I’ve been following the fighting between American and the global distribution systems (GDSs) fairly closely here, but I’ve yet to comment on the latest development. First, American decided to sue Travelport, but the big news is that now other airlines have decided to jump in. US Airways is suing Sabre, and this comes after the airline had just signed a long term renewal agreement with that GDS. What gives? The backstory is better than a soap opera.
If you need full background on this saga, I’d suggest starting with this post on why American wants to go around the GDSs. In short, to reach a huge chunk of customers (primarily corporate travelers), the airlines have to sign participation deals with each of the three GDS companies in the US. The airlines are now saying that the GDSs are holding them hostage because the GDSs are the gatekeepers to this large group of travelers and there’s no way around them and their monopolies. It’s a compelling argument. Let’s look at the US Airways suit more in-depth.
Recently, US Airways signed a multi-year deal for Sabre to sell its flights to all its travel partners. It was clear that US Airways was unhappy about this from the beginning. It responded to Sabre’s press release on the deal with a terse statement that it “disclaims any characterizations by Sabre of US Airways’ views of Sabre, Travelocity, or US Airways’ relationships with those companies.” What did it object to? Probably that “US Airways recognizes the value of the Sabre global distribution system and our innovative leadership in helping airlines market and sell their products.”
Now we know that a lawsuit was in the works. The story is a fairly simple one, and it shows an airline that had no choice but to sign with Sabre even though it clearly was unhappy with the terms of the deal.
Why do I say US Airways had no choice? Well, an incredible 35 percent of US Airways’ revenue comes in via Sabre. While some of this could be replaced since it comes in from online travel agents that have plenty of alternates, the biggest and most important chunk comes in from corporate travel agents that use Sabre as their sole booking source. Corporate travel is the lifeblood of most airlines since it’s full of frequent, high dollar customers. But much of corporate is done through corporate agencies and 85 percent of those agencies are locked in to a single GDS.
As we know by now, booking through these reservation systems can be expensive, and so airlines like American have been proactive about trying to pitch a “direct connect” solution that would bypass the GDS and save a boatload of money. Beyond saving money, it would allow the airlines to sell more than just a seat with things like premium seats, priority check-in, etc. But that’s just the tip of the iceberg. Not being dependent upon the GDSs would allow airlines to get more creative in how they sell in general.
So why can’t they kick the GDS habit? Because Sabre and the other GDSs have travel agents locked in. This is one of those goofy industries where the airlines pay booking fees to the GDS and the GDS then provides kickbacks to the travel agents to keep them onboard. In other words, the GDSs pay their customers to use them. Where else does that happen? With this type of relationship, it’s hard to get the travel agents to stop using GDSs and the GDSs use tactics to make it even harder.
Some GDS relationships require travel agency exclusivity, but even those that don’t still threaten to take away the kickbacks if the agencies start using other sources. The result is that no agency in its right mind would walk away when money is flowing in the door.
So why don’t the airlines just start paying the travel agents some of that money directly? They’ve tried. Back in 2005, for example, America West tried to offer agents a commission if they booked on the America West website. Sabre flipped out and increased rates twice in three months for those bookings that came through Sabre. America West couldn’t get all agents on Sabre to switch overnight, so the ones that remained on Sabre became so expensive that the airline had to back down.
Since Sabre holds such a large chunk of US Airways’ revenue, it’s impossible for US Airways to walk away. Because of that, Sabre can effectively demand anything it wants. And it does. US Airways had this to say about its most recent negotiations with Sabre in the suit:
Sabre’s monopoly power was witnessed most recently in its efforts to force US Airways to enter into a new contract with Sabre that contains numerous oppressive and
anticompetitive terms designed by Sabre to harm competition and entrench Sabre’s dominance. US Airways had no choice but to sign the agreement, which it did under protest, or face a complete shut off from Sabre’s network.
So what were these terms? We don’t know all the details, but there are some that are pretty clear. The biggest issue is that Sabre requires “full content” provisions in its agreement. In other words, any fares offered by US Airways in any distribution channel must also be provided to Sabre. You probably remember that there were a lot more web fares in the early days of online booking, but ever since this full content provision has been thrown in there, those have effectively disappeared. US Airways, along with every other big US airline, has no way to offer discounted or special rates on its website anymore, because Sabre and the other GDSs won’t sign an agreement without that provision.
In the latest negotiation, US Airways offered to pay a higher booking fee in exchange for the elimination of the full content provision, but Sabre declined. This full content provision is like a noose. It not only prevents the airlines from offering different fares on its website, but it even prevents the airlines from doing things that the GDSs can’t handle.
For example, when US Airways launched its Choice Seats program which allowed customers to pay a fee to sit in a better seat, Sabre couldn’t handle the functionality. Because it couldn’t handle the functionality, it tried to block US Airways from selling Choice Seats through any channel because of this “full content” provision.
As you can see, US Airways and the other airlines are stuck. So now it’s time to head to court to get the feds to agree with them that this is monopolistic behavior. Back in 2004, the feds had originally deregulated the GDS industry and that’s when this problem started. US Airways and American cite several examples of bad things that the feds warned were possible at the time. Now that they’re proving to be true, the GDSs are finally getting challenged. It’s now up to the courts to decide if this is unfair or not.
As you can imagine, the GDSs deny everything. They say this is a smokescreen that is really an effort limit customer choice and are trying to portray themselves as the heroes of the customer. I personally just don’t see it. Take a look for yourself.
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