AMERICAN AIRLINES “DIRECT CONNECT” – BACK TO THE PAST

Since the maturation of the Global Distribution Systems and the advent of online booking services, retail distributors of air travel have provided consumers with:

These consumer benefits, unequaled in any other line of commerce, are now threatened by a plan, called “Direct Connect,” being promoted by American Airlines.  The American plan, if implemented as communicated by American and if it then spreads to other airlines, could have the following effects on travel agents and consumers:

           
Here is why and how.

I. THE HISTORICAL TREND TOWARD AGGREGATION AND UBIQUITY OF AIR TRAVEL INFORMATION

Prior to 1978, under government regulation and collective airline management that offered no flexibility, the agency distribution system evolved slowly. In that year the Airline Deregulation Act inaugurated a period of unprecedented fare complexity, rapidly changing route networks and new airline entry (and exit).  Almost simultaneously the airlines introduced to travel agencies their “computer reservations systems,” known today as Global Distribution Systems or GDSs, making it possible for travel agents to quickly and efficiently compare the services, prices and inventory of airlines anywhere, a sea-change from the index cards, printed schedules and telephones theretofore relied upon for information and booking.  This new capability, combined with consumer confusion over the constantly changing array of prices and services, led to significant growth in the number of travel agencies and the number of customers they served. Industry fares sold doubled in size between 1978 ($10.8 b) and 1982 ($21 b). Without immediate and efficient access to comparative air travel information, the agencies would have foundered, consumers would have been deterred and airline deregulation itself likely would have been impossible.

The information revolution was not without problems.  The airline owners of the GDSs biased the displays in their favor.  Playing upon the inability of travel agents to bear the costs of searching through multiple screens of information, the airline owners engaged in what amounted to de facto withholding of fare and schedule content so as to favor their owners at the expense of non-owning airlines. The government soon recognized that this withholding of content, by effectively burying it, was leading to perverse results including higher prices and other restraints on competition.   A series of regulatory interventions ensued, culminating in the airlines’ largely disposing of their GDS ownership interests which in turn made possible the substantial deregulation of the GDSs at the end of 2004.  In the regulated era, and thereafter, the GDS-travel agency information network evolved to produce ubiquitous, low/no cost (from a consumer’s perspective) comparative data with integrated workflows that had their source in centralized and neutral aggregation of information.

By the mid-1990s, the technology of the Internet had also evolved to the point where commercial exploitation was not only feasible but unavoidable.  The online travel agencies, or OTAs, emerged to become the first e-commerce success story, enjoying double-digit growth for most of their first ten years and reaching millions of travel buyers around the country and the world.  The OTAs, like the rest of the travel retailing business, drew their data primarily from the GDSs.

The consumer benefits of this information and booking network have been recognized repeatedly in government reports and rulemaking proceedings.  Those benefits explain the performance: in 2008 the GDSs processed $98.7 billion in travel agency and OTA bookings.  Each GDS handled about 65 million price and availability requests per day. Faced with ubiquitous access to unbiased comparative travel information, complete price transparency, unlimited channel choice and very low search costs, consumers are enabled to make optimal travel decisions.  This in turn fosters inter-brand competition among the airlines and produces the best services at the best prices for consumers, while also enabling the airlines to reach tens of millions of consumers in a cost-effective manner. 

The GDS-centered network is continuing to evolve as the latest airline marketing innovation unfolds – unbundling for separate sale of “ancillary services” formerly included within the price of air travel.  These include checked bags, advance seat assignments, meals, pillows, blankets and other “extra services.”

The sale of ancillary services is earning billions in incremental revenue for the airlines, but the process by which information about them is accessed and through which they are paid has often been opaque and inefficient, or worse.  Corporations that manage their travel under policies governing thousands of travelers are extremely concerned about the subornation of their management controls if employees are buying travel in one place and ancillary services elsewhere. Some airlines are not creating any mechanism for timely direct communication with travel intermediaries in a manner that can easily be consumed and displayed in the shopping and booking process, of the constantly changing fees for services such as checked bags. In addition to the lack of information, the technical means for the “pre-sale” of ancillary services at the time of booking an air trip in many cases do not exist for intermediaries.  As an example of the negative impacts for consumers, travelers who prefer to buy through an intermediary channel are therefore deprived of the opportunity to get online discounts offered for pre-registration of checked bags.  Finally, the airline ticket counters are made more congested and vastly less efficient by the presence of passengers who were prevented from pre-registering and paying for their checked bags.

Some airlines have argued that the real issue behind those problems is that the GDSs are unable to provide the functionality to enable intermediaries to accomplish these tasks.  This is wrong.  GDS systems are already providing a platform for key airline merchandising initiatives (e.g., pre-paid seats) and have been using XML connectivity for years.(1) Moreover, forward thinking members of the aviation community and associated intermediaries are hard at work on the development of internationally accepted technical solutions to enable the same ubiquity for ancillary services as exists for basic fares and flight information.  But one airline is not cooperating.

II. AMERICAN AIRLINES’ “DIRECT CONNECT” COULD UNDERMINE CONSUMER BENEFITS OF UBIQUITOUS ACCESS TO UNBIASED COMPARATIVE INFORMATION.

American Airlines has surfaced a plan that casts serious doubt on its intention to make new ancillary offerings and other merchandising offers available via the GDSs that nearly all travel agencies use, and that consumers – through traditional and on-line agencies – rely upon to make informed travel decisions.  American has instead said it intends to make its products available for sale by intermediaries through a “direct connect platform” in various bundles that include ancillary services tailored, in some cases it says, to negotiated terms with larger corporate customers.  The central problem is that American has avoided any commitment to make these services available to GDSs, whether through the Direct Connect platform or otherwise.  The efficiency of well-informed consumer choice is thus threatened since, under American’s plan, not all consumers will have equal access to American’s fare and fee data.   

Tellingly, this behavior by American follows public comments in April of 2009 in which American’s CEO stated publicly that he could see a day when intermediaries that sell the airline’s products would pay American for access to those products.  Apparently American is so confident of its market influence that it believes it can force a new distribution business model on the industry and consumers.   

While American suggests that the GDSs could be involved in its distribution model in some indeterminate way, based on what the airline has communicated to some agencies to date, it seems the airline’s plan calls for this to happen under a model that (1) pushes the airline’s costs downstream, subverting existing economic arrangements between GDSs, travel intermediaries  and their customers, (2) imposes on the existing distribution system enormous investment costs and/or processing inefficiencies and (3) threatens consumers not only with higher costs, but with the inability to efficiently gather the information they need to make the best travel choices. 

The Airlines Reporting Corporation (ARC)(2) is developing, for late 2010 delivery, new electronic documents that in theory will enable travel agents to settle sales of ancillary services through ARC.  However, carrier usage of such products is not mandatory and would be substantially thwarted if a program like American’s Direct Connect program is implemented. 

An example of the types of services claimed to be suited for the direct connect platform is the offer of a discount to a corporate account, bundled with negotiated ancillary benefits, such as free checked bags and/or preferred seat assignments or assured access to seats in a roomier part of the cabin.  American claims this so-called “advanced functionality” can only be obtained through a direct connection. It has stated in meetings with intermediaries that it will offer incentives for them to adopt the Direct Connect program , but the amounts and duration of such incentives remain unknown.

What is known is that integrating information and transactional capability through a Direct Connect program will force large data system restructuring costs on intermediaries.  And it is not clear how, if at all, Direct Connect transactions could be settled through the established processes used by all travel intermediaries – the Airlines Reporting Corporation.  Nor is it clear how, or at what cost, smaller travel agencies will acquire American’s information, book it and settle it through a system that also provides access to the broad range of airlines and other suppliers the agency shops and books. 

Of greatest concern, however, Direct Connect would disadvantage consumers.  For example, some airlines today offer, by email, “up sell” opportunities to consumers after the initial booking and again when they check-in online the day before flight.  A passenger will receive an email offer to upgrade to a roomier section of the plane, without change of fare class. Other ancillary services may be offered, such as discounted checked bag fees, at the time of online check-in within 24 hours of flight time.   How the airlines will parcel out these opportunities to customers and agents is unlikely to be channel neutral under a Direct Connect program such as American envisions.  In other words, consumers using a travel agency, including an on-line agency, may not receive the same information or opportunities as those consumers using the airline’s own website. 

The GDSs have stated they are ready, willing and able to provide all sales-merchandizing functionality for airlines at the initial sale. Yet, the process of standards development to make this possible for the broader agency community is not being supported by American. In any case, since the airlines are unlikely to pay intermediaries for distribution of ancillary services, there is a serious issue of how the economics of this process will work for intermediaries and consumers.

It is, in all events, critical that consumers have the opportunity, through a channel of their choice rather than one dictated to them, to assess all the options open to them in a transparent and efficient manner.  While there is no doubt that consumers are interested in the price of individual services, they are also ultimately most interested in the total cost of the trip.  Maintenance of total price transparency must be a highest-order goal of any regime created to charge consumers for separate ancillary services or bundles of them. Otherwise, increased search effort will inevitably hamper consumers’ ability to obtain optimum price solutions, resulting in their paying higher prices than a competitive environment with full channel choice and full and unbiased content would produce. In the worst case these increased costs may simply deter people from traveling altogether, which ironically would be bad for the very airline(s) that caused the problem.

In observations that underscore why it is that American’s plan, if successful, would cause serious harm to travel agencies and to business and leisure consumers, one commentator has described American’s Direct Connect as “not unlike a dealer model” and that “At this point we can only speculate on what role the GDS will play in the future of AA’s distribution.”(3)  This observer also confirmed the “disintegration” aspect of direct connect: “Technology wise it creates a challenge for the intermediaries to develop independent supply chain systems”(4) and “Ultimately the AA announcement … is just another step along the way from holistic to heterogeneous (read fragmented) supply.”(5)

Fortunately, no matter what American may think, it cannot force this new radical model on travel agencies and corporations in the U.S. because it competes over most of its network with other U.S. and foreign airlines. Many of those other airlines have long-term, full-content GDS agreements and in any event seem more willing to work with the travel intermediaries who sell so much of their tickets. Unless and until American withdraws this ill-considered plan, American’s competitors have an opportunity to gain for themselves the premium business and leisure travel sales that American may lose by making it more difficult and expensive to book travel on American than it will be to book travel on American’s more partner- and customer-focused competitors.

Nonetheless, consumers, travel agents and corporations, of course, cannot "just trust to fate" on this important issue because the consequences for them if American's scheme is followed by other airlines are far too costly.  Instead, consumers, travel agencies and corporations must protect themselves now by raising their voices, loudly and directly, to American's competitors to be absolutely certain they understand that the flight path to success is to meet the needs of their customers for transparent and complete information, as well the needs of those who sell and buy so much of their product - and not to follow the lead of American.

(1) XML is a programming language that enables reservations capabilities and enhanced services, such as interactive seat maps and pre-reserved seats, in lieu of traditional communication protocols used for GDS connectivity.

(2) ARC is an airline owned company that accredits persons seeking to be a travel agent and settles accounts for travel agency sales on behalf of member airlines. It is responsible for creating industry-acceptable accountable documents that can be used by agents and settled electronically through ARC’s computer systems.

(3) American Airlines unleashes a GDS earthquake, Timothy O’Neil-Dunne in TNooz.com, November 3, 2009.

(4) Id., emphasis added.

(5) Id., emphasis added.