American is reviving its direct-booking conflict with distribution middlemen like Sabre. Advances in technology and fat profits at U.S. airlines make the threat more plausible now than a decade ago.
It has been many years since a U.S. airline paid incentives to travel agencies for booking tickets, barring a few rare exceptions.
That’s why American Airlines caught many industry insiders by surprise when it recently said that it would offer to do just that, resuming a practice that ended well over a decade ago.
The twist is that the payment comes with a catch this time: To get the incentives, travel management companies have to use American Airlines’ new technology platform to book tickets directly with the airline. That means bypassing the third-party vendors that travel agencies tend to rely on, such as Amadeus, Sabre, and Travelport.
Specifically, in June, American Airlines, said it would start to pay travel agencies $2 per net segment (essentially each leg of a flight) done via its technical connections that go around the computers of companies like Sabre.
Sabre quickly responded to American’s announcement by saying that it is willing to work with the carrier to enable it to reach its objectives, according to news first reported by The Company Dime.
At first, that statement may seem counterintuitive for a company that has vehemently opposed these sorts of direct initiatives by airlines. Sabre’s revenues are dominated by its air distribution business.
But — as Sabre executives reiterated Tuesday — the company is trying to diversify its business streams so it can be less vulnerable to threats like this.
Sabre CEO Sean Menke expressed skepticism that airlines are truly willing and able to take on the cost of handling the complexity of direct distribution.
“Getting into direct connect doesn’t address the mid- and back-office costs to agencies associated with that,” Menke said.
Menke also cites other unexpected costs. “We spoke with one airline that had created so-called ‘direct connects’ with online travel agencies in China,” he said. He added the airline’s cited a look-to-book ratio — which is a measure of the volume of data requests its system has to cope with for every actual transaction that took place — of 10,000-to-1. That’s well beyond the 500-to-1 that they are more likely to experience with direct bookings that come in via their consumer-facing websites.
Menke suggests that airlines may not be sure how to handle the cost and scalability issues of direct distribution.
But he concedes that if some airlines persist in wanting to take end-to-end direct distribution fully on their shoulders, Sabre will need to react.
One approach he hinted at is for Sabre to upgrade its passenger service systems or tools that airlines use to manage their reservations, to fill in some of the gaps left by Amerian’s solution.
In other words, the company would provide airlines help with tools to run their direct connections that bypass their distribution divisions. For example, it could offer an enhanced shopping engine that is an alternative to ITA Software by Google’s QPX shopping engine, which is often used by American.
“Today the vast majority of ancillary revenues are sold through airline dot coms, and that’s a real opportunity for us,” Menke says, alluding to the possibility of selling tools for carriers that are more cost-effective at doing the job than the airlines’ in-house tools.
Sabre already uses New Distribution Capability-based standards to help American sell its seats with more legroom, called Main Cabin Extra, with dynamic pricing. But Menke wants to go much further.
One issue that was not discussed on Tuesday’s earnings call is incentives to agencies. While these kickbacks vary from roughly $1 to $3 a booking, they may be, on average, more generous than the $2 per segment fee American is offering.
Another issue that needs airing is the complexity of the new process for travel agencies. There is a labor cost involved in agents having to juggle more than one tool to complete a booking. By keeping bookings within a traditional and familiar workflow like Sabre’s, things might be speedier, and time is money.
Plus there is the simplicity of all of the data records and work being done on one system — such as Sabre’s — rather than on multiple platforms.
By bypassing companies like Sabre — a move that a lot of travel management companies have traditionally opposed — agencies may risk losing out on these incentives.
(UPDATE: American Airlines has taken issue with our characterization of its initiative in this section of our article. See below for their take.)
American seems to be arguing that the functionality it provides is superior to what companies like Sabre can offer, and that that will benefit agency customers and help them drive more business by dollar volume over time.
For instance, the airline says its technology will let participating agencies sell packages of services and amenities customized for small groups of travelers, such as just for C-suite executives.
American says this functionality has never been available, via companies like Sabre or otherwise, before.
American’s Different Path to Direct
American’s bypass uses the so-called New Distribution Capability, or NDC, standards for data messaging that the airline trade group the International Air Transport Association has been pushing for some time.
American says that already a tenth of its U.S. tickets booked by travel agencies are booked directly using a more basic form of NDC standards.
In other words, 5 percent of all of American’s global bookings are never touched by any part of Amadeus, Sabre, or Travelport already today — before this latest initiative. These are pure direct between the airlines and the agencies.
American is not alone in its interest in direct distribution and NDC-standards-based interfaces. Airlines pay companies like Sabre fees that average two percent of ticket revenue, some of which agencies share. Airlines would rather not pay that fee or else have the fee paid by agencies instead.
For example, this November British Airways and Iberia will add a surcharge on tickets booked by Sabre and other third-parties, copying a move by Lufthansa. Sabre says the three airlines represent only four percent of the tech giant’s annual revenue. It adds that it is in ongoing talks with Lufthansa regarding lawsuits the airline and tech company have filed against each other over the surcharge.
American says it does not plan to slap on a surcharge on third-party bookings the way Lufthansa has done and British Airways and Iberia plan to do, according to Travel Weekly.
Simonson echoes Menke’s views by saying, “Airlines haven’t yet reckoned with the complexity that needs to be mastered to scale up direct distribution and to be able to manage the cost at every level and facet. Not every airline will want to manage the complexity or be able to scale it at a sustainable cost in a way that’s superior to what we offer.”
Back to the Future
Some industry veterans will find this news to have echoes from the past. In the mid-2000s, American made a previous attempt at cutting technology middlemen out of the distribution chain. Lawsuits flew from both sides and the global distribution systems retaliated against the airline.
Two things have changed since the mid-2000s. American is now much more profitable — and is better able to afford to take risks. Earlier this week it recorded a second quarter 2017 pre-tax profit of $1.3 billion.
Technology has also advanced significantly and become more widespread — making it more plausible for airlines and agencies to knit together all the processes that are required to make direct distribution work.
A sticking point will be fees. A travel agency that uses a Sabre, Amadeus, or Travelport system to comparison-shop will likely have to still pay a fee to the third-party vendor. Similarly, if the agency uses NDC-based technology provided by a company like Sabre or another vendor like Farelogix, it will also have to pay that vendor a fee. Details are still up in the air about how the costs will all align.
After publication, American Airlines’ Cory Garner, vice president, sales and distribution strategy at American Airlines, contacted Skift to say we mischaracterized his company’s initiative.
Garner says American is not targeting or excluding Amadeus, Sabre, or Travelport. “It is not a conflict,” he adds.
American is providing the same fares and inventory to everyone, he notes. It is not mandating that any agency participate. It will not punish agencies that choose to stay away from it. And it invites the three technology companies to find ways to accommodate its new system and mutually benefit from it.
Yet the nuances are complicated. Before we get to Garner’s points, we will attempt to explain how there is now a third distribution path that’s developing that is in-between “direct” and “indirect” distribution.
In the beginning, companies like Amadeus, Sabre, and Travelport built and laid pipe that connected airlines with travel agencies. Let’s call these indirect connections “blue” pipes.
A decade ago, American was one of the first airlines to build direct connections that avoided those three middlemen. Let’s call these “yellow” pipes.
Now American is rolling out a third option. Let’s call it the green pipe, but it comes in various shades of green. American wants hundreds of green pipes.
The new green pipe is mostly built and laid by American, though a part of this pipe built and passed through a third-party tech vendor.
Lots of vendors who become so-called “level 3 certified” by the IATA lobbying group can be these vendors. Farelogix is one of many.
Garner says Amadeus, Sabre, and Travelport could be, too, if they wanted.
American is inviting them to compete with Farelogix and similar vendors., and create their own little pieces and connect into these green pipes.
Poignantly, as of today neither Amadeus, Sabre, nor Travelport has a level 3 connection with American today.
So that means that agencies using American’s new green pipe get access to functionality they can’t through Amadeus, Sabre, or Travelport.
For example, corporate flyers on American are often allowed to break a lot of the ticketing rules about, say, last-minute cancellations, that are denied to ordinary consumers buying restricted leisure tickets. But the workflow for agencies to process such changes — grouped together under the phrase “waivers and favors” — has been cumbersome.
American’s new tools streamline the “waivers and favors” process for agents. That gives its path (the “green” pipe) an edge over the legacy one (the “blue” pipe) offered by Amadeus, Sabre, and Travelport — unless those companies actively participate in its program.
Once one of these three companies does participate, its travel agency subscribers would have the option to participate in American’s $2 a segment incentive program or remain in a standard Amadeus, Sabre, or Travelport program (and receiving incentive payments from those companies that are derived from fees American pays those companies). The content and functionality would likely be the same in either case, the airline says.
But what about those earlier, “yellow” direct connects? Well, American has not paid agents $2 a segment for these tickets and it does not plan to. As agencies’ deals to use the “yellow” pipe with American expire, they’ll be given a choice to enter the new “green” pipe called the NDC Incentive Program (which you might call “NDC Better”), ask to renew their current deal (the “yellow” pipe), or revert back to the old (“blue”) technology used by Amadeus, Sabre, and Travelport.
It is Garner’s opinion that American is not targeting or excluding Amadeus, Sabre, or Travelport. He says it is not causing a conflict, that it has created an optional program that is inclusive of all industry players, and that it has communicated about its effort in inclusive language.
It is Skift’s view that the picture is somewhat more complicated than that.
In Skift’s analysis, within about 18 months from now, it is highly likely that the large travel management companies HRG and Frosch — and perhaps others — will have shifted much of their American Airlines ticket booking out of a path in which Amadeus, Sabre, and Travelport touch the tickets.
In that scenario, American will no longer have to pay those three tech companies fees for those tickets — a significant saving. We suspect the airline will likely also encourage other agencies to follow the same path.
So, in Skift’s view, American has introduced a firm wedge to shift a greater share of bookings out of the traditional legacy distribution system channel.
We believe that’s true, even if American has left an out for these companies to essentially create new business lines and business models for servicing these “green” pipe connections.
The word disruption is overused in the travel news media. But this is a case where “disruption” seems apt to us.
Photo credit: American Airlines planes queue up at Philadelphia International Airport earlier this year. Sean O'Neill / Skift