Eastman's Off-The-Wall Comment(S)

Eastman’s Off the Wall Comments© Ahhh … March. This winter in Southern California has been akin to living in Seattle; we’ve had the 2nd wettest winter since 1884 – almost 36 inches rain. It’s been wet and cool since early January. But today it is a delightful sunny 76F (24C) degrees. There is a light wind coming off the desert blowing the haze and smog out to sea. It is a wonderful spring day to be sitting on my deck conjuring up March’s “Off-the-Wall Comment(s).”

From Various Trade Stories, March 2005 Comments emanating out of ResExpo

“I’ve never seen Sabre, Galileo, Amadeus and Worldspan “lock arms” this much.” Jim Davidson, CEO Farelogix, Former President/CEO Amadeus North America, “ResExpo: GDSs unite in defense against new entrants”; Travel Weekly, March 7, 2005

“There will be a lot of pain. The question is, who will bear that pain?” Mitch Gross, General Manager, The America’s, Galileo’s Client Services, “ResExpo: GDSs unite in defense against new entrants”; Travel Weekly, March 7, 2005

“The number one trend in the travel business is for companies to attempt to be more agile.” Mike Hulley, Vice President, Transportation Global Industry, EDS, “Big Ideas in Travel Distribution – ResExpo 2005”; TravelMole Weekly Insider USA, March 7, 2005

“Airlines are increasingly moving to the Internet to sell tickets not only because of lower costs but also because Internet success in driving customers, unlike more traditional advertising such as print or the electronic media, can be exactly measured.” John Slater, Managing Director, Distribution Planning, Continental Airlines, “Big Ideas in Travel Distribution – ResExpo 2005”; TravelMole Weekly Insider USA, March 7, 2005

“The emergency of ITA and G2 is really about business models, noting that GDSs deserve the competition for treating airlines as suppliers and not customers.” Peter von Moltke, Senior Vice President, North America, Amadeus, “ResExpo: GDSs unite in defense against new entrants”; Travel Weekly, March 7, 2005

“GDS Companies are missing the point. It is about technology.” Jeremy Wertheimer, President/CEO ITA, “ResExpo: GDSs unite in defense against new entrants”; Travel Weekly, March 7, 2005

The ResExpo conference in early March generated a great deal of publicity … largely because it was the first significant trade event to follow the announcement of G2 Switchworks and ITA of their new GDS by-pass solutions. United Airlines had announced in early February that it would offer a per-ticket incentive of up to $5.00 for early-adopting travel agencies that shifted from legacy GDS tool to the newer systems. 1

All of the quotes noted above were quips picked up and reported by one travel trade magazine or another during the ResExpo conference.

These quotes were part of the introduction I used this month to discuss the topic of GDS By-Pass in presentations to the Silicon Valley Business Travel Association and two TQ3 Navigant’s Corporate Advisory Board meetings – to draw attention to the diverse views that GDS by-pass represents. Each quote has its own spin … and I’d like to take a moment to put some “un-spin” on the thoughts proffered.

“I’ve never seen Sabre, Galileo, Amadeus and Worldspan “lock arms” this much.” Jim Davidson, CEO Farelogix, Former President/CEO Amadeus North America

There is little doubt that the traditional GDSs are “locking arms” against this new external threat to their dominance and control of the traditional travel distribution model. An alternative digital gateway solution for booking seats on airlines is a major threat to the traditional GDS industry unlike anything that has come along before.

Not even the evolution of Internet travel agencies posed much of a threat to the control over distribution for the GDSs. Yes, Internet travel agencies have significantly transformed the relationship between buyers and access to-and-from the distribution system – and with the relationship between buyers and travel agents; but the GDSs remained the digital-links through which the major trunk carriers continued to offer product.

The fact that United Airlines would offer corporate travel agencies an incentive to abandon the traditional GDS system in favor of an alternative, lower-cost, gateway into the United host is a very real “wake-up” call. The GDSs can chip-and-bitz about market- share among themselves – because the literal market-share shift was minimal and always within their own industry oligopoly. True, there was some erosion of bookings via airline-direct Internet web sites; but for the most part, the actual booking tools were actually provided by the GDSs or their subsidiaries.

As new-business start-ups, neither G2 Switchworks nor ITA would represent much of a threat to the traditional GDS structure (I know … I’ve tried a couple of times “;-]] ). But both ITA and G2 evolved out of the successful airline owned online travel agency Orbitz. Both have leaders well recognized from the Orbitz evolution and ITA’s fare-rules engine has become the backbone of a number of other airline and Internet product offerings. Concurrently, G2 was apparently intimately involved with the development of the Orbitz

1 “TMCs Ponder UAL's Carrot”; BTNOnline.Com, February 7, 2005 ______0e8f9763a419e2f79316e58704d97354.doc Page: 2 All rights reserved by The Eastman Group Inc www.eastmangroup.com alternative-GDS model prior to Cendant’s acquisition (if the law suits between the two are to be believed). And G2 recently obtained $10 million dollars in equity funding.

All that is to say, between them, these two new-entrants have the foundation upon which prudent investors can foresee the possibility of achieving critical-mass in an alternative new-technology distribution channel. Add FareLogix and a few other smaller players, and what the airlines are siphoning off for themselves via direct-bookings, the traditional GDS distribution structure is significantly threatened! Is it no wonder that Sabre, Galileo, Worldspan and Amadeus have “locked arms” to forestall these new entrants?

“There will be a lot of pain. The question is, who will bear that pain?” Mitch Gross, General Manager, The America’s, Galileo’s Client Services.

And that is a very good question!

Historically, the airlines have borne the pain! In the past, the airline “pain” of paying segment fees to GDSs was fairly easily off-set by the price control that the oligopoly of GDS distribution provided for the airlines. Product pricing could be controlled via the channel distribution … and there was insufficient “spill” between channel retail outlets for spill to be meaningful. But along came Internet … and all of a sudden, the channels could put their pricing out to “the world;” which led to ubiquity of fare information.

The Internet has virtually eliminated the ability of the airlines to control their pricing via different distribution channels (other then on their own web sites). In so doing, the Internet has concurrently created a commodity market for airline seats. Some of you may have noticed that JetBlue announced plans to roll out a dynamic packaging option on their web site this summer2 – that will integrate “packaged air and hotel” pricing; effectively beginning the process of combining two commodity product offerings as one to create a “value add” for buyers (lower total price) with higher opaque margins for the suppliers. This is not an easily implemented solution within the traditional GDS architectures; but almost a “no-brainer” on new technology platforms. Therein lays one of the less painful alternatives by which traditional GDS segment fees will be off-set or replaced.

There is another aspect of this question that needs to be explored. In each of the sessions I worked in this month, I asked the participants the following two questions … “How many of you access Internet from home?” Virtually every hand was raised. “So, who pays for that Internet access?”

Therein lays another answer to who is going to bear the pain. Instead of the airlines having to fund all of the software technology, all of the telecommunication costs and all of the hardware costs – the users are going to have to start picking up a portion of those costs. But today, the bulk of the $4.00 segment fees go to supporting a technology base that mandates the use of proprietary hardware and software – by suppliers, vendors, intermediaries, and virtual users. With the exception of the “JetBlue’s” of the industry (and there are a few others in addition to JetBlue), virtually all of the “user-friendly” web- based front-end tools exposed to customers and agents alike – all go through “technology interpreters” for conversion to the “proprietary technology” solutions that serve the GDSs and airlines.

2 “JetBlue plans dynamic packaging”; Travel Weekly, Travel Technology Section, March 21, 2005 ______0e8f9763a419e2f79316e58704d97354.doc Page: 3 All rights reserved by The Eastman Group Inc www.eastmangroup.com But in today’s contemporary technology world, virtually everybody uses interactive communicating technology tools – from PCs to Blackberry’s to cell-phones; all owned by the users and all moving data across common technology platforms using common software conversion protocols. What costs $4.00 per segment to process on proprietary technology and software platforms costs 25% of that on alternative platforms – in large part, due to the commonality and universal acceptance of the alternative technology platforms!

Still, implicit in Mitch Gross’ comment is a hidden cost that the airlines must, ultimately, bear. It will be a very real pain. Fortunately, it will be largely a one-time pain; in lieu of the ongoing $4.00 per segment pain that the airlines are confronted with if they continue to support the traditional GDS distribution structure. That airline pain will be the cost of converting their legacy proprietary software and hardware technology platforms into contemporary technology solutions! And the hard reality of that pain WILL NOT be the literal costs of technology conversion – but the hidden costs of retraining, restructuring, and redefining the tasks and roles of the people within the airlines.

Frontier Airlines recently “scratched” the surface of this pain when they moved from being hosted on EDS Shares to being hosted on Sabre. I’m told that the migration process went pretty much “as planned;” with the minor technology and data mapping hiccups that are typically spawned by such migrations. But in spite of purported training on the new Sabre systems – the actual switch from many-years of using command-line instructions to the new Sabre web-enabled user-friendly screens virtually brought Frontier to its knees. The agents had been trained – but they had NOT been confronted with “real time” issues in “live-stress” situation; and when they were, they reverted to “first-learned” skills – trying to figure out how to use command-line entries and applying Shares structures to a Sabre data environment.

On the day of migration, virtually all flights were delayed; many were canceled. Customers at the airports found themselves waiting in lines for up to two hours. Many spilled themselves to other carriers. Delays were system wide. Telephone wait times were up to 4 hours (for those with the patience to hold). The problems were not resolved in one day as the Frontier PR people initially claimed – but lasted for more than a week. Four weeks after the migration, callers to the Ascent Frequent Flier telecenter were still getting a pre-announcement suggesting wait time of one to two hours; and recommending that Ascent Members might be served in a timelier manner via the Frontier web host.

What is the “pain” of such an experience? What is its cost in lost employee moral … in lost customers … in lost revenue? And in this case, the bulk of the problems were apparently created by experienced users moving from a traditional “command-line” response structure to a purported “user-friendly” set of web screens already proven to be more efficient and effective for a number of other carriers!

There is real truth to Mitch’s question – a truth that can be mitigated with careful planning. But it is a truth of any new technology transition that rings true not just for airlines (as the example I use implies) – but for virtually any travel business that is today, a part of the traditional distribution channel.

______0e8f9763a419e2f79316e58704d97354.doc Page: 4 All rights reserved by The Eastman Group Inc www.eastmangroup.com Technologists tend to dominate these kinds of business structure transformations. It is easy to become mesmerized by the technology focus; and miss or downplay the human elements of change. Yet, just as consumers have learned to efficiently use Travelocity, Expedia, eTravel, and Orbitz user-friendly type front-ends., the operational and other aspects of technology transformation in the way travel product is created, distributed, and delivered can be overcome with thoughtful foresight and a focus on humanness of the transition. By focusing on the human elements of implementing new business processes, the technology facets will virtually take care of them selves.

“The number one trend in the travel business is for companies to attempt to be more agile.” Mike Hulley, Vice President, Transportation Global Industry, EDS

Regular readers of OTWC have been seen this message frequently. The key word here is agile.

However, agility is NOT reflected in dependency on a single technology platform or gateway. Agility is NOT represented by dependency on a single distribution channel. Agility is NOT based on having an outside third-party channel vendor or supplier promising to be responsive to the ever-changing industry on YOUR behalf.

Agility … whether one is discussing product packaging, internal operations -- or the technology tools to enable either or both … is dependent on the primary business entity owning and controlling its own information management technology switch.

In the traditional distribution structure, various intermediaries provide different elements of the digital packaging of travel products. Technology traditionally came from the GDSs. Travel packaging was typically the role of tour operators. Travel agents performed the retail outlet functions of product distribution. Roles were fairly clearly delineated and pricing structures served to fund the appropriate channel.

In a digitally-driven information world, as noted above, these channels have come apart. The problem is that they have NOT yet restructured themselves. It makes no difference whether one is an airline, a GDS, travel agent, corporate travel buyer, tour or cruise operator, trade group, hotel or bed-and-breakfast property, leisure travel buyer, Internet travel marketing company, car rental or limousine services company, financial settlement center, ground services provider, or any other of the myriad of other travel industry participants – it is no longer possible to intelligently predict the future of your business marketing alliances and/or distribution channel structures. All that you CAN predict is that whatever they are today – there is only a 15% probability that they will still be the same in three years!

Thus, if you are to remain agile in today’s evolving business environment, it is incumbent on one to take control of and maintain or manage from within your own business entity, the key technology that enables your business to integrate its products with widely divergent suppliers and/or buyers (i.e. distribution channels). The greater a company’s dependency on a single channel or provider of services – the more likely that company is to become a sole provider or outlet of products controlled by that intermediary channel.

If survival depends on agility, then it is incumbent on every business entity to control the technology switch through which it obtains its product and/or sells its product. It is quite ______0e8f9763a419e2f79316e58704d97354.doc Page: 5 All rights reserved by The Eastman Group Inc www.eastmangroup.com possible to outsource virtually all other elements of your digital information/management/processing environment if you control the flow of information to and from the entities and business processes that go into fulfilling your product commitments. Outsourcing your control platform virtually relegates your product offerings to those of your outsource platform! In today’s travel business environment, the traditional roles structure alluded to above is no longer valid; and one moves along that path with great risk.

“Airlines are increasingly moving to the Internet to sell tickets not only because of lower costs but also because Internet success in driving customers, unlike more traditional advertising such as print or the electronic media, can be exactly measured.” John Slater, Managing Director, Distribution Planning, Continental Airlines

I’m sure that John Slater might have said this more directly, had he know that he was being quoted. But the message is quite clear. Airlines are moving to Internet because response can be exactly measured. Airlines do not have those same kinds of measurement tools when they use mass media tools such as advertising in print, television, or radio.

The very critical concept to which John seems to refer is measurement … measurement AND, implicitly, the control that comes from being able to track and measure immediate response.

One of the facets which John did not outwardly focus on is the “interactive” aspect of both measurement and control. The ability to track the interaction of prospective buyers with the product offerings is even more valuable. After all, people don’t visit a web site without a reason … whether it’s an airline hosted web site or an Internet travel agency. Even if they don’t buy on this visit, their interaction with the offerings can provide significant customer information.

John’s thoughts suggest two additional aspects. The first is that traditional media platforms will become increasingly suspect – and will, over time, necessarily develop some form of linked-response tie-ins that will enable them to compete to some extent with the digital interactive tools. Without such auditing or accountability, investments in those traditional media must necessarily wane.

The second aspect of John’s remark is that what goes for airlines … necessarily goes for virtually everybody else in the airline distribution channel. If travel agents, agency buying groups, corporate travel buyers, etc., cannot measure, manage, and virtually control the sales of seats for a given airline (or hotel, car rental firm, etc.) – they will be unable to prove in measurable terms that they are “eligible” for whatever business relationship they seek to make. Said in today’s terms – incentives, overrides, commissions, contract fare pricings, etc; will all become measurable and accountable … O&D market by O&D market, room by room, etc.

The ability to measure goes both ways in a digital world. The numbers must match … and discrepancies justified. This is particularly true as traditional market share and comparative billing data made possible by the oligopoly of the existing distribution channels – become virtually useless as buyers and sellers create direct links for both purchasing and settlement. The power of negotiation will belong to the negotiator with the greatest knowledge; and if knowledge base is equal, then it will default to the buyer – ______0e8f9763a419e2f79316e58704d97354.doc Page: 6 All rights reserved by The Eastman Group Inc www.eastmangroup.com because airline seats, hotel beds, rental cars, and the core traditional travel products have become commodities of basically equal value available from alternative sources as a result of the digital information evolution!

“The emergency of ITA and G2 is really about business models, noting that GDSs deserve the competition for treating airlines as suppliers and not customers.” Peter von Moltke, Senior Vice President, North America, Amadeus

Peter is truly correct in his observation. This is, of course, an extension of the airline culture. The airlines owned the GDSs. When the airlines spun the GDSs out of their economic and psychological protection – they provided levels of “insurance” that the new business entities would survive in the form of multi-year contracts for services. The airlines set themselves up for failure … by not really negotiating closure on future pricing (i.e., by not hedging their future distribution costs).

And the legacy structures embedded in the airline and GDS systems were also perceived (by airlines and GDSs alike) to be the most cost effective structures – because nobody had bothered to try to understand the growing cost imbalance being created around the standardization of Internet and PC-based technologies.

In point of fact, had the dot-net era not evolved as the airlines were encountering financial problems – it is quite possible that the airlines would still be owners of the GDSs. Given this basically cultural history of co-dependence … there was no perceived need on the part of the GDSs to treat airlines customers. One could not survive without the other.

And that co-dependency allowed the GDSs to keep increasing segment fees as they created front-end solutions to interpret the evolving Internet world to their industry’s legacy platforms – without really understanding how those increased costs that were being passed along to the airlines or recognizing that the traditional channel structures through which airlines priced their product were coming apart as a function of Internet. The tradition-bound thinking has ended up “blind-siding” both the airlines and the GDSs.

It is quite probable that the GDSs do not yet understand that the airlines are less and less, “co-dependents” – and more and more, “customers.”

The unanswered question is – with the GDSs figure that out in time to restructure their relationships to ensure survival? That is a far more subtle and controversial question – with the answer hidden beneath 40-plus years of culture, tradition, and incestuous business processes.

“GDS Companies are missing the point. It is about technology.” Jeremy Wertheimer, President/CEO ITA

Jeremy‘s quote can have an infinite number of meanings … and may very well have. Further, the quote is not reflected in the context of his whole thought.

The general nuances of the material reporting on these exchanges seemed to suggest that the GDS representatives were trying to argue that their $4.00 average segment fee was cost justifiable given the value add that the GDS brings to the distribution process. The GDSs were and are claiming that the costs (Mitch Gross’ “pain” comment) of ______0e8f9763a419e2f79316e58704d97354.doc Page: 7 All rights reserved by The Eastman Group Inc www.eastmangroup.com developing alternative business processes to incorporate the use of the alternative GDS business model were so costly that nobody could afford to make the transition.

For travel agencies, corporate travel buyers, tour operators and consortiums traditionally dependent on the GDSs providing all of the technology solutions necessary for participation in the distribution channel – this kind of thinking is very valid. As noted above, the GDSs thought/think of the airlines as “co-dependents”; just as they think of their “agency outlets” as “co-dependents.” It is very clearly a mental picture issue.

Implicit in the quote above is that Jeremy believes that the GDSs have their thinking twisted – that it is not about the economics or value-add issues; rather, that the issue is technology cost.

After all, the airlines have taken to hosting their own web sites because the new technology is less expensive than the traditional structures. Consumers have become educated in using the Internet and the Internet is amuck with software vendors able to offer low-cost solutions structured to serve buyer-specific needs.

The traditional distribution structure is fraught with proprietary high technology costs that cannot support or serve the new technology models (for reason’s discussed above); while virtually the entire buyer base is functionally integrated and familiar with the new technology platforms.

Given the availability of low cost programmers and readily available hardware technology resources to provide easy access to the new GDS alternative gateways – his legitimate question challenges the perceived GDS nonsense about “value-add” via the GDS channel? .Further, his company has a proven development history in responding to the challenges presented by the industry (as also noted above)

So, is the question really about the economics and value-add that the GDSs allude to – or is it about the economics of the technology platform that Jeremy and the other new entrant’s suggest?

And the answer is … in my opinion – neither!

At least, not either in the direct sense of what is likely to happen over the next six months to a year!

The problem is not in the distribution side of the equation! The problem resides on the airline or product supplier side.

As OTWC readers know well by now, the core airline technology platforms are basically 1960’s era technology. Until recently, the cost-benefit of transforming these systems from the holistic self-contained digital platform into contemporary modern information environments was unjustified. While Internet has created increasingly significant stress on these legacy platforms – the self-contained nature and wholly-owned sole-settlement process (i.e., the only way to buy a ticket on a legacy carriers is via an outlet that can “settle” with ARC or a BSP) made it unnecessary to integrate new business processes or technologies.

______0e8f9763a419e2f79316e58704d97354.doc Page: 8 All rights reserved by The Eastman Group Inc www.eastmangroup.com The success of the JetBlue and AirTran new business model carriers … carriers that gain significant cost advantages through the use of new technology solutions throughout their business processes … is forcing the legacy carriers to reconsider. A few have already embarked on changing their base core hosting platforms.

But for the majority, the legacy structure remains intact. And, unfortunately, the legacy structure is more than just an inventory hosting environment. The embedded structure includes virtually all inter-airline and intra-airline messaging. It includes operations and crew scheduling, catering, maintenance, airport operations, ground-to-air communication, airport reporting, government reporting, air traffic control interaction, revenue management, revenue accounting, financial settlement, etc., etc., etc. The legacy airline information structure is a virtual onion of overlapping and interdependent systems and processes.

It is simply not possible for the airlines to incorporate, respond to, or adequately serve the needs of these new technology solutions being proffered by the likes of ITA and G2. Should there be a flood of demand for G2 or ITA services, the airlines would be forced to throttle or limit their use.

Yes, the airlines want qualified users willing to fund their own transition costs to begin to adapt these tools. But the purpose of enabling these tools to have access is, in my view, experimentation! They are experiments by the airline suppliers around which the airlines can begin to learn how to manage the new technology environment without the front-end filters provided by the GDSs. The airlines are the ones moving, under controlled and measurable structures, away from the traditional technology structures that have served them these past 40-plus years.

And as the airlines come to understand and manage these direct-link alternative technology gateways – they will acquire supplemental knowledge that will transform not only the distribution structure, but the core communication links, services, processes, and communication structures of the airline’s operations and business model. There will be no turning back. The organic network of interactive bilateral communication will become strategic and tactical tools as the legacy carriers come to understand how badly they have been victimized by the technology platforms of the new-entrant low cost carriers.

Yes, Jeremy is right that the issue is about technology; but NOT about technology as applied in the external distribution structure. It is about the legacy carriers re-discovering themselves in a quest for survival – and the ensuing structural transformation will engulf virtually everybody in the travel transport, packaging, distribution, and purchasing environment.

How it will end up is just about anybody’s guess. With the increasing success of point- to-point one-class airline products and new private-jet products coming under the umbrella of traditional airlines3 beginning to evolve, it is reasonable to expect increasingly divergent distribution structures – each serving unique niche packaged product offerings in order to capture the value-add of concurrent commodity product offerings.

3 http://www.avweb.com/newswire/11_12b/leadnews/189409-1.html ______0e8f9763a419e2f79316e58704d97354.doc Page: 9 All rights reserved by The Eastman Group Inc www.eastmangroup.com And such a model will necessarily be interactive … packaging in response to buyer’s virtually immediate needs. Such a technology structure brings us back to the issue discussed above concerning the risk in over-committing to a single technology or supplier resource and the need to maintain immediate control over a business entity’s own digital communication switch structure to ensure agility in the marketplace.

From: “The Beat ~ a business travel newswire” (March 3, 2004) … “Incentives paid to agency subscribers of the Galileo global distribution system rose by $18 million in 2004, according to Cendant Corp's Annual Report, published Tuesday [March 1, 2004].

From: “The Beat ~ a business travel newswire” (March 4, 2004) … In Response: “The Beat ... An op-ed by from Bruce Finch, AutoDesk, San Rafael “Graft (my term…I believe the industry calls it "incentive money") continues to fuel ridiculous payouts ultimately paid for by the corporations using these tools. If the airlines, GDSs and travel management companies stopped trying to "bribe" everyone, maybe we’d see what the real costs are, and the high fees which airlines pay to the GDSs would drop due to internal competition...NOT because some cash-hungry procurement or travel manager saw a chance to make a buck. Seems pretty transparent to me. ….

From: “The Beat ~ a business travel newswire” (March 4, 2004) Describing in its Annual Report Worldspan's position as the largest processor of online travel transactions in the United States, the company also revealed the degree to which it depends on its largest agency subscriber, Expedia…. Expedia booked 28 percent of transactions processed by Worldspan in 2004. …. Inducements paid by Worldspan to travel agencies rose in 23 percent in 2004; Cendant and Sabre previously also reported multimillion-dollar increases. "Inducements grew due to the growth in transaction volumes and the continuing shift toward online travel agency transactions, which tend to have higher inducement costs than traditional travel agency transactions," according to Worldspan.

OK … so did you pick up on that discrepancy?

There are multiple concepts to pull out of these three quotes lifted from “The Beat” this month – but did you see the conflict in claims?

Cendant said “incentives paid to agency subscribers” drove distribution costs up. Bruce Finch on AutoDesk jumped all over the implication that those incentives were/are the result of corporate travel managers and other mega agencies negotiating overrides and other productivity agreements – all of which are funded by the airlines through segment fees.

______0e8f9763a419e2f79316e58704d97354.doc Page: 10 All rights reserved by The Eastman Group Inc www.eastmangroup.com In fact, that has been the traditional distribution channel mantra – segment fee costs are going up and up because of incentives paid by the GDSs to high production mega travel agencies – primarily the agencies that serve the corporate customers! It is, like some much of our traditional distribution thinking, an embedded mental concept. Like Bruce says, “… seems transparent to me.”

Have you caught the discrepancy yet?

Did you note in the Worldspan report that they don’t call the costs “incentives” – but inducements! But that is not the discrepancy. The discrepancy that needs to be noted is Worldspan’s statement that “…Inducements grew due to the … continuing shift toward online travel agency transactions, which tend to have higher inducement costs than traditional travel agency”

The discrepancy is that “online agencies tend to have higher inducement costs than traditional travel agencies [that serve corporate travel departments]” (the boxed after- though being this author’s add-on thought).

There are some other tidbits in The Beat’s report on Worldspan’s annual report that offer some interesting insights. Captured above is the fact that Expedia represents 28% of Worldspan’s transactions. Not reflected here is that although Sabre evolved an agreement with Expedia about a year ago to handle additional transactions, Worldspan claims that Expedia has not shifted any purchasing from Worldspan. If true – this suggests one of two things. Either Sabre has not learned to treat Expedia as a “customer” (see above); or that IAC/Expedia is still considering acquisition of Worldspan as a gateway to serve traditional airline’s not willing, ready, or able to begin moving toward the new technology platforms.

Given that Worldspan has been marketing their hosting environment … and like Sabre, already operates a functional new-technology environment virtually capable of modeling the G2 or ITA alternative technology solution at any time that the airlines said “let’s do it” … it makes an acquisition of Worldspan by IAC/Expedia seem even more likely to me. I suspect that the major hindrance in such a buy-out is tied more to a disparity in the perception of value between IAC and the investors that stepped in to buy Worldspan from its airline owners some years back.

Two other little tidbits in The Beat’s story were also of interest. The first is that Worldspan accounted for more than 67% of the online bookings processed in the U.S in 2004 and that such booking generated about 48% of Worldspan’s total year-end bookings. The second little tidbit was that Worldspan’s top ten agency subscribers generated only about 9% of Worldspan’s total bookings in 2004.

It is very clear that Worldspan has, as noted in OTWC’s for many years, strategically positioned itself as the Internet gateway to the airlines. As some of the direct-booking business models discussed above gain critical mass, Worldspan will necessarily need to restructure its revenue model very quickly; necessarily faster than either Sabre or Amadeus with their significant airline hosting platforms serving as an alternative revenue base. Galileo is, for all practical purposes, already “morphing” into Cendant … and as such, appears headed for a role as a niche-gateway for agencies seeking franchise-like support linked to Cendant-owned properties.

______0e8f9763a419e2f79316e58704d97354.doc Page: 11 All rights reserved by The Eastman Group Inc www.eastmangroup.com That said, the significant dynamic in play between these two annual reports is the dichotomy between the implied responsibility for incentive/inducement payments – and those responsible for the ever-increasing segment fee costs to airlines.

Important in this premise is the culture of competitive tradition which Bruce Finch describes as “graft.” The fact that he openly uses such a harsh term suggests that he and many of his travel manager compatriots are coming to the realization that they have met a corporate travel cost enemy … and in the words of Pogo, ”… he is us!” Such recognition suggests a new openness to alternative distribution channels – not just G2 or ITA, but other direct-link and/or agency reverse-consolidation buying.

And equally important is the dichotomy as to whether the online agencies or the traditional agencies are driving those incentives/inducements! Whether it is the corporate travel community or the online booking agencies that cause the greatest distribution angst for carriers will drive much of the first-focus new technology decisions as the airlines expand their experiments. Increasingly, the ability to measure and manage transactions will influence the supplier’s decision. Intermediaries in travel distribution and travel buyers will need to be sensitive to how this dichotomy plays out – as it will influence both technology and supplier relationships over the next two to three years. ++++++++++

It appears that I have “babbled enough” for today. And as usual, I’ve left a bunch of stuff on the table. And in “classic” Off-the-Wall Comment(s) tradition – this is going out as a first draft. Please use your common sense to “interpret” my grammar, spelling, and logic errors.

Respectfully,

\\ Richard

Address feedback to << [email protected] >> "Off-the-Wall Comment(s)" more than one month old can be viewed at the URL << http://www.eastmangroup.com/otwc/index.html >>