Northwest Backs Down: Following Backlash, Carrier Rescinds GDS Fees, Keeps Direct Focus By David Jonas SEPTEMBER 06, 2004 -- Northwest Airlines late last week rescinded a policy to levy fees on travel agent bookings made through global distribution systems. The reversal came after 10 days of sharp criticism from GDS companies, travel agents, trade groups and corporate clients who said they were shifting bookings away from the carrier. Well-known for ruining other airlines' attempts to raise fares by not matching them, Northwest had stood alone during the controversy, which most viewed as a de facto fare hike. Without support from any other major carriers?and facing retaliatory action from all four primary GDSs, a lawsuit and a potential U.S. Department of Justice investigation?Northwest lost the first major distribution battle following the expiration one month ago of federal GDS regulations. A Northwest official said agencies would not be billed for the GDS fee that was in place last week for less than two days. Despite the failure, Northwest's move was representative of major airlines' efforts to change distribution economics by pushing corporate and agency clients to use carrier Web sites and other lower-cost, direct-connect technologies. Northwest specifically cited Orbitz Supplier Link and threw support behind G2 SwitchWorks, a Chicago-based startup with letters of intent from at least six other carriers. Corporate travel managers and other industry sources said they understood Northwest's rationale, but had several problems with the specific policy. For starters, the nonrefundable $7.50 per-ticket fee would had to have been absorbed by some party in the distribution chain. Northwest vice president of sales and customer relations Fay Beauchine had said, "it's up to the agency to decide" between absorbing the fee and passing it to customers. Agents widely were choosing the latter, resulting in higher per-ticket costs for corporate clients and other end users. "In a zero-commission environment, where we receive remuneration from customers, the agency has no revenue stream to put this against," said Andrew Winterton, American Express vice president of supplier relations, speaking with BTN prior to Northwest's reversal. "It is a ticketing fee that customers will pay." The new fee also presented accounting headaches and extra processing costs for agents and corporate clients. "Northwest did not consult with the agency community or consider the impact from a process orientation," said Tammy Troilo-Krings, chairman for Travel Solutions, speaking last week on a Business Travel Coalition teleconference. "We have to create an anomaly to accommodate an airline, for which we believe are unfounded processes. It is pretty clear they did not think it all the way through." "If you stand back and look how an airline might like to price, unbundling costs makes sense," said John Heilner, vice president of Management Alternatives. "But this adds too much complexity." He said some of his clients were "more upset than they would be if it were just a straight fare hike." Many viewed Northwest's channel price differentiation as a forceful attempt to move clients to its preferred distribution outlets. The airline said lower-cost alternatives that had not incurred the new GDS fees were the Orbitz Supplier Link affiliate agency program, its own Web site?including the dedicated WorldAgent Direct portal for travel management companies (BTN, Oct. 7, 2002)?and any other channels that "use technology that bypass GDSs." "Not every airline has a robust solution like WorldAgent Direct," said Al Lenza, Northwest vice president for distribution and e-commerce. "It still is the best-kept secret." Northwest later told BTN that more than 9,000 agencies had enrolled in the program as of Aug. 1, though bookings represented only a fraction of total volume. The airline until year-end is offering agents a $5 per-booking incentive through its portal. Nevertheless, many corporate travel buyers will not easily be persuaded to choose Northwest's?or any supplier's?preferred booking channels. The GDS model, though decades old, still is seen as the single source with the most comprehensive content, and fragmentation presents new questions and challenges. "This will cause well-managed programs to be less efficient," said Chris Staal, Thomson Corp. vice president of global sourcing strategies, noting that airlines always were more likely to offer deals to companies with strong agency relationships and solid data. "A company now is held hostage to either pay the fee or use disparate channels, which is contradictory to what they had always encouraged." Staal, also speaking with BTN before Northwest's reversal, criticized the airline for excluding corporate and agency partners from its deliberations. "They did this in a vacuum," he said. "That is a pretty reckless way to change the industry." "They have picked a very bold and controversial move that will affect only a small portion of costs," said Amadeus USA president and CEO Kay Urban. "If you force someone to move away from a system of value and to lose control of the record by booking in various places, you cannot pass value down the chain to the traveler. Who suffers? The traveler." Supplier-direct channels make some buyers nervous by jeopardizing efficient comparison shopping and lowest fare policies, complicating data consolidation and raising security and traveler tracking concerns. "An entity is telling customers how they must buy," said Paul Ruden, senior vice president for legal and industry affairs at the American Society of Travel Agents, also speaking during the BTC call. "It is supposed to be the other way around." Though all four GDSs took action to disadvantage Northwest in their displays, or at least list Northwest fares inclusive of the $7.50 roundtrip fee, Sabre went farthest in retaliating. In trading lawsuits with Northwest, both alleging breach of contract, Sabre said adding the fee in pricing displays "reflects the Department of Transportation's long-standing policy requiring airlines to include the entire price to be paid by the customer to the air carrier in any advertising or solicitation." Sabre also confirmed last week it had removed Northwest's long-haul business class inventory in Z, C and J fare classes. Now that Northwest has dropped its fee GDS companies are likely to return Northwest to normal, unbiased status within their displays. Though no other airline followed Northwest's lead, opting instead to keep a low profile during the firestorm, executives around the industry said they agreed with the principle. Though by no means a top expense item, annual distribution costs for an airline run into the hundreds of millions. New technologies, low-cost competition and evolving consumer and corporate purchasing habits provide to airline management the opportunity and motivation to explore new models. "Airlines need to incentivize agents to make the move off the GDS. Northwest has set up a model where the incentive is in alleviating the new fee," said Steve Jarvis, Alaska Airlines vice president of e-commerce and distribution, also speaking before Northwest's about-face. "It is risky, but times are tough for airlines and we need to reduce costs everywhere we can." Meanwhile, Continental Airlines last week said it is planning a number of cost-cutting initiatives, including "reductions in distribution costs." The carrier would not clarify. Northwest's attempt was not the first aimed at recouping distribution costs by passing some of the burden to consumers and travel agents. Delta in early 1999, for example, began adding a $1 surcharge to tickets not booked through its Web site (BTN, Jan. 25, 1999). Though the carrier reversed its decision shortly thereafter, it proved airlines were intent on shifting volume to lower-cost channels. Changes in airline distribution accelerated two years ago when American Airlines introduced EveryFare, which essentially traded access to Web fares in exchange for agencies taking on some of AA's GDS costs (BTN, Oct. 7, 2002). The complicated program partly led to a spate of new agreements between airlines and GDSs that traded full content for discounts off segment fees (BTN, Oct. 28, 2002). Many such agreements remain in force through 2006 and 2007. Major carriers are expected to make new attempts to move customers to cheaper distribution channels and many in the industry closely are watching development of direct connections between suppliers, corporate clients and agents who book on their behalf. Enter G2 SwitchWorks, one of several new companies looking to accomplish that very goal. Late last month, it publicly disclosed plans to develop a cheaper, superior travel distribution network on behalf of the travel agency community. G2 claimed its TrueConnect system when launched specifically would offer "100 percent automation" for various functions available in existing GDSs, as well as new ones. For example, the system would include an automated switching mechanism that routes transactions through proper booking and fulfillment processes and a "super PNR" functionality that allows agents, rather than GDSs, to own all information contained in passenger name records. Those agents then can develop supplier relationships "without a big, lumbering GDS in the middle," said president and CEO Alex Zoghlin, an original Orbitz architect. The privately owned company also said it would never operate a travel agency and therefore will not compete with agency customers. It also touted the fact that all data are kept private, as opposed to GDS data that are sold in the form of marketing information data transfer products. G2 already is selling its service to travel agents and has begun testing. Citing non-disclosure agreements in place "with pretty much the whole world," Zoghlin declined to elaborate. On the supplier side, "for those airlines that put the press release out with us"?identified as Alaska, Continental, Delta, Northwest, United, US Airways and one that went unnamed?"obviously we are testing with them," he added. "We have structured relationships that allow us to book directly on their systems and bypass all existing legacy infrastructure." Supplier distribution costs through G2 would be "about 80 percent less than they are paying today," Zoghlin said. Such claims obviously draw interest from cost-conscious carriers. "GDS costs are my single largest selling and marketing expense," said Doug Leo, US Airways vice president of sales and international, "and G2 provides an opportunity to address that head-on." John Slater, Continental managing director of distribution and e-commerce, in a statement said TrueConnect removes distribution costs, "rather than simply shifting existing distribution costs between the airline and the agency," the strategy at the heart of Northwest's short-lived GDS ticketing fees. G2 generated lots of buzz this summer (BTN, Aug. 16), but "until it is up and running, it is vaporware," said one corporate travel manager. "They have a $3 booking fee, compared to $12.50, but what is the full range of services they are offering?" asked Amex's Winterton. "I have been offered direct connects for 25 cents per booking, but booking is the simplest aspect. The issue is how this would fit in with corporate travel management. What they are proposing to do has a great amount of innovation but we will wait to see how they use intelligent code and infrastructure." Winterton would not comment on any cooperation between Amex and G2, saying only that Amex "has no commercial agreement with G2." Northwest did keep intact other nonrefundable fees, including a $5 fee per booking through a reservations center and a $10 fee for tickets booked at airports. The fees initially were for domestic tickets only but late last week were extended to international tickets. After announcing the fees and the GDS fee, Northwest executive vice president of marketing and distribution Tim Griffin said "the economics through our different channels are roughly equivalent." At press time, American Airlines was the only carrier to announce matching policies. Its similar phone reservations and airport ticketing fees were scheduled to take effect today. Like Northwest, American did not add fees to bookings through its own Web site. American specifically said it would not add costs to travel agencies, a statement that likely played a role in killing Northwest's GDS fee. "These businesses charge their own fees for services they provide," American said. --------------------------------- Do you Yahoo!? Yahoo! Mail - 50x more storage than other providers!