KLM, TAP Air Portugal and US Airways fully divested themselves of their shareholdings in Galileo by cashing in their stock in the GDS. KLM had owned 10.2% of Galileo, US Airways 6.7% and TAP less than 1%. In addition, United, which had owned 31.9% of the company, reduced its shareholding by more than half, to 15.2%.
In response to the carriers' actions, Galileo's board authorised a purchase of up to $500 million in its common stock in the open market or in privately negotiated transactions.
Once Galileo's public offering - valued at $1.65 billion - closed, 70.2% of the GDS was publicly owned, while eight airlines held the remaining 29.8% of the company: United, with a 15.2% stake; British Airways and Swissair, each with a 6.7% stake; and Alitalia, Air Canada, Aer Lingus, Austrian and Olympic, each with less than a 1% stake.
United plans
United says it will use proceeds from the divestiture to invest in its core business, improve its creditworthiness and return cash to shareholders. The divestitures and stock sale follow moves by United and US Airways to stop selling Galileo's Apollo system.
Last year, US Airways outsourced its information technology services to Sabre, which is 82%-owned by AMR, parent of its marketing partner American Airlines. Most recently, United put its hosting business - which manages its inventory and which had been handled by Galileo - up for sale, an action which United and Galileo decline to discuss publicly.
Bill McFarlane, a San Francisco-based consultant, who formerly ran Galileo's North American operation, says the four airlines' decision to reduce or fully sell their stake in the GDS reflects "the changing face" of distribution in the travel industry. At one time, airlines felt it was important to own a piece of a GDS, so they had control over their destinies. Now airlines see the GDS as an important distribution channel, but not the only one.
"They're forging relationships directly with customers on the Internet, with priceline.com and other on-line services. So while the GDSs are still important, they're no longer the only game in town." He believes the carriers will profit from a stock sale because Galileo stock is probably at its pinnacle.
Star system
McFarlane believes that United, in its quest for a new vendor to handle hosting, will probably consider bringing all Star Alliance carriers into one system, which could be developed by an existing GDS or by a new company, perhaps a joint venture between United and Lufthansa.
"One challenge for all alliances is that they will have to look and act like one airline," McFarlane explains. "It's hard if they're using five or six different systems around the world. They need to look at ways for their technology to allow them to work together."
Meanwhile, Karl Keirstead, who follows GDSs for Lehman Brothers, predicts the stock sale will not "seriously disrupt" Galileo. "It could be positive for the computer reservation system ownership and the decision-making process will be less cumbersome. This may free management more than in the past," he says.
Calling hosting a "low-margin business", Keirstead says United's decision to end its hosting relationship with Galileo will have a minimal financial impact on Galileo.
In other developments, Sabre officials are considering a possible spin-off of Travelocity, the company's on-line booking system. The investment community has been anxious for Travelocity to go public, to take advantage of the stock market's current love affair with Internet offerings. But Sabre has made no formal decision to take the Travelocity booking system public.
McFarlane predicts, however that a spin-off is "only a question of time" and suggests that the US Department of Justice's charges of anti-competitive activity by American might have delayed an initial public offering.
"Sabre might want American to have a better public stance before it pursues a spin-off," he says.
Another analyst, Stephen McClellan, from Merrill Lynch's office in San Francisco, questions whether Sabre will ever spin off Travelocity. He says "they might sell pieces of it to portals like Yahoo, in exchange for access to the portals' users".
Finally, Priceline.com, which runs an on-line auction system to sell airline tickets, has gone public, reaching a market capitalisation of $10 billion. Delta Air Lines, which began participating in Priceline's system last year after obtaining warrants to buy almost 19 million shares of Priceline's stock, bought a stake worth $1.3 billion on the on-line company's first day of trading, when Delta's market value was itself $10.6 billion. Continental, too, has now signed up to the system.
Source: Airline Business
