Read the full interview HERE
We interviewed the founder of Travelocity and Founding Chairman of Kayak.com on the structural changes in air and hotel distribution over the last decade.
- The history of Sabre and formation of the GDS business
- Potential impact of coronavirus on Sabre and Amadeus
- GDS pricing structure and bargaining power with airlines
- Core differences between hotel and air travel distribution
- The founding of Travelocity and how Expedia stayed closer to the customer to own the transaction
- Strategic analysis of Google in the travel value chain
Maybe we can take a step back and look at how an airline specifically looks at the value of the GDS and compare that, obviously, to the direct distribution that they’re been pushing for the last decade or so?
They’d all prefer to have direct booking, all the time. They don’t want to pay the fee. Just as they cut the fee of travel agent commissions to zero, they would like to reduce their distribution fee to zero, because they can’t control many other costs. The oil is out of their control. Labor is unionized. Airplanes cost what they cost. There’s not much more to cut. Distribution costs are always the sacred cow that they go after to cut their costs. Now, in business travel, they seem pleased. Most of the business travel goes to the GDSs; those are high-paying passengers. As a proportion of the cost, the distribution cost is relatively low. For a $200 ticket, they don’t like it because the distribution cost is fixed by flight. It’s charged by flight segment, not by the price. On low-price tickets, they don’t like it, which is why they want direct connects to the big OTAs because, mostly, they sell leisure travel. If we look back at other crises, after 9/11 was the time the airlines finally decided to cut commissions to travel agents. I think Delta did it first. The big travel agent associations and American Express said, we’re not going to book you anymore. Then three days later, all of the other airlines did it. That was that. Crises are times when companies make decisions that they hadn’t been able to make before, particularly if the quarter is a disaster anyway. We might see some interesting changes during Covid, you never know.
What do you think could happen?
There could be one side action in refusing to pay fees or cutting fees or finding some other way to act. I think the carriers won’t do that right now because they just got bailed out by the government. It’s very hard to take action and they’re not allowed to take action on many things, under the governmental rules. If we get past September, when those rules lapse, and somebody is flat on their back, then we’ll see. Some of these airlines have done something that I really don’t like. I’ve served on 17 corporate boards, I think 6 of them public companies. Some of them have been buying back their stock like crazy to raise their stock price and, in some cases, reward employees. Then they go out and take massive amounts of debt. Those two things don’t work. Stock buybacks, if you have the cash like Apple does, that’s one thing. If you’re going to do a buyback and load up on debt, that’s something different.
Therefore, some of the carriers are in difficult positions with that. We’ll see what happens coming out of this. I heard Robert Crandall, who was the chairman of American – I worked for Bob – say that this the second or third-time airlines have been bailed out by the government. Maybe there needs to be some type of re-regulation here. They are an essential facility. They’ve been given permission now to drop some routes, under this bailout agreement. That’s good. They don’t have to fly to cities where nobody is flying. Maybe there’s something that says, in exchange for this, the government will allow you to do that. I don’t know. A lot of people are saying, oh, they shouldn’t charge bag fees and they shouldn’t charge change fees; I think that’s bunk. I think if they didn’t do that, the ticket price would be higher. That’s the way it goes. It’s always interesting to see. Hotels, for example, did not stop paying commissions when the airlines did. The big hotel chains have rumbled about that, but they’ve never done it. I don’t think they’ll pull it off this time either, but maybe they’ll make some other changes to distribution costs.
How does the airline try to claw back as much direct distribution from both leisure and business travel from here?
Of course, in leisure travel, they’re trying to make people loyal. They’ve done that with the AAdvantage Program and the frequent flyer programs. They try to make their websites attractive. It’s very hard in leisure, because leisure travel is price driven. People travel a couple of times a year for vacation. They rarely go to the same destination. They need to search, broadly, for price. It’s a pain in the neck to go to eight websites. I think it’s just not going to change customer behavior. It’s even more true with hotels, where there’s less loyalty and many more choices. On business travel, it’s somewhat easier because there is price negotiation; there are corporate discounts. There are large travel management companies who control most of the business. They are trying to put direct links into the large travel management companies. Most of those companies don’t control their own technology, except for the biggest ones like American Express, so that’s hard to do, as well. I’m not sure they’re going to be able to get a lot more direct business from the corporations during this time.
They have put in some direct links just so they can sell a little better. I made a speech on direct links for one of the GDSs last fall. For this interview, I went out just to refresh my memory and see what news stories there had been about direct links. There haven’t been many. Even before Covid, it quieted down. It’s very hard to get all of the airlines to change their technology at the same time. That’s what they’re being asked to do here. The big airlines want to do it right now, BA, American, Lufthansa. All the little guys say, no.
I’ll tell you a funny story. In the old days, the really old days, the airlines communicated, initially, by teletype, which you may not even know. Teletype was a very old technology. We still called it teletype even though we’d moved to computers. One day at Sabre, we had a bug and we sent out millions of teletype messages to all the carriers. Most of the carrier’s computers just threw them in the bit bucket. I got a letter from a carrier in Africa who still used a teletype and I burned up their entire paper budget for the year because their actual physical teletype printed out thousands of pieces of paper. We didn’t know anybody that was still using that. It’s an example of how long it takes people to catch up with technology and move from EDI to XML to what’s next?
Read the full interview HERE