Costly Battle that Will Either Make Or Break American Icon

American Airlines was once a great carrier. A world leader. For example, many years ago it invented the immensely profitable and powerful Global Distribution Systems – which aggregate, display and disseminate airfares through the travel agency network – by creating Sabre. It was a smart move that changed the aviation landscape forever. It was a truly innovative play but one that would have long term consequences that the carrier could never have envisaged.

Those glory days for American Airlines are long gone. Like the US airline industry, largely regarded as an inconvenient joke with the exception of low cost pioneer South West Airlines, AA is a mess trying to figure out how to make a future in a low cost world. AA hasn’t made a profit from flying since 2007 and analysts expect another loss this year. Clearly the AA business model isn’t working so now it’s trying to cut costs. It hasn’t had much luck with the unions so has now turned its attention to distribution and is now – in the grand daddy of all ironies – locked in an all out legal brawl with Sabre, which it (foolishly?) sold in 2000.

In 2010 AA spent US$853m on Global Distribution System costs, commissions, booking fees and credit card expenses. Some would say that’s the cost of doing business. American sees it different and over the past few weeks its attempts to impose a new distribution regime – central to which is a direct connect for agency groups to AA that bypasses the GDS – has caused turmoil with various distributors such as Expedia and Orbitz uniting against the carrier.

Now AA has just won a Phyrric victory over Sabre which wanted to drop AA from its system a month before its contract was due to end. Reuters reports: “American Airlines Inc has won a court order temporarily blocking Sabre Holdings Corp from presenting its fares in a manner the carrier fears might steer customers to other airlines. The order by a Tarrant County, Texas judge followed Sabre’s January 5 decision to drop American flights from its Sabre Travel Network by August, one month earlier than planned, and change how it displays the carrier’s fares to ticket buyers.

“American, a unit of AMR Corp, accused Sabre in papers filed earlier on Monday of violating its contract by pushing the carrier’s fares lower in displays, making them harder for ticket buyers to find. The carrier said this threatened irreparable harm ‘by eliminating countless sales that American would have earned and by misleading the public into believing that American’s services either no longer exist or are not competitive.’ Monday’s order blocks the change while AMR seeks long-term relief, including punitive damages, the carrier said.”

That argument has some merit on its own. AA says more than $7 billion of tickets on its flights are booked annually through Sabre’s system, accounting for close to half the airline’s ticket revenue. Obviously the Sabre move to downgrade AA positioning status on its system would have a big impact on revenue. So AA is angry and wants the relationship to continue on the agreed terms. Yet at the same time, AA has declared through numerous other actions that it no longer believes that the GDS offer value and therefore wants to bypass that business conduit.

For example, AA imposed a surcharge on bookings through the Travelport GDS in many markets outside the US, including Australia, a move Travelport has challenged in court. It also resulted in AA pulling out of Orbitz. Oh yeah, a mess of contradictions.

Confused? I am. But three things are clear: 1) AA needs the GDS and will do so for a long time; 2) this is only the very start of a long-term and potentially very damaging war; 3) AA should never have sold Sabre. The money is clearly in distribution.

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