April 8 - Shelve IATA Resolution 787 And Start Over

 

Trade Group Should Apply For A Business Review Letter 

A contrast in change-management strategies

EXTRACT

Business Travel Contractors Corporation pioneered a model for change management at the industry level in the early 1990s that emphasized deep stakeholder collaboration, thorough proposal planning and a U.S. Department of Justice (DOJ) Business Review Letter. In contrast, the International Air Transport Association (IATA) did none of these things when developing the business-model strategy behind Resolution 787, and the included New Distribution Capability, and is under fire for being developed in secret without regard to supply-chain participants’ interests, including the end customer, and for misleading regulators. The marketplace, including ACTA, ASTA, BTC, ECTAA, GBTA, WTAAA, consumer groups and others industry participants have publicly flagged troubling inconsistencies in IATA’s statements and raised many still unanswered threshold questions (see http://btcnews.co/ZsMB6I). IATA should listen to stakeholder feedback, shelve Resolution 787, start over, and when prepared, file with DOJ for a Business Review Letter. 

I. Background

In 1994, as a Vice President on the corporate staff of CIGNA, I founded the Business Travel Contractors Corporation (BTCC) as a buying group to advance fundamental change to the airline distribution model. We worked for two years to understand how to remove costs from a dysfunctional distribution system and the price of a ticket through 1) net airfares, 2) travel agency fee-based pricing and 3) a mileage-based, negotiated corporate airfare structure.

The companies that were sponsors and clients of BTCC, and that were willing to put their purchasing decisions and marque names behind industry change, were AT&T, Bell Atlantic, Black & Decker, Chrysler, CIGNA, Coca-Cola, Colgate Palmolive, Digital Equipment Corporation, First Data Corp., FORD, Hewlett-Packard, IBM, Johnson & Johnson, McDonald’s, Proctor & Gamble, R.J. Reynolds Tobacco and Xerox.

We knew that what we were proposing would be considered radical, and even threatening to some. After all, at its core we were seeking to rearrange commercial relationships among the principals - airlines, travel agencies and corporate buyers - such that airlines would no longer compensate agencies, but rather, corporations would purchase fares from airlines net of commissions and overrides and compensate agencies directly for services rendered. Out would be the corporate travel department as “profit center,” and in would be financial discipline and accountability when the quarterly rebate check from the agency was replaced with an invoice.

Sure enough, when we made our proposal public in June of 1994 our concept was controversial. The following quotes capture the range of reaction to the change that we were proposing.

The aim is to wring out administrative and marketing costs from travel. The Wall Street Journal

The scheme looks set to cause a minor revolution in the business travel industry."Financial Times of London

In another era, Kevin Mitchell might have been burned at the stake: challenging the status quo has never been taken lightly. ASTA Agency Management

Kevin's concept is an intriguing solution to an intractable problem. Robert L. Crandall, Chairman, American Airlines

Not to put to fine a point on it, most airlines wish Mitchell and BTCC would go away.  Perry Flint, Air Transport World

In anticipation of concerns that our proposal would create throughout the industry, we took three major steps.

A. We Collaborated. Even though the development of our proposal was customer led, there were seats at the table for major airlines and travel agencies as well as for agency and travel-buyer associations. We briefed the U.S. DOT early in our process as well as the UK and German competition authorities, as many BTCC companies had operations there. We included airline labor unions and vetted our proposal with Nobel Laureate and Professor of Economics at MIT Paul A. Samuelson.

B. We Presented A Completely Developed Industry Proposal. We were determined to fully think through our proposal and not launch until the T’s were crossed and the I’s were dotted. We retained the best airline and travel industry consultants as well as the law firm of Jones, Day, Reavis & Pogue for antitrust review and Edelman Worldwide for public relations support. As a near-final step we presented our ready-for-market proposal to the General Counsels and CFOs of the BTCC companies to wind-tunnel-test it and ensure all companies were comfortable legally and that our strategy for change management was coherent. But we did not stop there.

C. We Applied For a Business Review Letter. In 1994 we took the additional process step of applying for a Business Review Letter at the U.S. Department of Justice (DOJ). We felt this box needed checking to assure all travel industry stakeholders that an independent government agency expert in antitrust law and with the power to investigate and compel testimony would protect their interests and those of consumers. And investigate they did. DOJ interviewed major industry players to assess the purpose and anticipated effects of BTCC’s plans. After 9 months, BTCC received a favorable Business Review Letter, which can be read at http://btcnews.co/14Xh4Lu. We were finally ready to implement in 1995 and the industry knew that we were a serious group advancing fundamental change and that we were thoroughly prepared in every way.

No other concept previously presented to the industry was ever developed on this scale or with this level of preparation. A dramatic and bold step. E.J. Hewitt, President, National Business Travel Association

The marketplace worked both by embracing BTCC's proposed net fares and travel agency fee-based pricing components and rejecting its corporate airfare structure component. Indeed, the market began accepting 2 of the 3 BTCC changes even as the U.S. DOJ was reviewing the buying group’s plans. The change-management that BTCC and its buying group clients led ultimately resulted in average airline distribution costs (commissions, overrides and CRS fees) of some 15% in 1994 decreasing to just a few percentage points today.

Ironically, with all the handwringing by airlines about $7 billion in annual GDS costs (airlines' number) this cost represents just over 1% of the some $600 billion in global airline revenues sold via the GDSs and travel agencies – quite the favorable outcome for airlines and their customers!  This is an especially advantageous result for the airlines as the travel agency channel also takes on a lot of the costs of sales and service that the airlines would have to absorb in the case of tickets sold directly to travelers.

II. A Contrast In Change-Management Strategies

While we were just 17 corporations, and were confident that what we were proposing was legal, we strove to be direct in our communications about the purpose and likely effects of BTCC’s proposal to the industry and sensitive to the financial investments that agencies and other marketplace stakeholders had made in the then current model. We took all the extra steps to be inclusive and protective of the interests of all industry stakeholders.

In vivid contrast, IATA’s new business model development-process has been exclusionary of industry stakeholders, except for the airlines themselves. And we are not talking about 17 market participants as with BTCC, but 240 horizontal airline competitors agreeing behind closed doors on a new industry structure to facilitate the distribution and sale of transportation services. Resolution 787 was written to have the appearance of being benign to the outside world while its drafters and signatories created a business model that would raise ticket prices for all travelers.  This new business model would achieve that airline objective by shielding airfares from the competitive discipline the airlines have complained exists due to the current level of fare transparency that enables easy, efficient and anonymous price comparisons by all and any consumers of base ticket prices. 

This new, airline-engineered business model for the pricing and sale of tickets could also make express and tacit division of markets more easily accomplished by orders of magnitude. And it most certainly would be a massive infringement of fundamental privacy rights, with airlines having created by agreement among themselves the right to demand such personal details about every consumer as that person’s name, age, marital status, and past travel and shopping history as a condition for even quoting that consumer a price to fly from point A to point B. (See BTC NDC briefing paper at http://btcnews.co/Zdp6ym.)

III. A Communications Conundrum & Consequence

Because of the obvious purpose and likely effects of Resolution 787, and its included New Distribution Capability (NDC), IATA finds itself with a communications conundrum. It cannot possibly communicate in a straightforward manner, as that would belie its public statements mischaracterizing NDC as just being a new technology communications protocol. Instead, IATA’s communications are seen by many observers as obvious misstatements and dodges, swiftly proven inaccurate and misleading by a review of underlying IATA documents and presentations. (See analyses at http://www.businesstravelcoalition.com/)

Because the marketplace, including ACTA, ASTA, BTC, ECTAA, GBTA, WTAAA, consumer groups and others, have pressured IATA by flagging troubling inconsistencies in IATA’s statements and raising many unanswered threshold questions, IATA’s application to the U.S. DOT for approval of Resolution 787 is a tortured, too-cute-by-half attempt to carve out for approval only the communications protocol while running from the new business model fully articulated in Resolution 787 that new messaging is being expressly designed to support.  In short, in its DOT application seeking approval of Resolution 787 “only insofar as” it references new communications protocols (a tangential and minor part of the Resolution at most), IATA literally asks DOT and the rest of the world to ignore the “man behind the curtain.”  (See press stories at http://bitly.com/bundles/btckevin/4)

IV. Who Looks Outside, Dreams; Who Looks Inside, Awakes - Carl Gustav Jung

Tony Tyler, director general of IATA, joined a couple of airline CEOs and gave his own “I have a dream” speech upon announcement of NDC:

“We’ve done a great job of improving efficiency and bringing down costs, but we’ve handed that benefit straight to our customers,” Tyler says. “As soon as someone’s got a cost advantage, instead of charging the same price and making a bit of profit, they use it to undercut their competitors and hand the value straight to passengers or cargo shippers – and you’ve got to ask why? I think one of the reasons is that the way we sell our product forces us to commoditise ourselves.” Tony Tyler, Director General, IATA - Flightglobal

Since the beginning of commercial air transportation, technological innovation has been a central force behind industry growth. Customers have driven the success of innovations such as loyalty programs and corporate self-booking tools, and travel agencies have supported their customers’ needs. When new technologies add true value, the customer – individual traveler or professional travel manager – will embrace them, and associated change.

Hope springs eternal for Tyler and a NDC model that would stamp out “commoditization” through discriminatory, authenticated shopping and enable the stabilization of or increase in fares and ancillary fees. This fantasy is against a marketplace that isn’t buying the message and growing evidence that things cannot possibly turn out the way he and advocates of NDC want. Bad motives beget bad strategies, beget bad outcomes; the dream of Resolution 787 has turned nightmarish. Tyler should turn away from false dreams and look inside the industry at potential partners, and awake. Customers and distribution system participants are vital travel industry stakeholders who could help IATA and its members achieve important goals. 

V. Erroneous Assumptions Can Be Disastrous - Peter Drucker

Tyler has identified commoditization as a problem for some airlines. However, assuming that a workable solution is a horizontal agreement among competitors to terminate the very fare transparency from which consumers have long benefitted is misguided in the extreme. This construct for change needs to be abandoned and replaced with a responsible, thoughtful planning process that includes customers, distribution system participants and regulators. Indeed, there is available a proven change-management process that works at the industry level.

The U.S. DOJ will not even consider an application for a Business Review Letter if the new business plan is already being implemented in the market. As such, IATA should listen to stakeholder feedback, shelve Resolution 787, start over, and when prepared file with the U.S. DOJ for a Business Review Letter. If IATA were to receive a favorable Letter, then the industry would be assured that an independent, expert agency looked carefully at IATA’s plans and concluded that competition problems are not sufficient to warrant DOJ suing the trade group to block it.


EDITOR’S NOTE: A signatory letter to U.S. DOT Secretary LaHood regarding Resolution 787 can be viewed at http://btcnews.co/YoB3yJ. It will be submitted to the Docket; please consider joining your industry colleagues and signing it.

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