Ahhh … March. This winter in Southern California has been akin to living in Seattle; we’ve had the 2nd wettest winter since 1884 – almost 36 inches rain. It’s been wet and cool since early January. But today it is a delightful sunny 76F (24C) degrees. There is a light wind coming off the desert blowing the haze and smog out to sea. It is a wonderful spring day to be sitting on my deck conjuring up March’s “Off-the-Wall Comment(s).”
Eastman's "Off-the-Wall Comment(s)"© ...
The ResExpo conference in early March generated a great deal of publicity … largely because it was the first significant trade event to follow the announcement of G2 Switchworks and ITA of their new GDS by-pass solutions. United Airlines had announced in early February that it would offer a per-ticket incentive of up to $5.00 for early-adopting travel agencies that shifted from legacy GDS tool to the newer systems.
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OTWC_March_2005 Page: 1
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All of the quotes noted above were quips picked up and reported by one travel trade magazine or another during the ResExpo conference.
These quotes were part of the introduction I used this month to discuss the topic of GDS By-Pass in presentations to the Silicon Valley Business Travel Association and two TQ3 Navigant’s Corporate Advisory Board meetings – to draw attention to the diverse views that GDS by-pass represents. Each quote has its own spin … and I’d like to take a moment to put some “un-spin” on the thoughts proffered.
“I’ve never seen Sabre, Galileo, Amadeus and Worldspan “lock arms” this much.” Jim Davidson, CEO Farelogix, Former President/CEO Amadeus North America
There is little doubt that the traditional GDSs are “locking arms” against this new external threat to their dominance and control of the traditional travel distribution model. An alternative digital gateway solution for booking seats on airlines is a major threat to the traditional GDS industry unlike anything that has come along before.
Not even the evolution of Internet travel agencies posed much of a threat to the control over distribution for the GDSs. Yes, Internet travel agencies have significantly transformed the relationship between buyers and access to-and-from the distribution system – and with the relationship between buyers and travel agents; but the GDSs remained the digital-links through which the major trunk carriers continued to offer product.
The fact that United Airlines would offer corporate travel agencies an incentive to abandon the traditional GDS system in favor of an alternative, lower-cost, gateway into the United host is a very real “wake-up” call. The GDSs can chip-and-bitz about market-share among themselves – because the literal market-share shift was minimal and always within their own industry oligopoly. True, there was some erosion of bookings via airline-direct Internet web sites; but for the most part, the actual booking tools were actually provided by the GDSs or their subsidiaries.
As new-business start-ups, neither G2 Switchworks nor ITA would represent much of a threat to the traditional GDS structure (I know … I’ve tried a couple of times “;-]] ). But both ITA and G2 evolved out of the successful airline owned online travel agency Orbitz. Both have leaders well recognized from the Orbitz evolution and ITA’s fare-rules engine has become the backbone of a number of other airline and Internet product offerings. Concurrently, G2 was apparently intimately involved with the development of the Orbitz alternative-GDS model prior to Cendant’s acquisition (if the law suits between the two are to be believed). And G2 recently obtained $10 million dollars in equity funding.
All that is to say, between them, these two new-entrants have the foundation upon which prudent investors can foresee the possibility of achieving critical-mass in an alternative new-technology distribution channel. Add FareLogix and a few other smaller players, and what the airlines are siphoning off for themselves via direct-bookings, the traditional GDS distribution structure is significantly threatened! Is it no wonder that Sabre, Galileo, Worldspan and Amadeus have “locked arms” to forestall these new entrants?
“There will be a lot of pain. The question is, who will bear that pain?”
Mitch Gross, General Manager, The America’s, Galileo’s Client Services.
And that is a very good question!
Historically, the airlines have borne the pain! In the past, the airline “pain” of paying segment fees to GDSs was fairly easily off-set by the price control that the oligopoly of GDS distribution provided for the airlines. Product pricing could be controlled via the channel distribution … and there was insufficient “spill” between channel retail outlets for spill to be meaningful. But along came Internet … and all of a sudden, the channels could put their pricing out to “the world;” which led to ubiquity of fare information.
The Internet has virtually eliminated the ability of the airlines to control their pricing via different distribution channels (other then on their own web sites). In so doing, the Internet has concurrently created a commodity market for airline seats. Some of you may have noticed that JetBlue announced plans to roll out a dynamic packaging option on their web site this summer[2] – that will integrate “packaged air and hotel” pricing; effectively beginning the process of combining two commodity product offerings as one to create a “value add” for buyers (lower total price) with higher opaque margins for the suppliers. This is not an easily implemented solution within the traditional GDS architectures; but almost a “no-brainer” on new technology platforms. Therein lays one of the less painful alternatives by which traditional GDS segment fees will be off-set or replaced.
There is another aspect of this question that needs to be explored. In each of the sessions I worked in this month, I asked the participants the following two questions … “How many of you access Internet from home?” Virtually every hand was raised. “So, who pays for that Internet access?”
Therein lays another answer to who is going to bear the pain. Instead of the airlines having to fund all of the software technology, all of the telecommunication costs and all of the hardware costs – the users are going to have to start picking up a portion of those costs. But today, the bulk of the $4.00 segment fees go to supporting a technology base that mandates the use of proprietary hardware and software – by suppliers, vendors, intermediaries, and virtual users. With the exception of the “JetBlue’s” of the industry (and there are a few others in addition to JetBlue), virtually all of the “user-friendly” web-based front-end tools exposed to customers and agents alike – all go through “technology interpreters” for conversion to the “proprietary technology” solutions that serve the GDSs and airlines.
But in today’s contemporary technology world, virtually everybody uses interactive communicating technology tools – from PCs to Blackberry’s to cell-phones; all owned by the users and all moving data across common technology platforms using common software conversion protocols. What costs $4.00 per segment to process on proprietary technology and software platforms costs 25% of that on alternative platforms – in large part, due to the commonality and universal acceptance of the alternative technology platforms!
Still, implicit in Mitch Gross’ comment is a hidden cost that the airlines must, ultimately, bear. It will be a very real pain. Fortunately, it will be largely a one-time pain; in lieu of the ongoing $4.00 per segment pain that the airlines are confronted with if they continue to support the traditional GDS distribution structure. That airline pain will be the cost of converting their legacy proprietary software and hardware technology platforms into contemporary technology solutions! And the hard reality of that pain WILL NOT be the literal costs of technology conversion – but the hidden costs of retraining, restructuring, and redefining the tasks and roles of the people within the airlines.
Frontier Airlines recently “scratched” the surface of this pain when they moved from being hosted on EDS Shares to being hosted on Sabre. I’m told that the migration process went pretty much “as planned;” with the minor technology and data mapping hiccups that are typically spawned by such migrations. But in spite of purported training on the new Sabre systems – the actual switch from many-years of using command-line instructions to the new Sabre web-enabled user-friendly screens virtually brought Frontier to its knees. The agents had been trained – but they had NOT been confronted with “real time” issues in “live-stress” situation; and when they were, they reverted to “first-learned” skills – trying to figure out how to use command-line entries and applying Shares structures to a Sabre data environment.
On the day of migration, virtually all flights were delayed; many were canceled. Customers at the airports found themselves waiting in lines for up to two hours. Many spilled themselves to other carriers. Delays were system wide. Telephone wait times were up to 4 hours (for those with the patience to hold). The problems were not resolved in one day as the Frontier PR people initially claimed – but lasted for more than a week. Four weeks after the migration, callers to the Ascent Frequent Flier telecenter were still getting a pre-announcement suggesting wait time of one to two hours; and recommending that Ascent Members might be served in a timelier manner via the Frontier web host.
What is the “pain” of such an experience? What is its cost in lost employee moral … in lost customers … in lost revenue? And in this case, the bulk of the problems were apparently created by experienced users moving from a traditional “command-line” response structure to a purported “user-friendly” set of web screens already proven to be more efficient and effective for a number of other carriers!
There is real truth to Mitch’s question – a truth that can be mitigated with careful planning. But it is a truth of any new technology transition that rings true not just for airlines (as the example I use implies) – but for virtually any travel business that is today, a part of the traditional distribution channel.
Technologists tend to dominate these kinds of business structure transformations. It is easy to become mesmerized by the technology focus; and miss or downplay the human elements of change. Yet, just as consumers have learned to efficiently use Travelocity, Expedia, eTravel, and Orbitz user-friendly type front-ends., the operational and other aspects of technology transformation in the way travel product is created, distributed, and delivered can be overcome with thoughtful foresight and a focus on humanness of the transition. By focusing on the human elements of implementing new business processes, the technology facets will virtually take care of them selves.
“The number one trend in the travel business is for companies to attempt to be more agile.” Mike Hulley, Vice President, Transportation Global Industry, EDS
Regular readers of OTWC have been seen this message frequently. The key word here is agile.
However, agility is NOT reflected in dependency on a single technology platform or gateway. Agility is NOT represented by dependency on a single distribution channel. Agility is NOT based on having an outside third-party channel vendor or supplier promising to be responsive to the ever-changing industry on YOUR behalf.
Agility … whether one is discussing product packaging, internal operations -- or the technology tools to enable either or both … is dependent on the primary business entity owning and controlling its own information management technology switch.
In the traditional distribution structure, various intermediaries provide different elements of the digital packaging of travel products. Technology traditionally came from the GDSs. Travel packaging was typically the role of tour operators. Travel agents performed the retail outlet functions of product distribution. Roles were fairly clearly delineated and pricing structures served to fund the appropriate channel.
In a digitally-driven information world, as noted above, these channels have come apart. The problem is that they have NOT yet restructured themselves. It makes no difference whether one is an airline, a GDS, travel agent, corporate travel buyer, tour or cruise operator, trade group, hotel or bed-and-breakfast property, leisure travel buyer, Internet travel marketing company, car rental or limousine services company, financial settlement center, ground services provider, or any other of the myriad of other travel industry participants – it is no longer possible to intelligently predict the future of your business marketing alliances and/or distribution channel structures. All that you CAN predict is that whatever they are today – there is only a 15% probability that they will still be the same in three years!
Thus, if you are to remain agile in today’s evolving business environment, it is incumbent on one to take control of and maintain or manage from within your own business entity, the key technology that enables your business to integrate its products with widely divergent suppliers and/or buyers (i.e. distribution channels). The greater a company’s dependency on a single channel or provider of services – the more likely that company is to become a sole provider or outlet of products controlled by that intermediary channel.
If survival depends on agility, then it is incumbent on every business entity to control the technology switch through which it obtains its product and/or sells its product. It is quite possible to outsource virtually all other elements of your digital information/management/processing environment if you control the flow of information to and from the entities and business processes that go into fulfilling your product commitments. Outsourcing your control platform virtually relegates your product offerings to those of your outsource platform! In today’s travel business environment, the traditional roles structure alluded to above is no longer valid; and one moves along that path with great risk.
“Airlines are increasingly moving to the Internet to sell tickets not only because of lower costs but also because Internet success in driving customers, unlike more traditional advertising such as print or the electronic media, can be exactly measured.” John Slater, Managing Director, Distribution Planning, Continental Airlines