Monday, 24 January 2011


Over the last couple months interesting developments have occurred in the travel arena especially between airlines, OTAs and GDSs. Much of the speculation started when Google purchased ITA, the leading flight information software in July 2010 and we still have not seen any clear strategy on what Google will do with their purchase of ITA. The official reason behind the move was to make the flight search easier and more compelling to the travelers in order to increase online purchases. The question is what really lead Google to make this purchase?

As almost 90% of travel planning starts online all airlines, hotels, car rentals, cruise-lines and other travel and hospitality businesses have been forced to set a strategy to drive bookings direct. Given this shift in the marketplace Google might have seen the ITA purchase as a game-changing opportunity. This complements Google’s constant work on improving the search result pages and adding more advanced and user-friendly interfaces - and more changes are on the way.

Another recent development was American Airlines’ announcement of their Direct-Connect-Strategy and their pulling out their flights from Orbitz and other affiliates sites. Expedia announced that they will not sell American Airlines tickets anymore. Sabre Travel Network announced that they are planning to terminate their contract with American Airlines from the GDS (global distribution system) in August this year – further increasing the tension.

Competition between American Airlines, OTAs and GDSs is increasing. Other airlines have not yet reacted as they seem to prefer to observe the developments from a distance. However, in the US we have seen low-cost airlines such as Southwest successfully implement a direct-to-consumer strategy and proven that is can work well. Today it is estimated that 80% of flight tickets are sold via the GDSs and OTAs. Perhaps that is the reason why other airlines are reluctant to follow the AA suit.

Since the cost of a booking via the GDS to the airline is considerably high and represents a big chunk of revenue “loss” for the airlines, a direct strategy becomes a tempting changeover. The increase in the online search and the implementation of direct-to-consumer strategy could save a substantial amount of money for the airlines. Especially considering huge revenue losses the airline industry has faced over the last two years ( and many others have gone bankrupt) due to the economic environment, the increase in the fuel and other operational costs, saving money is critical to survival. The only viable way to decrease costs and increase profitability is by reducing the dependency on other channels and third parties including the GDSs and focusing on a more proactive direct-sales strategy and that is what lies behind the AA plan.

The other advantage of a direct-strategy is that the airline will be able to cross- and up-sell its products and services and create more opportunities for additional revenues. However, this is not without risk and may lead to further decrease in the ticket sales and ultimately end in further revenue loss for the airlines.

As mentioned the majority of flight sales currently comes from the GDS especially over TMCs (Travel Management Companies) and the around 600,000 partnered travel agents who are using the system to make bookings daily – most of which is business travel. This may be the central reason why American Airlines have partnered with Kevin Spacey pouring money on TV advertising over the recent months. (This was, primarily to promote their business class and attract the business segment.) This they have done to compensate any potential loss of bookings from the GDS and other channels. Thereby American Airlines have created a base on which to build their direct-business-segment in conjunction with its direct-connect strategy. We assume that American Airlines have studied other low-cost airlines’ strategies and developed a plan that would fit with their organizational structure.

All these developments point to a necessary change in the airlines’, GDSs’ and OTAs’ business models – and we will see more changes and developments in the coming weeks and months. Like airlines; hotels and other travel and hospitality businesses have already embraced a direct-to-consumer approach but they are still lagging behind the airlines. Once these industry segments catch-up with the airlines, it will accelerate the speed at which these changes take place – changing the whole business model as we know it.

From a hospitality point of view the hotel chains have managed to increase their direct revenue by restricting the OTAs and GDSs and by selling best available rates on their own websites. They have also managed their channel strategy carefully by connecting all channels and implementing a consistent pricing strategy in order not to cannibalize their direct approach or lead to confusion from a pricing point of view. Revenue management practices have evolved over the last decade and it has become an important discipline in managing the distribution channels including their own websites. This and other developments will lead to further changes in the distribution strategies for the airlines, hotels, car rentals and other business.

It is time to set a clear direct-strategy and be ready for any outcome in this competitive landscape. Today OTAs and other third parties charge a substantial amount of commission for a booking and most travel and hospitality businesses rely on those channels. The economic downturn and the developments in the technology and consumer consumption behaviours suggest that more radical changes are on their way. The only viable option is to have a plan B, strengthen the direct approach and your website, be consistent among all channels from a pricing point of view, and be ready to take risks, change and innovate.

If you would like to learn more on how the changes may affect your business please get in touch with us.

by Velit Dundar

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