September 2022, Virtual
September 29 2022, Virtual
Now in its 27th year, the Business Travel Awards
SEVEN YEARS AGO online travel agency Expedia had a major falling out with InterContinental Hotels Group (IHG), which saw the world's biggest hotelier (by number of rooms) refuse to let Expedia sell its inventory at prices below IHG's own websites.
Two years ago Expedia had a copycat row with Choice Hotels International, the sixth biggest hotelier in the world (by room numbers), and stopped selling Choice rooms on its website. This time, Expedia won.
Five months ago Expedia took issue with the decision by American Airlines (the US's third biggest international airline) to try and push more ticket sales through its own website, with the result that Expedia stopped selling American's seats online. Last month both sides settled for what appeared to be a draw.
These series of seemingly random spats involving a global airline and two major hotel chains with one of its main distribution sources are not isolated incidents. They reflect, instead, a strategic - and increasingly bitter - battle under way for control of the content that underpins the business travel world.
Airlines - and to a lesser extent hotels - are fighting to take back 'ownership' of their seats and beds after effectively, or so they believe, losing control of them over the past decade to the new generation of online ticket agencies (OTAs) as well as traditional global distribution systems (GDSs). The fear for the airlines and hotels is that the products they sell - seats and beds - are becoming increasingly commoditised by the way they are sold online by third-party distributors, with price-driven searches giving suppliers little chance to highlight, for example, their enhanced in-flight services or softer mattresses.
This fight for control of content and distribution, moreover, could be the start of a fundamental restructuring of the whole way business (and leisure) travel is organised and paid for over the next decade. And already there are new players emerging: Google, for example, recently bought travel search company ITA Software for $700m. Both Microsoft and Apple have also made clear their desire to get involved in the online travel market.
The decades-old legacy GDSs unsurprisingly feel threatened by the airlines' long-term aim to become the focal point of distribution, a move which also has implications for travel management companies (TMCs), which inevitably have a close relationship with the GDSs.
And corporate travel buyers - as well as individual business travellers who book their own travel - may face higher fares and reduced transparency as a result.
Yet when American made its move last autumn to change the terms of its soon-to-expire distribution deal with Orbitz, (48 per cent controlled by Travelport, which also owns the Worldspan and Galileo GDSs), it did not seem at the time to herald such a seismic shift in the airline world. The airlines have been talking for years about taking greater control of their distribution, but nobody believed they would actually do it.
American, however, timed its move carefully, coming ahead of a raft of similar renegotiations it is due to have this year with other OTAs as well as the GDSs. Yet what seemed to most industry observers as simply a negotiating ploy for better terms quickly snowballed into a major crisis when it became clear that American had more of a game-changing plan in mind. The airline wants more bookings to be made through its Direct Connect system - basically its own online booking set-up - which would not only cut the cost of fees paid to third party distributors (such as GDSs) but also give it closer links to its customers.
"Our direct connection system offers a path to a new era of buying and selling travel services," explained Derek DeCross, vice president and general sales manager for American Airlines, when the row first erupted.
The spat then turned nasty, with litigation flying from all sides. "This is not a skirmish between American and the online travel agencies, but rather an all-out war for the future of both airline and all travel distribution in the US and around the world," claims Kevin Mitchell, director of the US lobbying group Business Travel Coalition which earlier this year helped launch an alliance of 250 or so companies and organisations called Open Allies for Airfare Transparency.
But by early spring there was a lull in hostilities as the key players seemed to believe a pause was sensible to try and resolve some of the issues, culminating in last month's peace deal between Expedia and American. Although both sides were said to have made concessions (details remain confidential), Expedia agreed eventually to embrace American's Direct Connect sales channel by means that could include greater use of so-called 'aggregation technology' provided by the GDSs to enable third-party access to airlines' systems, particularly for non-fare content.
But the wider issue has by no means gone away - American's flights (at the time Buying Business Travel went to press) were still not being listed on Orbitz, while American and Sabre Travel Network were due to resume litigation in June this year, unless a deal is reached before then.
American and Sabre had become engaged in legal sparring in January over Sabre's decision to downgrade American's data on its GDS as well as terminating its contract (to sell American flights) when it expired in the summer. Sabre senior vice president Chris Kroeger said at the time: "This is broader than a specific contract dispute - It has become clear that American Airlines intends to impose an unproven, costly and unnecessary system on to the public.".
Eventually, some sense prevailed, leading to a status quo agreement while attempts to find a solution were explored. The threat of more courtroom squabbling may see some sort of deal thrashed out before June and talks between Sabre and American were said to be continuing as Buying Business Travel went to press. However, the legal dispute between American and Travelport/Orbitz actually escalated last month when American launched a new lawsuit claiming damages against Travelport and Orbitz.
Yet, despite of the raised peace hopes from the Expedia settlement, the dispute is starting to creep up the corporate travel buyer's agenda. GDSs are the bedrock of how TMCs operate and any change to the status quo will affect both them and their clients significantly. Carlson Wagonlit Travel in the US, for example, has estimated that its clients' transaction costs would increase by over USD$50 a ticket if it was forced, when booking flights, to deal with the airlines direct rather than through the GDSs.
"Direct connects mean less transparency for the business traveller and escalating technology costs for corporate travel programmes," says Andrew Winterton, CWT's UK-based president for suppliers, products and technology.
HRG's Bill Brindle, director of global distribution and technology, thinks American's move to Direct Connect will add more complexity to the system. "It takes us back to square one again, back to reinventing GDSs once more," he told the recent Innovation in Airline Distribution Conference in London.
It is rather ironic, however, that American should be at odds with the GDSs - especially Sabre, since it was American that launched it back in 1964.
Before that time, the rapid growth of aviation in the post-war decades had been hampered by the limits of distribution of tickets without any of the modern-day technology. The airlines fundamentally had - and still have - the problem of selling millions of seats every day to a highly fragmented customer base.
But, working with IBM, American set up the Semi-Automated Business Research Environment (Sabre) initially as an internal computer reservation system (CRS) but eventually deployed in the 1970s into travel agents' offices to deliver, via dedicated terminals, accurate schedules, fares, availability and booking capability instantly at point-of-sale.
This was followed by the other major airlines, who all formed their own proprietary systems before airline GDS ownership was deemed anti-competitive by US and European regulators and they were forced to sell them off. Now the airlines can pick and choose who they work with - BA, for example, currently has distribution deals with all the major GDSs.
What is changing the dynamics of the whole distribution debate, however, is that the airlines are facing a difficult financial future.
The two biggest costs for airlines are fuel and labour and while efforts to curb wages are an ongoing process for all carriers, it is the prospect of oil prices continuing to remain high because of Middle East tensions that is the real worry.
Reducing the costs of distribution is a no-brainer in business terms but American's gamble is whether, given the economic environment, now is the time to do it.
In addition, the success of US airlines in charging ancillary fees - which brought in nearly USD$10bn in extra revenue for the carriers last year - represents an important additional profit centre.
Booking and paying for these through an airline's own website ensures no cut for third parties.
Yet while American is leading the charge with Direct Connect, its rivals are adopting a wait-and-see approach. A BA spokesman, for example, confirmed that the airline has no plans to follow its transatlantic alliance partner American with its own direct connect system. But as far back as 2007, when BA was renegotiating its agreements with Sabre and other GDSs, it is understood that BA considered moving to a direct connect approach but backed off as it felt the time was not right.
Delta, however, has been taking a tougher stance on distribution, pulling its fares from farecompare.com, one of the new breed of meta-search sites which takes content from OTAs (Orbitz in this case). Yet US Airways has this year signed new distribution deals with Travelocity and Expedia, albeit supposedly with the ability to develop direct connect systems as well at a later stage.
HRG's Brindle, moreover, did confirm that HRG was already working with "five or six" smaller airlines who were operating a direct connect distribution system. And HRG has also agreed with Travelport for use of its Universal API (application programming interface) software to access content from airlines and hotels "as a complement to core GDS content", according to an HRG statement.
What happens next in the underlying struggle for control of this content remains uncertain, with the latest moves for peace regarded by observers as merely akin to a ceasefire rather than a solution. But, after the aggressive stance which sparked the whole conflict off, the momentum remains with American and, behind the scenes, its fellow airlines.
Perhaps the most pertinent fact in the whole debate is that Europe's biggest short-haul airline and America's largest domestic carrier both have virtually total control over their distribution and always have, generally eschewing the GDSs and other third-party distributors. They are, of course, Ryanair and Southwest Airlines. It may be no coincidence that they are also two of the world's most consistently profitable airlines.
IntercontInental Hotels Group's senior management knew it had a problem in the summer of 2004. Despite its hotels recovering strongly from the global slowdown in the aftermath of 9/11, IHG was still losing money on many of the rooms that were filled with guests.
The reason? IHG, along with other hotel chains, had panicked during the economic downturn and had allowed a significant proportion of its room inventory to fall into the hands of the new breed of online travel agencies, such as Expedia and hotels.com.
These companies bought the rooms from IHG at wholesale prices but sold at retail to their own online customers.
IHG, however, was unhappy as it had no direct control over the sales process - such as what claims were made about the accommodation - nor the actual price charged. Yet if guests wanted to complain, they tended to direct their ire at the hotel group rather than at Expedia.
So IHG told Expedia and others that unless they agreed to operate under the hotelier's rules then they would not have access to its room inventory. Expedia refused to fall in line, holding out for three years before eventually agreeing to sell under IHG's terms.
Two years later, in the autumn of 2009, Expedia was again at loggerheads with a major chain - Choice Hotels International - over issues such as access to last-room availability for Expedia clients. Again, it was a question of who was in control of the hotel group's inventory. Expedia subsequently stopped offering Choice rooms on its websites while the Choice CEO Stephen Joyce held firm.
But Choice did not have the same clout as IHG and was operating in a much more fragile economic environment, post recession. So after just two weeks, Choice chose to settle, putting Expedia back in the driving seat.