Ticket distribution costs ANALYSIS - Airlines target
By Kyle Peterson and Karen Jacobs
Mon Jan 10, 2011 10:31pm IST
CHICAGO/ATLANTA (Reuters) - A feud between American Airlines (AMR.N) and several companies that sell its tickets shows new determination by airlines to lower costs and could spell new business challenges for online travel agents.
American is steering those third-party sellers toward its in-house technology that the airline says will save it money and allow customers to shop for flights based on more factors than just fares. This is needed, the airline says, because carriers now charge separately for so many travel-related perks and items such as bag checks, meals and priority seating.
But a shift to new technology operated by American and its peers could disrupt the lucrative business model now favoured by travel agencies like Orbitz Worldwide (OWW.N) and Expedia Inc (EXPE.O) and the companies that provide the data they publish.
AMR is leading the charge to cut distribution costs because several of its key distribution contracts expire in 2011. Other airlines may follow suit and force more changes to the business model, said Andrew Watterson, an airline consultant at Oliver Wyman, a management consulting company.
"This dust-up will change the economic landscape of this relationship," Watterson said.
"There are sophisticated actors trying to change, improve and benefit from how we search. We can't even imagine what our experience is going to be like in five years," he said. "But we do know over the next year or two the economic, behind-the-scenes, who-gets-paid-what will change dramatically."
COSTS UNDER SCRUTINY
The cost of ticket distribution is a relatively low-ranking line item for major airlines, whose top two expenses are fuel and labour. But airlines are looking especially hard at their non-fuel costs as they claw their way back to stability from a downturn that saw soaring oil prices and sagging travel demand.
AMR's distribution costs, which are listed as commissions, booking fees and credit card expenses, were $853 million in 2009. That figure includes AMR's American Eagle regional airline.
For United Continental Holdings (UAL.N), which is the parent of the newly merged United Airlines and Continental Airlines, the combined distribution expense number for 2009 is $1.21 billion.
The showdown between American and the third-party sellers follows a court decision in December that allowed American to stop selling tickets on Orbitz. American shunned Orbitz after the agency refused to use American's new "direct connect" technology for selling its flights.
The third publicly traded U.S. online travel agency Priceline.com (PCLN.O) still carries American tickets, and some experts believe the company has agreed to use American's technology.
Meanwhile, Sabre Travel Network, a unit of Sabre Holdings, said it would halt its distribution deal with American in August -- a month before the end of its contract. Sabre is one of several of several global distribution systems like Galileo and Amadeus, which act as pipelines to bring fare and flight information to travel agents.
"We oppose American's efforts to impose a costly and unproven system on travel agents and travellers," Chris Kroeger, senior vice president, Sabre Travel Network, said in a statement.
We strongly agree with the many industry and consumer groups who believe American's actions will make it much harder and more costly for agents and consumers to easily comparison shop among airlines, which will result in increased prices for consumers," he said.
Expedia also has dropped American Airlines tickets from its listings, charging that the airline's new commercial strategy is "anti-consumer" and "anti-choice."
Delta Air Lines (DAL.N) announced last month that it removed its flight listings from smaller online sites CheapOAir.com, OneTravel.com, and Bookit.com. Last week, the Atlanta based carrier said it has notified Airfare.com, CheapAir.com, Vegas.com, AirGorilla.com and Globester.com that it would end participation on its websites in the United States and Canada Jan. 7.
"Delta continues to evaluate its online distributors, and intends to be more selective in its use of online travel sites in the future," spokesman Trebor Banstetter said in a statement.
CUTTING OUT THE MIDDLE MAN
Southwest Airlines (LUV.N) sells its fares mostly through its own website, Southwest.com, a move it says helps keep costs down.
The discount carrier said more than 80 percent of its transactions were done at Southwest.com. It also works with a couple of global distribution systems to ensure that its fares are available to business travellers.
Michael Van Houweling, senior director of marketing at Southwest, said the carrier sold tickets through online travel agencies at one time but has for the past decade pursued "a very pure online distribution strategy." He said the airline at present has no plans to re-evaluate that practice.
Southwest, which does not disclose its distribution costs, says its more exclusive online distribution strategy keeps lower costs but also helps build customer loyalty.
"Because in many cases we don't have a third party helping sell our fares, that does help reduce our distribution costs," Van Houweling said in an interview. "It's a more effective way for us to distribute our fares from a cost perspective."
Other airlines hope to see similar benefits. The Open AXIS Group, which was founded by North America's largest airlines, promotes a more modern forum of content distribution.
"This is a battle that's been going on for 15 years and it's just the most recent skirmish," said airline consultant Robert Mann. "But it seems to be the most contentious."
"While American is most upfront about it, everybody else is egging them on. They may not be saying so, but they're definitely egging them on," Mann said. "If American looks like they're going to make an end run around this thing, everyone else is going to be right behind them."
(Reporting by Kyle Peterson and Karen Jacobs, editing by Dave Zimmerman)