April 21 - Low-Cost Distribution In A Low-Cost World


Commentary

Why have low-cost carriers (LCCs) WestJet, AirTran, JetBlue, easyJet and even Southwest embraced global distribution system (GDS) platforms to distribute their products and ancillary fees? Because it represents a low-cost, proven strategy for penetrating the high-yield business travel market segment that has long been the province of legacy network airlines. Indeed, Finnair, Air Canada, United Airlines and other major carriers are increasing their use of GDSs in merchandizing their optional services.

Managed Travel Community Support

Corporate travel managers, who ultimately and gladly bear the cost of airline distribution in the price of their tickets, value the universal approach that GDSs bring to the purchasing and cost control of air, rental car, hotel, rail and other business-travel related services. Importantly, when volcanoes, paralyzing snowstorms, political unrest and tsunamis produce global disruptions, travel managers value the GDS-supported capacity to track the whereabouts of travelers to know they are safe and to be able to quickly rebook flights and hotels.

Travel management companies (TMCs) likewise embrace the efficiencies and tools uniquely enabled by GDSs as they look after service-intensive corporate clients. In addition to traveler security requirements just discussed, TMCs need the capability to combine air carriers, especially on international travel where fare structures may allow it, and complex itineraries may demand it. Similarly, itinerary changes are made cost effectively and quality control systems are supported for areas such as fares, seats and travel policy. And TMCs provide clients with detailed travel data reporting from booking information provided by the GDSs. For managed travel, there is no solution currently in the marketplace as robust as the one provided by the GDSs; on this there is nothing to debate.

Airline Revenue Benefit

Airline strategies that wrap around the stated needs of their best corporate customers and sales-channel partners also generate significant benefits for the airlines themselves. This begins with the fact that an outsourced distribution platform can deliver excellent returns on each dollar invested in terms of customer acquisition, average passenger yield and technological innovation. No where is this more true than air tickets for managed travel programs sold through TMCs and their corporate online booking tools.

Because business travelers change plans often, the product offered to them by airlines is by design highly flexible, and is offered in return for an airfare that can be 5 to 6 times higher than the lowest public fare. Indeed, airfares sold through GDSs and TMCs – which facilitate the majority of managed travel tickets purchased - are estimated to be on average $275 higher than through airlines’ websites.

Airline Cost Benefits

The average blended GDS fee paid by airlines for domestic U.S. and international business travel tickets is known to be around 1% (one percent) of the price of a ticket. This represents a high-value proposition for both the airlines leveraging the reach of GDSs and the customers who eventually pay for GDS services in the price of airline tickets purchased. Combine this with the reduction in TMC commissions from 10% to zero and it becomes vividly clear why the GDS / TMC channel value proposition for this market segment is so very strong.

According to Carlson Wagonlit Travel’s Andrew Winterton, President, Suppliers, Products and Technology, “GDSs continue to invest an estimated $750-800 million annually to enhance their system capabilities. As a result, they are technically capable of supporting new and evolving airline products and services during the shopping and booking process.” (ABTN 24-11-10)

But just as important, GDS capital outlays, operating costs and IT staffing requirements are obligations that both LCCs and major network carriers currently avoid. The costs - financial and management time and attention - associated with hundreds of individual airlines endeavoring to replicate the reach and product depth of the GDSs is almost unimaginable.

Another distribution cost avoided is the pre-shopping that consumers accomplish on the Internet. In PhoCusWright’s Consumer Travel Report Second Edition, May 2010, the research firm identified that 87% of travelers began their shopping in 2009 at online sites such as Travelocity, Orbitz and Expedia. After evaluating the various offerings at these sites, some 28% of shoppers then jumped to suppliers’ websites to make their purchases. This distribution cost savings should be recognized as effectively lowering the average cost of GDS fees.

Context

Since the U.S. GDS industry was deregulated in 2004, and through two successive rounds of airline-GDS negotiations, GDS fees to airlines have dropped some 35% to 45% while distribution options for airlines have grown tremendously, including metasearch engines, aggregators and airlines’ own websites. GDS’ share of the U.S. airline ticket distribution market has fallen from 75% or more in 2004 to about 50% today. However, it is estimated that more than 80% of the managed travel market share remains on the GDS platform.

No doubt the share shift since deregulation is the result of a highly diverse and competitive marketplace identifying where the center of gravity is in the GDS value proposition. There are many channels through which airlines can reach price-sensitive consumers and unmanaged business travelers. However, for the corporate managed travel community, the Gold Standard for full-service capability remains the GDS. It is, quite simply, the clear preference for virtually all managed travel procurement programs and, for many, the only solution they will reasonably consider utilizing at this time.

©2001 to 2017 Business Travel Coalition, Inc..