GDS Practices Reform: A Clear Need

For most air carriers, after labor and fuel costs, distribution costs represent the next largest cost area, and an area offering substantial cost management potential.  Though the absolute categories may vary, the same is true for many other travel suppliers and services participating in GDS distribution.

Electronic distribution costs, including fees for reservations ("booking") transactions made through travel agency subscriber electronic distribution systems, are a rising portion of these costs.  GDS market practices directly contribute to the cost increase.

In an improving market for travel, booking transactions and "churn" have risen faster than traffic itself. Global Distribution System (GDS) companies have increased, in lock-step fashion, booking fees and/or changed the basis on which they charge fees, to capture the benefits of transaction growth , churn and their market practices.  The result has been sizable increases in carriers' GDS fees, composed of both rate and volume: unit price and/or billing basis increases, on top of volume and churn-related increases.  In a startling result, substantial transaction fees are often now charged for series of questionable travel agency transactions resulting in zero net traffic.

GDS operations exhibit a clear, operational economy of scale.  Benefitting from both rate and volume increases, and capturing churn, GDS company financial results have improved.  GDS unit costs decline as unit revenue and volume from fee-payors increase, creating a dramatic swing in GDS profitability, but no supplier relief.

GDS company investors are the dominant air carriers in each global region.  As a result, profits from fees charged smaller, net fee-payors carriers are redistributed to system owners, the fee-payors' major competitors.  Fees from net-payors increase their costs and reduce their earnings, while these proceeds improve the earnings and reduce the costs of system owner-carriers, reinforcing their dominance.

Rate increases, while sizable, are tariffed.  However, GDS fee-payors are exposed to substantial excess and unearned charges, as well.  These are caused by GDS practices that illustrate the need for reform, including "productivity-based" GDS subscriber pricing and service contracts that induce questionable booking behavior, failure of GDS to enforce "proper use" provisions of the subscriber agreements, questionable GDS billing practices and rapacious GDS policies toward carriers detecting and requesting credit for unearned fees.

America West's dispute with Sabre, over the matter of unearned booking fee credit claims, is the proverbial "tip of the iceberg".  In fact, this is a widespread problem with virtually all GDS and for participants.  As an example, hotel and car rental firms cannot acquire electronic format invoices, with which to reconcile billings.

GDS market and billing practices must be reformed, and the timing is favorable.  The U.S. DOT's attention is focused on the GDS issue as a consequence of impending NPRM that concern contractual practices, and by the expiration of present GDS rules during 1997.  The non-air issue, while not a DOT matter, is no less pressing.

A participant-based initiative for change, directed towards both GDS companies and (in the case of airlines) the DOT, could be handled cost-effectively as a shared effort by a group of similarly-situated participants, introduced as a part of individual carriers' existing initiatives or as counter-claims.

In response to a circular on the topic, R.W. Mann & Company received expressions of interest from a number of air carriers and other GDS participants, indicating interest in the issue and in participating in group action, should that be formed.

 GDS Participant Environment Suggests Group Action

The GDS-participant environment is favorable to a finding of GDS practices abuse:
 

• the quasi-essential service nature of GDS places them in a position to abuse participants
• the productivity-based nature of GDS subscriber pricing agreements clearly results in excessive transactions, churn, increased participant fees, reduced earned-booking yield and higher cost factors
• the failure of GDS companies to discipline subscribers' booking behavior according to stated, "proper use" terms of their subscriber agreements and Codes of Conduct shows collusion with subscribers
• the advent of GDS fee audit software, shown effective at identifying unearned/billed fees, resulted in a lock-step change in the charging basis to, in effect, charge for churn, accompanied by a substantially condensed window of opportunity for pursuing claims and "stonewall" responses to claim requests
• the GDS' failure to remit credits for good, documented claims, citing unwritten or previously undisclosed "no refund policies", constitutes the final abuse of market power
• substantial disputed amounts are involved, over a period of years
• GDS behavior become increasingly shrill and coordinated, as the basis for monitoring their billing practices advanced from simple "gut level" challenge to relational database-oriented scans and processing of DOT-mandated and GDS-supplied Booking Information Data Tapes
• the length of time involved, pattern of dealing and likelihood of collusion, in respect of "parallel thought" on revised charging basis and denial of good claims, suggests possible claims under RICO

A combination of factors work to improve a group action's likelihood of success, reducing litigation risks while improving likelihood of policy reforms and refunds.  The large number of participants similarly-situated (airlines, hotel and rental car firms, other services selling via GDS) can cost-effectively engage in a group action.

Moreover, participants can share their experience base, which will better illustrate to the courts and DOT evidence of the broad-based, pan-industry problems suppliers encounter, as well as the evolution and the inevitable need of suppliers to demand regulatory involvement, as a precursor to any effective GDS response.

Construction of a shared, comprehensive, pan-industry experience base and problem illustration can better close the case, than can the records of single carrier/single GDS disputes, which may be viewed as "isolated cases".

A favorable outcome in this cause of action would seek to yield individual carriers and/or group members, results in three dimensions:
 

• financial:  recovery of a sizable fraction of prior years' bookings, independent of the present terms of GDS agreements or IATA Clearinghouse rules
• policy:  needed reform of GDS billing practices, going forward
• support:  needed GDS reforms of subscriber behavior, going forward

Basis on which to Proceed

1./  Mann & Company proposes to initiate an individual project, on behalf of an Interested Party, based on an Interested Party's decision to move forward.  An Interested Party need not choose at this time to participate in a possible group action, though it has the option of doing so.

Mann & Company will begin by assisting an Interested Party's internal counsel and business group staff with additional data and experience gathering, review, and determination of in-house expertise with which to improve the company's case, whether pursued as the existing individual action or as part of a group action, should that occur and should An Interested Party be interested in joining other Interested Parties.

Any fees for this portion of the project would initially be for the  Interested Party's account.  All data and experience discovered in the individual project will be held as Confidential Material, unless released by the Interested Party, for use in any Group Action.

2./  Mann & Company will, for its own account, continue to seek and refine the interest of Other Interested Parties to which the Mann & Company interest circular was sent, and will solicit and seek the interest of service provider participants in other categories (e.g. hotel and rental car firms, others).

Should this result in additional carriers desiring to participate in and pursue a Group Action, these firms would be invited to join the Group, release proprietary data, experience and in-house expertise for integration in a Group Database and be assessed a share of Group Fees, with the Group Fees split on a basis agreeable to the participants.

3./  Any fees for the Interested Party's individual effort will be credited towards the Group Fees, if a Group is formed, the Interested Party participates and a Group Action is engaged in.  Upon joining the Group, any of the above-released, proprietary Interested Party's data, experience and in-house expertise discovered and determined to be useful to the Group Action will be integrated in a Group Database.

4./  Mann & Company will manage the project on behalf of the Group (if formed) and engage the services of additional business experts as required to supplement Group members' in-house business experts and its own staff.  Mann & Company will work with members of Group participants' in-house or outside counsel seconded to the Group Action, or secure the services of experienced, non-conflicted, cost-effective commercial litigators to pursue the Group Action, based on the Group's interest.
 

Next Step

If you are an Interested Party and have interest in pursuing this goal, Mann & Company would be pleased to meet with your nominees to discuss the matter further and initiate the project as outlined.
 

1996, R.W. MANN & COMPANY, INC.  All rights reserved.