ABTN speaks to technology expert Joshua Norrid, VP of Travel and Leisure at Progress Software, about the inevitability of direct connect, and why airline alliances could supplant GDSs.
What do you think about American Airline’s controversial experiment with direct travel agent bookings?
I think direct connect will work, however I think it’s got to take the right course. What I mean by that is they cannot just do a knife-edge cut-over and suggest that no connection to a Global Distribution System (GDS) is viable. I believe that the GDS will always probably be around, but it won’t have anything close to the level of the relationship that it has with the travel providers today. As long as they have that in mind, and as long as they maintain connections for the products that they cannot directly connect to, I think they’ll be ok. For air travel, I think they will probably shift towards an ownership model for those connections and make them direct with their vast partner network through Oneworld.
A lot of people in the industry are worried or nervous about direct connect. What would you say to them?
I would say that with the travel industry you have to have an open mind. Direct Connect is not necessarily a play towards complete and total disintermediation, like most people are charting it out to be. From the vantage point of a travel agent, the airline industry has not been paying travel agency commission since 2004. So, the commissions that are received by a travel agent are paid by a GDS.
If you look at the fees that an airline or a hotel company is paying a global distribution system or a hotel switch or whatnot, and you were to examine the volume of that, there’s no reason that the airline can’t cast new relationships with the travel agency community and provide them the same access or better access than they’ve already had. Having said that there’s going to have to be some renegotiation that takes place at the table.
I would say to a travel agency or to a representative body that this is not the last conversation that’s going to be had between travel suppliers and travel retailers. There’s plenty more on the horizon. Renegotiation is imminent.
What are each of the stakeholders trying to get out of this?
The airlines are going to try to get lower fees for bookings. They’ve got to reduce the cost of travel distribution as a component of day to day travel. Quite honestly, the travel agencies are interested in getting a better commission than what they’ve been reduced to with the ever decreasing GDS commissions.
Honestly, if the airlines were to stop paying the GDSs, and cut in half what they pay GDSs with reservations that were sourced from travel agencies, and then pay that to the travel agents, everyone would walk away happy. The airlines would have cut their cost per booking by 50% and as a direct result of that the travel agencies end up getting a higher percentage commission for each sale that they make direct to the air network. This is all hypothetical.
It’s interesting. We’ve heard lots of rumbling and grumbling in the industry about what’s happening, but from our perspective, as a technology company, we can enable this framework of direct connect existence at a level that’s unmatched in the industry. There’s just not anyone else out there that has the data technology that we have.
What about the argument that the GDS provides everything in one place, making it easier to compare and book?
It’s easier because the GDS has already invested in making those necessary connections, however if you look at what the various travel companies have done to fold those types of capabilities into their own central reservations system over the years I see that the tide is starting to turn.
There are also worries around fragmentation – travel agents having to have 100s of connections, whereas to a GDS it is just one connection...
I don’t think that it’s going to be a worry. I believe that there will be a way to make it work, because airlines are continuing to develop their codeshare partnerships, their alliance partnerships amongst themselves.
Look at Oneworld provider, AA. When AA joined or helped create and found Oneworld with all of the other airlines, they immediately opened themselves up to connecting with six other parties. So by way of connecting with their network, if you will, then you had access to six other providers.
What we’re seeing is a compound annual growth rate of about 19% on travel alliances. So if you look at 2008, 2009 and 2010, that’s the rate the alliances are growing. What that means is that it’s only going to get better for a direct connect scenario to play itself out – ie. airlines are connecting to more airlines, and by way of connecting to any one of them, you get the benefits and the routing network of all of the ones that are in the alliance. I think the alliances may end up somewhat working to supplant the GDS network of today.
We’re focussed less on fragmentation in the market and more on helping active market participants deal with the fragmentation themselves. Today when you have a travel supplier and their traditional distribution channel outside of their own presence on the internet is through Global Distribution Systems to a network of online or traditional travel agents.
We predict that the cost pressures on the industry per reservation are ultimately going to drive the GDSs out of the business, and we believe that travel companies are going to want to create a much more direct relationship with their customers. And so from our perspective, enabling companies to continue to maintain their existing partnerships without the GDSs being in the middle and collecting a fee is something that is definitely on the horizon.
As we’re seeing with AA...
Yes. And Southwest, who I used to work for, voted early on in its existence to never yield, ever, under any circumstances, to the GDS. In fact, they built their own hotel, rental car and cruise connection within their own central reservation system and are selling those products at a 10th of the cost per reservation than anyone else in the world.
So is AA actually a little behind the trend?
Well, Southwest is sort of a maverick in and of itself. They’re always going to be one of the leaders and one of the innovators. Believe it or not, BA is a significant innovator in their own right, although many times their operational challenge muddy that up. Virgin Atlantic is another significant innovator. There are several of them that are pushing the envelope.
Unfortunately, behind the scenes everybody has this 40 to 45 year old legacy technology that they have to contend with. We’re starting to see them move out of those, and to make the necessary multi-year, multi-million-dollar investment that will transform their fundamental systems and take them to the next generation, but that’s a three to five year play. That’s not something where you can pull out your magic wand, say abracadabra and have it done.
So is everyone watching AA?
I think the other airlines won’t move necessarily as rapidly on direct connect, but they are doing at least the minimum right now. They’re watching AA very closely, they’re going to see what happens, but while they’re watching they’re doing everything they possibly can to change their reservations platform, shifting to a more agile one that will afford them this capability down the road, or they’re cutting agreements with their GDS provider that gives them an easy out clause.
What is the future for the GDS model?
I think the future for the GDS is to continue to act as an aggregator for product that is ancillary to air. So, we’re going to see travel and tours, activities, rail, auto-rental and hotels. Whereas a few of the more prominent airline players seemingly have the dollars to invest in this next generation philosophy, the hoteliers are dieing. The auto-rental companies are having a hard time of it as well. They haven’t quite recovered – they’re behind the airline recovery we’re seeing in terms of the return of the business traveller. So it will be a while for them, and they’re going to need to maintain linkages to the GDS to keep their volumes up. I think GDSs ultimately will significantly reduce their volume, but they will probably end up changing that for higher volumes on products that are ancillary to air.
In 10 years time are we going to look back and ask what all the fuss was about?
I think that we’ll ask whether we accomplished what we really said we were going to. There has to be a healthy set of measures that are put in place early on for any kind of direct connect strategy to work. For any kind of change like this you have to do the intellectual groundwork up front to figure out how you’re going to measure it through its lifecycle, or it’s doomed to failure. Careful consideration needs to be laid out around just exactly how we’re going to measure the success of switching to a direct connect model.
The other thing I’d say is it’s not going to work for everyone. If you don’t have greater then 1,000 daily departures, direct connect might not be for you. But there are going to be some of the larger providers for whom this is going to make financial sense.
Even with the cost of companies such as yourselves building this technology?
Well, you have to look at that one through the lens of how much it has cost for the last 40 years. When you look at these mainframe technologies, take the example of two airlines that have decided to codeshare. Today that usually ends up involving a Global Distribution System between six and nine months to make it successful, and a team of about 30 people. These are accurate numbers, pulled directly from my experiences at AA and Southwest.
Six to nine months, 30 people – and we’re not talking about inexpensive resources either. If you can take that and carve it down into weeks, or a month, then you’ve made a significant dent in what the upfront investment costs are in order to realise a direct connect codeshare scenario between multiple parties. That’s what we’re trying to enable.
We have yet to quantify how much it’s going to cost for the industry, but we’re working on it.
At a time when the industry is struggling financially, should this be where the money is spent?
Now is the time. You’ve got an 11-year cycle on airlines, hotels and car rental agencies for new investment. The last decade has been the worst decade on record for the travel industry. If it hasn’t been 9/11, terrorism, SARs, pandemics, global financial collapse... every time there has been recovery in sight, it has always ends up falling apart again. In fact, right now we have high oil prices, and there’s not an airline alive that has a hedging strategy that is effective north of $70 a barrel.
Is now the right time? I’ll put it to you this way. If they don’t do something soon to change their cost model on a per reservation basis, and get those things set in motion now, then they never will. They’ll end up continuing to operate in the mousetrap of 40 years ago.
Will everyone do it? No. Of the bigger and more prominent players in the industry, there’s not one of them on the planet right now that isn’t currently fundamentally trying to attempt a transformation of their reservations environment.
I think the key thing is that progress is focussed on operational responsiveness for companies. And what that really means is helping those companies use the technology that we put together in order to achieve their highest level of operating performance. Whether that is cutting costs, making data integration easier between different companies or different organisations within a single company it makes no difference. Whether it’s creating new revenue opportunities, we have a couple of viable solutions in that regard as well.
Our focus as a technology company is to help enable the industry. We’re very passionate about the industry. At the end of the day it really does come down to implementation and we have a set of tools and a philosophy behind them that we believe is different from everyone else in the industry.