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American Airlines business model strategy bet

In the high-testosterone game of Chicken, two drivers race towards each other at accelerating speeds. The first driver to veer his car off the path loses the game. Clearly win-win solutions fail to exist in this game. Either one player proves his cowardice, or both players crash.

A physically safe, but economically lethal game of Chicken is at play in the airline industry right now with American Airlines in one of the drivers’ seats. American wants travel agencies to bypass booking on Global Distribution Systems and instead use American’s own direct-connect network to book tickets. Global Distribution Systems (GDS) consolidate and keep up to date hundreds of airlines’ fares and schedules, presenting them to travel agents and online travel agencies like Expedia. GDS companies earn revenue from the airlines for any tickets booked on their system, sharing some of the revenue with the booking agents. Many GDS companies own on-line travel agencies. For example, Sabre, the largest GDS, owns Travelocity and, prior to 2000, was owned by America Airlines’ parent.

American says it’s trying to work with the middlemen; it wants tickets booked directly on its system so that it can “up-sell” customers with services that add fees (more leg space, extra points, etc.), thereby improving American’s average ticket price. The middlemen like Expedia smell a rat and are playing their own game of chicken, delisting American from their sites or giving its flights much less attractive billing. Like unions that knew the first auto company contract set the tone for all that followed, the GDSs and Expedias of the world aren’t going to give an inch. American reported Monday that it earned a temporary injunction keeping Sabre from downplaying American flights on Sabre’s search results to travel agents.

Many companies have cut the middleman out, or reduced their role, to reduce costs. “Big box stores” for example are such a big part of our vocabulary, landscape and economy that we sometimes forget life before them. Walmart, Office Depot and many other companies eliminated independent distributors – once dominant in connecting retailers and manufacturers – from their value chains. The resulting cost advantage over local retailers helped big box stores wipe out a ton of ma and pa local retailers.

As consumers, we should be concerned if GDS companies disappear. Their role in creating price transparency is vital as they advance price competition among airlines. But rather than focus all your anger on American, consider that GDS companies deserve some of the blame for the current crisis. Airlines are a vital strategic customer and GDS companies should have been working proactively with airlines to help them execute their marketing plans through the GDS channel.
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What advice does this strategist have for American? Avoid being penny wise and pound foolish.

In a great blog post, Patrick Stähler questions the easy “outsourcing” decision so many companies make. Often they’ve outsourced skills or partners that they later regret losing. Here’s but one of Patrick’s examples:
Hong-Ta Corporation was the manufacturer of the innovative Palm Treo 650 or of the Compaq iPaq, one of the first smartphones. Today, HTC as the firm is known today is very strong in smartphones and was one of pioneers in phones with Google’s operating system Android. Interestingly, Palm and Compaq are today irrelevant in the growing markets for smartphones. And both former pioneers are now part of Hewlett Packard.
Value chain decisions should align with your value promise. Southwest bypasses the middleman. The decision made sense in creating Southwest’s “lowest cost for short routes” business model. Yet Southwest may need to rethink its use of middlemen as it seeks to attract more business travelers and moves into some international routes with its acquisition of Air Tran.

American is not Southwest, however, as American relies on international travel revenue and has a strong position with business travelers. It may lack the market power to force its desired booking system onto its partners. Rather than play chicken, it should engage in a win-win conversation with its channels. I say this after booking a ticket on Expedia today and only after-the-fact realizing that American was not even part of the consideration set now that Expedia has de-listed American from its site.

In other words, design your value chain to both enhance your value promise and make that promise harder to copy. Align everything to your value promise and you’ll win any game of chicken.

More articles by Kay Plantes

Kay Plantes is an MIT-trained economist, business strategy consultant, columnist and author. Business model innovation, strategic leadership and smart economic policies are her professional passions. She resides in Madison, Wisconsin and Oslo, Norway. For more information visit her website - Business Model Innovation and read her most recent book - Beyond Price.

The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.

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