American Weighs Distribution Rewards

American Airlines’ distribution war could become very costly, the airline revealed in a lawsuit it filed against two global distribution system providers. But the airline is not yet showing any signs of backing down.

American’s fight with online agencies and global distribution systems has grown to the point where it involves more than 40% of its annual passenger revenue, could add $156 million in annual distribution costs and is diverting executives from work on other key airline initiatives, the airline says.

Left unsaid is whether that potential threat to American’s revenue will be enough to make it back down from its push for a new distribution model that it believes offers high rewards. American says its alternative—a direct connection to its internal reservation system for all sales intermediaries—would enable it to avoid costly global distribution system (GDS) booking fees and help it customize fare-and-fee offerings for consumers based on their travel characteristics.

The airline won at least a temporary reprieve Jan. 10 in one of the most potentially damaging parts of its battle: Sabre’s Jan. 5 decision to downgrade American’s listing in its GDS flight and fare searches, even if American offers an equal or better fare. A Texas state judge issued a temporary restraining order to prevent Sabre from continuing to do that, after American filed a lawsuit against Sabre and Travelport in the 67th Judicial District in Tarrant County.

But a full hearing is set for Jan. 24 on whether to extend that ban with a preliminary injunction, with Sabre pledging to “aggressively defend” against American’s claim that Sabre’s actions violate its contract; American’s other distribution-related challenges are ongoing.

From December 2009-November 2010, American disclosed in its lawsuit, it generated about $6.2 billion in passenger revenue from tickets booked via Sabre from geographic regions affected by the new display bias. (For regulatory reasons, Sabre did not implement the bias for bookings made by agents in the European Union or Canada.)

The display screen bias, when in effect, is “eliminating countless sales,” the airline says. It cited one example in which an American flight between New York John F. Kennedy International and Los Angeles International airports showed up as the first listing in an unbiased flight search display but 46th—and on the eighth screen—in the biased display.

“Corporate customers have expressed irritation and even anger toward American [due to] the unwarranted delays and difficulties caused by Sabre’s conduct,” it adds. “These valuable corporate customers likely will choose to book on [other] airlines. Indeed, [one] has already threatened to stop doing business with [us].”

Over that same period, Expedia bookings accounted for $1 billion and Orbitz $592 million in passenger revenue; American is no longer available on either online agency, but hopes to make up some of that loss with more direct bookings. American also says it generated $341 million in passenger revenue from bookings on Travelport-owned global distribution systems in markets outside of the U.S. and Caribbean, where American accuses Travelport of implementing a “bias against American.”

Altogether, that affected passenger revenue comes to about $8.1 billion, or 43% of the $18.9 billion that American collected in total. For comparison, American generated approximately $6.8 billion in passenger revenue from tickets booked directly with the carrier.

American also says Sabre has more than doubled American’s flight segment fee for each GDS booking, which the airline says could increase its annual costs by $157 million. As of Jan. 5, American says, Sabre raised the fee for a domestic point-of-sale flight segment to $7.31 on average from $2.73, and as of Feb. 4 it will raise the international point-of-sale fee to $7.36 on average from $6.84.

By American’s account, Sabre is basing its legal authority to bias displays and raise fees on two claims: that the carrier violated a contractual agreement to not market its Direct Connect “program” to GDS subscribers through the media or at public meetings, and that it is not providing the agreed-upon full-fare content to the GDS.

American has been talking to media about Direct Connect, but argues it is allowed to do so in response to a publicly waged and misleading campaign against Direct Connect by Sabre and other GDS and online agencies. American also says the contract defines “program” as one that consists of incentives, commissions or other economic waivers and favors, which it has not publicly marketed.

The full-fare dispute seems to center on American’s “Your Choice” program, which includes a “boarding and flexibility package” that customers using the carrier’s website can purchase to receive priority boarding, free standby rights and a halving of the change fee to $75. Customers who book via Sabre can get the reduced change fee but not the other benefits, nor can they purchase other “Your Choice” options such as airport club access or inflight Wi-Fi.

American, however, says only the reduced change fee “is even arguably a component of a ‘fare.’”

Outside of court, American faces another complication in its public relations battle: Travelport just signed a new contract with Air Canada for continued participation in Travelport’s Apollo, Galileo and Worldspan GDSs that includes direct connections to Air Canada’s internal reservations system and access to all of its optional services. That follows a November deal with Southwest Airlines that also allows direct connections.

In American’s lawsuit, the carrier says it asked Travelport for the “same type of agreement” as the one signed with Southwest, and Travelport refused. Instead, American alleges, Travelport told American—which created Sabre before selling it off decades later—that it created the GDS “beast” and should “continue to live with it.”

But Jean Collier, Travelport’s vice president of airline services for the Americas, says the company is open to similar agreements with any carrier as long as it is under “mutually agreeable commercial terms.” Although Collier would not elaborate, that presumably would encompass aspects such as fees charged to the airline.