United Signals It Wants a Better Deal with Reservation Middlemen

Scott Kirby has only been president of United Airlines since late August, but he is already making waves. This week, he suggested — with the support of CEO Oscar Munoz — that the airline may need to take a tougher stance toward the technology companies that act as middlemen between airlines and travel agencies.

Kirby called out distribution systems on what he believes are unfair prices and inflexible technologies during his past executive roles at American Airlines, US Airways, and America West.

Last October, he even testified in a US Airways lawsuit against one of the companies, Sabre, and accused its chief executive of, among other things, having threatened his airline with “an ultimatum” that Sabre would “boycott” displaying his fares to agents unless the airline accepted Sabre’s contract terms.

This week, Kirby, now at United, made some intriguing remarks when answering questions from analysts on a quarterly earnings call. What United does next could have a ripple effect on the industry’s distribution costs — worth more than $1 billion a year for United alone — and also on how easily travelers can compare prices for flights.

United Tries to Alter Relationship Dynamics

First, the backstory: Many technology companies make money off the airlines. United is no exception among carriers in trying to gain more leverage in these relationships.

The reservation services that middlemen technology companies provide to travel agency networks and online travel agencies are a particular sore spot for airlines.

Fun fact: Every airplane ticket you’ve ever bought was most-likely touched at some point by one of these four companies: Sabre, Amadeus, Travelport, or Travelsky. For some airlines, this is irritating. That’s because the middlemen charge airlines fees for each flight booked through an agent, online or otherwise. Some airlines think the fees and related costs are over the top for the services provided.

Fee estimates vary. Lufthansa claims it pays about $18 per roundtrip to the tech middlemen. Overall worldwide, airline lobbying groups say they pay $7 billion in fees a year to these reservation systems.

Some airlines are pushing back. For example, a little more than a year ago Lufthansa added a surcharge on tickets booked by agents through the middlemen. This move is being litigated by Sabre in a Texas court. If Lufthansa gets a legal green light, other airlines, such as United, may imitate the surcharge.

Basic Economy Seats Will Cause Complications

Back to United: How does it fit in all this jockeying for negotiating power? Well, that’s what analysts want to know. And analysts have two reasons to be asking questions.

First, in the next few months, United is rolling out a new product, basic economy seats. Unlike standard plane tickets, passengers booked in basic economy will have to pay extra to bring an overhead bag on the plane and they won’t earn elite qualifying miles.

In the past, non-standard products like that have posed challenges for Sabre, Amadeus, Travelport, and Travelsky to display and distribute to travel agencies.

Take the case of Air New Zealand. In 2011, it introduced its Economy Skycouch product, which meant you could essentially buy three seats for the price of two and then lie across them to sleep on long flights. It took a couple of years before Amadeus, Sabre, and Travelport could display that product in their desktop reservation systems. Meanwhile agents had to go to Air New Zealand’s website to book the item directly.

United’s Kirby seems to be concerned that a similar display failure will happen with its basic economy seats.

Kirby said Wednesday during United’s third quarter investor call, “To me, the most important thing that we’re going to need to do on [rolling out basic economy] is to communicate to our customers. And I assure you, on United.com, we’re going to have a very clear communications about what the rules and restrictions are….”

“We want all of our other entities that sell United tickets to do the same thing. And we want customers to know for sure what they’re buying and the GDSs (global distribution systems) can play an important role in that, (which) hasn’t historically been the top of their investment list, but we need them to do that.

“And if we can create a relationship, where they’re effectively communicating that and we have a cost structure that is fair and balanced, I think we can continue to evolve on the path that we’re on. But with those caveats.”

United president fought Sabre for years

Still, to understand the significance of Kirby’s comments, you need to follow Kirby’s past stints at American and US Airways. That matters because each airline sued Sabre, in separate cases about the fees, antitrust issues, and technological flexibility provided.

As noted, Kirby testified in the US Airways case, which American Airlines won last month, though the case is likely heading toward an appeal. Kirby’s enthusiasm was notable.

American Airlines Group’s decision to pursue the suit was also notable. The US Airways brand was defunct, after the merger, so to fight on struck some observers as odd. The amount of money in dispute was relatively small, too, some add. (The airline was awarded $15 million in damages.)

The case seemed to some industry insiders to be an emotional decision for its executives to pursue, given that the potential rewards did not seem to justify the cost of paying for lawyers and enduring the distraction. After all, in a similar case American Airlines choose to settle with Sabre out of court, to the tune of a $222 million handshake.

But beyond monetary concerns, there were antitrust issues at play, with the airlines contending that Sabre had a stranglehold on the domestic U.S. market. For example, the trial turned up an internal email that Sabre’s then-CEO Tom Klein had sent, asking his team to prepare to “bury [US Airways] so deep in the [search] display order that [travel agents] would never see them” if the airline didn’t accept its contract terms. Kirby accepted the deal at the time, claiming to the jury he had no choice because Sabre provided 40 percent of his airline’s bookings.

Regardless, the five-year trial overlapped with Kirby’s top roles at American and US Airways. Which leads to the question: Has Kirby brought with him to United that rancor toward the global distribution systems?

Kirby told analysts: “I’m not a 100 percent sure how the situation will evolve. There’s the potential for GDSs to be partners. But that has to be a balanced relationship if they’re going to be partners.

“It historically hasn’t been what I would describe as a partnership. It’s been a lot more one-way. We do have more and more customers coming directly to us. But we recognize that there are some things that some of our customers like to use the GDS for.

“In an ideal world, we’d get to a balanced relationship, where the GDSs were fairly compensated for what they add, but that it was fairly compensated and the customers actually had the choice of whether to go direct or whether to use the GDS.

“I think it’s also incredibly important. One of the big things that we’re going to be pushing on in the near-term is to get adequate disclosure to our customers when they buy through GDS.”

CEO Munoz Backs Kirby’s Ideas

Munoz backed Kirby’s remarks: “I’d just add that, over the course of the year, this conversation has been going on with many other partners in our distribution process with regards to how we want to move forward together with the emphasis on together and with the end customer in mind as well.”

“And so you will see some evolution and changes going forward, but again all with an open amicable conversational sort of tone as we move forward in our partnership.”

The distributors say they can accommodate technological requests from the airlines, despite the public skepticism expressed by some airline executives.

Sabre, the middleman with the largest market share in the U.S., had no comment on deadline. But its executive leadership has on investor calls cited several examples of it working to display content as airlines want. For instance, last year it began selling American’s Main Cabin seats (which have added legroom) on agent screens the way the airline preferred.

Amadeus, the middleman with arguably the largest market share worldwide, began last summer providing a feed for distributing United’s airline upsell products to agencies via the next-generation messaging standards that United and other airlines have long pushed for.

It says: “33 airlines are today actively selling, globally, their upsell products through travel agency desktops and other retailing interfaces, including web services for online travel agencies and other online players.”

It adds: “We’ve worked in tandem with our airline customers in the U.S. and around the world over the past several years as they have been evolving to differentiate their offers. The rich merchandising features and functionality we offer airlines today enable them to display their relevant, compelling offers across travel agency screens as well as online sites…. [We also make sure agents have the] critical information needed to provide their customers the best service and offer.”

“We closed 2016 with a 60 percent, year-over-year, increase in ancillaries sold through the Amadeus distribution channel, demonstrating a clear trend in meeting our customers’ merchandising needs.”

Travelport, another major middleman, says that “more than 200 of the world’s leading airlines, including United, have adopted our industry-leading merchandising solution … to display their branded fares and ancillary content in a graphically rich, visual way, allowing leisure and corporate agents to better understand the airlines’ brand proposition and sell more effectively.”

Reservation System has usability drawbacks

Kirby also answered a question about another third-party IT issue. Is it inevitable for United to dump its in-house reservation technology, SHARES, and opt to use an airline reservation system from another company at some point in the next three years? This is relevant because Sabre and Amadeus are among the companies that provide such systems as a sideline business. For instance, American uses Sabre’s system.

Kirby said no.

He said United’s in-house tool “is a good fundamental foundation and architecture” for the company’s needs. He added:

“We can make it a lot better for our people by putting a better front-end on it. But it is our reservation system. It’s not limiting anything we do from a revenue perspective or anything like that.”

Kirby admitted that the in-house system is not as user-friendly as it could be. But, he said, “You shouldn’t expect us to be changing SHARES and [our system] is not a limiting factor for us at all.”

Back to the main question about the distribution middlemen — a question Kirby was asked by Hunter Keay, an analyst at Wolfe Research. If the US Airways legal victory over Sabre is upheld on appeal, Keay recently forecast in a note: “Medium-term we would expect network airlines…. to sell more tickets directly on their websites and on their apps…. There’s a cost and revenue advantage to that.

“We would also expect airlines to use their websites [and apps] to exclusively sell certain low-fare tickets, depending on the market and time of travel [something that, as of today, their contracts with GDSs don’t allow].

“This could also marginalize the OTA [online travel agency] model, or it could force OTAs to invest in how they display airfares or risk one of the bigger airlines pulling out of an OTA altogether – which isn’t unprecedented.”