Protect me From my Friends

We all retain some of our childhood fascination with big battles, our love for Westerns (especially the Sergio Leone’s Spaghetti variety, like my favourite: The Good, the Bad and the Ugly), and for the climax, where the main characters are face-to-face in an ultimate fight where only the fastest draw will survive. 

In situations like this, we are not looking here at normal competition, where two companies with similar businesses are competing for market share. What sparks our interest is companies that are supposed to be - or to have been – partners, but which are not … as friendly with each other as you would expect.  

This situation has been perfectly theorized in the bestseller Inside the Tornado. There are different phases in a fast-growing new market. As the market matures, the game is to maximize market share and the size of the ecosystem. Then, the winners start to eat the lunch of their former partners. As an example, see recent announcements of Twitter’s new apps competing with what many developers have built around their platform.

Can we find cases of ‘co-opetition’ – that is, competitors working in partnership, or partners competing with each other - in the travel industry? Plenty of them.

The value chain of the travel industry, if we simplify, can be described as: airlines paying GDS providers (Global Distribution Systems) to make their products available to travel agencies; GDSs paying travel agents to be the provider that they use; corporations  paying travel agencies for the services they provide to them; and, more recently, software booking tools like KDS operating between travel agencies and corporations, sometimes paid by the latter, sometimes supplied and paid by the former. Ouch! Plenty of middle men here.

This post is not aimed at describing in detail how money flows within this supply chain, but it is an intriguing topic. Think about the concept of ‘net - net – net’ (triple net) air fares you probably have seen nowhere else, meaning negotiated, net of airline commissions and net of GDS fees fares.

As in the subtler Westerns, nobody is obviously good and nobody is obviously bad; we all are in business. We all want the good of our customers, but we all want our share of the pie.  Are we more in the “business = ecosystem” or the “business = battlefield” world? Both realities coexist.

Airlines originally built the GDS platforms, which they designed as their primary distribution tools. They defined the GDS business model and for a long time were their main shareholders. Then, airlines started to divest their holdings in these once-treasured businesses. All the GDSs floated and, as solid cash generators, were acquired by private equity funds. Airlines, especially in their crisis periods, started to feel they were charged too much for GDS access and tried to press for reductions, which resulted in the 2007/08 negotiations. (Funnily enough, the ugliest one was between Sabre and American Airlines, once Sabre’s 100% owner.)

Although airlines tried to extend competition by favouring so-called GDS Alternates, ITA, the dead G2 Switchworks and Farelogix, GDSs were just too powerful or were bringing too much added value - to use the business  usual way of saying it - to risk being bypassed. Again, I’ve nothing in favour or against any contender. This battle is far from being over and continues to generate heated controversy: see Scott Gillespie for his views on BTC’s Cruisade against American direct link initiative; he uses the word socialist to describe their lobbying activity, which this is more an insult in US than in France :-)

On the other side, GDSs pay high incentives to travel agencies. Inducements paid to the largest travel management companies (TMCs) have constantly grown. GDS market power, which allows them to wield power over mainstream airlines, depends on GDS market coverage, which is in turn mainly driven by travel agencies. Conversely, the GDS revenue derived by TMCs is substantial. We have here a perfect alignment of interest. TMCs have every reason to favour a lucrative channel, GDSs every reason to scratch the back of their main providers of market share. This is essentially what you observe, but game theory also says how these Yalta can become unstable if all conditions are not gathered for a Nash Equilibrium.  Each of the two links of the distribution chain is tempted to establish supremacy and, more importantly, not depend too much on the other. That’s why Sabre created Travelocity; Orbitz , originally an initiative of the big 5 US Airlines, was acquired by Travelport (Cendant at the time) and Opodo, same in Europe, entered the Amadeus umbrella.

The picture would not be complete, and I would be disingenuous, if I did not also examine the relationship between TMCs and Self-Booking Tools (SBTs) such as KDS. SBTs are nowadays at the heart of how travel agencies operate. The alignment of interests is, however, less obvious than between TMCs and GDSs, as SBTs contribute both to travel agencies operational efficiency (good) but also to a decrease of their service cost for buyers (good for customers), i.e. we reduce TMCs’ revenues (more problematic). Hence the ambiguous stance that has long been taken by some TMCs, who have officially embraced SBT technology while at times dragging their feet in implementing it. If the mantra is now “full integration” in order to offer best service to users, we are not yet at the story’s end. Of course, TMCs and SBTs must collaborate, and often do; but a lot is at stake and two complementary factors enter into the equation. 

1. Margins. In the same way that GDS distribution costs impacts airlines’ bottom lines, SBTs are an element of online transactions and, as such, viewed by TMCs as an element of cost to minimize in order to increase their margins. Hence periodic rounds of negotiations which can be source of tensions. 
2. Servicing the customer well is one thing, controlling the relationship is another one. For both TMCs and SBTs, hopefully with pure intentions, managing the client relationship can be viewed as strategic. 

Partners but sharing the pie and aiming at close strategic positions. Will one day Clint Eastwood enter the scene ?