have to perform a technical integration with Farelogix and there would be no need for a commerial relationship between the two, he says.

Garner says the airline currently is negotiating optional services packages with TMCs and corporations in North America, Europe and Asia as part of their overall relationships and the contracts will vary from agency to agency.

He says the airline is using various means to incent travel agencies to transition to the direct-connect “on a case by case basis.”

American has offered to make optional services available to the GDSs for free, Garner says.

“I don’t think this should be viewed as purely a GDS bypass strategy,” Garner says.

Garner claims the primary driver for American’s direct-connect strategy is that the airline can engage in merchandising, using its customer segmentation data, through Farelogix, but ATPCO and the GDSs don’t use such data.

“That’s the big tech reason,” he adds.

Garner says merchandising to customer segments can lead to “hundreds of thousands” of combinations of optional services.

In fact, in a presentation for travel management companies over the last few months, American compares the variety of optional services to made-to order burgers at the Whataburger chain.

American officials say they met with travel agencies and corporations in headquarter-city Dallas and around the country over the last few months because they want to give them adequate time to handle “the tech changes that need to happen” to mid- and back-office systems so they can adequately process and track optional services.

Garner says there were no discussions of a user-pay model or attempting to force TMCs to pay for optional services.

But speculation about a user-pay strategy was fed by separate statement from the CEOs of American and Delta Air Lines last year in which they argued that travel agencies and GDSs would one day would pay for airline content rather than the current business model, where airlines pay booking fees to the GDSs.

And, in recent weeks the BTC and ASTA have charged that user-pay is at the core of American’s merchandising strategy.

Meanwhile, Garner says American’s move to make optional services part of its Farelogix direct-connect will get some momentum when ARC completes the process to support Electronic Miscellaneous Documents (EMDs) for settlement. ARC’s timetable to roll out EMD capabilities is in the Fall of 2010.

Garner says supporting an EMD standard is a more-complex process than was e-tickets, which were rolled out over a protracted period.

He refers to the EMD standard as the “key lynchpin” for launching merchandising through American’s direct-connect.

Garner adds that adoption of EMDs will be a “slow burn,” but the merchandising capabilities they will facilitate will bring “full benefits in the long term.”

If you believe the Business Travel Coalition and industry rumblings, American Airlines is serious about proceeding with plans to make users — presumably travel management companies, corporations and global distribution systems — pay for content by leveraging its direct-connect business with Farelogix and perhaps other distributors.

This would turn the traditional airline-GDS-TMC/corporation business model on its head as airlines traditionally pay booking fees to the GDSs, who kick back some incentives to TMCs.

Now, the BTC is circulating a letter — and soliciting signatures — which would be sent to all major airline CEOs asking them to work with other parties to formulate “industry standards” [not the tech kind] to safeguard everyone’s interests.

BTC chairman Kevin Mitchell says the letter has 70 signatories so far, and it will likely be delivered to airline CEOs early next week.

He says commitments were made not to release the names of the signatories until the letter is delivered.

The BTC says it arrived at this point because in late 2009 corporate travel managers and TMCs reported to the American Society of Travel Agents and the BTC that American was spearheading a drive for a “user-pay model.”

The American initiative can be seen in the context of upcoming GDS participation/content negotiations in 2011.

Several major airlines, including American, threatened during the previous round of negotiations several years ago to drop out of GDS systems if the terms were not right.

Is American bluffing again — or is the time ripe for overturning the business model?

American Airlines hasn’t talked in any detail publicly about its plans and the airline didn’t immediately respond to a request for comment.

The text of the proposed BTC letter follows:

AIRLINE CEO SIGNATORY LETTER

Mon Apr 5 14:33:25 2010

[name]
Chief Executive Officer, (AA, CO, DL, UA, US, WN, B6, AS)
[address]

Dear Mr. [                ]:

As corporate travel departments, travel management companies (TMCs), online travel agencies (OTAs) and global distribution systems (GDSs), we write you to offer our partnership in extending your ancillary products and services in a manner that is consistent with consumer interests and that works optimally with de facto travel procurement systems and practices. We wish to support you in your efforts to maximize traveler uptake and resulting revenue growth from ancillary products and services. To that end, we ask you to ensure the full scope of your products is made accessible and transparent to all travelers, regardless of channel choice.

Your airline has shown that it values its corporate customers and respects the requirements of modern procurement programs. Your most valuable customers rely on the services of TMCs; together they have invested significant time and money in technologies that enable efficient shopping, booking, payment and reporting for airline products and services. The prime objectives of managed corporate travel programs have been to enable companies to control expenses and to fulfill agreements with airlines through enforceable travel policies.

Going forward, the success of these managed travel efforts is fundamentally dependent upon travel intermediaries having efficient access to the full range of airline options for any particular trip, and being able to monitor and track the comprehensive final cost of airfares plus related services purchased. To illustrate, in order to transact and subsequently report ancillary fees such as seat upgrades and checked baggage, TMCs, and indeed all travel agents, booking air travel must have the ability to deliver such fees transparently in the shopping/booking process. Importantly, the well-established and proven workflow processes of TMCs that feed into corporate clients’ systems rely almost exclusively upon the airline booking and servicing capabilities of GDSs.

Similarly, the millions of consumers who shop and book travel on OTA sites every month, which collectively account for some 16 percent of all U.S. airlines’ bookings, have encountered an increasingly complex landscape of air travel options to evaluate. The current lack of clarity and accessibility of a la carte products prohibits widespread consumer adoption – a hindrance to achieving the revenue generation objectives that predicated your airline’s implementation of an unbundled pricing strategy in the first place.

Your airline, your distribution partners and your biggest customers have a responsibility to enable travelers to compare both the true costs and benefits of their full scope of air travel options. The only path to near-term, broad availability of your airline’s ancillary products is to develop and deploy merchandising capabilities within the existing technology framework of your distribution system partners and corporate customers.

As those partners and customers, we have developed principles and standards which we ask you to review and commit to through a public statement of support. We are requesting that you help us help you by working cooperatively, diligently and in good faith with TMCs, OTAs, GDSs, and corporate travel managers on the rapid development of industry technical standards to ensure that your unbundled products are easily accessible by all travelers via any GDS in which you participate.

We look forward to hearing from you at your earliest opportunity.

Sincerely,

[signatory]
[signatory]
[signatory]

In the last round of GDS negotiations in 2007, airlines such as American Airlines and Delta Airlines stridently warned that they would pull out of major GDSs if the carriers didn’t get their way.

In 2010, American is pledging to go outside of the GDSs again, this time through Farelogix, and JetBlue, in more thoughtful tones absent the rhetoric, is pushing the message that the airline-GDS business model is broken and must change, leading up to negotiations next year.

Noreen Courtney-Wilds, JetBlue’s vice president, sales, says the industry took “baby steps” in the last round of negotiations.

After those talks, the airlines reduced the booking fees they had to pay GDSs, and the GDSs made themselves whole to a large extent by greatly reducing the incentives they pay to travel agencies.

“We all kind of know the financial model needs to change,” Courtney-Wilds said in a panel discussion, “Future of Distribution Forum,” at the TravelCom conference in Dallas yesterday afternoon.

She adds: “If it doesn’t change, folks will look for other ways to solve it.”

Courtney-Wilds notes that JetBlue recently transitioned to the SabreSonic reservations’ system and ratcheted up to full participation in the four major GDSs.

The upside is that JetBlue picked up incremental business from the GDS channel, but the downside of “opening up the floodgates” is that there was an increase in travel agencies “snatching up seats that you didn’t need help filling in the first place” at a higher distribution cost, Courtney-Wilds says.

She says JetBlue doesn’t need help selling $49 tickets and, referring to increased GDS distribution costs for sometimes low-yielding tickets, Courtney-Wilds adds, “we definitely have to address [that] going forward.”

Asked what was on her wish list as far as a new financial model, Courtney-Wilds says she doesn’t have all the answers, but that the solution should lead to a variable structure where the airline can pay for distribution in areas where the carrier wants to play — and presumably not pay in less-cost-effective areas.

One reason JetBlue opted to go full-throttle in the GDSs is that it gives the airline the opportunity to tap into the high-yielding corporate-travel business in certain markets.

Referring to a lot of noise these days about airline direct-connects bypassing GDSs, Courtney-Wilds says technical issues aren’t the basis of the conversation and all of this talk will be silenced once the airline-GDS financial model is fixed.

Fellow panel member Dan Westbrook, vice president, supplier development in the Americas for Travelport GDS, told the audience that the business model may need to be “fine-tuned,” adding that most airlines are willing to pay for high-yielding business.

He adds that Travelport GDS is talking to suppliers, looking for opportunities and trying to find the right balance.

Westbrook says the ultimate solution may vary, sector to sector.

Courtney-Wilds also had some stern, if polite, words for metasearch engines, too.

In the past, she says, JetBlue’s fares would appear in metasearch engines and consumers would link into the booking path on JetBlue.com, the airline’s cheapest distribution channel.

However, today JetBlue’s inventory is displayed in metasearch along with several other booking choices in the same results box and there are greater distribution costs for the carrier if consumers book through online travel agencies instead of going to JetBlue.com.

“The economics of the channel have changed and we are looking at that,” Courtney-Wilds says.