It must happen to a greater or lesser extent if American Airlines create a model that succeeds and then gets rolled out across the industry. The only way that TMCs will be able to give their customers what they want will be to direct connect with every key supplier and, as such, become mini specialist GDS in their own right. It will cost them a lot in time, resource and money despite what some AA loyalists say and you can bet your bottom dollar they will want it back with interest.
So how will such an event impact the balance of power in the travel supply chain? I think it will affect it significantly. Obviously the GDS will not simply sit back and let it happen and I am sure there is intense discussion and negotiation going on as I write.
However let us just pause for a minute and reflect on the following statements:
1) Despite airlines best efforts the TMC world still has considerable value to their corporate clients and will be hard to dislodge unless they do all the things TMCs do.
2) TMCs have been preparing their own strategies by building their own booking platforms that can be directed to be very specific on what choices they offer.
3) If airlines direct connect to these platforms they may be stepping out of the frying pan and into the fire as far as power balance is concerned.
The GDS are too darn expensive and working with a defunct, unjustifiable pricing model. I think many of us believe that and I can see why airlines are getting sick of paying sector fees even for cancellations and suchlike. The only thing is that GDS have a value to them and this value may be provided by TMCs in future. If you receive a value you can expect it to cost you as the TMCs will not give such distribution capability away for nothing. On top of that they will have their own platforms overlaying it which will allow dynamic pricing and availability control.
My message to airlines is to look at the broader implications of their actions. Remember how some thought GDS were great to own once. And how ownership, encouragement and support of OTAs were expected to reduce not increase cost. Not a great track record so far so look at your next step very carefully!
Saturday, January 29, 2011
Thursday, January 27, 2011
Better to never have something than see it taken away?
I wrote a few comments in my blog not that long ago about corporate entertaining. I tried to both entertain and inform but there was one particular argument I tried to put across. It was ‘never give someone something and then take it away’ i.e. once you invite someone somewhere regularly and then stop the reaction is worse than the initial benefit. This is exactly what is going on in travel at the moment but in a much broader sense.
Have you wondered why ‘low cost’ airlines like Ryanair manage to sell tickets much cheaper than say British Airways? Simple you might say, Ryanair is much more restrictive in timetable, booking conditions, departure airports etc. Plus they do not have the enormous cost infrastructure the big global giants have. Of course you would be right but it is far more than that, which brings me back to my entertaining analogy.
Nobody gets anything from a low cost carrier unless they pay for it. They never have and never will. What you get is a low cost and a menu of add on prices for everything from bags to card payment to seat reservations. That is the key reason for the low lead price and they absolutely depend on income from ancillary costs.
The big airlines are the complete opposite to this. Their prices are historically all inclusive but now they have to change rapidly to stem the flow of lost revenue to their new ‘low cost’ competition. So what do they do? They start looking at every distribution cost they incur and try to eradicate them. Things like free card usage, credit periods, use of agents and access to special fares. They will in fact ultimately end up pretty close to becoming low cost carriers themselves which is, to me, as worrying as it is welcome, in fact more so.
So the national airlines are starting to take away things they used to give away. Well actually they never gave them away. Instead they built the costs into those high prices they cannot compete with these days. As I implied in my heading, taking away something people are used to breeds discontent and intransigents. Pity the poor big airline, they are getting attacked for taking things away that their low cost competition never gave in the first place and get kudos for not doing so!
The travel world can be a cruel place sometimes. You only have to have a look at what is going on between all the supply chain intermediaries as the pain of this particular change is going on. Have a quick look at the rest of this blog if you want to see what I mean.
Have you wondered why ‘low cost’ airlines like Ryanair manage to sell tickets much cheaper than say British Airways? Simple you might say, Ryanair is much more restrictive in timetable, booking conditions, departure airports etc. Plus they do not have the enormous cost infrastructure the big global giants have. Of course you would be right but it is far more than that, which brings me back to my entertaining analogy.
Nobody gets anything from a low cost carrier unless they pay for it. They never have and never will. What you get is a low cost and a menu of add on prices for everything from bags to card payment to seat reservations. That is the key reason for the low lead price and they absolutely depend on income from ancillary costs.
The big airlines are the complete opposite to this. Their prices are historically all inclusive but now they have to change rapidly to stem the flow of lost revenue to their new ‘low cost’ competition. So what do they do? They start looking at every distribution cost they incur and try to eradicate them. Things like free card usage, credit periods, use of agents and access to special fares. They will in fact ultimately end up pretty close to becoming low cost carriers themselves which is, to me, as worrying as it is welcome, in fact more so.
So the national airlines are starting to take away things they used to give away. Well actually they never gave them away. Instead they built the costs into those high prices they cannot compete with these days. As I implied in my heading, taking away something people are used to breeds discontent and intransigents. Pity the poor big airline, they are getting attacked for taking things away that their low cost competition never gave in the first place and get kudos for not doing so!
The travel world can be a cruel place sometimes. You only have to have a look at what is going on between all the supply chain intermediaries as the pain of this particular change is going on. Have a quick look at the rest of this blog if you want to see what I mean.
Sunday, January 23, 2011
The Evolution of Air Distribution – The Story so Far
Now you are going to need to bear with me on this. Blogs are supposed to be brief and incisive but this one won’t. I just think that perhaps too many people assume that everyone knows about air distribution history and, by extension, fully understands the dynamics in play. I am not sure this is the case (why should they) so here is my understanding of how we got to where we are now.
It would take a book not a blog to go into the full detail and rationale so I will content myself and your patience by picking out the key players and change milestones in what will be a summary of what has happened and who are the movers and shakers. I think the customer needs to know the basics especially as they are ultimately paying unless they can do without at least one of the current cogs in the distribution mechanism.
Initially there was not much of an issue. The airlines worked in concert with each other and their supply chain and basically paid for everything required to distribute their product. They paid merchant fees to card companies, commission to agents (no such things as TMCs then) and fees to the GDS. Having picked up all these tabs they then sold their tickets with these costs built in to their fares. All of them did it so there was no problem Simple and reasonably effective in a well regulated, stable and growing travel market where little true competition existed.
As an example (and it varies hugely by area) airlines paid agents 10% commision and between 3 to 30% override, 1.5-3% card fees and 4% to 6% GDS charges.All of that bundled into the end ticket price.
Then things changed. Airlines expanded their route structures and became far more competitive with each other. The first sign of change was when ticket prices started to diversifyfrom airline to airline. In order to attract increasingly fickle travellers a fare differentiation was required. Carriers moved away from simply discounting their standardised global gross fare pricing and introduced corporate nets, yield managed specials and additional one-off deals.In one class alone you could end up with over a dozen fares each with their own restrictions and availability allocations.
The result was twofold. Firstly the ability to interchange tickets between airlines disappeared and secondly the need to mitigate pricing concessions made them look harder at their costs. Their distribution costs to be precise.
They found themselves in a real dilemma. The need to compete and discount was obviously threatening their profits (what there were) and simultaneously two other things happened. Low cost carriers with a totally different price model arrived who had to worry far less about convenience, timetables, airport locations and service which in turn encouraged corporations to view travel in a far more commoditised way. So, on one side they had to compete with carriers with a considerably lower cost base/tariff and on the other, a customer with a much harder stance towards price.
What became clear was that they could not continue paying the full cost of distributing their products whilst competing with new entrant pricing combined with more savvy buyers.Something had to give and what ‘gave’ was the air distribution model. After all, if you cannot beat the no frills airlines and professional buyers then the only option was to join them and challenge elsewhere in the travel merry-go- round.
I think their objectives were a mixture between the sound and the inevitable. The markets had clearly changed and if the end customer really wanted transparency and a lower cost model then give it to them. Whether they really wanted or needed it in the first place is a discussion for another day. Many of the arguments today are revolving around the desire for commoditisation coming head to head with the necessity for flexibility and uniformity of information and access.
There is another key influencing factor which is technology. Part of the reason why the main airlines feel both desirous and capable of change is that, for the first time there are other potential technology solutions out there. That is to say they are there if, and only if, the end users really do expect them to act individually rather than collectively with other provider’s inventory. Hence the current pressures on the GDS who provide all encompassing booking services and charge a high price for doing so. There is no way any individual airline can provide the diversity and product span that a GDS does.
The airlines (individually and at varying speeds) have called time on paying full distribution costs for all services to all customers. Unfortunately I do not see their goal as eradicating such costs. Their objective is to find what they see is the right home for these costs and then try to ensure the savings are not taken away by having to reduce prices to compensate the travellers, who will undoubtedly have to pay. Unless as I mentioned earlier a cog taken out of the distribution wheel. but which one?
So are there any expendable cogs? In some sectors of the market then probably yes. However, only if people recognise what they want and are prepared to accept the consequences and constraints of such. I think the line will be drawn between those corporations that want a controlled, managed and reported programme and others that choose a more deregulated approach where cheapest flights and few management ‘frills’ are acceptable.
If you want travel management you need knowledge and control. In order to do this you need someone to consolidate travel in all forms and package it into controllable chunks from as few sources as possible. At present this is best done through a GDS booking system, a travel management company and a mandated card programme. You take overall control of your travel, accept the price of doing so and form the right balance between value and all the other broader elements that complement your company ethos. Does anybody with a travel programme really want to run around numerous individual online airline sites and compare them when a GDS already does that in a one-stop environment?
On the other side if you want to maximise trip by trip savings there is no reason why approaching the cheapest distribution source and exploiting it until another one comes along is not the right way. To be frank the cheapest booking cost would be by going to an airline direct either independantly or through a TMC which is why carriers like American Airlines, Lufthansa etc are differentiating pricing and availability dependant on where the booking comes from. It does not by any means guarantee that overall trip price will be lower but the reservations element may be.
What I am begining to see happening is that airlines are finally differentiating between varying corporate needs and handling them individually. This part I applaud even though it has taken a long time and has a way to go. They are beginning to see the contrast between travel management and the very different service provided through Online Booking Agencies (OTAs) which, despite all the hype, focus on a different and smaller market that has a different list of demmands. It is this SME market and the OTAs that service them that are taking the brunt of current airline initiatives. The rest will follow.
Before I conclude let me set out the distribution milestones again as I see them:
1) Airlines have mainly eradicated standard agency commission payments but have failed to stop override and incentive payments. Whilst not totally successful it has enabled them to target better those they want to reward to a greater and more productive effect.
2) Agents responded by passing their new costs to the corporations by changing their contracts to management/transaction fees. End result? Most agencies protected their income and some grew it by ensuring remaining income from the airlines stayed with them and not passed on within their client deals. Airlines were forced to reduce prices to compensate customers.
3) GDS/Airline negotiations became far more aggressive. When you look at what airlines have to pay them, even for passenger cancellations and suchlike it is hardly surprising. Some airlines started charging TMCs for certain bookings to gain compensation. TMCs passed these costs on to the corporations but are still incentivised by GDSs which make airlines pretty mad as it is their fees that are funding them.
4) Various airlines changed some of the remaining IATA regulations regarding payment to shorten credit terms with TMCs and escalate penalties for perceived non compliance. A very much hidden cost that again the customer ended up collecting.I find it quite alarming how much cost comes into the chain via IATA and its interpretation of their own rules.
5) Credit/charge card usage has increased because of 4) as individual countries cut agency credit by 50% or more meaning TMC passed on the casflow deterioration to customers resulting in this migration to plastic . Ironic really as this area is very much a top target for airline cost reduction. Cards, like GDS charge wide and varying merchant fees to suppliers and these will be attacked robustly and very soon.
Where will this evolution take us? Airlines will continue fighting distribution costs. Instead of taking them all and then charging travellers through price they will try to dump them and leave the customer to pay separately. Meanwhile they will compensate by offering lower cost alternatives to those prepared to book direct. The battlefronts will be GDS fees, credit card merchant fees, cost of credit, TMC incentives and service deliverables. The customer will get what they say they want which is transparency and a unit price for everything. Currently I do not believe actual cost will go down. It will simply be realigned and will probably go up. If prices go down any further then there will be less suppliers, less choice and devolution not evolution.
It does not make sense that suppliers should pay for everything and then charge a correspondingly high price. Equally it does not make sense that the traveller gets all the bills and tries to negotiate their way out of them. I expect it is the way of the world and will provide yet newer business opportunities but regrettably the same old regurgitating costs.
It would take a book not a blog to go into the full detail and rationale so I will content myself and your patience by picking out the key players and change milestones in what will be a summary of what has happened and who are the movers and shakers. I think the customer needs to know the basics especially as they are ultimately paying unless they can do without at least one of the current cogs in the distribution mechanism.
Initially there was not much of an issue. The airlines worked in concert with each other and their supply chain and basically paid for everything required to distribute their product. They paid merchant fees to card companies, commission to agents (no such things as TMCs then) and fees to the GDS. Having picked up all these tabs they then sold their tickets with these costs built in to their fares. All of them did it so there was no problem Simple and reasonably effective in a well regulated, stable and growing travel market where little true competition existed.
As an example (and it varies hugely by area) airlines paid agents 10% commision and between 3 to 30% override, 1.5-3% card fees and 4% to 6% GDS charges.All of that bundled into the end ticket price.
Then things changed. Airlines expanded their route structures and became far more competitive with each other. The first sign of change was when ticket prices started to diversifyfrom airline to airline. In order to attract increasingly fickle travellers a fare differentiation was required. Carriers moved away from simply discounting their standardised global gross fare pricing and introduced corporate nets, yield managed specials and additional one-off deals.In one class alone you could end up with over a dozen fares each with their own restrictions and availability allocations.
The result was twofold. Firstly the ability to interchange tickets between airlines disappeared and secondly the need to mitigate pricing concessions made them look harder at their costs. Their distribution costs to be precise.
They found themselves in a real dilemma. The need to compete and discount was obviously threatening their profits (what there were) and simultaneously two other things happened. Low cost carriers with a totally different price model arrived who had to worry far less about convenience, timetables, airport locations and service which in turn encouraged corporations to view travel in a far more commoditised way. So, on one side they had to compete with carriers with a considerably lower cost base/tariff and on the other, a customer with a much harder stance towards price.
What became clear was that they could not continue paying the full cost of distributing their products whilst competing with new entrant pricing combined with more savvy buyers.Something had to give and what ‘gave’ was the air distribution model. After all, if you cannot beat the no frills airlines and professional buyers then the only option was to join them and challenge elsewhere in the travel merry-go- round.
I think their objectives were a mixture between the sound and the inevitable. The markets had clearly changed and if the end customer really wanted transparency and a lower cost model then give it to them. Whether they really wanted or needed it in the first place is a discussion for another day. Many of the arguments today are revolving around the desire for commoditisation coming head to head with the necessity for flexibility and uniformity of information and access.
There is another key influencing factor which is technology. Part of the reason why the main airlines feel both desirous and capable of change is that, for the first time there are other potential technology solutions out there. That is to say they are there if, and only if, the end users really do expect them to act individually rather than collectively with other provider’s inventory. Hence the current pressures on the GDS who provide all encompassing booking services and charge a high price for doing so. There is no way any individual airline can provide the diversity and product span that a GDS does.
The airlines (individually and at varying speeds) have called time on paying full distribution costs for all services to all customers. Unfortunately I do not see their goal as eradicating such costs. Their objective is to find what they see is the right home for these costs and then try to ensure the savings are not taken away by having to reduce prices to compensate the travellers, who will undoubtedly have to pay. Unless as I mentioned earlier a cog taken out of the distribution wheel. but which one?
So are there any expendable cogs? In some sectors of the market then probably yes. However, only if people recognise what they want and are prepared to accept the consequences and constraints of such. I think the line will be drawn between those corporations that want a controlled, managed and reported programme and others that choose a more deregulated approach where cheapest flights and few management ‘frills’ are acceptable.
If you want travel management you need knowledge and control. In order to do this you need someone to consolidate travel in all forms and package it into controllable chunks from as few sources as possible. At present this is best done through a GDS booking system, a travel management company and a mandated card programme. You take overall control of your travel, accept the price of doing so and form the right balance between value and all the other broader elements that complement your company ethos. Does anybody with a travel programme really want to run around numerous individual online airline sites and compare them when a GDS already does that in a one-stop environment?
On the other side if you want to maximise trip by trip savings there is no reason why approaching the cheapest distribution source and exploiting it until another one comes along is not the right way. To be frank the cheapest booking cost would be by going to an airline direct either independantly or through a TMC which is why carriers like American Airlines, Lufthansa etc are differentiating pricing and availability dependant on where the booking comes from. It does not by any means guarantee that overall trip price will be lower but the reservations element may be.
What I am begining to see happening is that airlines are finally differentiating between varying corporate needs and handling them individually. This part I applaud even though it has taken a long time and has a way to go. They are beginning to see the contrast between travel management and the very different service provided through Online Booking Agencies (OTAs) which, despite all the hype, focus on a different and smaller market that has a different list of demmands. It is this SME market and the OTAs that service them that are taking the brunt of current airline initiatives. The rest will follow.
Before I conclude let me set out the distribution milestones again as I see them:
1) Airlines have mainly eradicated standard agency commission payments but have failed to stop override and incentive payments. Whilst not totally successful it has enabled them to target better those they want to reward to a greater and more productive effect.
2) Agents responded by passing their new costs to the corporations by changing their contracts to management/transaction fees. End result? Most agencies protected their income and some grew it by ensuring remaining income from the airlines stayed with them and not passed on within their client deals. Airlines were forced to reduce prices to compensate customers.
3) GDS/Airline negotiations became far more aggressive. When you look at what airlines have to pay them, even for passenger cancellations and suchlike it is hardly surprising. Some airlines started charging TMCs for certain bookings to gain compensation. TMCs passed these costs on to the corporations but are still incentivised by GDSs which make airlines pretty mad as it is their fees that are funding them.
4) Various airlines changed some of the remaining IATA regulations regarding payment to shorten credit terms with TMCs and escalate penalties for perceived non compliance. A very much hidden cost that again the customer ended up collecting.I find it quite alarming how much cost comes into the chain via IATA and its interpretation of their own rules.
5) Credit/charge card usage has increased because of 4) as individual countries cut agency credit by 50% or more meaning TMC passed on the casflow deterioration to customers resulting in this migration to plastic . Ironic really as this area is very much a top target for airline cost reduction. Cards, like GDS charge wide and varying merchant fees to suppliers and these will be attacked robustly and very soon.
Where will this evolution take us? Airlines will continue fighting distribution costs. Instead of taking them all and then charging travellers through price they will try to dump them and leave the customer to pay separately. Meanwhile they will compensate by offering lower cost alternatives to those prepared to book direct. The battlefronts will be GDS fees, credit card merchant fees, cost of credit, TMC incentives and service deliverables. The customer will get what they say they want which is transparency and a unit price for everything. Currently I do not believe actual cost will go down. It will simply be realigned and will probably go up. If prices go down any further then there will be less suppliers, less choice and devolution not evolution.
It does not make sense that suppliers should pay for everything and then charge a correspondingly high price. Equally it does not make sense that the traveller gets all the bills and tries to negotiate their way out of them. I expect it is the way of the world and will provide yet newer business opportunities but regrettably the same old regurgitating costs.
Saturday, January 8, 2011
What does a hotel brand really mean?
Does that seem a weird question? Probably so but what I am trying to say is, does the logo over the door actually mean, or importantly guarantee anything? Is it saying ‘This is a Hilton, Holiday Inn, Four Seasons or whatever and this means you should expect and get what that brand markets?
This question is borne from spending many years trying to truly understand and make sense of the hospitality industry. It is a vital sector yet commentators and industry bodies barely notice it when compared to say airlines. What does make it so very different? And why should anyone need to care?
I think the difference is ownership hence my original question. You see there are quite a few different ownership scenarios within a single brand. Because a hotel displays say Hilton over the door does not mean it is owned by Hilton. Very often it is owned by someone completely different but Hilton has the management or marketing contract to run it and is employed by the owner to deliver an agreed profit. They are an employee of the owner and have to act accordingly.
So what I am saying is that if you negotiate with a hotel chain you may not be speaking to someone who has absolute control over policy, inventory or pricing with all their properties. Hence you can find yourself in a position where various properties opt out of some commercial agreements which are good for the whole family but not for them. It is a bit like a global TMC who has to sacrifice profit in one location to deliver a good deal in other countries. Most TMCs have had to come to terms with this but I do not think hotels have.
The issue becomes even more convoluted when you are dealing with hotel consortiums. These are mainly pure marketing organisations where hotels (of a certain comparable quality) link their properties to an umbrella brand in order to take on the big boys and achieve global coverage. Again, this does not mean that such consortiums can tell these hotels what to do as far as pricing and inventory is concerned.
Probably still the most influential person in any hotel is its General Manager who can, and do, instruct their reservations office to close out heavily discounted negotiated corporate rates if they think they can sell for more. Even worse for the bigger corporations is when their travellers tell them that the hotel ‘price at the door’ is cheaper than that negotiated by their procurement department. Sounds familiar?
Another side effect of confused and disparate ownership is the woeful lack of management information you get fro the hotel industry. The only really useful thing IATA does for airlines is it provides a standardised language and reporting base that is essential for meaningful information. Hotels do not have this type of global format hence they all do things in different ways. You really would be shocked by how little they know about their customers and what they spend.
So what am I trying to say? I am advising all buyers to find out exactly what control/ownership of key properties a chain or consortium has. Maybe you should insist on key contract clauses like last room availability and lowest price on the day. Perhaps require countersignature by the GMs of the main hotels confirming they understand and support the contract. Finally, why not think of ways to make your oh so wise travellers become willing watchdogs by actively encouraging them to test the system. You know how they love it so!
By the way, I have mentioned a few hotel brands in this post. This has been purely for general illustrative purposes only and does not imply that I was refering directly to them.
This question is borne from spending many years trying to truly understand and make sense of the hospitality industry. It is a vital sector yet commentators and industry bodies barely notice it when compared to say airlines. What does make it so very different? And why should anyone need to care?
I think the difference is ownership hence my original question. You see there are quite a few different ownership scenarios within a single brand. Because a hotel displays say Hilton over the door does not mean it is owned by Hilton. Very often it is owned by someone completely different but Hilton has the management or marketing contract to run it and is employed by the owner to deliver an agreed profit. They are an employee of the owner and have to act accordingly.
So what I am saying is that if you negotiate with a hotel chain you may not be speaking to someone who has absolute control over policy, inventory or pricing with all their properties. Hence you can find yourself in a position where various properties opt out of some commercial agreements which are good for the whole family but not for them. It is a bit like a global TMC who has to sacrifice profit in one location to deliver a good deal in other countries. Most TMCs have had to come to terms with this but I do not think hotels have.
The issue becomes even more convoluted when you are dealing with hotel consortiums. These are mainly pure marketing organisations where hotels (of a certain comparable quality) link their properties to an umbrella brand in order to take on the big boys and achieve global coverage. Again, this does not mean that such consortiums can tell these hotels what to do as far as pricing and inventory is concerned.
Probably still the most influential person in any hotel is its General Manager who can, and do, instruct their reservations office to close out heavily discounted negotiated corporate rates if they think they can sell for more. Even worse for the bigger corporations is when their travellers tell them that the hotel ‘price at the door’ is cheaper than that negotiated by their procurement department. Sounds familiar?
Another side effect of confused and disparate ownership is the woeful lack of management information you get fro the hotel industry. The only really useful thing IATA does for airlines is it provides a standardised language and reporting base that is essential for meaningful information. Hotels do not have this type of global format hence they all do things in different ways. You really would be shocked by how little they know about their customers and what they spend.
So what am I trying to say? I am advising all buyers to find out exactly what control/ownership of key properties a chain or consortium has. Maybe you should insist on key contract clauses like last room availability and lowest price on the day. Perhaps require countersignature by the GMs of the main hotels confirming they understand and support the contract. Finally, why not think of ways to make your oh so wise travellers become willing watchdogs by actively encouraging them to test the system. You know how they love it so!
By the way, I have mentioned a few hotel brands in this post. This has been purely for general illustrative purposes only and does not imply that I was refering directly to them.
Monday, January 3, 2011
Direct Connect – The first significant skirmish in a long campaign.
Christmas is supposed to be a time of peace and goodwill to all men but it also heralds the onset of a new year and, in turn, leads to encouragement of change. This can be illustrated by American Airlines who gave TMCs and their clients an early Christmas present of new cost and selected online agencies (OTAs) in particular to feel their power. The OTAs have started to respond with Expedia pulling American from their inventory. Obviously a lot more complex than that but you got the drift?
Immediately both sides are claiming victory. AA say their volume is growing and Expedia say they are not losing business. Meanwhile the travel world looks on at this test case. People really want to see if an OTA (or any TMC for that matter) can successfully move business or if airlines really can call all the shots. Whoever is perceived as the winner may set a radical trend in the industry and possibly change it considerably. Certainly if AA succeeds then many will follow after them
The trouble is that in reality this test of strength will prove very little in the business travel arena. Reason being that companies like Expedia hold only a pin prick of the worlds corporate travel market and the little they have is mainly towards the lower end in company size terms. In my personal opinion what American has done is picked a soft target to start with. The giant TMCs with their giant corporate accounts would be a different matter altogether. A smaller entity with a different client-base and business model is much easier quarry but one which they can get much tactical mileage from.
For instance how can anyone state at this very early stage that they are wining this argument? American says they grew in December. Big deal. This cannot be zeroed down to success in this dispute. Growth compared to what? Has not economic recovery got more to do with it? How much of American’s corporate market share is Expedia anyway? Yet they sagely point to some meaningless figures.
I do not think there will be any winner in this but I can say with a fair degree of certainty that the argument is a precursor to major industry change. Is that so bad? Probably not but with all change there is pain attached. Pain moves around the supply chain as quickly as cost and usually goes full circle. The airline will add cost and work to the TMC, The TMC will go to their clients, increase their charges and tell them why. The big corporate will go to the airlines and mitigate their increased cost by demanding compensation through their deal. The model has changed. But has it really and to whose benefit?
Like everyone else I will watch with interest and try to read between the lines to see where this will take us. As for the forthcoming figures and rhetoric? I will take them all with a pinch of salt and suggest you do the same.
Immediately both sides are claiming victory. AA say their volume is growing and Expedia say they are not losing business. Meanwhile the travel world looks on at this test case. People really want to see if an OTA (or any TMC for that matter) can successfully move business or if airlines really can call all the shots. Whoever is perceived as the winner may set a radical trend in the industry and possibly change it considerably. Certainly if AA succeeds then many will follow after them
The trouble is that in reality this test of strength will prove very little in the business travel arena. Reason being that companies like Expedia hold only a pin prick of the worlds corporate travel market and the little they have is mainly towards the lower end in company size terms. In my personal opinion what American has done is picked a soft target to start with. The giant TMCs with their giant corporate accounts would be a different matter altogether. A smaller entity with a different client-base and business model is much easier quarry but one which they can get much tactical mileage from.
For instance how can anyone state at this very early stage that they are wining this argument? American says they grew in December. Big deal. This cannot be zeroed down to success in this dispute. Growth compared to what? Has not economic recovery got more to do with it? How much of American’s corporate market share is Expedia anyway? Yet they sagely point to some meaningless figures.
I do not think there will be any winner in this but I can say with a fair degree of certainty that the argument is a precursor to major industry change. Is that so bad? Probably not but with all change there is pain attached. Pain moves around the supply chain as quickly as cost and usually goes full circle. The airline will add cost and work to the TMC, The TMC will go to their clients, increase their charges and tell them why. The big corporate will go to the airlines and mitigate their increased cost by demanding compensation through their deal. The model has changed. But has it really and to whose benefit?
Like everyone else I will watch with interest and try to read between the lines to see where this will take us. As for the forthcoming figures and rhetoric? I will take them all with a pinch of salt and suggest you do the same.
Tuesday, December 28, 2010
Loyalty Cards – What value?
There have been a growing number of reports recently about airlines reducing the number of ‘ex gratia’ cards negotiable within corporate agreements and I have no doubt whatsoever this will increase in future. There are a few possible reasons for this trend.
These cards started as a way of keeping the loyalty of regular travellers by giving a range of benefits from comfortable lounges and ‘free’ flights to priority for upgrades. They became a major instrument for wooing business people away from their competition, and possibly company policy by making the travellers feel special in a rapidly comoditising market.
Some corporations hated them and went to great lengths to try and cancel out their allure. A few tried with little success to confiscate the travel element (miles) for company use. Others took a different view and used the attraction of these loyalty clubs to underline and support the use of their chosen policy carrier. It was then that such awards became a significant beneficial component within corporate deal negotiations.
So all of a sudden airline loyalty clubs became valuable to corporates and a tool to sweeten a change in policy. This whole change thing became a great deal easier if you were able to hand out membership cards with substantial benefits to key travellers. As important were the top tier cards which appealed to status conscious senior executives. These Platinum/Black/Premier cards were usually allocated in very small numbers and linked to the company’s volume potential. Often you would see joint CEOs scrapping like alley cats as to who should get ‘The Card’ and TMCs being pestered to broker more of them.
Much of the above still happens now but the mood of the airlines is changing for a number of key reasons. Firstly the number of cards at high status (gold etc) has grown alarmingly causing lounges to become too full for comfort. The cost of these lounges and other benefits has risen correspondingly whilst their exclusivity has declined. I have been in some lounges which are busier and noisier than the seats outside them.
Equally there are fewer seats available for purchase with loyalty points which can cause problems.
The airlines in their quest to reduce distribution costs are now looking very closely at the value, and importantly, the cost of these schemes. They have gone from seeing these clubs as less of a marketing ploy and more of an out of control overhead. As a result they have identified the value and put a budget cost against it. This means that every time an airline salesman gives a card their budget gets debited accordingly. They now have to manage this cost in the same way that they do discount pricing and other overheads.
This state of affairs has reduced the number of cards being awarded within deals. Incidentally the same thing works within the airlines themselves. Senior airline management are having their own travel cards downgraded too and they are probably just as aggrieved as the corporate buyer. The problem is that if you take something away from someone it has at least twice the effect as giving it to them in the first place. What you never have you never miss!
I guess what everybody will have to realise is that if you drive mainstream airlines to behave like, and compete with low cost carriers you will see the continuing decline in such ‘luxuries’. Also, if you manage to finally be successful in mandating policy to your travellers then the need for such loyalty inducements disappear anyway.
These cards started as a way of keeping the loyalty of regular travellers by giving a range of benefits from comfortable lounges and ‘free’ flights to priority for upgrades. They became a major instrument for wooing business people away from their competition, and possibly company policy by making the travellers feel special in a rapidly comoditising market.
Some corporations hated them and went to great lengths to try and cancel out their allure. A few tried with little success to confiscate the travel element (miles) for company use. Others took a different view and used the attraction of these loyalty clubs to underline and support the use of their chosen policy carrier. It was then that such awards became a significant beneficial component within corporate deal negotiations.
So all of a sudden airline loyalty clubs became valuable to corporates and a tool to sweeten a change in policy. This whole change thing became a great deal easier if you were able to hand out membership cards with substantial benefits to key travellers. As important were the top tier cards which appealed to status conscious senior executives. These Platinum/Black/Premier cards were usually allocated in very small numbers and linked to the company’s volume potential. Often you would see joint CEOs scrapping like alley cats as to who should get ‘The Card’ and TMCs being pestered to broker more of them.
Much of the above still happens now but the mood of the airlines is changing for a number of key reasons. Firstly the number of cards at high status (gold etc) has grown alarmingly causing lounges to become too full for comfort. The cost of these lounges and other benefits has risen correspondingly whilst their exclusivity has declined. I have been in some lounges which are busier and noisier than the seats outside them.
Equally there are fewer seats available for purchase with loyalty points which can cause problems.
The airlines in their quest to reduce distribution costs are now looking very closely at the value, and importantly, the cost of these schemes. They have gone from seeing these clubs as less of a marketing ploy and more of an out of control overhead. As a result they have identified the value and put a budget cost against it. This means that every time an airline salesman gives a card their budget gets debited accordingly. They now have to manage this cost in the same way that they do discount pricing and other overheads.
This state of affairs has reduced the number of cards being awarded within deals. Incidentally the same thing works within the airlines themselves. Senior airline management are having their own travel cards downgraded too and they are probably just as aggrieved as the corporate buyer. The problem is that if you take something away from someone it has at least twice the effect as giving it to them in the first place. What you never have you never miss!
I guess what everybody will have to realise is that if you drive mainstream airlines to behave like, and compete with low cost carriers you will see the continuing decline in such ‘luxuries’. Also, if you manage to finally be successful in mandating policy to your travellers then the need for such loyalty inducements disappear anyway.
A Christmas Tale of Travel Distribution – 2
Cast of Characters:
Air Schizophrenia Services (ASS Air) – A major airline from Never Never Land.
Pass it on Travel (Past Travel) - A neurotic TMC who misses the old days
Scrooge Global Inc (Scroogey Inc) - A global corporation that hates travel budgets
Vera Merchant Fee ( VeraCard) - A credit/charge card that does not add up
Online Travel Agency (Ollie OTA) – Illegitimate love child of Air Schizophrenia.
IATAmania (Colin Cartel) - An airline association that interprets
the rules as they go along.
Globally Dysfunctional (Gordon GDS) – A misunderstood much maligned cog in
the Distribution wheel who nobody wants to pay
(Again, a work of absolute fiction and all the characters are simply a result of my overactive imagination)
It was a quiet peaceful Christmas Eve. It was mainly quiet because half a teaspoonful of snow had landed on the tarmac at London Heathrow causing the entire airport and access road infrastructure to go into meltdown and stop completely.
ASS Air barricaded himself in his office, switched off the passenger information announcements and tried to turn his mind away from the groaning, lamentation and anger coming from those selfish passengers in the departure hall. After all he had given them foil blankets so what were they moaning about?
Finally he decided to think back over the last year and consider what he might do in 2011. He tried to focus on all the fun things and the new friends he had made which lasted about 20 seconds so he then moved onto the progress he was beginning to make on distribution matters. He had quite a busy year in this area but he considered it mere positioning for what was planned for the coming year. He would show those vultures (I mean ‘partners’) a thing or two.
He started ticking off the successes and failures of the past. He congratulated himself for his success in transferring a major chunk of his own selling costs down the line. Who would have thought it could be so easy! Just put the squeeze and expense onto Past Travel and watch them ricochet onwards to Scrooge Inc. Job done! Except Scrooge being a savvy customer had let it happen in order to commoditise and claw back.
He was however beginning to understand Scrooge a lot better. It was difficult to start with but when he realised that old Scroogy played by different rules and was not impressed by his arrogance he found more subtle ways to play him at his own game. He discovered that as long as the up front price made Scrooge look good he could tinker away with the ancillaries rather like those ‘ghastly and common’ No Frills guys do.
It had been a shame about the black sheep of his family. After the wild euphoria of creating his very own online travel agency Ollie OTA had ultimately disappointed him. Now he had to try and undo the damage by putting him down in as humane way as possible. So off he had gone with his ‘content club’ and bludgeoned poor old Ollie as if he was a seal pup. Trouble was Ollie had a tougher infrastructure than he realised. ‘Memo to me’, he thought. Get in touch with Colin Cartel in IATA land and get him to come up with some kind of ‘creative’ rule interpretation to help me. After all good old Colin will do exactly what I say if he knows what is good for him. I am after all his boss.
That left just VeraCard and Gordon GDS to sort out. Both were thorns in his distribution sides but he was beginning to make serious progress. All he had to do was close his eyes to what travellers want and appeal to Scrooges desire for cheap nets and he would be nearly there. Vera would be much easier than Gordon. All he had to do was introduce a premium for using Vera (preferably higher than she cost) and watch old Past Travel do the rest. Scrooge would have to accept, especially if his competitor chums followed suit and they sure would like they always do.
Gordon GDS is another prospect entirely. Yes, Gordon is as anti change as he is and yes, he wants it all his way and yes, Gordon wants to increase his wealth not to diminish it. But like AssAir, Gordon does not appear to be able to come up with any more positive solution than more deep-seated intransigence. “Everything must change”, they cry, but not me! So Gordon hides behind the walls of Fortress Full Content while poor old AssAir tries to bash it down access brick by access brick. Meanwhile Scrooge and Pass It On shout for him to stop before they get hurt by the aftermath..
What a lovely time of the year Ass Air mused as he snuggled deeper into the ego massage machine chair that had been installed behind the double-locked steel door of his airport office. Have those damn passengers stopped snivelling he thought as he eyed the lovely looking ‘humble pie’ his cabin crew had cooked for him. No, he thought, I can always eat that when I absolutely have to and it will be Spring by then.
He reclined his lounger into bed mode and drifted into a blameless sleep.’ Oh what fun I will have next year’ he thought in his last moment of consciousness. But then he had a terrible dream. It involved all his antagonists sitting with him in a room sponsored by corporate travel trade associations and he was being made to cut a deal that would be fair for all and serving to the travel community.
But that really would be a fairy story
Air Schizophrenia Services (ASS Air) – A major airline from Never Never Land.
Pass it on Travel (Past Travel) - A neurotic TMC who misses the old days
Scrooge Global Inc (Scroogey Inc) - A global corporation that hates travel budgets
Vera Merchant Fee ( VeraCard) - A credit/charge card that does not add up
Online Travel Agency (Ollie OTA) – Illegitimate love child of Air Schizophrenia.
IATAmania (Colin Cartel) - An airline association that interprets
the rules as they go along.
Globally Dysfunctional (Gordon GDS) – A misunderstood much maligned cog in
the Distribution wheel who nobody wants to pay
(Again, a work of absolute fiction and all the characters are simply a result of my overactive imagination)
It was a quiet peaceful Christmas Eve. It was mainly quiet because half a teaspoonful of snow had landed on the tarmac at London Heathrow causing the entire airport and access road infrastructure to go into meltdown and stop completely.
ASS Air barricaded himself in his office, switched off the passenger information announcements and tried to turn his mind away from the groaning, lamentation and anger coming from those selfish passengers in the departure hall. After all he had given them foil blankets so what were they moaning about?
Finally he decided to think back over the last year and consider what he might do in 2011. He tried to focus on all the fun things and the new friends he had made which lasted about 20 seconds so he then moved onto the progress he was beginning to make on distribution matters. He had quite a busy year in this area but he considered it mere positioning for what was planned for the coming year. He would show those vultures (I mean ‘partners’) a thing or two.
He started ticking off the successes and failures of the past. He congratulated himself for his success in transferring a major chunk of his own selling costs down the line. Who would have thought it could be so easy! Just put the squeeze and expense onto Past Travel and watch them ricochet onwards to Scrooge Inc. Job done! Except Scrooge being a savvy customer had let it happen in order to commoditise and claw back.
He was however beginning to understand Scrooge a lot better. It was difficult to start with but when he realised that old Scroogy played by different rules and was not impressed by his arrogance he found more subtle ways to play him at his own game. He discovered that as long as the up front price made Scrooge look good he could tinker away with the ancillaries rather like those ‘ghastly and common’ No Frills guys do.
It had been a shame about the black sheep of his family. After the wild euphoria of creating his very own online travel agency Ollie OTA had ultimately disappointed him. Now he had to try and undo the damage by putting him down in as humane way as possible. So off he had gone with his ‘content club’ and bludgeoned poor old Ollie as if he was a seal pup. Trouble was Ollie had a tougher infrastructure than he realised. ‘Memo to me’, he thought. Get in touch with Colin Cartel in IATA land and get him to come up with some kind of ‘creative’ rule interpretation to help me. After all good old Colin will do exactly what I say if he knows what is good for him. I am after all his boss.
That left just VeraCard and Gordon GDS to sort out. Both were thorns in his distribution sides but he was beginning to make serious progress. All he had to do was close his eyes to what travellers want and appeal to Scrooges desire for cheap nets and he would be nearly there. Vera would be much easier than Gordon. All he had to do was introduce a premium for using Vera (preferably higher than she cost) and watch old Past Travel do the rest. Scrooge would have to accept, especially if his competitor chums followed suit and they sure would like they always do.
Gordon GDS is another prospect entirely. Yes, Gordon is as anti change as he is and yes, he wants it all his way and yes, Gordon wants to increase his wealth not to diminish it. But like AssAir, Gordon does not appear to be able to come up with any more positive solution than more deep-seated intransigence. “Everything must change”, they cry, but not me! So Gordon hides behind the walls of Fortress Full Content while poor old AssAir tries to bash it down access brick by access brick. Meanwhile Scrooge and Pass It On shout for him to stop before they get hurt by the aftermath..
What a lovely time of the year Ass Air mused as he snuggled deeper into the ego massage machine chair that had been installed behind the double-locked steel door of his airport office. Have those damn passengers stopped snivelling he thought as he eyed the lovely looking ‘humble pie’ his cabin crew had cooked for him. No, he thought, I can always eat that when I absolutely have to and it will be Spring by then.
He reclined his lounger into bed mode and drifted into a blameless sleep.’ Oh what fun I will have next year’ he thought in his last moment of consciousness. But then he had a terrible dream. It involved all his antagonists sitting with him in a room sponsored by corporate travel trade associations and he was being made to cut a deal that would be fair for all and serving to the travel community.
But that really would be a fairy story