Ownership changes and consolidation have reached global distribution systems (GDS) as they adapt to a tougher business environment
Consolidation has swept another industry, without the harsh glare of publicity, consumer suspicion, legislative outrage or investor speculation. The main reason is that unlike the airlines, the firms that distribute airline seats were ripe and willing for mergers and buyouts. Richard Eastman, the Eastman Group principal who advises distribution companies, says "this group had been poised for a makeover for several years".
The global buyout frenzy of 2006 brought sweeping changes through the sector, putting two of the major players into private hands within weeks of each other. Travelport, the former Cendant unit that had already gone private, snapped up Worldspan, the struggling but widely used US-based GDS for $1.4 billion in December.
That put into one group Worldspan, the Galileo GDS and the Orbitz internet site. At about the same time Sabre, the nearly ubiquitous GDS that owns Travelocity, other consumer-oriented internet sites as well as a major airline consultancy, went private in a $4.5 billion deal financed by the Texas Pacific Group and other private equity giants. Travelport itself went private in August when buyout firm Blackstone Group bought it in a $4.3 billion cash purchase from Cendant.
Eastman praised the participation of private equity, saying it took these technology-dependent firms away from the pressures of short-term investor deadlines. Others though were not as sanguine. The big question raised by some is whether the new owners will take a long enough business perspective allowing these companies to develop the tools they need, or if they will "flip" or spin off and sell major parts of their portfolios, says Norm Rose, who works for the PhoCusWright consultancy group.
But senior analyst Henry Harteveldt of Forrester Research says that even if some divestitures are possible, the companies realise the value of their portfolios and of having different brands for different consumer segments.
At the Sabre Group, officials are reassuring it will be "business as usual" at the company, says Gordon Locke, vice-president of airline and marketing. At the time of the buyout, Sabre chief executive Sam Gilliland told employees that the new owners, Texas Pacific and Silver Lake Partners, are "investing really for the long term. And I think that's really healthy for us as we think about long term versus what ended up being quarterly pressures."
The Texas Pacific tentacles reach throughout the travel industry but two points of contact in particular suggest that Gilliland's confidence is well placed: the private equity firm also has a stake in G2 SwitchWorks, the new technology entrant that has attempted to develop an alternative to the traditional GDSs.
Gilliland said some "limited forms" of collaboration between Sabre's GDS platform or other Sabre units and G2 are possible. But the most encouraging sign of long-term dedication by Texas Pacific is that its executive suite includes Karl Peterson, a travel-technology veteran who developed Hotwire, one of the earliest "opaque" discount internet-booking sites. On these sites travellers specify the route they want to fly, but don't pick a specific airline.
Hotwire is now part of Expedia, but Peterson remains the head of the Texas Pacific travel-related businesses and takes a personal interest in its holdings. Sabre's Gilliland says that the new owners had not discussed spinning off any Sabre units, adding: "I think they believe as we do that the portfolio should remain together."
Locke says that much of Sabre's focus will be on reducing costs internally. The company has announced it will cut a total of 180 UK-based workers at Travelocity Europe, which includes Lastminute.com, as well as others in the Travelocity business.
Sabre's strategy remains essentially unchanged. It has a portfolio that is behind the scenes with its various airline-operations and management products - the basic GDS as well as several strong consumer brands.
But it is in the Travelport universe, another portfolio heavy on consumer brands, that the biggest questions of future strategy arise. Many analysts have criticised Worldspan for lacking a long-term strategy after it was sold in 2003 to private equity by its former airline owners, Delta, Northwest and TWA.
Jean Collier, Galileo's senior director of airline services for the Americas, says: "Galileo and Worldspan truly complement each other in both technological and in geographic strengths." Travelport already envisions cross-selling some of the Worldspan advances such as its Rapid Reprice program to Galileo customers and sees cost savings of as much as $50 million a year, in addition to cross-selling benefits.
One big question is the future of Orbitz, which became part of Travelport in a $1.25 billion deal in late 2004. Analysts speculate that Travelport is thinking of partially selling or spinning off Orbitz. Such a sale could easily bring in about $1 billion, and raises an important question about the continuing value of brands when the owners are changing. Neither Travelport nor Sabre directly addresses any sale possibility, but Collier says: "certainly we are aware of the value of the brands".
The important reality in the competitive landscape is that, until Amadeus becomes more of a force in the US, these two giants, the Sabre Group and the Travelport grouping, will be locked in vigorous rivalry on price and service. And Amadeus does indeed have plans, says Harteveldt. "Amadeus has made it clear that they want to grow in the States but not at any price and not callously. They have diversified widely."
In the longer term, Eastman says: "The central challenge will be to find ways to see the costs are borne by the users not the airlines. This is what Amadeus understands so well." David Jones, executive vice-president commercial of Amadeus, sees this as the firm's global role as it increasingly becomes the technologist or "go to" company for travel. And Frederic Spagnou, the Amadeus airline business group vice-president, says it is focusing on understanding airline passengers to identify their future technology needs.
This positions Amadeus ahead in the next trend within distribution, says Eastman. This is revenue growth by "selling up". The idea is to persuade travellers to buy a higher class of service or options such as a preferred seat, the ability to change travel plans at the last minute, or buy onboard meals, flight insurance or other ancillary products. This selling up or unbundling, pioneered by Air Canada, is gradually finding acceptance with US carriers. United Airlines hopes to roll out a pricing plan in which it offers options on top of what it calls "bare fares", says planning vice-president Andrew Taylor.
United is contemplating offering fares that do not earn frequent-flyer points along with slightly higher fares that do earn loyalty points, just as the fare structure at Air Canada offers levels of loyalty-point earning power. At US carriers, these options are now mostly offered at airport check in but the challenge to the GDS will come when airlines sell up at the time of booking, says David Cush, senior vice-president global sales at American Airlines.
As these developments unfold, the GDSs are hell bent on securing their future. As Sabre's Gilliland notes: "Our confidence in the GDS model has never been stronger."
In the long-term, Harteveldt says, the GDSs may see a lower level of bookings, "perhaps to less than half within a three-year time perspective, but they have proven that they are not going away. They will be smaller but they will be players."
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