The Bankwatch

Tracking the consumer evolution of financial services

Expedia takes a hard line with American Airlines (AA) | why this is critical for the next phase of ecommerce – UPDATED

This is a good thing.  The problem with much of ecommerce is that it places a nice usable front end on to existing infrastructure.  It does not necessarily remove intermediate steps and costs and usually adds a layer of cost.  Online banking is the perfect example.  That is the root of consumer frustration that online should be cheaper but is not.

Expedia stops selling American Airlines tickets | ft.com

American Airlines and its online partners have struggled for months to agree terms as their contracts expire. American wants to pay the sites less and has pushed them to connect directly with its own computers rather than using intermediaries called global distribution systems.

As you may know the travel industry all use a couple of intermediaries, with Sabre being one of the largest.   So when your travel agent looks up a flight for you they are looking at Sabre, not AA United or BA.  Why should Expedia connect to Sabre too?  Sabre take a commission.  If Expedia uses Sabre then the only potential saving for Expedia is the cost of a travel agent.  It does not lever the competitive capability of Expedia.  By suggesting the removal Sabre Expedia places themselves in direct competition with Sabre.  (Taking that further, travel agents could always link through Expedia in the future, but thats a different point.)

By integrating direct to AA, Expedia can properly lever AA’s information and do the same with the inevitable other airlines as they come on board too so as not to lose competitive advantage.

They key though is elimination of the transaction cost inflicted by Sabre.  This is the real value in ecommerce – elimination of middleman costs and infrastructure that was built based on human front ends, in this case travel agents.

Relevance to Bankwatch:

This is why I see BankSimple as a good idea but really a first step, and little different than say a PC Financial or mbanx (both Canadian – one alive, one gone).  It has taken Expedia years to build up the customer loyalty and volume to be able to take a strong stance with AA.  Can AA and the other airlines afford to not fall into place with Expedia will be the question for 2011.  Clout is one way to get inside an old industry.

Banks have their Sabres throughout in terms of independent payment networks, ATM networks, cheque clearing, EFT /ECH networks, credit card networks.  How can the BankSimples and other new entrants get past those and disintermediate and eliminate the real costs that layer on to become bank services charges.

UPDATE; 3rd Jan, 2011

There are always two sides to every story.  This from the WSJ indicates that it is AA who pulled themselves from Expedia.  The reason is partly  the same as above, ie to remove Sabre from the transaction, but also to remove Expedia too, and thus retain the commission for themselves.  WSJ speculate the idea is to get out of the cycle of competing on price, and introduce competition on features such as wifi.

Time will tell if they can retain market share this way.  At a minimum it will mean an enhanced internet service from AA and the logic above will stand, which is to remove middlemen costs that were built to support pre internet sales distribution.

Further update: Barrons takes my tack and has quotes to support it.  Maybe WSJ missed this one.

A story and a theme to follow with interest.

Written by Colin Henderson

January 2, 2011 at 22:03

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