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Direct Connect Remains Divisive IssueAugust 22, 2011 By: George Dooley Travel Agent
Travel agents must pay close attention to their global distribution system (GDS) contracts and the ongoing multi front battle over Direct Connect, argues Mark Pestronk, Esquire, one of the travel industry’s top attorneys.
Pestronk warns that one outcome of the battle over Direct Connect – advocated by American Airlines – but sharply opposed by many travel agents, GDS’s as well as associations - could be a lowering of net rates to agents and urges informed negotiations over CRS contracts.
Speaking at a recent American Society of Travel Agents (ASTA) sponsored webinar, Pestronk offered his expert view of the Direct Connect controversy, entitled “Direct Connect or Misconnect.” Pestronk stressed that his views were his own – not ASTA’s.
Pestronk asked critical questions: What does the ongoing war between airlines and GDSes mean for agents? What is the effect on agents' existing deals and upcoming GDS negotiations? How can agents survive and prosper in today’s combative operating environment?
To Pestronk, the GDS/airline war is now in its 15th year as airlines pursue the laudable goal of reducing “distribution” costs and differentiate their brands in a highly competitive, often profit-short business. In turn, the GDSes and agencies have the worthy goal of keeping airlines in the system and expanding content to include ancillary services.
The five battlefronts in the war include 1) ongoing litigation, 2) the Department of Transportation (DOT) antitrust probe of GDS practices, 3) a DOT rulemaking proceeding on ancillary services, 4) the ongoing AA-Sabre and AA-Travelport renewal negotiations and AA’s attempts to create a few done deals. (AA has announced Direct Connect deals with a unit of American Express and Hogg Robinson).
Pestrunk has more than 35 years in the travel industry. He holds a bachelor's degree from Johns Hopkins University in international relations, a master's degree from Johns Hopkins School of Advanced International Studies and a law degree from Georgetown University. He is a member of the Virginia Sate Bar and the District of Columbia Bar.
What front will matter the most? Pestrunk notes that litigation is just “negotiation by other means” and argues that none of the pending cases will be decided before 2013. He also believes that the Department of Justice (DOJ) will not find antitrust violations (“It’s not illegal to refuse to do business with your competitors.”)
But the DOT decisions will count “because it favors full content and transparency” and may end up calling the shots. “Ongoing negotiations are most important,” Pestronk says. "These are commercial disputes, so there will be compromise. AA cannot risk mandatory rollout of Direct Connect, resulting in loss of bookings, so the threat of a rollout is really a tool in negotiations.”
What are the most likely eventual outcomes, he asks? “Most likely: a 2006-type outcome, where AA and then other majors get a break on GDS fees, leading to lower net agency incentives, but the majors stay in the GDSes.”
"Airlines will agree to sell all ancillaries through GDS – before DOT orders them to do so,” Pestronk predicts.
He believes a small number of agencies will use Direct Connect, so that AA will be able to claim victory.
But, he warns, the break on GDS fees “may well mean a net cut in agency incentives, as in 2006, but the form is yet unknown.
“It could be an incentive cut, a higher 'full content' fee, some new fee, or a combination of one, two, or all three. Let’s call it the 'hit.' Once the 'hit' rolls out, you need to check your GDS contract to see if the hit is allowed by your contract – it may not be,” Pestronk said.
Pestronk argues that, in general, “ all standard GDS contracts allow incentive cuts, new fees, and higher fees.”
What would be the effect of Direct Connect on existing GDS contracts, Pestronk asks? Leaving aside the operational burdens there are several possibilities, including: Loss of segment and growth, and acquisition incentives, refund of signing bonus, shortfall penalty (rare), and a new integration fee, he argues.
“However, Direct Connect probably won’t affect agency booking share quotas,” Pestronk says. (e.g., 90 percent of agents GDS segment must be on Sabre, but Direct Connect segments aren’t GDS segments).
How can agencies respond? Pestronk urges agents to consider a number of factors, including creating a “plausible threat of conversion” and offers from competing vendors. “Don’t fall for deadline tactics. Turn the tables. Find out what the best deals have been.” Pestronk also says agents should not take a rep’s word for what is possible and urges agents to emphasize growth plans.
AA’s Definition of Direct Connect: “The AA Direct Connect is a direct link into AA’s host reservation system for the facilitation of availability, shopping and pricing, booking, ticketing, and post-ticketing servicing transactions. The AA Direct Connect utilizes modern technology links and XML messaging, which can handle more robust and flexible transactions. The AA Direct Connect is designed to support future merchandising and ancillary services. The AA Direct Connect provides the technical flexibility to provide enhanced offerings and customized services.” Visit www.aa.com
For a position critical of Direct Connect with many agency and TMC members visit the Open Allies for Airfare Transparency (www.faretransparency.org). Also noteworthy are the positions of the American Society of Travel Agents (ASTA), the Business Travel Coalition (BTC), the Association of Retail Travel Agents (ARTA) and other groups.