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When British and American legal authorities published rulings on a merger case this month, they also provided a comprehensive, impartial look at how airlines want to change the way they sell tickets.

The rulings focused on whether technology companies Sabre and Farelogix should merge. But along the way, they summed up dozens of interviews with experts and leaders at airlines, agencies, and tech vendors worldwide. The rulings suggest that the sector — where airlines spend about $9 billion a year — is heading in a new direction.

The rulings found that large airlines have chosen to cooperate with tech middlemen, despite years of fighting. Yet some airlines will push a new “wholesale model” to pay travel agencies. The wholesale model would overthrow today’s system, where airlines pay tech intermediaries, who, in turn, kick back some of the commissions as incentive payments to agents.

The rulings reached opposite verdicts. In the U.S., a federal judge sided with Sabre against the Department of Justice, which had filed an antitrust suit to block Sabre’s acquisition of Farelogix. In the UK, the regulatory watchdog the Competition and Markets Authority said it would block the merger. The Department of Justice said Tuesday it may seek an injunction to temporarily put hold the merger on hold.

Yet looking beyond Farelogix’s fate, the two rulings agreed on a lot of trends in airline distribution generally.

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The 385-page British decision and the 95-page U.S. court verdict summarized views from dozens of experts. The experts said cooperation is the new watchword for corporate bookings. Most airlines and travel agencies will now spend most of their energies cooperating with Amadeus, Sabre, and Travelport, the so-called global distribution systems (GDSes), through something called “GDS pass-through.”

The GDS pass-through works roughly like this. Airlines take on the work of packaging the different aspects of travel, such as the route, type of seat, flight schedule, availability, and price information from various computer databases. They push that information to agencies. In other words, airlines take more control over how their “offers,” meaning plane tickets and other products, appear on the reservation systems that travel agents use.

Until now, Amadeus, Sabre, and Travelport have been responsible for “creating the offer.” By taking over “offer creation” themselves, airlines can control what travel buyers see, such as “branded fares.” An example of a branded fare is Air New Zealand’s Economy SkyCouch, which lets long-haul flyers buy more than one seat so they can lie sideways to sleep.

Amadeus, Sabre, and Travelport have said they aren’t opposed to airlines handling “offer creation,” a turnabout from a few years ago. They have said they agree that airline displaying those branded offers on agency reservation systems will encourage more travelers to buy upsells, like extra legroom. They have implied that higher transaction prices, on average, benefits everyone in the sector, though they couch this message in language about “providing more choice to consumers.”

A New Wholesale Model Interests Airlines

The fight over airline distribution is more about costs than technology. Airlines prefer taking over the task of creating offers because they want Amadeus, Sabre, and Travelport to charge lower commissions. After all, airlines are doing more of the work in the new process.

American Airlines has been pushing for a “wholesale model” of payments to match the pass-through model, the U.S. ruling found.

Under the wholesale model, the airline, not the global distribution system, pays the travel agency an incentive. The travel agency pays the global distribution system a fee for each booking made via the reservation system, which the tech companies run.

The wholesale model can save airlines money. American Airlines estimated that it had achieved cost savings of $66 million a year by shifting online travel agencies that book via Sabre to the wholesale model, according to carrier’s testimony cited in the U.S. ruling.

Airlines are still willing to pay the global distribution systems for handling other functions. They prefer the vendors to bear the burden of managing consumer searches made on online travel companies, for instance.

Another new model related to pass-through is the so-called private channel, which has been around since 2017. Airlines may provide different content to travel agencies that take part in their private channels.

Some airlines add surcharges for bookings made outside of their private channels as a way to lure agencies to join. Sometimes airlines pay lower or no incentive fees to agencies within the channel.

So far, the distribution companies have found ways to maintain their gross profit with private channels, according to a 91-page report by analyst John King at Bank of America Merrill Lynch in October. That suggests the tech giants will continue to support the trend.

Yet airlines and tech companies are still fighting over commercial terms for the wholesale model and private channels. Airlines want to stop paying a relatively fixed booking fee for volume sold. They would prefer a distribution model that more tightly rewards tech companies and travel agencies when they deliver more profitable outcomes for the airlines, said King. Airlines want tools that help coax travelers to buy upsells and more expensive products.

Another side effect to watch is that private channels and the wholesale model may lead to more consolidation among travel management companies, especially in Europe, as bigger players will be able to negotiate for volume discounts.

Which Tech Players Stand to Gain Most?

You would think that if airlines believe they can make more money through these new processes, tech vendors would be rushing to deliver the latest tools.

But the opposite seems to be taking place. Even before the pandemic, many suppliers of technology to the airline industry were struggling, the rulings found.

The UK watchdog used a variety of methods to figure out who the most influential tech players are in offering airline merchandising. They looked at who competed in and won airline contracts since 2016. They surveyed a couple of dozen airlines. They looked at strategy and marketing documents from various companies.

The UK ruling found that Farelogix, Amadeus, OpenJaw, and PROS had the sturdiest positions. Airlines seldom took a dozen other vendors seriously, the UK and U.S. rulings found, despite claims by Sabre and Amadeus that they face competition from about a dozen other vendors.

Different tech vendors have different specialties. But few focus on the “merchandising” function that is key to the GDS-bypass and “offer creation.”

The two rulings found that Amadeus, the travel technology giant based in Madrid, remains the best-capitalized company to offer merchandising solutions. But as of now, its service requires airlines to use its passenger service systems, an operational software suite. Amadeus doesn’t sell its merchandising tools on their own, which some airlines prefer.

Farelogix is the next most competitive service in merchandising, the rulings found. It stands out for letting airlines use its tools regardless of which passenger service system they use.

OpenJaw had the next-most-competitive reputation for merchandising, the U.K. ruling implied. The company’s ownership by China’s state-backed travel tech giant TravelSky concerned a few Western airlines, the UK ruling found. The UK authorities said they didn’t think OpenJaw would “likely to grow materially from its current competitive position” in the field of merchandising. However, that view conflicted with the company’s statements that it aimed to grow its presence in merchandising and distribution solutions and that five surveyed airlines considered OpenJaw would become stronger in merchandising.

Another alternative to Farelogix in the market for so-called merchandising tech is PROS (Pricing and Revenue Optimization Solutions). This airline operational software company has a core business of selling pricing, revenue management, and e-commerce optimization tools to airlines. PROS has focused its merchandising solution at powering airline.com bookings, though. It has “limited” ambitions to work with global distribution systems, the UK ruling found.

ITA Software also had potential strength as a player in merchandising. But the Google-owned company only supplies a merchandising solution to two airlines. Other carriers use ITA for its tools for shopping fares. ITA doesn’t appear to have a strong intention to improve its merchandising solutions, the UK ruling found.

Datalex is another player in merchandising. But Datalex’s accounting scandal and its loss of Lufthansa have hurt it, the UK ruling found. Datalex has not won any new customers since these financial problems arose, the ruling said.

Sabre said in late 2018 that, if it didn’t buy Farelogix, it would need “a few years” to build merchandising solutions comparable to what Farelogix, Amadeus, and others offer.

Travelport, which is a major distribution system, does offer private channels and enhanced branding for airlines via its reservation systems. But it doesn’t sell airlines tools for them to manage “offer creation” in the way others do.

Note: the rulings evaluated the relevant strengths of players in merchandising, not their strengths as businesses.

A Chance to Change the Distribution Game

It’s surprising how little momentum exists to provide a function that airlines say would boost their revenue and profit margins. Merchandising tech isn’t the only thing needed to improve how airlines and travel agencies handle tickets, but it’s a significant one.

The pace of change has been slow. Why? Airlines and travel tech companies run closed systems, and they’ve optimized these systems for efficiency, rather than agility. Yet agility is now crucial.

The sector will suffer unless airlines and tech vendors improve at upselling travelers, providing more relevant offers, and pricing products and services in “real-time” rather than with today’s frequent lags, the UK ruling implied.

Compared with other industries, such as retail e-commerce, innovation processes in the distribution of air travel services started comparatively late and, in some cases, have lagged far behind their technical possibilities, according to a filing made for the UK ruling by the consultancy Aviation Competition Law Research.

The contrast with sectors outside of travel is sharp. Companies like Amazon and Alibaba are reshaping digital retail. Consumers expect booking travel to become as seamless.

So large network airlines risk losing some business to upstart airlines that use more modern technologies. These carrier increasingly cross-sell tickets via so-called virtual interlining technology from companies like Dohop and AeroCRS. They also risk a tech player entering the fray and disrupting them by overlaying a service on top of the sector’s outdated technology.

A potential case in point: Top-tier venture capital firm Benchmark thinks it has spotted an opportunity by supporting next-generation distribution startup Duffel. While Duffel doesn’t sell merchandising tools to airlines, 20 airlines have signed up to use its distribution services in a sign of how the sector could be more disrupted.

To keep pace, airlines must upgrade their ways of distributing their content. For an update on that effort, see our Thursday story “Airline Direct Selling Through Travel Agencies May Prove Its Worth After the Crisis.”

Here are the UK Competition and Markets Authority final ruling and the U.S. Delaware District Court ruling:

Download (PDF, 2.88MB)

Download (PDF, 2.48MB)

Photo Credit: American Airlines aircraft queue. American Airlines Group has testified in U.S. and UK competition investigations into the actions of Sabre and other travel technology companies. A U.S. federal court and a UK competition watchdog have published comprehensive findings on airline distribution, revealin broad trends in the sector. American Airlines