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A Short Recap of Why American Airlines Is Suing Orbitz (and Its Parent Company)

You may have read that American Airlines is suing a company called Travelport which, among other things, is the parent company of Orbitz.  Airline distribution can be arcane, so I thought I’d sum up what’s going on here:

A wee bit of background:  Airlines distribute their seats to travel agencies through intermediaries called Global Distribution Systems (or GDSs), of which Travelport is a major player (Sabre is another you may have come across).  As it stands now, airlines pay GDSs to to make their seats available to travel agents to sell.  GDSs will often share that fee with the travel agent.  Airlines used to pay travel agents directly for every sale, but 15 years ago that system was modified; airlines still do pay commissions to larger travel agencies, but travel agencies now also charge consumers for booking tickets.

Airlines believe they pay GDSs too much for what they do, so American has come up with a solution:  they say they want travel agents to connect directly to the airline without going through a GDS.  I say that “they say” they want that because they don’t really want that; they just want lower GDS fees.  GDSs are deeply entrenched into the airline business — American Airlines used to own the GDS Sabre, for example, though they are in their own legal battle.  American says that GDSs cannot allow them to sell tickets the way they want (by upselling various products, for example).  GDSs say of course they can do that (though there’s some debate around that).

So why is American suing?  They say that Travelport, which owns Orbitz, is acting as a monopoly by (and I admit this is a bit odd) raising GDSs fees so high and offering such a poor customer experience (by not allowing American to sell ancillary products) that American had no choice but to pull their fares off Orbitz.

American, in a separate situation, has approached some travel agents and told them that if they do not connect to American directly (and bypass the GDS) the agency will be forced to pay a $5.50 per-segment fee to the airline for the right to access their seats through the GDS.

It all boils down to this:  who is going to pay the fee.  The best analogy is probably Ticketmaster, which is an intermediary between artists/venues and customers.  With Ticketmaster, customers pay the fee. They’re not happy about it, but they have no choice in most cases.  With airlines, the carriers pay the fee, and they’re not happy about it.  They’d like the travel agents to pay the fee (or, in turn, the end consumer).   They don’t want to come out and say they want consumers to pay the fee, so they focus on the direct connection issue.  However, the airlines need the GDSs, because they’re tied in with corporate travel agencies, which buy a good chunk of the business class tickets out there.  Those tickets pay the bills.  So while the airlines are complaining about distribution costs and wanting to eliminate the GDSs, they are really just posturing — they just want lower fees.  Which, after a few months of back-and-forth is what they’ll get (and what they’ve gotten when this issue arises every 5 years).

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  1. So, why doesn’t AA made the customer pay the GDS fee. If I had the choice between going to AA.com for a 5.50 lower price per segment or going through a GDS, I’d learn really quickly that going directly to AA.com saves me a bunch in a year. And I’d figure out “hey, look, I can actually buy access to the lounge for 30$ even if I’m not a gazimillionflyer”, cool! Sure would work out quite well, no? Wouldn’t that work? Or am I missing something? Isn’t the problem that AA is not innovating enough to beat the GDS? Or maybe it’s a lawyer thing again? Like that evil company (parent company from Comedy Network and CBS and Dora, etc., what’s the name again?) that was suing YouTube because it had their videos. Sure, it was wrong. But the real way to deal with it was to actually make those videos available on THEIR sites and make money out of it. Sure, it’s their own choice to NOT put them anywhere and force others to NOT put them up anywhere else also. But the real question is: aren’t they about selling what they produce? Isn’t the real question: how come they were sitting so long on something that end users wanted bad, imagine the traffic, ad revenue, etc. These people are doing a disservice to their shareholders and putting too much power into the hands of lawyers who them kill off the company’s goodwill (I’ve stopped watching CBS, didn’t go to that Dora-themed park in Orlanda, etc. after all the craziness when they wanted to get my private info from youtube because I watched the daily show on youtube). You know, you might win the legal battle but, in the end, you just lost. AA better figure out how to make money selling tickets and come up with a strategy and save the lawyer money and give it to the IT department… And don’t get me started on ticketmaster fees, what a ripoff… Shouldn’t bands like U2 be able to sell their own tickets on their sites and get the money? Who really needs ticketmaster anyway???

  2. Anyway, my point (sorry for the mouthful, ehehe), is that AA could easily say “we’re not paying the GDS fee anymore”. “You want a fee, go ahead a charge it directly to the passenger”. See how long the customers are going to stick with Orbitz or whoever. And AA would not lose an ounce of goodwill in the process. The way I see it, the GDS provides a service to the passenger in helping show all the options instead of having to go to each airline to compare. If they do a really good job at it and have lots of useful tools, notifications, etc. Then passengers will be willing to pay their fee. Nothing stops someone from looking at Orbitz then going to the airline to buy the ticket for 10$ less. Well, isn’t that what I already do with hotels? I check the prices at Orbitz then go to Priceline or directly to the hotel to get the hotel-points or the AAA-card price? Isn’t that what we do when we look up the price on Amazon on our cell phone while browsing at a Border’s store? And how do they react? Well, frequent buyer points, coupons, extra services, whatever. You’ve got to be smart and be relevant… Time=money, Make it fast, one click checkout, price guarantee, etc. Many people will continue paying the extra 10$ if the value is there…
    arrggg, sorry, another mouthful, I should have a column in your blog, ehehehe ;-)

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