In a world where none of the old assumptions about booking behaviour seem to apply, the global distribution systems are seeking new strategies to ensure they remain relevant

Conventional wisdom has it that the global distribution systems (GDS) are an endangered species. While some may caution against such a premature obituary, no one seriously doubts the need for profound change, nor that it is becoming urgent. Most urgent of all is the pressure now being applied by airlines to reduce the booking fee.

Time was when carriers were happy enough to stump up a flat-rate fee in exchange for ensuring that their flights appeared on travel trade screens across the globe. But the lure of cheap online distribution channels on the one hand and the threat from a new breed of low-cost carriers on the other, is rapidly breaking down the old certainties.

Having already scythed down travel agency commissions, the major carriers of Europe and North America now have the GDS booking fee firmly in their sights. At the same time, the GDS risks losing some of its relevance for the travel trade if it fails to capture the web fares that are setting the pace at the low-cost end of the market. Even if web-only fares are, in reality, a small proportion of the entire market offering, the travel agencies need the confidence that they have access to a full range of tickets.

In short, the GDS providers find themselves in much the same dilemma as the legacy carriers. They have to both change their hides and lower costs, comments Thom Nulty, a former president of US travel giant Navigant International and now a Seabury Group consultant.

The inexorable increase in booking fees, rising by an average of 3% a year in recent times, has hardened airline resolve, believes Nulty. For years, the GDS was a lot like labour: it cost more each year, and for some airline managers, the relationship with the GDS was defined by the annual notice of a fee increase, he says. David Jones, vice-president commercial at Amadeus, acknowledges as much when he concedes that the present model has left carriers feeling like "captive customers" and with growing resentment that they pay when the travel agencies largely do not.

Online leverage

Indeed, now that the internet has provided an alternative to mainframe distribution technology, and the low-cost carriers have clearly demonstrated that bypassing the GDS can work, the network majors have all the leverage they need to push through a change in the pricing model. At the same time, the end of regulatory controls over the computer reservation screens - itself a consequence of their waning dominance - is removing the final barriers to more dynamic market pricing. The last vestiges of US regulation are due to bow out later this year and the likelihood is that Europe will soon follow suit.

The relationship between distributors and airlines has to change, and on more than just the cost dimension, says Chicke Fitzgerald of T2Impact, a US consultancy on airline distribution. Each of the big global systems - Amadeus, Galileo, Sabre and Worldspan - is developing a strategy to differentiate itself from its rivals and to enable them to carry on in an industry in which, as with the airlines themselves, survival is not guaranteed.

It is potentially a high stakes game. The four major GDS providers together process comfortably ahead of a billion air bookings each and perhaps another 250 million for hotels, cruises and the like, generating in the process over $6 billion in revenues. For the airlines, their fees roughly equate to 2% of industry expenses.

Discount move

Things began to move last year as the US market leader Sabre set about an aggressive cost renegotiation with its major airline customers. The headline offer from its so-called DCA (direct connect availability)three-year option is to freeze the booking fee for the airline in return for a commitment to stay with the GDS and, importantly, a pledge by the carrier to open access to all published fares, including those previously offered only on the web. Sabre has signed up around 20 airlines to the discount deal. Galileo followed relatively swiftly with a similar offer, and Worldspan has also been obliged to enter the fray.

CIBC World Markets analyst Paul Keung points out that while Sabre may have led the discounting, it had earlier led the drive to raise fees, pushing through annual rate increases that have averaged around 3% over the past five years but spiking with an almost 9% hike in 2001. This year, Sabre will raise airline fees by 2.3%, except for those covered under the DCA discount programme.

There has been intense and largely unconfirmed speculation about the true level of discounting offered under the new deals, but the smart money puts it in the 10-15% range. Certainly, results for the fourth quarter show that the Sabre Travel Network business saw revenues slip by another 3% despite a modest rise in the number of bookings. The group expects booking revenues to stay flat at best, despite stellar growth from its Travelocity online sales arm.

Amadeus has so far resisted pressure to follow the DCA discount route, although Jones does not rule out following suit in the US market, where it is at its weakest, but would do so reluctantly.

For the record, Amadeus has a share of no better than 10%in the USA. GDS market share figures are notoriously contentious, but in round numbers Sabre has somewhere above 40%of the US air market, Worldspan just under 30%and Galileo 20%.

Amadeus draws its real strength from Europe, where it was born and based. Although publicly floated, the GDS is still majority controlled by Air France, Iberia and Lufthansa. And in the home European market it dominates with more than half of travel agency air bookings. Yet even here Amadeus has already had to face the discounts spilling out of the US market, as British Airways signed up with both Sabre and Galileo earlier this year.

While agreeing that the traditional GDS pricing model needs radical attention, Jones argues that the US discounts offer amounts, in reality, to little more than a "three-year truce" with the airlines, rather than the beginning of a sustainable long-term solution.

Value pricing

Last November Amadeus unveiled its own plan in the form of the "value pricing" concept. That essentially seeks to match the value that the GDS adds with the level of booking fee. So a booking made outside a carrier's home market, where customers are tougher to reach, is charged at a premium from one made in the home market.

As part of the initiative, Amadeus also promised to pilot a fee reduction for airlines to distribute low-fare content through the GDS. By mid-February, it emerged that BA would provide that pilot. In the wake of the discount deals with Sabre and Galileo, BA had threatened a booking surcharge that would have added £3 ($5.60) per sector for distribution. Now the UK carrier has agreed to drop the charge to £0.95 and only on its lowest intra-European fares.

Jones concedes that this is only the start. "It is a very modest first step in moving away from the block booking fee," he says, but promises to take the experiment further. For example, itemised pricing is due to be introduced for 2005 through which airlines could choose what services they take, such as pre-designated seating, and would pay accordingly.

Amadeus is equally confident that it can bring low-cost carriers into the fold. "There will be some more low-cost carriers distributing through Amadeus in the course of this year," promises Jones, talking of the need for a radical experiment, under which budget airlines could distribute for a fraction of the normal booking fee.

Jones goes on to predict that agencies too will have to start contributing if they are to secure access to the inventory and services they want. In theory, the travel agencies should already contribute, paying the GDS for the technology, training and access it provides. In reality, the agencies have been offered ever more lucrative incentives by the competing GDSs keen to secure market share. The smarter agencies may even find themselves in pocket from such deals.

Other of the GDSs have been more coy about the agency issue, but, as Jones points out, if airlines are paying less, something will have to give, and if it is not to be incentives then it would have to be service levels or investment.

Online initiatives

To replace revenues from air bookings, another option is to expand the business outside the traditional GDS market and all have been doing that to some extent. Henry Harteveldt, a senior travel analyst with Forrester Research, points to Sabre as taking the most dramatic steps to build its business as a technology supplier and, through Travelocity, a direct player in the online retail market.

Although the Sabre Travel Network continued to make up 75% of the group's $2 billion revenues last year, Travelocity came in at $395 million. More importantly the retail unit showed growth of more than 16%, even as GDS revenues shrank, and is set for around 30% growth this year. Keung at CIBC says Sabre will have to grow Travelocity, which has not posted a profit since it was founded in 1996.

For Sabre's chief marketing officer, Eric Speck, the brand's future lies in using its technology to make the central GDS serve various brand extensions that let the technology bring products directly to travel buyers. "We have already established the technological edge, and we can move from being a wholesaler and a supplier to others to being a major retailer in our own right," he says.

Amadeus, too, has also made a few investments in the web arena. Last year it acquired a 20% stake in Opodo, the site set up by European carriers which it already powers. But it tends to play down the implications of the move.

Of the big four GDS, it is perhaps the USA's Worldspan that remains most firmly committed to its original role as a backroom computer reservations system, serving rather than competing with its travel retail customers, on and offline.

Although the smallest of the big four, coming in at roughly half the size of Sabre or Amadeus, Worldspan has carved out a leading position in the booming US market for online bookings. These account for close to half of its business and Worldspan can point to contracts with Expedia, Priceline and Hotwire, as well as Orbitz, the travel site created by the US majors. Worldspan's selection in 2001 to be the booking engine for Orbitz buttresses its role as the leading internet processor, says CSFB analyst Scott Barry.

Worldspan was the last of the US big three to break away from its airline owners, American, Delta and Northwest. Although it still works closely with the last two, it finally went private in mid 2003. The buyout marked a turning point in the evolution of the US distribution industry by removing the last element of airline control over the GDS, and with that ended the prevailing legal argument for regulation: the long-held theory that airline ownership would make a system inherently unfair to consumers. American Airlines parent AMR had begun divesting Sabre in 1996, completing the spin-off in March 2000, and Galileo was sold off by its airline owners between 1997 and 2000. The two investors behind the Worldspan buyout, a Citigroup unit and the equity branch of the Ontario teachers' pensions plan, have no airline ties, making Worldspan an independent entity.

Amadeus remained airline controlled, but is not a major US domestic player. Worldspan had discussed a possible merger with Amadeus as far back as 1992, but those talks failed. Along with its new backers, Worldspan found itself under new management as Rakesh Gangwal became chief executive. Gangwal is a veteran of United Airlines, Air France and US Airways, and at all three led major restructuring efforts.

He retains a huge affection for the business. "I have always loved the airline industry and, among other things, learned from it the absolute necessity to have low costs and a value proposition," he says.

"As I travel about and as I walk through airport terminals, it never ceases to amaze me or excite me to see employees working to manage the complexities of this business," adds Gangwal from the Worldspan office in Atlanta.

Under Gangwal, Worldspan has renegotiated contracts, including its pacts with IBM and with AT&T to take advantage of excess capacity. "We are working to reduce our costs by as much as 15%. The cost-savings measures will be significant in the initial phase and we will continually evaluate our progress. Worldspan is looking at organic growth in e-commerce and also looking to grow our traditional business. Because of our value proposition, we expect to be one of the few GDSs that will grow."

Worldspan philosophy

Gangwal has a key belief, which he dubs "agnosticism". It is that the company will be a standalone entity that believes in all its customers, that has no relationship that could lessen its value to any. "There is a fundamental, philosophical difference between Worldspan and the other GDSs. Worldspan will not compete with our customers. We are not interested in becoming a travel agency, period. We see it as an enormous conflict of interest," he says.

In the words of Greg O'Hara, Worldspan's executive vice-president corporate planning: "We are happy to provide the plumbing and let someone else do the wallpaper. We don't need our name on everything; we don't need to let the marketing people drive things."

Alan Sbarra, of consultancy Unisys R2A, says that the real question is whether Worldspan can find enough agencies of the right size for its services. Another big question is whether Expedia will eventually build its own GDS system. There were anxious moments last year as Orbitz played hard-ball over a service level dispute, which looked like endangering their relationship. By the end of January, however, the differences were resolved.

Few doubt Worldspan's focus. As Henry Harteveldt of Forrester puts it, Worldspan will stay focused until it is "flipped" or sold. Worldspan executives say a flotation, partial or otherwise, is entirely possible but insist that Citigroup and the teachers' fund are long-term investors.

Galileo and cross-selling

Of the three US systems, the one that has puzzled analysts most is Galileo, which left airline control and later became part of Cendant, an $18 billion conglomerate that owns everything from hotel and car rental chains to real estate and financial service companies.

At first blush the grouping makes little apparent strategic sense, but what emerges is a corporation seeking balanced, predictable cashflows and making the most of opportunities to leverage its subsidiaries by cross-selling within the family.

For example, Cendant's hotel units, which includes the Days Inn and Howard Johnson chains, have long sold to and been sold by its rental car units, Budget and Avis. The company has also cross-marketed its mortgage financing, real estate and tax preparation units. Chicke Fitzgerald of distribution consultancy T2Impact, says that Galileo has fitted in as the in-house cornerstone of the Cendant travel system.

That is a far cry from Galileo's roots as the first truly global travel distribution company, formed by the union of Galileo (a child of BA, Alitalia, and KLM) with Apollo (a stepchild of United Airlines). After going public in 1997 Galileo hit hard times before being brought into the Cendant fold in the middle of 2001.

The head of Cendant's travel distribution services, Sam Katz, says that the philosophy is to transform the travel business "from an order taker to an order maker and from order takers to travel advisers".

Marcie Verdin, Galileo's marketing vice-president for the Americas, adds that the "real competitors" are Sabre and InterActive Corp, parent of Expedia and Cendant itself is building an online presence in the leisure travel market, with and CheapTickets, which came as part of an acquisition spree last spring.

Cendant also sees a future in packaged sales in the leisure travel market, bringing together different travel products at an attractive price. One of the acquisitions made last year was the Colorado-based Neat Group, a small but technologically advanced packaging programmer, and Cendant has set this up as a web-based service directly integrated to Galileo. The Galileo NeatAgent, says Verdin, can wrap inventory into single packages that are priced about 7% lower than competing products, even with a mark-up of 15%.

Katz says that if this part of the business can grow overall volume this year by 10%, Cendant's distribution division can cut its reliance on the GDS by five percentage points to 82% of revenues while increasing the retail travel service by three percentage points to 12%.

For the year, air segments may grow by a decent 8% but car and hotel segments should grow faster by 23%, Katz estimates.

But Harteveldt at Forrester comments that Cendant has "yet to make clear a sharply defined strategy and role for Galileo". He also questions the extent of the reliance on cross-selling. "It is fine as far as it goes but is a little like having your mother-in-law and your sister as your best customer," he says.

As some, at least, of the major GDS players begin to edge towards the online agency model and speculation continues about the potential of online agencies such as Orbitz or Expedia to launch into the GDS space, there are few hard certainties. One, however, is that pricing will have to be much more dynamic and market driven if the airlines are to stay on board.

Source: Airline Business