American rolled out a major new program on Friday that’s intended to encourage travel agencies/travel management companies to start booking flights differently than they do today. Airlines have long wanted to shake up the way their tickets are distributed, but this is the first time I can remember a major airline making a push to do so using a carrot instead of a stick. Not to play this up too much, but this could be the spark to effect big change, and it’s a good change at that.
Airline distribution is complicated, so I consider this a personal quest to try to make this post understandable. I don’t want to get into too much backstory, so to get a full understanding of how airline distribution has evolved, I’d suggested reading my three-part series on the topic. But I still need to get into some history….
Longer Backstory Than I Hoped
There has been a near-constant uneasiness over the last couple of decades regarding how airlines have sold tickets. If we flash back 25 years ago, the internet wasn’t for e-commerce. Airlines sold tickets directly via phone, ticket counter, or city ticket office. They also sold a tremendous amount through travel agents. Travel agents were great ambassadors for the airlines, because they could sell tickets without the airlines having to employ them to do the work. Instead, the airlines paid a commission to travel agents who sold tickets as well as a booking fee to the computerized reservation systems (now called Global Distribution Systems, or GDSs) that the travel agents used.
E-commerce changed everything, and airlines were very early adopters in the mid-1990s. Since flights were primarily chosen based on a mix of price and schedule, they were easy to sell online both through the airlines directly and through third parties that became the online travel agents we know today like Expedia. It was cheaper to sell tickets that way, and so airlines started offering discounts to people who booked directly. The strategy worked.
While this was going on, your standard travel agent became almost instantly irrelevant. Airlines ditched published commissions, and travel agents who booked air disappeared rapidly. Only those who could justify adding enough value to get travelers (instead of just airlines) to pay for their services survived. Oh, and of course, the big Travel Management Companies (TMCs) that handle corporate accounts were fixtures as well.
The GDSs, meanwhile, had become fat and happy. They were paid for every flight segment booked by the airlines, and it was a nice business to be in. Then they paid some of that money to travel agencies to use their systems as a way of preventing those agencies from looking at alternatives. But as soon as the airlines could sell lower fares directly, the GDSs woke up. They engineered a brilliant (if mildly-nefarious) plot to dramatically lower the fees airlines would pay in exchange for the airlines promising to always make their lowest fares available through the GDSs. You probably remember all those web fares back in the late 1990s. They disappeared because the airlines made this deal.
Over time, the airlines worked hard to get away from selling just by price and schedule but the GDSs and online travel agents didn’t really do much to adapt to the new world. The airlines unbundled and wanted people to buy a base fare and then add on everything they wanted. The model wasn’t a problem as long as people could compare apples to apples, but they couldn’t. The GDSs weren’t very good at supporting these ancillary sales and so the experience stunk.
A Standard is Born
Eventually, the International Air Transport Association (IATA) realized that this new way of selling required a new standard. And so, the not-so-creatively-named New Distribution Capability (NDC) was born. Once adopted, this provided a data transmission framework that all airlines would be able to use to sell their tickets, including ancillary services after purchase. This standard was hugely important. Previously, individual airlines started to develop their own systems for so-called “direct distribution,” but that meant it was expensive and difficult for third parties to develop around it. And if they did, it would only be good for one airline. With NDC, third parties could develop to the standard and then add additional airlines with ease.
At first, many saw this as a way of getting around the GDSs. If they could sell directly, they’d be able to eliminate a middleman, keep costs low, and be able to sell more ancillary services. But it became evident to many that trying to get around the GDSs was not the right strategy, especially as booking through them became less costly (especially in the US). The GDS today is an essential part of the business. The important travel agencies/TMCs use them, and there is no solution to replace them fully. There probably won’t be for years because of all the functionality that will be hard to replicate.
Some airlines in Europe have continued to fight this fight against the GDSs. Notably, Lufthansa Group and British Airways-parent IAG both have or have announced additional fees when their flights are booked through the GDS. But it’s a poor strategy since it penalizes the airlines’ best customers.
American Kills Them With Kindness
I realize this post is already long, but it was important to build the story. Now, let’s talk about what’s happening. American is saying, in effect, “we want everyone to use our NDC connection.” If you’re a GDS, great, use it. If you’re a new technology company? Great, use it. If you’re a travel agent, perfect, please use it. It’s pushing this in two ways.
First, American is making the technology available for any agency that wants to use it. Agencies can use the standalone SPRK desktop application to book with American if they don’t want or need to do any technical integrations. They can also work with a number of third parties which, now that NDC is catching on, have developed applications to interface with other travel agent systems. And lastly, they can develop something in-house if they’re big enough, and then just build it into their tool. Concur, for example, is working with American to integrate NDC.
Why would agencies do this instead of just sticking with a GDS? Well, there are benefits, especially for TMCs.
- They can create bundles by company so that certain attributes (seats, etc) can be always included. This can even include sub-groups for different parts of the company that get different things.
- The waivers and favors system can automatically integrated so there’s no need to toggle back and forth between the GDS and American’s system.
- They can improve the duty of care by showing travel agents not only if someone was booked but also confirming if someone boarded the aircraft.
- Agents will be able to sell all kinds of ancillary services in their systems. That includes upgrades on day of travel, same day changes, and same day standby. They can pre-order meals as well, with pre-purchase of paid food coming. And they can sell paid seat assignments, the only ancillary service Sabre (a GDS) supports for American today.
That all sounds nice, but American has finally realized that’s not enough. That’s why part two of American’s plan is to actually pay the agencies the same way the GDSs pay them today. They need to make them whole financially. For now, American says it will pay $2 per flight segment booked, and any agency is eligible. That’s the metric GDSs use as well, so it’s an apples-to-apples comparison. And at least for American, this is a competitive payout. For a small to mid-size agency, it’s probably a very favorable payout.
Sure agencies have agreements with the GDSs and have to meet their targets to get their payouts, and that’s why American is treating this so casually. There are no commitments and no minimums. Just book what you can using NDC and you’ll get paid.
American, naturally, will only pay this out for American-marketed flights. Agencies can book some other airlines via the NDC connection, but they probably wouldn’t. They’d do that through the GDS. In the meantime, if agencies have hit their goals with the GDSs, they can start booking through NDC so they can get all those added features that don’t come with GDS bookings. Sure, some development work is required (or at least a contract with a third party), but every airline is going to move toward this standard. Once it’s set up, it’ll be easy to plug in additional carriers.
This is a fantastic approach since it basically just opens the door and tells agents to waltz on in anytime they want. There’s no pressure to make the switch, but the combination of the financial and commercial benefit to doing so means agencies are going to be interested.
This kind of pressure is key to making GDSs change their ways. The threat of lost business is the only thing that will make them move. And American is effectively telling them to start using NDC or other methods of aggregating and selling tickets will pass them by. This isn’t about killing the GDS. It’s about dramatically improving functionality for all who use them or any other system. And that’s why it seems like this approach may be a winner.
My apologies to all of you who suffered through that post only to realize you don’t care about distribution… at all. It’s pretty fascinating stuff, but it can get wonky. Any questions? Hit the comments.