October 2018, Las Vegas
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Airlines vs GDS: is cooperation the way forward?
In an opinion on the thorny issue of the high fees of the global distribution systems, Tom Bacon wonders if a recent decision by Air France/KLM could signal a new type of relationship
IAG-owned British Airways, Lufthansa, and Air France-KLM have all implemented a GDS fee. In essence, these fees apply to customer bookings made through global distribution systems, the big three being are Amadeus, Travelport and Sabre. The aim, of course, is to ensure that more bookings are made directly through the airline websites. The surcharge covers the cost difference associated with higher-distribution-cost third-party channels and can help drive more customers to book directly with the airline.
Air France/KLM, however, recently announced that the surcharge will be waived for bookings made through ‘select GDS partners’, which now include Travelport and Amadeus, as well as Expedia, which uses all three major GDS providers. These partners have not announced a lower GDS fee for Air France/KLM but instead they said they would cooperate with KLM/Air France on IATA’s New Distribution Capability (NDC) standard.
Not just about cost
This move reminds us that the GDS fee was never all about the cost difference across distribution channels. In fact, as ancillaries have become a more important source of airline revenue, and as improved merchandising and personalisation is sought, it has never been more important to be able to offer increased content through third-party channels.
As ancillaries have become a more important source of airline revenue, and as improved merchandising and personalisation is sought, the ability to offer increased content through third-party channels has never been more important
Rather than just the $10-$15 distribution cost difference, a missed opportunity to collect a $30 checked bag fee, or a $15 advanced seat selection fee, or a $10 priority boarding fee becomes much more significant. The ancillary leaders – airlines like Spirit – report close to $50 per passenger in ancillary revenue.
In addition, airline choice now includes various re-bundled fares – new combinations of amenities sometimes referred to as ‘branded fares’. Air Canada recently announced a new such branded fare that joins four other unique bundles. These branded fares represent an easy way to book a ticket with the desired amenities and they often offer a discount relative to purchasing the same amenities on an ala carte basis. But making these new bundles available on third-party channels – channels that were designed to just display the lowest fare available – requires a new orientation for the distributors.
Race to sell more
Third-party channels, and especially the online travel agents, have historically been accused by airlines of driving a ‘race to the bottom’ in airfares as their displays focus so much on the lowest fares. But with the growth in ancillary options, passenger decision-making has become more complicated than just the lowest (base) fare. To meet traveller needs, it is important for these third parties to offer the fares and content important to customers in the new marketplace. So today, the airlines and the GDS’s are both motivated to work together to increase the available content.
Today, the airlines and the GDSs are both motivated to work together to increase the available content
By agreeing to work jointly on NDC, KLM/Air France and the GDSs are working toward increased content. NDC is the IATA standard specifically designed to facilitate ancillary purchases in third-party channels that have historically focused only on base fares. The protocol can make ancillary services, branded fares, and unique content available via the sites. The protocol can also support more personalised travel merchandising, which is increasingly the direction airlines are flying in.
The high cost of certain third-party distribution channels remains a concern for many airlines. All airlines continue to seek increased efficiencies in distributing their services. However, both the revenue opportunity and greater customer engagement associated with increased personalisation may offer an even greater profit opportunity for airlines than focusing on GDS fees.
Sure, NDC is continuing to be tested but this move by Air France/KLM is another sign that a cooperative approach between airlines and GDSs can help both. My view is that this agreement is likely to be followed by other carriers.
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Tom Bacon has been in the business 25 years, as an airline veteran and now industry consultant in revenue optimisation. He leads audit teams for airline commercial activities including revenue management, scheduling and fleet planning. Questions? Email Tom or visit his website