2 Feb 2018
This is a viewpoint from Rajendran Vellapalath,CEO of TPConnects. Air France KLM is the latest airline to introduce the GDS surcharge for travel agents. The airline joins other European carriers with surcharges, as Lufthansa introduced its levy in 2015 and British Airways introduced a surcharge last year. Some would argue that the GDS is a fair system. After all, it enables travel agents and their clients to access travel data, make price comparisons, access special rates, and book their travel. There’s also no denying that the mainframe-based system operated by the likes of Travelport, Amadeus and Sabre generate billions of dollars in global travel sales. These channels are massive revenue streams for travel providers.
Some industry analysts believe that the GDS may evolve and take on more of a tool for direct corporate bookings type of role, with technology targeting specific interests such as corporate or leisure travel. The fact is that the current system is old. It’s been around since the 60s and it has serious flaws baked into its older mainframe approach. Not so long ago, research revealed security flaws in PNRs as used by the GDS, which meant they could be easily hacked.
In addition, agencies can promote their own displays in favour of preferred partners. This means that travel agents’ bookings are swayed by the airlines they have preferred agreements with. It earns them bonus payments if they reach a certain volume each year. This can skew the equation away from the traveler’s best interests.
The fact is that three main players still dominate the global travel distribution system. Amadeus is the largest player in the travel agent air booking market, with a self-reported 43.5 percent market share in Q1 2017, followed closely by Sabre’s 36.3 percent, and others such as Travelport. All three make the bulk of their money from flights, earning huge margins through license fees, service fees, and transaction fees for bookings and access to their networks.
Now here’s the rub. Every GDS charges per transaction. Booking fees are usually between 2 and 4 percent of a ticket price, and around 20 percent for a hotel booking. So, for a percentage of a booking’s price, an airline receives access to a global network of travel sellers from travel agents to OTAs. Airlines also pay additional fees for system access and consulting.
When you consider that more than a billion flights are being booked each year, these are serious sums of money. Travelport reported its agency commissions as well as revenues. For the first quarter of 2017, the company made revenues of $650.8 million and paid commissions of $310.4 million. Compared to 2016, these figures show that while revenues have increased by 7% year-on-year, commissions are now 10% higher. (source: Business Travel IQ)
Carriers are fighting back
Recently, there have been disputes between certain airlines and the GDS. In a recent legal case involving US Airways, it was revealed that some airlines pay different transaction fees based on their contracts with the GDS. Some pay as much as $16 per transaction.
Last year, Ryanair failed to renew its agreement with Amadeus as it became abundantly clear that they, like many other airlines, found that GDS fees cut too deeply into margins. Tensions between airlines and GDSs have been further exacerbated with carriers making more from unbundling their fares and then offering services like luggage, food and drink as add-ons. This move has been hugely profitable for airlines — and has increased airline revenues by shielding these add-ons from middlemen.
European airlines have perhaps been most active in exploring models outside the GDS. In an attempt to shift bookings to other channels Lufthansa placed a surcharge of around $16 on GDS transactions made by travel agencies. CEO Jens Bischof claimed that in addition to the high fees, the technology associated with its current sales systems couldn’t display their individual offers adequately.
We are seeing changes to the current systems. The travel distribution giants struggle in areas like airline merchandising and hotel content, and smaller companies are making investments in certain areas that have gone through changes in recent years. New companies like ours can aggregate content faster and in a simple way. The fact is that it’s new technology that will guide and change the travel distribution system. Smaller players have more of an opportunity to create innovative solutions that do not involve the big three.
We also need to consider the social networking and search companies, TripAdvisor, Google and Facebook. They have direct access to consumers and are pushing hard into selling travel. If Facebook opens up its user base of more than one billion people to travel companies you can imagine that many will jump on board.
Changes to airline strategy
Competition among carriers is intense and the airline industry is under extreme financial pressure. Airlines have been heading towards a merchandising strategy for some time now, increasing profits and shifting from a service provider to a retailer. This hasn’t been an easy move as its success is reliant on the support of players like the IATA as well as GDSs. However, there is no doubt that this is the path they need to take to grow and attract wider sales. While some full-service carriers are trying to find less costly approaches that meet customer needs, others are evolving and moving away from the traditional low-cost carrier model in search of different sources of revenue such as premium passengers, according to a recent report by Embraer.
The fact is, in order to make these changes successfully they cannot be restricted by financial burdens, outdated systems and old technology. New platforms and systems need to be continuously developed to support them as the airlines’ business model evolves and passengers demand more from their carrier wherever they book their tickets.