American Airlines: Three Spend Management Lessons That Extend Beyond Procurement (Part 3)

In the first two posts in this series (Part 1 and Part 2 ) looking at creative ways that American Airlines has cut costs outside of procurement, I shared both historical and current examples of the airline's track record in getting creative with the cost reduction pen. It's worth noting that these cost savings don't necessarily have to come at the expense of the customer's satisfaction, although, as we'll see below, can come at the expense of partners. For this final example, I refer to American Airline's recent attempt to cut Orbitz and Travelport out of the indirect distribution equation by trying to sever a relationship requiring them to distribute content (e.g., fares, schedules, etc.) to Orbitz through a global distribution system (GDS) that essentially serves as another middleman in the travel booking equation.

What's interesting about the situation is that Orbitz's parent company, Travelport, also owns Gailileo and Worldspan. Spend Matters believes the earnable GDS margins on a typical ticket can be significantly higher than the profit that the online booking service (e.g., Orbitz) can make, especially if the booking fee is discounted or waived (as is often the case in the highly competitive web travel market). And this is why Orbitz (i.e., Travelport) is fighting American Airlines tooth and nail to preserve the middleman GDS distribution system rather than allowing American Airlines to connect directly to Orbitz' systems.

Yet American sees an opportunity here, and probably believes that other airlines will follow suit if they succeed with their contractual and legal challenge. After all, typical GDS fees can represent between 2-3% of a typical lower/mid-priced ticket, according to various sources and our own discussions with a former Orbitz employee. These fees are paid by the airline, cutting directly into the carrier's margin and presenting a clear opportunity for not only improving the bottom line by eliminating the expense, but also as a means to gain greater control over their content.

The situation is not unlike what we might see play out in five to ten years time (maybe sooner) with supplier networks that continue to raise prices for large suppliers in general indirect materials/MRO categories. Might Grainger, Dell, Office Depot and others end up challenging network fees in the future, either opting to go direct for content distribution or PO/ASN/invoice connectivity? Who knows. But if anyone ends up doing it, I suspect it would be Staples, given the company's historic aggressiveness and pole position in the office products market. As it is with American today, all eyes will be on the one supplier that has the spend cojones to prop up their margins by going after the middleman.

Jason Busch

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