Mark Pestronk
Q: Our corporate-oriented agency needs its GDS service, so we cannot realistically start booking on supplier or third-party websites like many leisure-oriented agencies may now be doing. During Covid, we experienced a booking shortfall that triggered penalties under our GDS contract. Now, our GDS vendor will forgive those penalties if we sign a new long-term contract. However, I am worried about another major industry disruption. What are my realistic alternatives to signing a long-term GDS contract?
A: Some consortia and franchisors offer GDS access to their members, and their deals have reasonably good segment incentives, few or no penalties and the ability to terminate on short notice. If you don't belong to one of these organizations, you should consider joining.
In addition, a couple of very large agencies also have the ability to extend their GDS contracts to other agencies. Under those deals, your agency may need to be classified as a branch office under ARC.
The downside to these arrangements is that the GDS vendor can probably terminate them, and the consortium, franchisor or large agency can probably do the same. You have less control over your future than if you have a contract with your GDS vendor.
In any case, I don't see the risk of disruption in the same way you do. After Covid, most if not all agencies owed shortfall penalties, but as far as I know, no agency paid all of them. Rather, penalties were forgiven (or substantially reduced) on signing or fully performing a new contract.
I predict that the same industrywide rollover and forgiveness would happen if there were another major industry disruption. As Zac Brown sings in his hit song, "We're all in the same boat."
The standard GDS contract length is three years for small agencies and five years for large agencies, although some very large ones have gone to six, seven or eight years. What do the big ones know?
The largest agencies proceed from the assumption that GDS offers are going to get worse in the years ahead because the airlines and other suppliers have figured out ways to bypass the GDS. While the bypasses are now cumbersome, they will undoubtedly become less so in the years ahead.
The ability to bypass the GDS means that the GDSs can no longer charge booking fees that reflect their gatekeeper status as near monopolies. Their negotiating clout with the carriers will gradually weaken, so what they can charge them will undoubtedly go down.
Since incentives for travel agencies depend on what the GDS vendors can collect from suppliers, it follows that incentives will go down, too. The big agencies' strategy is to pin down today's incentives for as long as possible.
Although most GDS contracts allow their incentives to be cut under certain circumstances, you are still better off under a long-term contract than you are under a series of short ones, just as you are better off under a long-term office lease in a market where rents are rising.
Mark Pestronk is a Washington-based lawyer specializing in travel law. To submit a question for Legal Briefs, email him at mark@pestronk.com.