Marketing 12th Edition by Charles Lamb,Charles Lamb,Joe Hair

Exercise 16

WILL A NEW RESERVATION SYSTEM TRANSLATE TO HIGHER PRICES FOR TRAVELERS?
American Airlines, one of the top three airlines in the United States and a major international carrier via strategic alliances with leading carriers around the world, was founded in 1930 as American Airways. As an innovative leader in air travel, American Airlines started the frequent flyer program in 1981. Since then, every major airline in the world has adopted some form of a frequent flyer program. In late 2010, American Airlines once again took the lead in an airline initiative that could change the way consumers search for and ultimately purchase airline tickets.

In an effort to reduce distribution costs, gain greater control over the marketing of its airline tickets, and better meet customer expectations, American Airlines upgraded its reservation system. In making the upgrade, the company expected third party travel operators such as Expedia, Orbitz, and Priceline to follow suit.
The Reservation System
Consumers want low fares while also having the ability to customize their itineraries. Plus, they want to do this themselves and not have to go through a travel agent. Via an in-house reservation system called Direct Connect, American Airlines will be able to present a variety of individualized options to consumers, including prices, flight schedule, seat upgrades, lounge access, faster check-in, hotel reservations, and car rentals. Direct Connect constitutes a wholesale shakeup of the traditional reservation process that has relied historically on global distribution systems (GDS) such as Amadeus, Sabre, Worldspan, and Galileo. All of these global distribution systems were designed originally by airlines, but all are now operated by independent owners.
Middlemen such as Expedia and Orbitz conduct business via a GDS and do not want to upgrade their reservation systems to models such as Direct Connect. However, the Direct Connect technology will enable airlines to bypass the GDS and avoid paying the GDS fees. Airlines stopped paying commissions to travel agents in the 1990s, but the GDS model enables travel agents to sell tickets and collect fees from the sale of tickets via the GDS.
The Dispute
In December of 2010, American Airlines announced that it would no longer do business with Orbitz. By making this move, Orbitz could no longer sell American Airlines tickets on its online booking Web site. At the heart of the dispute was that American Airlines wanted Orbitz to use Direct Connect instead of GPS. Orbitz refused to switch reservation processes, so American Airlines withdrew its tickets. Beating American Airlines to the punch, Expedia announced on January 1, 2011 that American Airlines tickets were no longer an option on Expedia.com. Following suit, Sabre dropped American Airlines' ranking on its site thus making it difficult to find American Airlines fares on this GDS.
Some say that the bottom line is that American Airlines wants travelers to buy directly from its Web site, such as the process utilized by Southwest Airlines. From a pricing perspective, the middlemen such as Orbitz and Expedia say that this will allow American Airlines to raise ticket prices since customers will not have easy access to competitive pricing information. These distributors are charging that American Airlines' new Direct Connect model is anti-consumer and anti-choice. Conversely, American Airlines says that it will enable lower ticket prices since it will eliminate the cost of the middleman, contending that the GDS model used by online travel agencies prevents airlines from offering the lowest possible fares.
The chief financial officer at US Airways said that his company agreed in principle with what American Airlines was doing, citing the importance of lower airline distribution costs. Yet this competitive airline recently entered into an agreement with Expedia in which US Airways committed to offering all of the airline's content on Expedia through the GDS model. It could be that competitive rivals see this as an opportune time to appear more customer-friendly, in the hopes of gaining customer affinity while American Airlines battles it out with the middleman.
Identify each channel member's pricing objective.