The future of global distribution systems the world wide web as an alternative travel distribution c

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The future of global distribution systems: The World Wide Web as an alternative travel distribution channel

Some of the authors of this publication are also working on these related projects:

Canadian Tourism Exchange View project

Rene Waksberg

4PUBLICATIONS    8CITATIONS    

SEE PROFILE

UNIVERSITY OF SURREY DEPARTMENT OF MANAGEMENT STUDIES

THE FUTURE OF GLOBAL DISTRIBUTION SYSTEMS:

THE WORLD WIDE WEB AS AN ALTERNATIVE TRAVEL DISTRIBUTION CHANNEL

Abstract

The objectives of this research are to understand the competitive challenges and threats facing global distribution systems (GDSs) - computer distribution systems for displaying available services, effecting bookings, and ticketing by tourism suppliers - resulting from the emergence

of the World Wide Web (WWW) as an alternative distribution channel Distribution can be looked at as a process of filling a number of gaps between production and consumption; a process the GDS was created to fulfil With the WWW, tourism suppliers now have an alternative distribution channel, and their decision to move to this channel is governed by market forces - demographic, technological, and competitive trends - as well as economic, control, and adaptability considerations

Additionally, the important trends marking society today are the distribution of information and the globalisation of the economy This combined with the consumer who now demands more value and convenience are among the forces that help to shape the role that the WWW will play

in displacing the GDS as the main distribution channel for travel bookings

It was found that although the GDSs will be forced to evolve and offer additional services to remain competitive, the competitive pressures against the GDS, ranging from technological developments to consumer trends are such that the GDS will capture a decreasing share of the travel distribution market Airlines will start to migrate their distribution to the WWW, and favour direct-selling to the customer using this cost-effective channel of distribution, and newer and smaller suppliers who could not afford to join the ranks of electronic distribution will also sell via the WWW Finally, with technology more accessible to all, there is increasing talk of creating agency, or supplier-owned, GDSs, to replace those already existing The future for the GDS is bleak

List of Contents

LIST OF TABLES V LIST OF FIGURES VI LIST OF ABBREVIATIONS VII

CHAPTER 1 INTRODUCTION 1

1.1 BACKGROUND 1

1.2 METHODOLOGY 2

CHAPTER 2 REVIEW OF LITERATURE - THEORETICAL FRAMEWORK 4

2.1 DISTRIBUTION THEORY 4

2.1.1 Role of Distribution Channels and Intermediaries 7

2.1.2 Single versus Multichannel Distribution 9

2.1.3 Distribution Strategies 12

2.1.4 Distribution in Travel & Tourism 15

2.2 TRENDS 17

2.2.1 Distribution of Information 17

2.2.2 High Tech/High Touch 18

2.2.3 The Global Economy 18

2.3 CONSUMER TRENDS 19

2.4 TECHNOLOGY TRENDS AND COMPETITIVE ADVANTAGES 21

2.4.1 Technology and Competitive Advantage 22

2.4.2 Tests of a Desirable Technological Change 23

2.4.3 Technology Strategy & First-Mover Advantages 24

2.5 SUMMARY 26

CHAPTER 3 CRS AND GDS DEVELOPMENT: THE FIGHT FOR COMPETITIVE ADVANTAGES 27

3.1 CONTROL OF PRODUCT DISTRIBUTION 28

3.1.1 Control of the distribution chain 28

3.1.2 Intensive Distribution 28

3.2 CREATING COMPETITIVE ADVANTAGE THROUGH USE OF TECHNOLOGY 30

3.2.1 Superior Marketing Information 30

3.2.2 First Screen Bias 30

3.2.3 Code-sharing 31

3.2.4 CRS Anti-competitive Rules 31

3.3 THE IMPORTANCE OF ALTERNATIVE DISTRIBUTION CHANNELS 32

3.4 SUMMARY 33

CHAPTER 4 COMMERCE ON THE INTERNET: THE WEB AS A TRAVEL DISTRIBUTION CHANNEL 35

CHAPTER 5 GDS AND COMPETITION TODAY 41

5.1 GDSS DO NOT HANDLE NON-AIRLINE PRODUCTS EFFICIENTLY 41

5.2 AIRLINES SELL DIRECT TO CUSTOMERS,BYPASSING GDSS 44

5.3 BRANDING ON THE WEB 46

5.4 INTELLIGENT SEARCH ENGINES:FORGET THE TRAVEL AGENT AND THE GDS 47

5.5 TICKETLESS TRAVEL -SAVING ON DISTRIBUTION COSTS 48

5.6 TRAVEL AGENTS:FRIEND OR FOE ? 49

5.7 THE GENESIS OF NEW GDSS TO CHALLENGE THE OLD 51

5.8 INFORMATION AND TRANSACTIONAL SITES:WHAT THE CUSTOMER WANTS 53

5.9 NEW TECHNOLOGIES REDUCE BARRIERS FOR NEW ENTRANTS 54

5.10 SUMMARY 57

CHAPTER 6 THE FUTURE FOR THE GDS 58

6.1 AREAS FOR FURTHER RESEARCH AND OBSERVATION 61

APPENDIX: GLOSSARY 62

BIBLIOGRAPHY 63

List of Tables

TABLE 4-1:WHAT ARE THE BENEFITS OF ONLINE TICKETING? 36

TABLE 4-2WHAT ARE THE DRAWBACKS OF ONLINE TICKETING? 36

TABLE 4-3:FACTORS THAT COMPRISE CONSUMERS’ FAVORITE ONLINE TRAVEL SITE 39

TABLE 4-4:FREQUENT TRAVELERS SOURCES OF TRAVEL INFORMATION 40

TABLE 5-1WHICH WEB SITES HAVE YOU USED MOST RECENTLY FOR BOOKING ? 46

TABLE 5-2WHAT IS YOUR FAVORITE INTERNET TRAVEL SITE ? 46

TABLE 5-3WHAT TYPE OF INTERNET TRAVEL SITE WOULD YOU BE MOST LIKELY TO PURCHASE ON-LINE TRAVEL SERVICES ?” 47

TABLE 5-4TRAVEL AGENCY DEPENDENCE ON CRSS IN THE USA 50

TABLE 5-5GDSCOMPETITIVE PRESSURES 56

List of Figures

FIGURE 2-1:INTRODUCTION OF AN INTERMEDIARY TO REDUCE CONTACT POINTS 6

FIGURE 2-2DISTRIBUTION IN TRAVEL 16

FIGURE 3-1CRS USE IN USA(1996) 29

FIGURE 5-1:SAVING ON DISTRIBUTION COSTS 42

List of Abbreviations

ASTA: American Society of Travel Agents

CRS: Computerised Reservation System

GDS: Global Distribution System

IT: Information Technology

TIA: Travel Industry Association (of America)

VRS: Virtual Reservation System

Chapter 1 Introduction

There always comes a moment in time when a door opens and lets the future in

-Graham Greene (The Age of Unreason)

However, GDSs only administer reservations, they do not manage the stock of suppliers; this task falls on the supplier‟s own reservation system The World Wide Web (WWW) has added a widely accessible, and far-reaching channel of distribution, allowing airlines and other travel suppliers to bypass the GDS and allowing the consumer direct access to the supplier‟s own reservation systems Similarly, new communication interface facilities, such as language translators that convert a proprietary reservation format to one which can interface with a GDS

or the WWW, have opened alternative channels of distribution for the supplier, and are some cause for future concern among intermediaries in the travel distribution process

The precursor to the GDS, the computerised reservation system (CRS), first came into being as

a result of back-office automation back in the early 1960s, and was conceived primarily as an efficiency tool However, in 1976, American Airlines introduced the Sabre CRS, and United Airlines introduced the Apollo CRS to travel agencies, marking the evolution of the CRS from seat inventory system to a product distribution network and important source of competitive advantage The CRS technology firmly established the travel agent as the primary channel of distribution in the travel distribution chain It was quickly demonstrated that users tended to favour those systems with which they were the most familiar This, in addition to greater airline competition following deregulation in 1978, encouraged the use of CRSs to increase bias, especially in screen displays, thus maintaining competitive advantage for the CRS owner airlines

In addition to being a source of competitive advantage, CRSs have also become profitable businesses By the mid 1980s, the major non-US carriers faced many challenges including deregulation and the threat from direct competition with US airlines Without their own strong CRSs, these non-US carriers faced the choice of conceding CRS dominance to the US carriers

or either developing new systems (very costly) and/or forming alliances with the US carriers This combination of new systems and strategic alliances have resulted in global CRS, usually referred to as global distribution systems

The objectives of this research are to understand the competitive challenges and threats facing GDSs resulting from the emergence of the World Wide Web (WWW) as an alternative distribution channel, as well as possible strategies they may adopt to remain competitive A shift

in distribution as a result of technology could bring into question the underlying economics of GDSs To what extent the emergence of the WWW as an alternative distribution channel will mark the end for GDSs, or whether GDSs will be forced to evolve and offer additional services

is the subject of this dissertation

The structure of the dissertation is as follows: Chapter 2 is a review of the literature and a theoretical framework for the dissertation while Chapter 3 will examine the evolution to date of CRSs/GDSs in the context of competitive advantage and distribution theories Chapter 4 discusses the use of the WWW as a travel distribution channel, and Chapter 5 focuses on some

of the threats currently faced by GDSs Finally, Chapter 6 looks at the role GDSs will play in the future of travel distribution The methodology is presented here as an explanation of the secondary research used for this dissertation does not require a separate chapter

All data and information gathered for writing this dissertation was based on secondary sources Due to the dearth of theoretical articles in the area of electronic travel distribution, this being an area of rather recent developments, much of the theoretical background has been borrowed from retail distribution as appropriate The research was conducted by reviewing current and historical literature on distribution theory and competitive advantages, as well as social and technology trends Information about current strategies employed by GDS and their owners are

in the public domain, and were obtained by reviewing hundreds of articles in trade journals (online and print) and electronic mailing lists Theoretical articles excepted, virtually no information related to the GDS and the World Wide Web used for this project is more than 18 months old Hundreds of articles were scanned for content appropriate to this research; in the end, slightly over a hundred were retained The surveys used in the analysis come from the Travel Industry Association of America (TIA), the American Society of Travel Agents (ASTA), and several Web marketing researchers Approximately half of the articles used were obtained online, as might be expected for such current material; these are indicated as such in the bibliography

Some attempts were made at contacting high-level officials within GDS firms These proved to

be unsuccessful It is felt, however, given the secrecy of a firm‟s marketing plan, that no interview would have been sufficient to provide any information beyond what is publicly available in interviews transcribed in tourism/travel trade journals

Although no formal interviews were held, the author attended the 1997 Tourism and Technology Conference in Edinburgh where he had the opportunity to meet and discuss informally with industry members Some discussions and clarifications were also provided through email Information was supplemented by reviewing the proceedings from several tourism and technology conferences held in the past 6 months

Limitations

Given the focus of this dissertation, the limitations are mostly due to the speculative nature of the conclusions More time and/or money might have provided a more in-depth analysis, but no primary research would have been as comprehensive as studies having already been undertaken by TIA and ASTA What is limiting is the value-added of all the information gathered

in producing this dissertation; the conclusions reached at the end of the day were much the same as those expected when the dissertation was first begun

Chapter 2 Review of Literature - Theoretical Framework

There is little theory available about information technology and its effects on distribution channels Therefore, attempting to analyse the impact of Information Technology (IT) on travel distribution, and more specifically, global distribution systems, requires drawing on theory from other sectors, such as retail, to develop a useable framework for further discussions The literature comes mainly from the world of manufacturing and physical distribution; however, much is applicable in the tourism industry if we consider the parallels of manufacturer to travel product supplier (producer)

This chapter is a review of literature and social theories and trends which are pertinent to the analysis of global distribution systems It is intended as a theoretical framework against which to explore the directions that have marked the development of GDSs Although theory will be applied from the point of view of the GDS, the whole distribution chain, from supplier through intermediaries (GDS, travel agents, the World Wide Web) must be examined in order to understand the motivations of the various players

In this chapter, basic distribution theory will be reviewed; this is the backbone of the travel industry supply process The role of distribution channels and intermediaries, single and multichannel distribution, and distribution strategies will all be related to distribution in travel Consideration will then be given to trends social, technology, and consumer which have marked and will mark the coming years These are the environmental factors over which a firm has no control, but to which it must react to remain competitive Finally, from the point of view of the firm, a review of competitive advantages theory, taken mainly from Porter‟s body of work, will be examined

Middleton (1994) proposes that a distribution channel in travel and tourism is any organised and serviced system, created or utilised to provide convenient points of sale and/or access to consumers, away from the location of production and consumption, and paid for out of marketing channels Travel agencies and the home PC (via the WWW) are examples of additional points-of-sale away from the location of consumption

This definition is more broad than Donnely's (1976:p 57), which states that "any extra-corporate entity between the producer of a service and prospective users that is utilised to make the service available and/or more convenient, is a marketing intermediary for that purpose" However, this definition is somewhat restrictive as we find many examples of distribution channels in travel and tourism which are not extra-corporate entities (i.e the distribution channel

is direct to the consumer, or is internal to the producer)

Authors agree (see, for example, Christopher, 1986; Kotler, 1997) that a distributor effects an economy of effort That is, by introducing a middleman (the distributor, or the global distribution system), the number of contacts compared to producers directly contacting each customer is reduced Looking at Figures 2-1 a) and b), it is obvious how the introduction of the intermediary reduces the contact links required between supplier and buyer

Figure 2-1: Introduction of an intermediary to reduce contact points

Adapted from Kotler (1997, p 531)

2.1.1 Role of Distribution Channels and Intermediaries

Alderson (1954) expressed the tasks to be fulfilled within the marketing (distribution) channel in terms of a number of gaps between production and consumption:

Time gaps Consumers purchase items at more or less discrete intervals, whilst the majority of

firms, produce on a continuous basis in order to reap production economies This is the case in travel, where individual consumers purchase their tickets on a discrete basis, while the airlines and hotels produce seats and rooms continuously

Space gaps Consumers are usually dispersed throughout the market; producers are located in

a few areas and are often separated by distance from their customers This provided impetus for the creation of travel agencies to disperse the product (information) delivered from airlines and other travel suppliers through GDSs The WWW has created another channel to fill in this space gap

Quantity gaps Firms usually produce large quantities at a time; consumers usually consume

small quantities at a time; the plane seats and hotel rooms are produced in large quantities, but consumed only one seat or room at a time

Variety gaps The range of products manufactured by a firm is limited; consumers have many

needs which require a wide variety of products to satisfy them A vacation or business trip requires more than just the airline seat which only the airline can provide, or the hotel room which only the hotel can provide The travel agent, through the GDS fills this “variety gap” in order to offer all the products required by the consumer Offering the greatest variety/service is essential to remain competitive

To this list, Guirdham (1972) added the following gap:

Communications information gaps Consumers do not always know the availability and/or source

of the goods they want; producers may not know who and where the potential purchasers of their products are Nowhere is this more true than in the information-sensitive sector of travel The development of GDS helped make handling this information manageable

These gaps need not be closed by an intermediary; however, it is the usual case that this can

be done most cost-effectively through such a distribution process In other words, the use of an intermediary becomes appropriate when it is cheaper to close the gap with an intermediary than without an intermediary Christopher (1986) warns, however, that the benefits gained by using

an intermediary must be carefully weighed against the costs, for the marketing objectives of the intermediary may not coincide with those of the supplier The benefits might include better coverage, lower selling costs, wider product range, customer convenience, and market knowledge and customer finance, while the costs can be loss of margin, loss of marketing control, low priority given, and inadequate customer service

In filling this production-consumption gap, the distribution chain can be looked at in terms of its final added value Trade-offs are necessary between the number of intermediaries and the profit margin An airline, for example, must decide how much it is willing to trade off in transaction fees to the GDS and commission margins to the travel agent in order to close these gaps

According to Stern and El-Ansary (1996, p 3) , the intermediaries are necessary “to bridge the discrepancy between the assortment of goods and services generated by the producer and the assortment demanded by the consumer The discrepancy results from the fact that manufacturers typically produce a large quantity of a limited variety of goods, whereas consumers usually desire only a limited quantity of a wide variety of goods” From an economics point of view, the role of the intermediaries, therefore, is to transform the assortments of products made by producers, into the assortments wanted by consumers They match supply and demand This definition is restricted to filling quantity and variety gaps only

Middleton‟s (1994) definition of the role of distribution channels is more basic It covers only the time and space gaps previously mentioned and claims two functions:

1) To increase points of sale

2) To facilitate purchase of products in advance of their production

Christopher (1986) sees the supply and distribution channel as a number of intermediaries acting independently of each other and often with conflicting objectives and requirements Christopher states that although the basic problem can be characterised as a “zero-sum game”, i.e where for one player to increase his profit, another must lose it; long-term relationships between channel members can result in “non-zero sum gains” This zero-sum gain of trade-off

between travel agency commission, GDS transaction fee, and travel agency usage fees for GDS is potential for conflict in the travel agency - GDS - travel supplier relationship

Although global distribution systems are usually thought of as intermediaries, acting as the

information broker between the supplier (airlines and hotels), and the retailer (travel agent), they

are also suppliers of information and of service Therefore, they have a dual role as intermediaries and supplier This is an important point to bear in mind, as various distribution

chain players vie for strategic and competitive advantages in the distribution chain

2.1.2 Single versus Multichannel Distribution

Robert Weigand (1977) has argued that a single channel of distribution is not sufficient to counteract the many instances in which the channel is dictated by external forces beyond the control of the company He cites the example of when a supplier raises prices, but there is no opportunity for the wholesaler or retailer (the travel agent in tourism) to pass the higher prices along to his customers In such a case, the intermediary's margin is squeezed In a freely competitive market, they may be squeezed out completely if there is not sufficient margin to make the investment attractive This is the issue facing both travel agents and global distribution systems

In his analysis, Weigand points to some of the market forces which catalyse the development of multiple-channel distribution:

(1) Different types of Markets Customers wishing to buy direct from the factory (or

supplier/manufacturer/principal), do so at such a low price as to preclude a middleman (intermediary)

Here, Weigand refers to the idea of "bypassing the channel", where imaginative customers in high priced markets will scheme to qualify as buyers in the low-priced markets One or several intermediaries may be bypassed When they are all bypassed, this becomes known as direct-sell The World Wide Web has added a widely-accessible, and far-reaching channel of distribution, allowing airlines (and hotels) to bypass GDS and travel agencies and sell direct to the customer

(2) Different Geographical markets Weigand speaks of an inevitable spillover when different

distribution channels reach the same customer, for this creates inefficiency in the distribution system To a large extent, for example, many potential travelers are using the WWW booking facilities to research the best flights, but still going to the travel agent to close the deal This causes a spillover in the distribution channel, and additional cost for the owner of those multiple channels as they must pay for the different distribution methods

Wasson (1983, p 233) provides for the same forces, stating that “Because the same or similar offerings often are bought by quite diverse kinds of buyers, many producers must sell through multiple channels to reach their full potential The segments served, the assortments desired, and the appropriate channel contacts of most segments usually differ too widely for any line to

be sold through a single channel, even for physically identical offerings”

Frazier and Shervani (1992) define a separate channel to exist wherever a "distinct process can be identified through which a product can be selected, purchased, ordered, and received by the firm's customers” The process could be varied based on ownership of the channel, type of intermediary, location, or technology

Some of the motivations for moving from single channel to multiple channels are outlined below:

Demographic Trends

Time-constrained customers should be willing to pay for value-added services within channels

of distribution that conserve their time Customers are no longer seeking value from goods, but from the transaction itself Poon (1993) writes that consumers are becoming more sophisticated and experienced, and as a result of their changing values, lifestyles, and demographic circumstances, there is an increased demand for more variety and better quality Davidson (1992) states that “consumers, the real base of power, have made a massive shift in distribution

in recent years by bringing about a multiplicity of channel arrangements”

Technology Trends

As previously stated, technology provides additional distribution options, and a cost-efficient means of contacting the customer A firm can increase channel control by adding an additional in-house channel, while keeping cost efficiency high through the application of IT Although the

high development cost of CRS was an entry barrier, these barriers are now reduced, as new technologies enable firms to enhance market coverage while containing costs

Competitive Trends

As Frazier & Shervani (1992) suggest, firms can no longer afford to stand idle while their competitors make inroads into market segments through the use of non-traditional distribution channels, such as the WWW; the use of multiple channels is a natural response to the issue of market coverage

There is a competitive vulnerability to firms who are highly dependent on any one distribution channel Control will be low if the single channel is non-integrated, but if it is integrated, the firm has low flexibility because of sunk costs A multichannel distribution strategy allows the firm to reduce its dependency on one specific channel, while at the same time allowing itself to remain insulated from environmental volatility

Kotler (1997) explains that by adding channels, a firm can gain advantages in three areas: (1) increased market coverage, reaching customer segments the current channels cannot reach; (2) lower channel costs, including selling to existing customers through lower-cost channels; and (3) customised selling, fitting customers‟ needs

Both the airlines and the GDSs have employed strategies to maximise their distribution channels, but this typically introduces channel conflict and control problems Conflict arises when two or more channel members compete for the same customer Control problems occur to the extent that the channels are more independent and make co-operation more difficult

Types of conflict and competition that exist include: vertical channel conflict, a conflict between different levels in the same channel (example: GDSs versus travel agents); horizontal channel conflict, a conflict at the same level within a channel, and multichannel conflict, when a firm has established two or more channels which compete with one another (example: airline selling through GDS and travel agent versus airline selling direct to customer via phone, or online) This conflict intensifies when the members of one channel get a lower price, or are willing to work with a lower margin

2.1.3 Distribution Strategies

Designing a channel system calls for analysing customer needs, establishing a channel objective or strategy, and identifying and evaluating the major channel alternatives Channel strategy, according to Christopher (1986), should be considered in terms of channel length and channel breadth

Channel length concerns the extent to which intermediaries should be used, or whether firms

should “direct sell” to the customer There is an inevitable trade-off in losing control to the intermediary The three intermediary options differ in the degree of control they exercise over the distribution channel:

(1) corporate systems, in which a manufacturer owns and operates a vertically integrated “captive” channel system This, in essence, is the relationship between the GDSs and their respective airline co-owners;

(2) contractual systems, the most common manifestation of which is franchising This contractual arrangement is used frequently online by some booking systems, which franchise websites using their booking engines;

(3) conventional systems, which are the most accessible from the supplier point of view, but offer the most control problems

Channel breadth is essentially one of market coverage The two extremes are intensive and

selective distribution while Kotler (1997), also considers a third: exclusive distribution

At one extreme is selective distribution, where distribution is to more than a few but less than all

intermediaries This requires less distributors to dissipate effort and provides adequate market coverage with less cost and more control than intensive distribution At the other end of the

spectrum, intensive distribution targets as many outlets as possible and is the preferred scheme

when consumer location convenience is required In speaking of intensive distribution, we

consider the GDS as the supplier to the travel agent; GDSs have tried to capture as much of the travel agencies as possible in order reach the greatest number of customers Finally, exclusive distribution severely limits the number of intermediaries and thus allows for control of service

level/output offered by the resellers It enhances product image and allows higher mark-up The

great power of the WWW lies in its ability to provide intensive distribution, reaching all consumers subscribed to online services, without the cost of a proprietary network

Kotler suggests that firms are tempted to move from exclusive/selective distribution to intensive distribution to increase coverage and sales, but that this strategy, though helping the firm‟s short-term profitability, may hurt it in the long run

The decision to use one type of distribution over another is influenced by:

(1) Product characteristics: convenience vs speciality;

(2) Buyer behaviour - where perceived risk is high and information is required before purchase, or where there is high brand loyalty, or the customer seeks individuality, then selective distribution is preferable;

(3) Degree of control The supplier must tradeoff between the greater control afforded

by selective distribution over intensive distribution By selling direct to the consumer, the supplier (either GDS or airline) can exercise greater control over the chain;

(4) Marketing strategy- where a high level of distribution is required , then intensive distribution is preferable; this is the strategy of GDSs in providing as many travel agents with their GDS system

From the supply side, backwards integration can smooth logistical planning and can be achieved by means other than ownership A close working relationship with a supplier can achieve these goals as well as outright buying of a supplier Sabre, for example, purchased a 3rd party CRS software vendor, thereby obtaining greater control over the product and distribution chain

According to Kotler (1997), a firm‟s overall distribution channel strategy should be guided by 3 considerations: economic, control, and adaptability:

Economic

Unless a channel can meet certain goals, it is likely to be abandoned in favour of a more

efficient alternative These goals can be broken down into channel cost efficiency and revenue generation capabilities The channel should therefore be carefully monitored for its ability to

deliver required output while staying cost competitive, and a trade-off made between the two

Control

A firm will attempt to establish control over its distribution channels in order to guarantee the outputs (in the case of global distribution systems: service, in the case of airlines: tickets), provide channel support for its products, as well as acceptance of its promotion and pricing policy Travelocity, the on-line reservation system, is owned by Sabre, for example

As in the case of economic considerations, control considerations can be further broken down

into channel competence and channel compliance The former is a measure of a channels

ability to provide the level of support (service) while the latter is its willingness to provide this level of service The extent to which this exists determines the extent to which the firm has control over the channel If necessary, forward or backward integration should take place

Adaptability Considerations

As customer requirements and competitive and market conditions change, so too should a firm‟s channel strategy; it should be able to adapt to this change The two dimensions Kotler

presents of adaptability are growth and flexibility Channel growth refers to the extent to which

various entities in the distribution channel are open to growth, which can be a major area of conflict between suppliers and other channel members when goals and expectations diverge Flexibility is the ability of the channel to adapt to changes in the channel environment For global distribution systems, which rely heavily on electronic media to distribute its service, this flexibility

is of utmost importance

Trade-offs exist among the three considerations when deciding between using a single channel

of distribution, or multiple channels, and between in-house channels and third party channels

Kotler points out that no marketing channel can remain competitively dominant; therefore, unconventional channels should be explored, for the company using such a channel will encounter less competition during the initial move to this channel, giving it a competitive advantage over others This was the strategy employed by Sabre, which, by unveiling the Travelocity online booking site early on, was able to establish an early lead and competitive advantage in the race for Web bookings

Revaluation is necessary in order to determine if the present distribution strategy is the most efficient and effective way of reaching customers at the lowest possible cost commensurate with quality of service required This pressure for change sometimes comes from the intermediaries themselves We can consider, for example, that the availability of information on all airlines provided by a global distribution system has shifted the balance of power away from the airlines into the hands of the consumer, who can now easily choose an airline with the most discounted fare

2.1.4 Distribution in Travel & Tourism

The major difference between traditional production and tourism production, is that in the tourism industry, customers are brought to the product, not the other way around Unlike the distribution of physical goods, in travel and tourism, distributors do not purchase products in bulk and therefore do not share in the financial risk of production The principals are responsible for generating and marketing demand They are the risk takers

According to Middleton (1994), the lack of physical inventory makes tourism distribution channels all the more important Producers are willing to pay high costs for these channels in order to gain competitive advantages by increasing their points of sale It is therefore in the producer‟s interests to find the most efficient, widely accessed, and cost effective distribution methods This is the main selling point for the WWW Figure 2-2 which shows some of the travel distribution channels commonly employed The cloud represents the World Wide Web

Figure 2-2 Distribution in Travel (Author’s own work)

SUPPLIER

Switching Company

Tour Operator

Call/Resv Centre

Retail Agent GDS

Online Retail Agent

CUSTOMER

World Wide Web

2.2 Trends

In discussing the evolution of a service such as travel distribution, one must consider the societal trends and their impacts Written in 1982, John Naisbitt's Megatrends exposes the major social, economic, political, and technological changes gradually influencing and shaping society Tourism is an extremely information-sensitive industry - the links between and among consumers are provided not by goods, but by the flow of information (services and payments)

“Change occurs so rapidly that there is no time to react; instead we must participate in the future” Naisbitt could be referring as much to individuals as to the large corporations (including GDSs) when he made the statement In the business world, such reaction time is even more critical Naisbitt points to several critical restructurings in society which are of interest to the topic of this dissertation: distribution of information, high tech / high touch, and the global economy

2.2.1 Distribution of Information

The industrial based society is giving way to an economy based on the creation and distribution

of information He argues that although it was believed that the post-industrial era would be serviced based, it is in fact information based One has only to look at the increase in information-based jobs versus service-based jobs to realise to what extent this is true

In an industrial society, the strategic resource is capital; in the information society, the strategic resource is information He who has it has an advantage over he who doesn't, but as information is more and more widely available, the advantage gained by such information can

be short-lived Information is now instantaneously shared This makes gaining a competitive advantage all the more difficult and is why a race always develops to release one‟s product first

Naisbitt explains that information technology brings order to the chaos of information pollution, and gives value to data that would otherwise be useless This is one of the main raison-d‟être of the global distribution system; managing information in such a way as to bring order out of chaos, and to provide the airlines with information of value to management The opposing point-of-view suggests that information technology can cause a glut in information; those seeking to

profit from the online medium must seek to provide information to the customer which is of added value

As a result of this information-intensive trend, society is changing from one of emphasis of

supply, to one of emphasis on selection From the customer point-of-view, the society we live in

has turned from one of few personal choices, to one of multiple options Already back in 1982, Naisbitt spoke of an explosion of home computers This has opened up another distribution channel for airlines, the effects of which are still largely uncertain Therefore, with reference to travel distribution, the customer selects between conducting business with different suppliers through different distribution mediums

2.2.2 High Tech/High Touch

We are moving in the dual direction of high tech/high touch, where each new technology is matched by a compensatory human response

Naisbitt speaks of the rejection of electronic funds transfer for it lacks this hi-touch component Society is beginning to accept electronic commerce, and companies are embracing it; however, there is still a long way to go before the average consumer (the one who does not fly frequently and who is not a regular online user) feels secure about making purchases electronically This is one of the major stumbling blocks faced by GDSs or other suppliers selling directly to the consumer The high touch aspect is what may allow travel agents to play an important role in the travel distribution process Realising this too, several third party reservation system vendors are including travel agents in the supply chain role

2.2.3 The Global Economy

We are all part of a global economy Telecommunications has made a global economy possible

No longer are economic events and strategies to be determined in isolation A dependence on hierarchical structures is being given up in favour of informal networks, which is especially important in the business community, and is applicable to distribution channels Networks can offer what bureaucracies can never deliver - the horizontal link, including alliances The many alliances and mergers which have taken place, both in airline and among GDSs (most recently Galileo's plan to purchase Apollo), are indicative of this trend

According to Naisbitt (1990), financial services are the most involved sector of the global economy, and have more to do with electronics than finance or services, which have been around a long time The “electronic” stumbling block of transaction security is the subject of much interest for the commercial world, for this will allow WWW commerce to flourish, with

obvious consumer implications (securing more on-line sales) The development of the extranet

may be an important step in that direction The extranet is a collaborative network that uses Internet technology to link businesses with their suppliers, customers, or other businesses that share common goals An extranet can be viewed as part of a company's intranet, or internal Internet system, that is made accessible to other collaborating companies

Middleton (1994), in speaking of the importance of CRSs realises that the major systems are international and becoming global in operation, and that there will be growing competition by the main players for market share Such is the dynamics of business in the new digital economy In Megatrends 2000, Naisbitt (1990) also speaks of global merchandising leading to global pricing This, combined with ready access to competitors products and services, means that the competitive advantage of one GDS over another can only be measured by the depth and breadth of its information

Megatrends 2000 also predicts rise of the Pacific Rim This is true for airlines, which are looking

at building high capacity jets to cover the demand in the pacific rim basin Among the global distribution players, there are high stakes involved in tapping that market Sabre recently made inroads into China, while Amadeus has recently created a presence in the Philippines and Macao (May 23, BTN On-line)

Anderson (1992) muses that three things seem certain for the foreseeable future: “increasing

quixotic customers, increasing exotic markets, and increasing neurotic retailers”

The average consumer is changing He is becoming more money-rich, but more time-poor, and more ethnically diverse He is more accustomed to, and comfortable with information technology As Poon (1993) remarks, travel agencies will have to use their CRSs (GDSs)

creatively and provide the information that consumers want CRSs will have to provide the capabilities to provide the services that customers want; this is the direction in which the GDSs are trying to head

Poon (1993) refers to mass marketing no longer being the dominant paradigm The new competitive advantage will be the data collected on customers, the relationship that has been built with them, and the speed and richness of the information collected For this the GDS is well-suited There has been a gradual move from segmentation to relationship marketing (Achabal & McIntyre, 1988) and technology can be applied to track customers Relationship marketing is a key way of treating customers differently It is an attempt to establish a relationship with the customer and create a competitive advantage which is sustainable It means treating them individually and catering more precisely to their specific needs in a timely fashion Airlines have employed this strategy successfully with their frequent flier programs However, such a relationship scheme is a little more difficult between a GDS and a traveler, for the former is usually transparent to the latter

This idea of customer profiling is already exemplified in some of the WWW reservation systems, which will recall, for example, that you have a preference for window seats in aeroplanes, or compact cars Similarly, when certain deals fit one's criteria for cost or destination, and email may be sent to the customer automatically There is a trade-off to be made between the decreasing costs of maintaining these relational databases, and the increasing benefits to consumers Information and credit risk - the accuracy of the information delivered and the potential for security over the WWW, must also be considered

The authors (Achabal & McIntyre, 1992) also speak of the change from customer service to customer experience in order to gain competitive advantage: convenient hours of operation (consider that the WWW is “open” 24 hours a day), visual display (again consider the WWW and it‟s multimedia capabilities), and access to all other relevant information, give the WWW an increasing edge over the intermediaries

Society is moving from store-based to distance-based retailing via interactive services

"Computer based experience with mouse-based and hypertext-media, remote-controlled

"zapping" with the TV, catalogue buying, and experience with Automated Teller Machines are all developing the needed adaptation on the part of the potential customers that will make distance-

based retailing a natural extension and thereby change it from a discontinuous to a more continuous innovation" (Achabal & McIntyre, 1992)

Man is a clever animal There is no way to keep him from devising new tools The error lies in thinking that new tools are the solution It could be a fatal error

John Hess (GEO, March 1981)

Technological advancements change the rules of competition, but many companies fall into the trap of believing that all technological change is valuable, that it is important for its own sake, and that new technologies always lead to increased profits

Technology creates a new basis for competition in the tourism industry and has become a key determinant of competitive success Although it spawns both threats and opportunities, it is essential for business to apply these technologies where these increase efficiency and give them a competitive advantage

Although many of Acahabal & McIntyre (1992) arguments were written with the retail world in mind, they are applicable to travel and tourism as well The authors suggest that because technology is available to everyone, it is the mixing and blending of different technologies together in application systems that constitutes the competitive advantage It is the difficulty, in terms of capital and time, in developing such applications that constitutes the basis for

generating sustainable competitive advantage, explaining why airline competition was so fierce

in developing their CRS systems

The authors go on to elicit Porter's competitive advantages theory Competition, according to Porter, comes not only from the obvious direct competitors, but from suppliers (principals in travel), from new entrants (i.e new GDSs), and from substitutes for their services (GDS-like reservation systems)

There is always a trade off in the use of new technologies Not applying technologies is risky; one ends up always being behind the most advanced competitor Applying technologies too fast

carries the risk of being on the "bleeding edge" of technological developments, which can be too expensive to be profitable The key is to study emerging technologies as they become available and apply them appropriately at the right time

The WWW is a good example The evolution of the WWW is so new that even as recently as

1994, Middleton (1994) makes no mention of its potential However, he states that "if style home-shopping takes off, even though it is a viewdata system, it can generate enough business to gain access to CRSs" and adds that "electronic information technology conveys enormous flexibility to producers, the full score of which has yet to be fully developed" In the three years since his publication, the WWW, with its multimedia capabilities, has caused this growth to expand to an extent unimaginable

Minitel-As previously stated, technological change might not be important for its own sake, but is important if it affects competitive advantage and industry structure Technology is used in the broadest sense in Porter‟s (1985) work, and relevant points are brought forward here

2.4.1 Technology and Competitive Advantage

Technology can have a powerful effect on cost and differentiation In fact, highly efficient technologies are drivers as powerful as economies of scale, advantages of timing or interrelationships A firm gains a competitive advantage when it discovers a better technology than its competitor for developing an activity American‟s Sabre and United‟s Apollo systems prove this point; they control over 60% of the US CRS market

Porter suggests that changes in the buyer‟s technology will have a competitive advantage effect and perhaps force a change on the supplier‟s technology as well, due to their technology interdependence, and the supplier‟s desire to maintain its differentiation and competitive advantage We can think of the penetration of the home PC - owned by the buyer - and how this has forced GDSs (and airlines & hotels) - the supplier in this case - to consider changing technologies to permit WWW-to-GDS (CRS) interfaces

Technologies which allow companies to offer better services will give them a differentiated advantage in competition This role of differentiation is a difficult one to achieve for GDSs,

because the technologies are available to all players Competitive advantage should therefore

be sought by some other means; this is the real challenge for GDSs these days

2.4.2 Tests of a Desirable Technological Change

Some of the salient tests for desirability of change with respect to the emergence of new distribution channel technologies, such as the WWW are (Porter, 1995):

(1) The technological change itself lowers cost or enhances differentiation and the firm's technological lead is sustainable

(2) The technological change shifts cost or uniqueness drivers in favour of the firm, such

as CRS biases which originally favoured the owner airlines

(3) Pioneering the technological change translates into first-mover advantages other than those inherent in the technology itself American Airlines pioneered the CRS, and

as a result gained a competitive advantage in both cost and differentiation

(4) The technological change improves overall industry structure This is the case of CRS/GDSs, which have, until now, opened up travel distribution

Relative to the last point above, technologies that become widespread can positively or negatively affect an entire industry‟s attractiveness Even where it does not give one firm a competitive advantage, it can affect the potential for the industry as a whole Conversely, if the change does give a firm a competitive advantage, its widespread imitation may worsen the structure of the industry Finally, technological change can raise or lower entry barriers

Technological change can result in changes in bargaining relationships between supplier and buyer Some of the consequences include:

(1) Buyer power - technological change allows buyers to backwards-integrate for economies of scale As travel agents or customers (both buyers) gain access to the WWW, they could conceivably bypass the GDS to buy straight from the airline Although not many airlines allow this at present, this accessibility is a growing trend Still, the accessibility of technology is

allowing travel agents to work on a GDS project of their own to compete against the airline owned systems;

(2) Supplier power - a monopolistic industry means that one supplier can set the terms of purchase To date, the airlines‟ dependence on GDSs has meant a monopoly of transaction fees;

(3) Substitution - technologies develop to offer cheaper alternatives to existing products, changing their relative values and prices New 3rd party software vendors take advantage of advances in software technology to offer competition to GDS front-end products made available

to travel agents;

(4) Industry boundaries - technological change can create, blur, or even eliminate industry boundaries (information technologies, for example, combine the telecommunications, computer, and television industries) The WWW has blurred the lines between intermediaries With an almost standard interface, a customer could as easily book with an airline, a GDS-owned booking service, a private booking service connected to GDS, or a virtual travel agent

2.4.3 Technology Strategy & First-Mover Advantages

A firm deciding on technologies to develop must be aware of where they are in the marketplace

- whether they have chosen to lead in cost or in differentiation They should never assume that

a technology is mature Almost every product and value activity is made up of a combination of technologies While one particular combination of technologies may be mature, a new technology could be substituted and the entire S-curve started again Sabre has always adopted this strategy by pouring millions into research and development With the rate of technological change being what it is, and the many competitors entering the foray, the importance of keeping

on top of things cannot be underestimated

In choosing whether to lead or follow in the technological race, Porter (1985) indicates a firm must take into account sustainability; sustaining your lead means that competitors can't duplicate it This can be achieved by “First-Mover Advantages” Among the advantages are the reputation and image and associated benefits of being regarded as a pioneer By being first, a firm may shape the way a product is defined and marketed, and choose the best brokers,

distributors or retailers In so doing, and by saturating the market with its product, a firm may keep other competitors from joining in through high switching costs; switching systems or supplies costs money and time, which a customer may be unwilling to pay Most CRS-travel agency contracts contain a penalty clause for switching to another CRS

Many of the largest companies today were the first-movers in their era, and have maintained that lead ever since (example Sabre) However, if a first-mover doesn't have adequate resources to follow through, other companies may take over the lead This made early attempts

at entering the CRS race difficult; lack of capital Now, with software technology more accessible to all, the tide has turned

There are also disadvantages to being first The pioneering costs include gaining regulatory approvals, educating buyers, developing an infrastructure, and developing needed inputs which can be major barriers to overcome Only an airline-backed system like American Airlines‟ Sabre has the necessary capital to design and maintain a system which for many years did not make any profit

The many disadvantages are being felt at present by the original CRSs If a company doesn't adapt to changes in buyer needs, it may become identified with an old generation of technology

A first-mover can define standards for an industry This can be an advantage, but in the case of CRSs, may actually be a disadvantage, as these systems were designed with airline reservations in mind, and are not as adept at handling reservations for other products Industry critics argue that the legacy systems are not well suited to handling reservations for products other than airlines First-movers may be unprepared to respond to a technological shift because it's deeply committed to an older technology, one which a follower may be able to duplicate without the high costs of R&D that the first-mover has invested This the case with the suite of 3rd party booking products which are entering the marketplace

If a firm does not respond to these threats its competitive advantage may be quickly eliminated

2.5 Summary

This chapter has looked at the important roles that the different members of a distribution chain play in terms of filling a number of gaps between production and consumption Among these are time gaps, space gaps, quantity gaps, variety gaps, and communication and information gaps

It was shown that the decision to move from a single channel to multichannel distribution is dependent on market forces - demographic, technological, and competitive trends Once the number of channels has been determined, the channel length and breadth (selective, intensive

or exclusive distribution) must be chosen and guided by economic, control, and adaptability considerations These choices are equally applicable to distribution in travel and tourism

The important trends marking society today are the distribution of information, the dual importance of a high tech and low touch environment, and the globalisation of the economy This, combined with the consumer who now demands more value and convenience, are among the forces that help to shape the role that the WWW will play in displacing the CRS/GDS as the main distribution channel for (air) travel bookings Finally, firms must try and obtain first mover advantages and maintain technological lead and flexibility, if they are to succeed

Chapter 3 CRS and GDS Development: The Fight for Competitive Advantages

This chapter will focus on the development of the computer reservations system (CRS) from two perspectives: the use of technology for competitive advantage, and the importance of the emergence of a new channel of distribution In the 1970s, this new channel was the CRS, but in the 1990s, it may well be the World Wide Web The problems and challenges faced by the players in travel distribution when CRS technology first emerged as a new distribution channel are similar to the new challenges faced now as the World Wide Web (and other interactive services) emerge as today‟s new technological promise for a more efficient distribution channel CRSs evolved through a variety of forces including entry barriers, technological developments, and economies of scale and scope Although CRSs evolved from the airlines which generally own them, and have proven to be a great competitive advantage to the latter, their objectives are sometimes contradictory The airline created the CRS as a channel of distribution to increase distribution cost-effectively, whereas the CRS is a revenue generating provider of service trying to maximise its revenues by effectively increasing distribution costs Their sometimes incompatible goals resulted, in one case, in Sabre being created as a separate entity from its previous parent, American Airlines

The beginning of the CRS

Airlines sell one of the few products consumed while it is being produced, right in front of the eyes of the customer

“An airline seat is like fresh food - a grapefruit, say - in that it spoils after so

much time on the shelf Every empty seat taking off on every flight is a spoiled

grapefruit and exactly as valueless Both required time, value and money to

create, and both came to a wasteful, meaningless end And on an exceedingly

large number of flights, the sale of one last seat, according to the First Rule of

Airline Economics, could easily decide whether the plane flew the entire

distance in the red or the black.”

Petzinger, 1996, p 57

The speed of jet travel encouraged more business and leisure travelers to fly on impulse, demanding even more up-to-date inventory records and faster communication IBM created a real-time reservation system for American Airlines called SABER, for Semi-Automatic Business

Environment Research Later, the project was renamed Sabre and it “was to become the very weapon the name implied” (Petzinger, 1996, p 60)

The dawn of airline deregulation in the US provided the framework to facilitate the rapid development and diffusion of computerised reservation systems A CRS was required simply to keep track of the new routes, services, schedules, complex fares, and new airlines resulting from competition after deregulation

3.1.1 Control of the distribution chain

As outlined in Chapter 2, consideration must be given to the degree of control a firm exerts over its distribution channels; greater control means greater flexibility in pricing and promotion policy This desire for control created competition between the travel agent and the airlines A central reservation system accessible to travel agents would allow them to reduce their search costs; they would no longer have to flip through the Official Airline Guide (OAG) to find flights The airlines would benefit with a reduction in distribution costs, since fewer reservation staff would

be needed American Airlines feared loss of control of the distribution system should such a system be implemented by the travel agency community Loss of control would mean that airlines, in addition to paying travel agents commissions, would have to pay a transaction fee for using someone else‟s distribution channel With the number of tickets an airline sells per day, this adds up to millions of dollars a year American, smaller than United at the time, was aware that if a race existed to outfit agents with computer terminals, United would win Thus a joint system between United and American was proposed (though it never came to fruition), both as

a way of effectively blocking the travel agents‟ chance of developing their own system, and to prevent United from developing a proprietary link

3.1.2 Intensive Distribution

Intensive distribution of the CRS means more points-of-sale, which translates to more business for the owner airlines both from flight bookings and transaction fees for use by other CRS listed airlines Both carriers strived for intensive distribution, and so a race ensued to see who could connect the greatest number of agents to their proprietary system However, having gained first-

mover advantages, American controlled the distribution channel and achieved a marketing triumph with its reliable reservation system, gaining market share over its rivals United did not push as aggressively as American to achieve intensive distribution; it practised selective distribution by signing up only those agencies which were financially healthy whereas American chose to sign up any travel agency that could pay the equipment rental In the end, even if American didn‟t have the most planes in the industry, it had the most distributors, and thus the most control American‟s Sabre still controls most of the market share of CRSs, due to its early entry into market, an example of Porters early mover advantage (see Figure 3-1) CRSs still compete vigorously for subscribers The loss of a travel agent to the incumbent CRS is greater than the gain experienced by the incoming CRS First, there is the booking fee the incumbent CRS-owning airline now needs to pay to the competing system Second, the incumbent CRS loses the booking fees from the other airlines booked by the travel agency Last, there is the intangible but universally recognised halo effect, that is, the positive effect on bookings of maintaining „ongoing, mutually supportive business relationships between a vendor and its travel agent subscriber‟ (GAO, 1988, p 6; de Pommes, 1992)

Figure 3-1 CRS use in USA (1996) (Source: ASTA, 1996)

3.2 Creating Competitive Advantage through Use of Technology

American‟s Sabre acted as a distribution system for all the airlines (for no travel agent would be interested in owning multiple systems, one for each airline), but could still attempt control over distribution through other means, thereby restoring its competitive advantage over the other airlines listed on the CRS Financial incentives were introduced; travel agents would receive an override commission for booking more flights with American Therefore, where two flights were essentially similar, a travel agent would choose an American flight for the possibility of extra commission However, United quickly adopted the scheme to minimise Sabre‟s competitive advantage The manipulation of technology then became the means of achieving this competitive advantage

3.2.1 Superior Marketing Information

A CRS provides owners superior access to useful marketing data on competing carriers and travel agent bookings; Sabre allowed management to accumulate the most detailed information ever collected on travel patterns emanating from every major city - by destination, by month, by season, by day of the week, by hour of the day for American and other airlines subscribed to the CRS - information that could be used by American to dominate in the airline industry Bob Crandall, president of American Airlines, used technology as a competitive weapon to sustain his airline‟s competitive advantage

3.2.2 First Screen Bias

Airlines used “screen science” to control the travel agent‟s selection of flights It had been determined that in 92 percent of cases, agents reserved from the first screen, this after years of being conditioned to see the fastest flights listed first in the OAG (Petzinger, 1996, p 140) The formula determining which flights to include on the first screen was based on a weighting of factors such as proximity of departure hour to requested time, elapsed time, connection time, etc., but left great room for judgement Although Sabre displayed the best service meeting this

criteria on the first screen, it did not necessarily list this service on the first line Invariably, this

was an American flight A study by American Airlines in 1983, before the elimination of biases, suggests that the benefit accrued to American from this first screen bias from Sabre-equipped agents was an increase in passengers of as much as 20% (Buchanan, 1989) For example, between Baltimore and Chicago, American had 25 percent of total flying capacity, but 44

percent of the booking made through Sabre From New York to Los Angeles, the figures were

42 and 60 percent respectively (Petzinger , p 140)

3.2.3 Code-sharing

Code sharing involves two carriers placing their individual designator codes on the same flight

As a result, a code-share flight is listed twice in the CRS Triple listings occur because both carriers in an alliance list flight segments under their own code and because CRSs also display

a third listing in which the flights are shown as an interline connection in which the airlines that are actually operating the flights are listed (GAO, 1995) However, by listing flights several times, other flights which might have been listed on the first screen of the CRS are “crowded out” onto the second, less often used screen Currently, US Department of Transportation rules

do not limit the number of times a flight can be listed (GAO, 1995) It will be interesting to see what the effects of the new 5-airline STAR Alliance (Air Canada, Lufthansa, SAS, Thai Airways, and United) will have on these rules

first to create a system entails huge development costs, and this was no exception for American Airlines Despite the removal of most biases, airlines continue to receive incremental bookings

as a result of the halo effect

The 1984 legislation resulted in a financial bonus for American and United Since discriminatory

fees were not allowed, a higher equitable fee was charged to all users of the system (DOT,

1986) Subsequent to the 1984 ruling, the booking fees American and United charged climbed

to $1.75 and $1.85 respectively Smaller airlines labelled the ruling a "licence to steal” (dPA, 1993a) As emphasised by a US Department of Justice report (DOJ, 1985), the level of booking

fees is not determined in a competitive market; a Department of Transportation study found that the major CRS vendors charge booking fees well in excess of the costs of providing the bookings, leading to substantial transfer of incremental revenues from non-CRS-vendor airlines

to CRS-vendor airlines and from minor-CRS-vendor airlines to major-CRS-vendor airlines (GAO, 1988) The latter occurs because of the necessity for an airline to be listed on all CRSs This revenue transfer creates an artificial competitive advantage for the CRS-vendor airlines and limits competition

The rules are still being contravened, despite the anti-bias regulations As recently as October,

1996, American‟s Sabre was charged with violation of CRS rules for distributing software to 650 travel agencies which contained screen biases, between April 1993 and February 1996 (DOT,

1996 Oct 28)

The CRS became an alternative distribution channel to the airline reservation centres; one that could not be ignored Despite the high cost of CRS booking fees, effective product distribution meant that airlines were required to list on all CRSs to remain competitive in the air travel business Declining to pay a particular CRSs vendor fee or being listed on any CRS would reduce the likelihood that travel agents subscribing to a particular CRS would book passengers

on that airline At the time, airlines had no other economically viable channel of distribution, such as the WWW

An example of the negative impacts of ignoring a potential distribution channel (in this case the CRS) can have on a supplier is given by People‟s Express The airline broke down at its most vulnerable distribution point: reservations By refusing to pay transaction fees to Sabre or

unable to handle its sole channel of distribution, the telephone By ignoring the CRS as a distribution medium, and not having an alternate distribution channel (phone-in reservations) with sufficient breadth (not enough phones), People‟s Express lost potential business This is a lesson many airlines wish not to repeat with the advent of the World Wide Web as the newest distribution channel