DOT Advisory Committee on Aviation Consumer ProtectionAugust 7, 2012Next Generation Airline Distribution1Speakers»Sharon Pinkerton: Airlines for America»Montie Brewer: Former CEO, Air Canada»Al Lenza: CEO, Lenza Group»Monty Myers: Eureka Software Solutions, Inc.»Gary Doernhoefer: IATA General Counsel2»Airlines are transparent and are committed to ensuringthat consumers aremade aware of the prices of our products prior to purchase»Airlines want the ability to customize their product forthe benefit ofpassengers»GDS markets are fundamentally flawed and anticompetitive»GDSs have used their market power to charge airlines supracompetitive fees,which is bad for consumers and airlines»GDSs have used their market power to prevent new entry and eliminate themarket forces that DOT hoped would materialize when itderegulated theGDS industry in 2004»A mandate forcing carriers to provide content to GDSs is unnecessary andwill raise costs for consumers and stifle innovationOverview of Key Points3Historical Overview of GDSs»Airlines created/owned CRSs (GDSs) for electronic distribution of theirservices back in the 1970s»In 1984 DOT regulated GDSs to prevent anticompetitive practices»Late 1990s – early 2000’s airlines sold GDSs»In 2004 DOT deregulated the GDS industry, citing thedivestiture of airlineownership and the expected entry of new technologies»In deregulating the GDS industry, both DOT and DOJ (docketcomments) expressed significant concerns about the state of GDSmarkets»DOT and DOJ found that GDSs exercised market power over airlines andthat booking fees were at supracompetitive levels4AIRLINEDISTRIBUTIONSNAPSHOTTravel Agency Online Travel AgencyAirline Reservation Systems5AIRLINEDISTRIBUTIONSNAPSHOT-HowtheMoneyFlowsTravel AgencyOnline Travel AgencyAirlines Pay GDSs $7 BillionGDSs Pay Agents $3 BillionAirline Reservation Systems6The Internet ChangedEverythingTravel AgencyOnline Travel AgencyTravel AgencyOnline Travel AgencyAirline Reservation Systems7DYNAMIC RETAILREQUIRES SUPPLIERPRODUCT CONTROLLegacy Model (3rd Party Manufacture)Anonymous Selling Model:Airline doesn’t know who the traveler is until after the sale ismade.New Model (Airline-Controlled)Passenger-centric Model:Airline knows who the traveler is and dynamically creates anoffer.Airline Host SystemOAG(Schedule)ATPCo(Fares)GDS(Or 3rdparty)Travel Agency Online Travel AgencyGDS(Or 3rdparty)AirlineTravel AgencyOnline Travel Agency8TWOSIMULTANEOUSBATTLESThe Fight OverDistribution Costs.The Fight OverInnovation andRevenue.Airlines paySupracompetitivedistribution fees(~$7B per year)GDS feesrepresent $12-20 per ticket.There isa growing cost dividebetween carriersthat sell through their websites and those usingthe GDS.New solutionsthat offer 80% cost savings areresisted by the GDS.GDS payment modelincentives are in the wrongplace.Customer ends uppaying the cost.Airlines compete onproduct differentiation.Airlines, learning to be retailers, desire tocustomizeofferingsto the needs of individual customers,including personalized pricing (free baggage, VIPservice, etc.)Dynamic integrationwith airline-owned data (e.g.loyalty status; history; inventory) is essential.The GDS channel - faced with massive investment inupdating their platforms - isslow to respond.The Product Gapis increasing between carriersrelying on web sites and those using GDS.Customers do not haveaccess to new productsdesigned to meet their travel needs.COSTCHOICECustomer Benefits9•No seat assignment•No food•No changes•No refunds•No frequent flyer miles10•Fare families all available to the last seat•Each fare family offered enhanced benefits•Over 45% purchased a higher priced product1112»Personalization is everywhere, forexample:»Many retailers – Amazon, Ebay, Toyota,Nike»Online search – Google, Bing»Media – Netflix, Spotify, iHeartRadio,Hulu»Targeted Marketing – Groupon, HomeDepot, Lowes, ExactTarget, MailChimp»Social Media – Facebook, Pinterest,Klout/Cathay-PacificConsumers want and expect personalization13New ModelBuilt from ground up using modern technologies»Personalization technology/capabilitiesare enabled by Internet andtechnological advancements»Airlines have created a new model thatwill support personalization and improvetransparency»Supports efficient and robustcomparison shopping»Comparison can be early in shoppingprocess integrated with air shopping»Comparisons that matter to consumersallow clear consideration of the fullspectrum of choices»Comparison results in moretransparency, not less»Timely support for airline innovation andevolutionLegacy ModelBolted onto technology concepts from the 1960s»Innovation has been slow – power ofInternet not engaged»NOT in material production in the U.S.»Only a handful of airlines worldwidehave announced actual (and limited)adoption»Does NOT support true consumercentric personalization, dynamic, up-tothe-minute relevance for consumers, orrobust comparison shopping/booking»Stifles innovation by further encouragingairline standardization/commoditization14New ModelMeets airline and consumer needsLegacy ModelMaintains the GDSs’ gatekeeper role»Substantial increases in the amount ofdata uploaded to GDS»New complex GDS rules must becreated/published by airlines»Large delays in uploading andprocessing data in antiquated model –“hours” of latency»Personalized and transparent shoppingnot truly integrated early in shoppingprocess consideringoptions/prices/descriptions»GDSs openly pushing to control evenmore of airline data (e.g., detailedinformation about customers)»Advanced shopping and pricing engines»Employs widely accepted Internettechnology»Support for fast changes and responsetime»State-of-the-art mainstream software andhardware core technologies»Ready availability of talented software andhardware engineers»More robust ecosystem of third-party toolsand technologies15»Limit new competition (difficult for 3rdparties)»Use incentive fees/back office support, restrictive contracts tolock inagencies»Use market power to force airlines to sign restrictive contracts(and now there are in effect just 2 GDSs in US)»Contractual limitations on airlines promoting new entrants»Misrepresent promising new technologies to agency community»Stalled new technology pending possible new regulationsWhat they have doneGDS Response to Emerging Competition16TAXAIRFARE»Invest in the requisite technology to support full personalization»Support airline marketing strategies and customization»Facilitate non-GDS technology (afraid to lose control and lose GDS share tomore nimble, lower cost competitors)»Airline/GDS deals signed yet to be implemented or produce meaningfulresults (UA-Economy Plus; US; seat assignments; DL/Travelport/Amadeus;No OTA implemented except Priceline-AA)What they have not doneGDS Response to Emerging Competition17»Often require near 100% use of a single GDS»Financial incentives paid to travel agencies tied to nearexclusivity»Severe penalties common for use of new technology outsideof the GDS»Restrictions placed on comparison of GDS and non-GDS fare/productinformation on a single travel agency screen»Travel agency accounting systems interfaced to GDSs but failto work aswell with 3rdparty systemsContracts with Agencies Limit Competition18»Airlines must provide all published fares and inventory (cannot offer lowerfares via less expensive channels)»Cannot incentivize agencies to use non-GDS technology, orin some caseseven talk about the benefits of non-GDS technology publicly»Cannot choose participation by region of the world»Cannot share the high cost of GDS booking fees with travel agencies»Airlines must choose—foreclose any flexibility to promotecompetition orpay significantly higher booking feesContracts with Airlines Also One-Sided19»Majority of tickets still distributed via GDS-powered agency network»Airlines want to present offers in manner they choose ata competitive costso they can make the best offers to individual customers»Overall GDS related costs have gone up since the GDSs consolidated, andremain multiple times higher than GDS alternatives»Airlines see an opportunity to reduce $7B in annual cost and avoid thepotential of $1B in additional fees on ancillary products»If bilateral negotiations between airlines and GDSs are replaced by agovernment mandate, GDS costs will only increase further»GDSs and airlines are identifying opportunities to work together – do notneed a mandate to achieve this cooperation.»Mandate likely to retard new consumer technology benefits/increase costsAirline-GDS Relationship20Today’s Consumer RealityAir travel is no longer a commodity- there are choices»Fares with differing rights orrestrictions»Changeable tickets – fee/no fee»Refundable tickets – fee/no fee»Service classes on board»First Class, Economy Plus»Advance seat selection»Upgrade options»Priority boarding»Priority passage through securitylanes»Onboard food service»Travel insurance»Inflight telephones»Inflight entertainment»Inflight internet access»Flight status notifications»Checked bags with or without fees»Same day standby fee/no fee»Airport lounge access»Frequent flyer mileage awards andbonuses.21What Consumers Should Expect»A choice of competitive services related to air travel»To know the choices and services available to them»To know the cost TO THEM of each choice»To be presented with offers that are designed to meettheir particular needs»The ability to choose the services they want and not payfor what they donot want»To know the cost of the entire trip BEFORE they purchasethe ticket22»GDSs don’t show all airlines»No DOT mandate there»GDS-owned online travel agencies»Don’t disclose which airlines are not shown»Don’t use the data they have for comparison»When disputes arise, GDSs remove airlines»Airlines are investing in new technologies and supportingnew entrantsComparability is not the IssueThe GDS Middleman Is23Proposed Mandate vs. The Consumer»A static set of “Core” services is anti-consumer»Limits choice of services»Confusion comparing personalized offers»Helps preserve suspect GDS business model»Gives GDSs leverage in negotiations withairlines»Locks in high costs»Fails to open market to new innovationIF YOU WANT TO COMPAREAPPLES TO APPLES....ALL YOU CAN GET AREAPPLESIF YOU WANT TO COMPAREAPPLES TO APPLES....ALL YOU CAN GET AREAPPLES24Conclusion»Consumers are served by choice and lower costs»GDS policies limit choice, inhibit transparency, and increase costs»Airlines invest to present robust fare and service choices»Directly»And through travel agents»Markets are not working because of GDS practices»Few new entrants, struggling»Some Airline-GDS deals, but not very robust»Availability of consumer choice still constrained»Proposed DOT mandate will make matters worse, not better, for the consumer»What’s needed is to eliminate GDS imposed barriers to adoption of newtechnology and innovation – and then let the market work.