Jane Levere NEW YORK
Global distribution systems face an ongoing challenge to create a sustainable, profit-making role for themselves in an environment increasingly dominated by the Internet and online distribution.
The past 18 months have been a tumultuous period for the four global distribution systems (GDS) - Amadeus, Sabre, Galileo and Worldspan - with the latter two currently standing at a particularly crucial crossroads.
Galileo, the GDS with the second highest number of air segments booked, last year saw its bookings and earnings seriously decline. To right itself and maximise shareholder value, the company hired an investment bank to determine its optimal future shape. Although no transaction has been concluded, it is believed that either a leveraged buy-out or sale is in the offing.
In addition, in early 2001 American Airlines parent AMR said it would buy the assets of failing carrier TWA, including the carrier's 26% ownership of Worldspan. It seems clear that AMR, which last year divested itself of its ownership in Sabre, has no interest in permanently maintaining ownership of Worldspan, leaving that system's future up in the air.
Ownership issues notwithstanding, all four companies also face ongoing challenges, the resolution of which will determine their long-term viability. Inextricably linked, these include creating a sustainable, profit-making role for themselves in an environment increasingly dominated by the Internet and online distribution, and while also developing other sources of income besides the service fees they charge airlines.
According to Garrett Communication's 2001 GDS Yearbook, these fees rose last year, continuing several years of annual hikes, and ranged from 4% (Worldspan) to 8.7% (Sabre).Such increases continue to alienate carriers, which industry observers uniformly predict are likely to respond by finding less costly distribution systems to replace the GDS.
Brave new world
According to Garrett, each GDS is developing its own unique strategy to position itself in what the yearbook describes as "the brave new world" of travel distribution - a world in which the companies will be forced to compete for share with the Internet and other non-GDS distribution systems.
Headed by new president Bill Hannigan, recruited in late 1999 from the telecommunications industry, Sabre has opted to make several acquisitions to diversify its operation. Notable are its purchase of GetThere.com - a California-based specialist in corporate booking software business and a former competitor of Sabre's BTS operation - and Gradient Solutions, an Irish developer of e-commerce solutions for travel.
Earlier this year, Sabre also sold its airline outsourcing business to software giant EDS for $670 million, enabling it to focus on the faster growing and more lucrative travel marketing, distribution and software business. The company also continues to benefit from a 70% ownership in top travel web site Travelocity.
Galileo, according to Garrett, has begun to embrace the Internet "after some hesitation" about its web strategy. It fully purchased Trip.com - a web site for business travellers who are not governed by corporate travel management policies - and has also developed a new site, GalileoTravel.com, that directs consumers to Galileo travel agencies near their homes. Its diversification campaign included last year's formation of Quantitude, which sells network services to other companies, and Galileo Wireless. Galileo has also bought software developer Terren Corporation.
Amadeus pursued its own diversification strategy last year. It bought travel agency consortium Vacation.com as a means of gaining in-roads into the vital travel agent community, and teamed with Terra Lycos to purchase a controlling stake in OneTravel.com, an online travel agency. More significantly, Amadeus entered the airline services sector for the first time by signing contracts with British Airways and Qantas to provide reservations, yield management, inventory control and other services.
Meanwhile, Worldspan, which Garrett calls the "most nimble GDS in terms of grabbing business and expanding its franchises", continued to pursue the online market. It has solidified a client base that already includes Expedia, Priceline and the highly controversial Orbitz, an airline-owned web site that is positioning itself as a prime competitor to Expedia and Travelocity.
Solidified client base
According to Jesse Liebman, Worldspan's senior vice president and general manager of the worldwide travel supplier services, Worldspan currently processes over 50% of all travel transactions that originate on the Web.
As the GDS community revisits its strategy, the biggest challenge will be to find new sources of income. Chicke Fitzgerald, a Tampa-based travel distribution consultant, states that the firms must wean themselves "from their reliance on booking fee income. They've got to find a new business model."
Fitzgerald says features of these business models could range from new revenue sources, such as consulting fees and advertising income, to new ways for companies to compensate each other. In this vein she cites Priceline's payment of stock warrants to Delta Air Lines in exchange for Delta seat inventory. "The GDSs that survive," she explains, "are going to have to be very diversified in their lines of business. They will have to be extremely open in the ways they communicate, and adopt technology standards that allow people to plug in and play with their systems."
Dallas-based travel distribution consultant Nick Bredimus discusses the biggest single threat to distribution companies: "Airlines still think that booking fees are too high. If there is any way they can circumvent GDSs, they will."
Bredimus believes most of the reason for the high booking fees is the lack of viable alternatives. "GDSs are just opportunistic," he says. "As long as airlines are dependent on them, they can charge what they want. Airlines must invest on their own in alternative systems that are not the GDS model."
Most believe the airlines will take this step and one industry observer, Matthew Fassnacht, who follows distribution systems for JP Morgan, believes Orbitz might eventually transform itself into such an alternative system. "If Orbitz were smart, it would not go after consumers, which is stupid, but become an alternate GDS for travel agents working on the Internet," he suggests." They need to find a way to build an alternate system that's cheaper than the current one, and offers lower fees to airlines. But their biggest challenge will be signing up enough agents."
According to Fassnacht, non-GDS distribution systems have already begun to establish themselves. One is Navitaire, a Minneapolis-based company that took over Via World Network and connects corporations to airline reservations systems, providing ticketing and sales reconciliation services.
At least one GDS official, Worldspan's Liebman, claims his company ultimately will be able to counter such moves by carriers. "If airlines pursue direct connections, we will find a way to be successful in that environment," he claims. But when asked what these ways might be, he says only that "the collection of things we will need to do is for now hard to assess."
Experts say the structure of fees paid to travel agents worldwide, which have continued to rise inexorably, must be reconsidered too. Agency fees - which GDSs fund through income earned from travel suppliers - must change, warns Bill McFarlane, a San Francisco-based management consultant. "GDSs have to recognise that they're in the distribution business, and need to compete on the value and service they provide to agencies rather than fees paid to them. The fees must remain static or fall back."
Jennifer King, a security analyst who tracks distribution systems for Merrill Lynch, believes "the big, defining factor now for a GDS is its market share among online travel agencies. Worldspan and Sabre have the largest market share of online agencies because of Travelocity and Expedia. I see Sabre gaining market share through Travelocity, while Worldspan has got to be gaining market share through Expedia and Priceline."
Bredimus believes another issue that will continue to dog the GDSs and impede their progress is ongoing uncertainty about global airline alliances. "If alliances' futures were more certain, you could see partnering of automation. But alliances are not as stable as people predicted they would be. Some type of shakeout is due," he predicts.
| GDS market share - 2000 | ||
| GDS | Market share | Travel agency locations |
| Sabre | 33.0% | 66123 |
| Galileo | 28.2% | 41,200 |
| Worldspan | 13.6% | 20,252 |
| Amadeus | 24.9% | 52,559 |
| Source: Garrett Communications 2001 Yearbook | ||
Reduced system costs
Scott Alvis, senior vice president of travel supplier distribution at Sabre, says that one of his company's greatest challenges is to get "general system costs down to ten times less than what they are now. We are in the process of rearchitecting the core of Sabre so we can do pricing transactions at a much lower unit cost." These lower system costs could ultimately create cost savings Sabre could pass on to airlines and other suppliers.
Perhaps one of the greatest unknowns about the future of GDSs is how many will remain long-term. Predictions on this vary, with estimates ranging from two to four. Merrill Lynch's King says she would not be surprised if the four systems continue operating, unless someone is acquired.
In a recent report on developments with Galileo's potential sale, she predicts that "the longer we wait without resolution to its corporate structure issue, the less any premium over the current price is likely to be in the event that an acquisition or buy-out is proposed. Furthermore, there is significant downside risk if the plan is abandoned due to lack of interest."
JP Morgan's Fassnacht, on the other hand, expects that at least "two, probably three" systems will survive, but he predicts the services they offer will be "vastly different than those offered today". Specifically, he believes systems will run under an à la carte business model. Rather than paying a booking fee for everything, airlines will pay separately for each activity, and GDSs will price each service individually," he said.
He believes GDS technology could evolve "into something newer, with more robust content, such as real-time customisation of vacation packages".
Source: Airline Business
