Eastman Group



To say the least, this has been an interesting month – between personal, company and industry events. From an industry perspective, the Northwest gambit to charge service fees for GDS channel bookings has stirred up a pot-full of excitement; although the media blitz seems reminiscent of the emotions generated when the airlines started eliminating commissions.

Eastman's "Off-the-Wall Comment(s)"© ...

Well … let’s start with the disclaimers first. I have friends, clients and associates on both sides of this argument. So, what follows is a personal opinion that reflects the trends I see and an effort to explain why those trends are or will evolve; and is not intended in any way to reflect on the specific issues, the proponents, antagonists, or pending litigation.

That said – one wonders, “… so what’s the big fuss all about?”

If you’re a follower (not necessarily a believer … just a regular reader) of “Off-the-Wall Comment(s)” … such a move by one airline or another should not be a surprise.

A number of friends and associates have suggested that by today (the 31st), Northwest would be forced to retract it’s position. As of the waning moments of the day, this has not happened. Whether they do or do not will be, in my view, based on legal considerations – NOT on the merits of the decision to charge additional fees for using the GDS channel for product distribution!

OTWC has frequently commented on the fact that the hyperarchy of information … the integrated use of Internet, cell phones, PDAs, WiFi, business-rules driven robotics, interactive voice, etc … is changing the way travel product is distributed. More important is the fact that these lower cost technology tools and platforms have made the holistic GDS distribution structure to which most people in the industry are still job-dependent -- obsolete!

As an aside, the January 2003 Off-the-Wall Comment(s) has a specific piece that discussed the impact of the speed of change created by technology evolution … applied specifically to the airline and distribution aspects of information. That it has taken 18-plus months to get to this point is reflective of the inbred obsolete business processes that prevail in both the legacy airline production structures and their historic distribution channels.

Still, it is naïve and foolish to think that the legacy airlines … using the same obsolete 40-year-old business process model … are going to continue to fund further obsolescence when they now have a lower cost and more competitive tool available to them!

Airlines no longer sell a service where quality of product drives price and they can absorb inefficiencies in the service value-add. Airlines do not even sell a good where brand is the primary product differentiator and brand-enhancement can be attained through controlled distribution channels. Airlines today sell a commodity … a seat going from point A to B. Product differentiation among commodities is primarily driven by lowest cost … since any seat will get you A to B.

If low cost production is the primary competitive driver – then eliminating all inefficient, non-productive, or high cost production or distribution aspects of the “production line” is essential. It makes no difference whether it’s Northwest or some other carrier … airlines producing commodity seats MUST. take advantage of every way possible to lower the cost of seat production. And it has become very very clear that the low cost carriers … which Northwest claims represents 70% of its current competitive market … have proven the validity and cost effectiveness of non-GDS distribution channels. In point of fact, Northwest has proven it to them selves!

Don’t think that the other carriers are not waiting in the wings for this mess to sort itself out.

Given this line of thinking, please go back up to the “clippings” that lead into this piece. Ask yourself … just exactly who is rising up in arms over this Northwest action?

Loudest and most aggressively … the GDSs lead the list; and interestingly, the large corporate or contract buyers are right behind.

So one has to ask the question … what happens to the GDSs if the Northwest initiative is implemented? Answer … Northwest begins to shift more and more distribution business away from the GDSs to its alternative direct booking channels. While OTWC has been pointing to that trend for the past five years … what the Northwest action does (particularly if mirrored by other airlines) is speed the rate of change!

What is a bit of a surprise to me is that it is Sabre, among all the GDSs, that is leading the charge against the Northwest initiative. I say that because, of all the GDSs, the only one with a technology platform capable of adapting to the GDS by-pass alternative distribution channels– is Sabre. But technology does not, in itself, support a business plan, employ staff, pay for facilities, or even sustain contract compliance to enable some aforementioned business strategy or plan. .

Clearly, the speed at which the Northwest initiative can restructure the distribution structure of the industry is clearly a major driver as the GDSs have unilaterally “circled their wagons” in the face of this impending danger. The issue is NOT, as the GDSs spin-artists would have the public and government believe, creating an artificial fare increase or making consumers pay for something that consumers once got free! Nothing is “free” in commerce … “free” only comes from different packaged ways of packaging … or not packaging.

The other really interesting aspect of the clamor that the Northwest initiative has drawn – is that from the associations that represent the “mega-corporate” buyers!

The proverbial question arises … why these folks. The answer seems to lie in the “deals” that their corporate constituents get; “deals” that are sometimes direct and sometimes a pass-through from their corporate mega-agency.

Note … the squawk is primarily coming from the corporate representatives – NOT the mega-agencies (yet). One might attribute this disparity to the fact that, largely as a result of the erosion of commissions on fares over the past few years, most of the corporate-dealing mega-agencies have agreements where such costs are passed through (i.e. not their problem).

As those of you who read last month’s OTWC know, I was a panelist at NBTA … discussing the impact of GDS deregulation. There were four of us on the panel … the head of a mega-corporate travel operation, a Vice President of a mega-travel corporate agency, a Vice President from one of the four GDSs … and myself. Toward the end of the second session (it didn’t come up in the first session) … the question was posed to each of the panelists – “How will deregulation impact your role in the distribution channel?”

The travel manager seemed to feel that he would need to develop the tools and agreements to access the increasingly disparate inventory sources and relevant fares. The corporate travel agency took the position that they would have to marry all of the data and sources in response to the corporate travel manager’s needs. The GDS representative suggested that their job was to ensure that they could provide to the agency all of the different and disparate inventory and fare sources.

Taking the role of a vendor … airline, hotel, car, limousine, etc. … I suggested that it was in my best economic and control interest to simply by-pass the GDS and travel agency and offer my product through direct Internet links directly to the corporate travel manager. The corporate travel manger gasped … “You just took away my value-add.”

In fact … it’s unlikely that the vendor-direct model took away the travel agency’s value-add. What vendor-direct does do is change the role of the travel agency: changing the agency from a conduit of transaction processing to a manager of travel information on behalf of the corporate travel manager. The reality is that many corporate travel agencies are already there – and in that role, are not particularly adversely impacted by the Northwest initiative.

It was the GDS that really should have gasped … “You just took away my value-add.” Because effectively, that is exactly the shift in the distribution channel that Northwest is attempting to incentivized with its new pricing model!

Or said differently, the GDS distribution channel needs to change its value-add role from that of being a vendor switch or source. Unfortunately, the cost of the infrastructure and the limits of the legacy platforms have inhibited the GDSs, with the possible exception of Sabre, from making a direct transition.

That is not to say that Cendant is not evolving alternative platforms around which Galileo plays an increasingly less significant role … or that Amadeus is not transitioning its primary revenue stream from distribution into hosting. These are clearly strategic initiatives that will, over time, supplant the revenue streams derived from distribution. But the “time” when these alternative revenue streams can support the infrastructure of the current GDSs is not here yet – and thus, it remains necessary to defend the obsolete and costly historic distribution model – and engender from their primary transaction revenue sources, equally loud claims of “unfair to the buyer, unfair to the traveler.”

I do not know whether Northwest can or will sustain this battle … for it has become an emotional and legal foray that inserts short-term unknowns into the trend line. Northwest has almost two more years to run on the various web-fare agreements it has with the different airlines. And two years in this fast-changing industry is like the blink-of-an-eye. But these facts are pretty clear …

1. The trend toward direct purchasing for both bulk and individual travel is going to continue because it drives commodity vendor distribution costs lower.

2. The role of the traditional GDS distribution channel will have decreasing value-add as direct travel distribution becomes prevalent … and the GDSs as we know them must wane or morph into other types of value-add contributors (as most seem to be doing).

3. The trend toward re-packaging air with other products will grow to create opaque margins for commodity offerings and concurrently, greater profits for intermediaries with technology driven packaging solutions.

4. Corporate travel buyers must evolve onsite tools to acquire, sort, and offer corporate-tailored packaged travel purchased directly from vendors; which, when combined with #2 above, will change both buying and revenue off-set streams.

5. Mega corporate travel agencies must become managers and/or operators of the tools used by the corporations; deemphasizing their dependency on GDSs and traditional distribution models and emphasizing their tactical knowledge and operational skills.

While I think it’s still 50/50 as to whether Northwest will be forced to amend its position … the reality of the new evolving hyperarchy of travel information suggests that it is simply a matter of time before this or some similar legacy airline incentivized GDS by-pass initiative takes hold. There is insufficient value-add in the current distribution channel to enable legacy airlines to compete with the low cost carriers. And, short of some new mainframe miracle technology witches potion –the GDSs will have a very tough time transforming themselves fast enough to be able to cost-effectively compete with their existing model in the new significantly lower cost hyperarchy of information.

Eastman's "Off-the-Wall Comment(s)"© ...

While somewhat disparate comments in the five snippets above, they each point to the transformation in travel distribution that is taking place as the Internet and other elements of the information hyperarchy evolve.

Both Carnival and Intercontinental Hotels are making an effort to reign in price distortions of their product. These distortions are created by the fact that (a) competitive pricing is easily searched and readily obtained, (b) vendor margins and commission structures still tend to reflect the controlled distribution and information channels that have prevailed over the past 40 years, and (c) low cost automation tools enable intermediaries to “play” with the commissions and margins in response to the competitive issues noted in (a); reflecting vendor loss of control over both pricing and their product image.

The new GS2 Switchworks TrueConnect product was announced at virtually the same time as Northwest (above) initiated its new pricing gambit. Coincidence or not, the Switchworks technology structure will, purportedly, run on a much lower cost based architecture than the current legacy GDSs. In some ways, Switchworks represents the same kind of low cost business alternative that the low cost carriers have used to erode the traditional legacy carrier airline networks. That said, there is a big gap between presenting the technology solution and managing its subsequent delivery.

In the Orbitz announcement that it is opening up an agency-commissionable gateway suggests that it, too, is striving to be in the GDS business. Orbitz is taking advantage of GDS deregulation to expand its market. Because of existing contractual agreements with both its airline owners and its GDS provider (Worldspan) … it is unlikely that Orbitz is able to offer vendors the same low price transaction processing fee that Switchworks implies that it will offer. But then, Orbitz is live and online direct with a number of airlines today; and Switchworks has yet to get a product to market. As noted above, two years in this business passes in a “blink-of-an-eye.”

All of which brings me back to the issue of Carnival and InterContinental. Here are two key industry vendors that are reigning in control of their distribution channels in an effort to sustain their past business processes – in lieu of recognizing that the distribution structure has changed … is continuing to change … and creating innovative or cleaner pricing structures to deal with the new reality of direct bookings (and settlement) and/or packaging of travel commodities by intermediaries. Carnival and Intercontinental are certainly not alone. In fact, virtually all the majors in their respective industry segments are striving to do the same thing.

It is important to recognize that the airlines had the high margins and high commission products less than 10 years ago. Their distribution structure was so archaic that it became a prime target of the new Internet and web commerce offerings. But the commodity nature of both the airline product and the digital transaction processing services that support distribution of air product are marginalizing the profit opportunities – and thus, the new distribution technologies are expanding their toolsets to serve the higher margin travel segments.

And the managements of those segments seem unable to learn from what happened to the airlines. Because they are “major players”, they appear to be attempting to sustain control of their product pricing through the distribution channels. While brand (i.e. products are goods), channel pricing will work. When it costs a lot of money to get into the distribution channel … major vendors are able to control the channels and, accordingly, their product. But in the hyperarchy of information, even the smallest vendor can get product into the information and distribution channel – and look just about as big as the major player.

The net effect is that as open distribution evolves along the lines of Orbitz or a solution like Switchworks proposes … the hyperarchy of information increasingly drives commodity pricing at the individual vendor level. Commodity pricing induces either direct selling (as is happening with the airlines today) … or integrated packaging to opaque pricing (as is evolving with some high-end tour and leisure travel agencies).

Accordingly, major players that do not adjust their product distribution and pricing structures to reflect the hyperarchy of information – set themselves up as “bulls-eye targets” for market-share erosion! One need only look to the legacy carriers as examples. The longer that it took individual carriers to adapt to the new information and communication structures, the greater their loss of market-share has been (not to mention, internal operational performance).

The Switchworks and Orbitz alternatives represent only one of the new emerging models … in both cases, low cost individual user direct booking gateways to vendors. But mega agencies like American Express, Carlson, the large AAA regional, Navigant, etc. … are going to rapidly evolve their own direct booking tools (it’s in place at Carlson WagonLit) to bypass even these tools. And just as many airlines are beginning to take direct bookings from cruise lines and tour operators … those very same cruise lines, tour operators and other travel packagers are going to have to enable direct bookings from their buyers.

Eastman's "Off-the-Wall Comment(s)"© ...

The last comment spent the better part of two pages discussing some of the “why” behind this Financial Times excerpted story above … from a different perspective. However, this story induced a letter to the Financial Times editor from Joe Buehler, Chief Executive of netStrategic in New Canaan, CT. Joe’s view provides a restatement of the theme found in Off-the-Wall Comment(s) above. It’s worth printing here because it is succinct and it is in somebody else’s words…

By Joseph E Buhler

Published: August 18 2004 05:00

Sir, With reference to Comment & Analysis (August 16): online travel companies have had the staying power, and have not become victims of the post-bubble bust, because travel is an ideal service to be purchased conveniently online at any time.

What has recently changed for online intermediaries is that the low-hanging fruit has largely been picked and future growth can only be sustained by a shift away from price-focused individual component sales to the online sale of leisure packages. To achieve that requires significant investment in new technology that offers web users a much improved online travel-buying experience.

Dynamic self-packaging of individual multi-destination travel components that in combination make up the entire trip content will have to become the standard to take online leisure travel to the next level.

Offering online travelers not the cheapest price but true added value is the profitable way forward. Seamless, real-time connectivity between online agencies and suppliers will not only make this possible but also result in cost efficiencies that will allow online intermediaries to continue to play an important role in the marketplace and offer competitively priced bundled services.

The purchase of single components for a simple single destination trip will shift even more to large supplier websites; but there will always be a much larger number of small- and medium-sized suppliers, especially in the accommodation sector, that must rely on intermediary sales to attract customers in any market and online travel companies will continue to be their most cost effective partner.

To quote Thomas W. Malone from his book “The Future of Work” … “The major ways human societies have been organized through history reveal a remarkably simple pattern that foreshadows how businesses are changing.” Societies have evolved from nomadic independent bands through centralized control of kingdoms to decentralized democracies.

Similarly Malone points out, “The major changes in how businesses were organized throughout history echo the changes in how societies were organized.” Business structures have evolved from small independent businesses to corporate hierarchies and are now transforming into decentralized networks.

Throughout his book Malone makes the point that in each of these transformations, newer and more efficient communication tools and processes have been the driver … whether in society or in business. And each change has restructured the dynamics and interactions of the processes that enabled the societies or business structures to succeed.

Thus, what we are experiencing in the travel industry is not particularly new. What makes it different is the speed at which it is happening. The rate-of-change is dynamically increasing – and expectations that old models and old processes will work in this new paradigm are fraught with risk. In this increasingly digital world, it is necessary to bypass intermediaries that cannot provide cost-balancing value-add contribution or margins. The natural commodity valuation induced by the hyperarchy of information precludes any business structure other than automated direct interactive information links … or interactive packaging of commodities to transform the whole to some level of context or buyer needed service.

Respectfully,

\\ Richard

-----------------------

From Financial Times©, August 16, 2004

Run aground: how the climate turned competitive for online travel companies. From online pet shops to trendy fashion "e-tailers", the end of the dotcom boom in 2000 quickly made it clear how many of the outlandish start-ups to receive sizeable sums from star-struck investors were silly ideas doomed to fail. Not all online operations went the way of or , however. The travel industry was among the first to realize the internet's potential as a simple sales tool. The technology was a natural asset for an industry that did not depend on the shipment of bulky goods or require overly complex transactions. Booking travel on the internet became an immediate hit.

Indeed, the sector has continued to grow even though events of the past three years - including terrorist attacks, war and even the outbreak of severe acute respiratory syndrome in Asia - have undermined confidence in international travel. Online travel has grown from an industry worth $5bn in sales in the US in 1999 to $20bn in 2003.

Companies that had weathered such traumatic conditions might have been expected to grow strongly when optimism returned to the travel industry. … But, ironically, the upturn in confidence and the improvement in passenger numbers seem to have had an unexpectedly negative effect on some of the largest players in the online travel industry. In fact, the return of the good times has revealed new challenges and doubts about their business model.

The decline in the performances [many online outlets] comes at a time when more traditional holiday companies are also under pressure. [Large] package tour operators … used to exploit their purchasing power to acquire hotel rooms, airline tickets and car hire at cheap prices. They would then package them and sell them on to holidaymakers.

That model is under threat, partly because more people are choosing to build their own holidays using the internet. Why, then, are internet travel companies struggling? Online intermediaries make money by selling the products of other companies. Unlike traditional package tour operators, they allow consumers to decide how best to assemble the component parts of their holiday. But because they do not own the products they are selling, the online intermediaries will always be at risk if there is a change in their supply chain. Increased demand from travelers is now disrupting that supply chain.

From ©, August 6, 2004

Carnival to cut pay to agents making own pricing scheme -- Carnival Cruise Lines will cut compensation to retailers who publicly advertise non-Carnival approved rates and promotions, effective Jan. 1, the line said Thursday.

From ©, August 17, 2004

InterContinental Hotels Group will continue to distribute through Travelocity, Priceline, Hotwire and Mark Travel Web sites, but will drop Expedia and in a dispute over a new IHG standard.

From ©, August 24, 2004

Seven major airlines signed letters of intent to distribute content through a new GDS here headed by former Orbitz Chief Technology Officer Alex Zoghlin. The airlines include Alaska, Continental, Delta, Northwest, United and US Airways. Zoghlin said he’s barred from naming the seventh airline, but together they represent 80% of agency sales volume. The employee-owned company, G2 SwitchWorks … plans to charge airlines booking fees -- believed to be in the $3 range -- per trip, and then leave it to travel agencies to negotiate incentives and all other areas directly with the airlines. G2 SwitchWorks will not pay agency incentives.

From ©, August 2, 2004

Orbitz today announced it has opened its Premier Affiliate Program to travel agents. Orbitz' says its Affiliate Program gives travel agents a low-cost alternative to access the most travel options and unbiased matrix displays, while enabling them to earn commissions. The U.S. Department of Transportation's deregulation of Global Distribution Systems (GDSs) on July 31 created the opportunity for Orbitz to expand this program.

From ATW OnlineCom©, August 30, 2004

Worldspan joined Sabre Travel Network and Galileo in expressing its displeasure with Northwest Airlines' decision to begin imposing a fee on all domestic tickets issued by US and Canadian travel agencies through a GDS. Worldspan said it was shocked by the announcement, and that based on its agreement with Northwest it believes the fees the airline says it intends to bill to travel agencies cannot be charged to Worldspan's traditional or online agencies.

From Dallas Star-Telegram©, August 31, 2004

Sabre fighting airlines over distribution -- It's possible Sabre Travel Network could win the battle against Northwest Airlines, but the country's biggest reservations system still has to fight the war against airlines' efforts to cut their ticket distribution costs.

Eastman’s Off the Wall Comments©

August 2004

From Associated Press©, August 24, 2004

Northwest Airlines Corp. and a major ticket distributor have filed dueling lawsuits over Northwest's new fees for customers and travel agents who don't buy tickets on Northwest Web sites. The new fees, … prompted an outcry from travel agents when Northwest announced them on Tuesday. They also prompted an immediate lawsuit from Sabre Holdings Corp. - a large distribution system used by travel agents. But another Sabre move may sting Northwest quicker: Sabre said it would make Northwest fares less prominent in its displays, while charging the airline more. … Sabre's move brought a lawsuit from Northwest on Wednesday in U.S. District Court in Minneapolis. The airline claims that Sabre's retaliation breaches their July 2003 contract, which Northwest claims specifically prohibits Sabre's action.

From TravelWireNews©, August 26, 2004

AAA announced that travelers will pay more, waste time and lose access to travel experts under new fees announced yesterday by Northwest Airlines. "These new fees are worse than a fare increase," said Steve Frank, president and CEO, AAA Minneapolis. "Not only will they result in higher fares, but they penalize travelers and travel agents for using customer- friendly booking methods."

From Travel Wise News©, August 26, 2004

Cendant on Thursday said it would no longer prominently display Northwest Airlines fares on its global distribution system, Galileo, due to ticket fees imposed by the airline. The move by Cendant to de-emphasize Northwest flights on the schedules it provides travel agents is similar to the action taken by Sabre after the airline's announcement about the new fees on Tuesday.

From ©, August 27, 2004

In a statement condemning the recent move by Northwest Airlines to start charging travel agencies as of September 1 for travel bookings made via a global distribution system, Amadeus said the air carrier was creating an unfair bias against passengers who choose to use a travel agency instead of the airline's website.

From ©, August 27, 2004

The National Business Travel Association will hold a summit next week with Northwest Airlines to voice the concerns of corporate travel managers  regarding the carrier’s recent announcement that it will charge for bookings made via the Global Distribution Systems (GDSs). NBTA’s goal is to broker a relationship that will lead to solutions to the current industry challenges related to distribution.

From ©, August 27, 2004

ASTA today filed a complaint with the Department of Justice's Antitrust Division, asking for an immediate investigation into Northwest Airlines' announcement that, effective Sept. 1, 2004, it will begin charging travel agents a fee for bookings made via a Global Distribution System (GDS) for travel within the 50 United States.

From Associated Press©, August 24, 2004

Northwest Airlines to Add Ticketing Fees -- Northwest Airlines Corp. plans to lower distribution costs by more than $70 million annually and said it will roll out new ticketing fees for domestic flights in an effort to compete with low-cost carriers. In a move to cut costs and encourage customers to buy tickets through its Web sites, the company said domestic tickets issued through its U.S. reservation centers will include a $5 call center ticketing fee, and domestic tickets issued through airports in the United States and Canada will include a $10 airport ticketing fee. The new fees will start Aug. 27.

From ©, August 25, 2004

Sabre Travel Network, a Sabre Holdings company, today announced that it is instituting a new policy for any airline participating in the direct-connect availability (DCA) three-year program which charges a fee on tickets issued through Sabre that is not also applied to the airline's own website. The policy goes into effect today for Northwest Airlines in response to its announcement today imposing new ticketing fees on all domestic tickets issued through U.S. and Canadian travel agencies using a global distribution system (GDS).

From Business Travel Coalition© Press Release, August 25, 2004

Northwest Airlines' Policy Represents More Customer Contempt --The Business Travel Coalition (BTC) today voiced concern in an Open Letter to be sent to major airline CEOs over a new policy announced by Northwest Airlines. The policy seeks to transfer some $70M in product distribution costs to customers through additional charges. Charging customers for something they are already paying for in the price of their tickets would appear to be an unethical business practice that the U.S. Department of Transportation and States Attorneys General would want to consider investigating.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download