The current furor over airline Direct Connect, specifically American Airlines' “AA Direct Connect,” has stirred the emotions of almost everyone in the industry – from pundits to industry lobbying groups, according to recent online commentary from Jim Davidson, president and CEO of Farelogix.
In "According to Jim," Davidson offers a strong defense of American’s policy and confronts many of the charges made by critics of AA’s policy. This includes addressing some of the “alleged ills” caused by Direct Connect including higher cost travel options for consumers, the lack of product and pricing transparency and the lack of travel comparison.
Backed by screen shots of specific examples and a case study of a theoretical company, Davidson urged readers to follow the money. Offering a primer for those that don’t understand the money flow in airline distribution, Davidson argued that consumers are ultimately paying as much as $7 billion in added costs to support indirect channels of distribution such as online and offline travel agents.
Here's Davidson's stance:
“Today, airlines distribute and sell their products through two channels: their direct channel (airline.com website) and their indirect channel (travel agents and online travel sites). Generally speaking, of the one billion or so airline tickets sold around the world each year, sixty plus percent of those tickets are sold through the airline indirect channel. Since there are only three companies in the world – Sabre, Amadeus, and Travelport (called Global Distribution Systems or GDS) – that control the airline product distribution for this indirect distribution channel, the airlines must agree to the terms put forth by the GDS for airlines to sell through this indirect channel. Here is where the $7 billion comes in. The GDS charge the airlines each time the airline sells a ticket through their system, with the average charge being in the $12 per ticket range. Multiply that $12 by 600,000,000 tickets per year and you get about $7 billion dollars.
“For general comparison purposes, it costs airlines about $2 to $3 per ticket to sell through their own websites or to use the Direct Connect model. This is about an 80% savings over the cost of the GDS channel. Now, taking all of the above into account, ask the question: If the airline is paying $10 more per ticket to sell through the GDS, who do you think is paying for that higher cost? That’s right, the consumer.
“The airlines can realize significant savings by using their websites or new Direct Connect models that result in overall more efficient technology utilization and potential removal of billions of dollars of unnecessary costs from the travel supply chain, and lead to ultimate savings for the consumer. In other words, Direct Connect is, from a “Follow the Money” perspective, quite pro-consumer. Yet, a majority of status quo players – largely travel agencies and GDS companies – are vehemently opposed to this movement.
“We have also learned that the issues surrounding airline Direct Connect put forth by the distracters, lobbyists and naysayers are not real issues at all, but rather part of well-funded and carefully crafted PR campaigns designed to secure the status quo’s position within the travel supply chain. Sure, there are some real costs and required investments associated with change, updating and modernizing, but there always is when we innovate and improve things. The real issue surrounding the resistance against the airline Direct Connect model is only found when one Follows the Money.
“The real story is that adoption of the airline Direct Connect model for the indirect distribution channel has the opportunity to take out billions of dollars of unnecessary cost to airlines and ultimately to consumers. But at the same time, adoption of the airline Direct Connect model significantly disrupts a money flow that has been long-established and long-depended on by a number of intermediaries, including the GDS, travel agencies and online travel sites.
“Adoption of the airline Direct Connect is a painful change for some of these established intermediaries. As such, some will resist, fight and challenge change to the bitter end because, just like in most cases, following the path of the money leads to the real issues and truths….and opportunities for those willing to see things as they really are."
Visit www.farelogix.com for Davidson’s complete analysis.