With AA's high-profile legal tussle with the GDSs in mind, Martin Cowen assesses the impact of direct connect on the business travel industry.
THE PHRASE 'DIRECT CONNECT' had been lurking in the travel distribution shadows for some time before American Airlines brought the concept into the full public and media spotlight with its dispute with the global distribution systems (GDSs).
And like most things that live in the shadows, you're never really sure what it is until it emerges. If direct connect is going to be a big issue for the airline industry, what exactly is it?
American's ongoing dispute with distributors has done little to clarify matters. The recently declared truce between Sabre and American means that, like the snow before Christmas, what was everywhere has gone. For now.
Chris Kroeger, senior vice president for Sabre Travel Network, has been its spokesman on the American issue.
The strange time-warp continuum that is the gap between print deadlines and this magazine arriving on readers' desktops makes dealing with the specifics of a developing news story unwise. But Kroeger is also interested in the wider issues that the dispute has raised.
"This is broader than a specific contractual issue," he says. The specific contractual problem Sabre has with American is in the hands of the lawyers. Publicly-available court documents so far have shown that Sabre believes that by restricting its access to certain fares, American is reneging on full-content obligations under the terms of its current deal.
Kroeger declines to speculate "too much" on why American has acted the way it has, and is especially reluctant to contemplate whether this was the first salvo in the imminent contract discussions between a number of airlines and the GDSs.
Direct connect, according to Kroeger, is any system that connects directly to an airline's system, bypassing third-party distributors and the associated costs. He argues that direct connect already exists: "We already have direct links with American and another 400 or so airlines and they are all in the GDS, too. There is no need to look for a replacement."
Particularly if the American Direct Connect platform, provided by Farelogix, is "new, unproven, incomplete", and unlikely to cope with the complexities surrounding normal reservations, never mind disruption and crisis management, says Kroeger.
Travelport has also been fairly vociferous in this. Travis Christ, its president for the Americas, was working with a similar definition of direct connect to Kroeger's.
"We think direct connect is any travel supply which is distributed by the supplier rather than through a third party reseller," he says, adding that the issue for travel is that "there are so many suppliers in the travel eco-system, you need third parties to pull all the data together and normalise it".
Christ continues: "There is a system in place which already works. It provides a single source where travel content is delivered to the end consumer in an efficient and practical way. We think that what we do offers the best technical and economic answer to distribution.
Imagine if there was nothing but hundreds of direct connects to airlines, all bypassing the GDSs."
He isn't overly concerned about the training that such a nightmare scenario would require. "Direct connect should have a user-friendly interface, so I don't think training would be an issue for agents or TMCs," he says. "It's more a question of having to try to comparison shop using separate systems, and to connect any bookings made directly with other back-office systems."
The airline industry is leading the way with direct connect, but the issue of avoiding third party costs is on the radar of suppliers of other travel products. In the leisure sector, Europe's two biggest players, TUI (Thomson and First Choice) and Thomas Cook have both told the City that they want around 70 per cent of all bookings to come direct, either as walk-in bookings on the high street or to their call centres and websites.
They argue, not unlike American, that distribution costs paid to third parties bite into the already wafer thin margins.
Eurostar is a good example of a supplier that needs to have a multi-channel approach to serve the differing needs of leisure and business travellers. Darren Williams, head of UK sales, admits Eurostar is aware of the AA-GDS spat, and is watching with interest. "We have no plans to follow them [AA]," he says, "but we understand where they are coming from in terms of cost."
Eurostar has had a direct connect with leisure travellers at eurostar.com and has used third parties, such as Expedia and lastminute.com, for some time. However, it was acknowledged that these channels had "limitations" in business travel, and in 2005 the train operator started full migration of its content on to the GDS.
"The cost of the booking through the GDS is higher than through our own website, but it gives TMCs and corporate customers everything they need," Williams says. Eurostar's business travel component is growing year-on-year, and GDS connectivity is vital for this. "There's an operational benefit, too," he says.
"Disruptions are easier for TMCs to manage because all the data is in the same place, so there is an operational benefit to us from the GDSs too."
Williams says he hasn't had any requests from corporate clients for a Eurostar direct connect. "We have two significant customers who have direct connect relationships with our contact centre," he reveals, with eurostar.com serving the needs of unmanaged travel. Eurostar is also "very mindful" of how much a robust direct connect would cost.
As mentioned, Sabre and Travelport have been leading the anti-AA charge, while Amadeus has been fairly quiet - it was "unable to talk about direct connect at this stage" for this article, though Amadeus has been named as one of the 117 members of the recently launched Open Allies for Airfare Transparency coalition.
The prospect of direct connect crossing the pond and becoming a European issue is something that all three GDSs are looking at, particularly in light of AA's new joint venture with BA and Iberia. "It is a global issue, when you look at it in terms of how airlines work with their partners, and what happens to codeshare, alliance and interline bookings," Sabre's Kroeger says.
And what about Asia-Pacific? The growth of aviation in this region over the next decade presents distribution opportunities for everyone, particularly start-up airlines without the legacy system issues of mature markets. And the growing airline IT units of Travelport, Sabre and Amadeus could well be building the direct connect systems that will cut out their distribution colleagues.
In Europe, Ryanair has championed the cause of direct connect since it first took to the skies, taking bookings only at its website. More than 70 million passengers were estimated to have booked directly with the airline in 2010, all of them bypassing any third-party intermediary.
Easyjet's model of providing third parties with application programming information (API), while maintaining its control over yield, has also proved successful. However, failed premium airlines Silverjet, Eos and Maxjet all had a mix of direct and third-party sales, and look what happened to them.
It would be far-fetched to suggest that distribution issues were behind the demise of the business class-only carriers, but it is clear that how tickets are sold can create a competitive advantage. Easyjet's early success is widely attributed to it putting the phone number of its call centres on the side of its planes. Painting everything orange helped, too.
The current economic climate - even before an 0.5 per cent drop in Q4 GDP - makes it unlikely that there will be any new airlines launching soon in the UK. But Eurostar execs are preparing for Deutsche Bahn to start running trains from London direct to Amsterdam and/or Frankfurt from 2013. In airline terms, Eurotunnel slots are now available.
"Getting your distribution strategy right is crucial to success," Eurostar's Williams says. "Price, network and service also play a part, but distribution will be a battleground."
He continues: "The rail market is an echo of the air market. Airline technology is now disassociated from the carrier. In the rail sector, the distribution technology is still closely linked with the operators. But we think that in five to ten years' time there will be a rail GDS, offering train operators what the airlines have already."
Travelport's Christ suggests that the differences between a direct connect and an API were negligible in real terms, and referred to its recent deal with Air Canada, giving Travelport access to "all fares, seat availability, fare families and optional services offered by Air Canada". This is achieved by the GDS "interfacing" with Air Canada's API, known as AC2U.
Christ says Air Canada "has historically been at the vanguard of merchandising and ancillary fares". Ten years ago, he said, Air Canada tried direct connect and its customers "spoke with their feet".
"The most efficient path is providing customised dynamic offers to customers through an API or XML [extensible mark-up language] feed," he says, suggesting that this offered an acceptable compromise for airlines and the distributors. Negotiations between Air Canada and Travelport were based on "different economics" with "progressive thinking" playing a part. "The risk/reward model has been tweaked slightly," he says, without going into detail.
"Ultimately, the relationship is about enhancing the profitability for airlines; should an airline spend money to create a whole new system, or just work within the current system to make the most revenue?" Christ says, while acknowledging that the current system needs to continue to modernise and evolve.
So if Travelport and Air Canada can come up with a compromise, why are the airlines and its distributors generally squaring up to each other? One argument that hasn't really been discussed is why the airlines should have their distribution strategy decided by the people who distribute their product. Why can't American or any other airline want to keep some fares to itself for direct connect?
In the current case, it's a contract issue about transparency, but Christ generally agrees. "Airlines are perfectly entitled to set their own distribution strategy," he says, "and can decide who they want to distribute their products. But the distributors can also decide which airlines they want to work with, and on what terms. "Negotiation, co-operation and interaction is essential," he concludes. "Business works best when partners work together productively."
Though they may disagree, most corporate buyers would understand airlines' claims that direct connect can, theoretically, save costs. But airlines are trying to drive more revenue via ancillary sales, for which they need a more costly system (the International Air Transport Association (IATA), is working on a set of standards to harmonise the sale of ancillary revenues, which should be in place by 2014).
An often-overlooked part of the airline/corporate relationship is frequent flyer points (FFPs). In a new development, businesses with an interest in helping airlines drive incremental revenues are trying to get airlines to help customers redeem points in a way that is more profitable than giving away their precious seats.
Collinson Latitude is an incremental revenue specialist. Head of its travel unit, Iain Webster, explains: "There is still a lot that can be done with FFPs. We are interested in encouraging airlines to widen their thinking about the customer base."
On the leisure side, he says that "online auctions", using FFPs as currency, could engage travellers. They could redeem points in exchange for airline-related products, while the airline could partner with non-travel suppliers for exclusive and differentiated offers. Corporate buyers, he suggests, would be able to use points to pay for lounge access or in-flight wi-fi.
Direct connect isn't an issue when it comes to FFPs, as the airlines own all the data. "But they have had loyalty schemes for 30 years, and there is still a lot that could be done with them," says Webster.