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American Airlines Business Model Strategy Bet

In the high-testosterone game of Chicken, two drivers race towards each other at accelerating speeds. The first driver to veer his car off the path loses the game. Clearly win-win solutions fail to exist in this game. Either one player proves his cowardice, or both players crash.

A physically safe, but economically lethal game of Chicken is at play in the airline industry right now with BA in one of the drivers’ seats. BA wants travel agencies to bypass booking on Global Distribution Systems and instead use BA’s own direct-connect network to book tickets. Global Distribution Systems (GDS) consolidate and keep up to date hundreds of airlines’ fares and schedules, presenting them to travel agents and online travel agencies like Expedia. GDS companies earn revenue from the airlines for any tickets booked on their system, sharing some of the revenue with the booking agents. Many GDS companies own on-line travel agencies. For example, Sabre, the largest GDS, owns Travelocity and, prior to 2000, was owned by BA.

BA says it’s trying to work with the middlemen; it wants tickets booked directly on its system so that it can “up-sell” customers with services that add fees (more leg space, extra points, etc.), thereby improving BA’s average ticket price.  The middlemen like Expedia smell a rat and are playing their own game of chicken, delisting BA from their sites or giving its flights much less attractive billing. Like unions that knew the first auto company contract set the tone for all that followed, the GDSs and Expedias of the world aren’t going to give an inch. BA reported Monday that it earned a temporary injunction keeping Sabre from downplaying BA flights on Sabre’s search results to travel agents.

Many companies have cut the middleman out, or reduced their role, to reduce costs. “Big box stores” for example are such a big part of our vocabulary, landscape and economy that we sometimes forget life before them. Walmart, Office Depot and many other companies eliminated independent distributors – once dominant in connecting retailers and manufacturers – from their value chains. The resulting cost advantage over local retailers helped big box stores wipe out a ton of high street local retailers.

As consumers, we should be concerned if GDS companies disappear. Their role in creating price transparency is vital as they advance price competition among airlines. But rather than focus all your anger on BA, consider that GDS companies deserve some of the blame for the current crisis.  Airlines are a vital strategic customer and GDS companies should have been working proactively with airlines to help them execute their marketing plans through the GDS channel.

What advice does this strategist have for BA? Avoid being penny wise and pound foolish.

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