The problem for airlines: How do they control the GDS?

Like a hot potato, distribution costs are being tossed around from airlines to agents to consumers. American Airlines now wants agents to pick up the tab for being allowed to book web fares through the GDS. It may be a ploy to circumvent competition issues in the US, but it may also be the start of an attempt to move all GDS fees to the agents. Qantas meanwhile is urging agents to help airlines cut GDS fees by practising good GDS behaviour.

American Airlines stirred up the industry in the US late September by launching a new programme allowing travel agents to book its web fares.

Having access to the web fares through the GDS was not the issue - it was something the agents had wanted for a while. The issue was that agents participating in the the "EveryFare" programme had to pick up the tab for the GDS booking fee. To make the bitter pill go down a little easier, American sugar-coated it by providing participating agencies with allowance credits to partially cover GDS fees.

Those allowances, initially set at US$4.13 per flight coupon, will gradually diminish over the next five years. In return, participating agencies compensate AA with an amount equal to the fees paid to their GDS of choice.

Before this, American's web fares were only available on the carrier's website and through certain lower-cost online channels, notably Orbitz and Travelocity.

AA said it set a schedule of gradually declining agency allowances to enable participants to secure lower GDS fees and realise efficiencies from new distribution technologies.

"We are saying to travel agencies, this is our cost of distribution through Orbitz," American's CEO and chairman Don Carty said. "If you want access to the same inventory as Orbitz, these are the costs to manage."

He added that agency access to web fares nullifies competition-related complaints lodged against Orbitz. American has been vocal in the press about its intentions: to cut down its GDS fees which cost American US$400 million last year. Through this programme, American expects to halve its GDS fees in five years.

It also said it will eventually have agents book these web fares through its own website at aa.com, thereby bypassing the GDS completely.

A week later, Northwest Airlines also made announcements that its web fares will be available to travel agents. Unlike American, it launched an Internet site for agents, in which they would have free and unrestricted access to its web fares, enjoy simplified reporting, complete online booking capabilities and others.

"Northwest's WorldAgent Direct site will make doing business with the airline free and easy for travel professionals," said Fay Beauchine, vice president of sales and customer relations.

"WorldAgent Direct, designed with the help of travel agents, will be second to none in the array of products and services it offers, from fully integrated reporting to end-to-end support of the customer experience."

It is clear the focus of airlines is to zero in on distribution costs and GDS fees have again come into the limelight.

A recent study backed by Orbitz reported that airline fees paid to GDS will total US$2.2 billion this year. It found GDSs continue to generate "significant profit margins, despite losses by air carriers and increasing cost pressures on travel agencies".

A United spokesman confirmed these findings with its own evidence. "Last year alone, we spent US$300 million on GDS booking fees and the costs continue to increase. These fees have gone up over 350 percent for United over the past 20 years. By comparison, during this same 20 year period, United's average domestic revenue per enplaned passenger has increased less than 14 percent," he said.

While United, one of the world's largest carriers, maintains travel agents account for more than 70 percent of its revenue, the airline made it clear that this channel is also its most expensive.

"It is an indisputable fact that these same traditional travel agents, because of high GDS fees, represent our most expensive distribution channel. The average GDS booking fee was less than US$1 per segment in the early 1980s. United is estimating that the fees for 2002 will be over US$4.50 per booking. This is at a time when the costs associated with data processing activities in other industries have declined tremendously, he added.

The Orbitz study's conclusion? That growing consumer demand for lower air fares - caused in part by the evolution of the Internet - "is compelling airlines to embrace new technology and find innovative alternatives to lower their distribution costs."

American and Northwest's move are in sync with the study's conclusions.

An industry observer suggested to TravelWeekly that American's move is only a temporary solution that makes use of current distribution technologies - namely the Internet.

"It is likely developing a process that will move all GDS fees to the agents - not just those for Internet fares, but for all fares."

He also asked, "If there was an Internet infrastructure 20 years ago, would there have been any GDS created? Probably not.

"The GDSs will have to make themselves relevant today - being a very powerful complier of products," he said.

While the Internet has presented itself to airlines as another effective distribution channel, the GDSs are finding the Internet has caused other problems.

For one, GDSs are not meant for bulk usage, but by creating open links with web retailers to its system, the GDSs are finding the volume of usage has hit record highs.

"They must then decide if they want to pump in more capital to bulk up their servers to take in public hits. But to do so would require a lot of money - who will pay for that? And these hits are often not translated into actual bookings and hence, may not generate any segment fees for the GDSs," he said.

In the US, GDSs are also being affected by the increase in domestic travel as opposed to international travel. Most of the domestic travel is done on low cost carriers that do not depend on GDSs. On top of that, more major carriers are going direct to the consumers and bypassing the GDS.

"The airlines have created a monster that it is now trying to eliminate. GDSs, on the other hand, must diversify and find other revenue streams so as not to squeeze its traditional suppliers - namely the airlines," he said.

Meanwhile, Worldspan is working on a new pricing strategy to replace the current model "that is broken", according to the Atlanta-based GDS. It has said that the current model is "unfair" to the suppliers.