"They have had a very easy life for a very long time. But distribution is no longer secure. Supply is no longer secure. Other people have replicated the technology functionality at a lower cost. There are not just four players, but a whole bunch of others who can do exactly the same thing and can do it better". Timothy O'Neil-Dunne of US e-commerce consultancy T2N International conjures up a sobering picture of the challenges facing the computer reservation system (CRS) providers or, as they prefer to be known, the global distribution systems (GDS).
He argues that the traditional distributors of airline inventory are under threat from direct airline Internet sales and online travel providers as they break the monopoly once enjoyed by travel agents. Not only is the Internet undermining the core CRS client base, it is also generating new providers of search engine technology and database management, thereby undermining the CRS technology edge. By "building walls" of technological, global distributors raised the cost of entry into their market. "The Internet has blown this away," O'Neil-Dunne says.
Andrew Light, analyst at Salomon Smith Barney in London, believes powerful "web robots" developed by other technology companies could circumvent the CRS and says that, "even if there is still growth, the core bookings business is stagnating [in terms of pricing and value]. Airlines are not happy with the pricing process and are putting pressure on this part of the business".
Yet this bleak outlook contrasts sharply with the recent performance of the world's largest CRS providers.
Net profits of all three listed GDS grew in double figures last year. Madrid-based Amadeus was the star performer, recording a 58% profit gain, excluding specials, and increasing revenues by 15%. Operating margins were 17%, even higher than the 16% recorded in 1998. The company's share price in mid-February was double the value it was when it launched its initial public offering in October.
Sabre and Galileo also recorded significant sales and profit growth. All the big four CRS providers, including privately owned Worldspan, saw a significant growth in the bookings and the income from fees that they generate.
Geographical expansion outside the slow-growing US market, is part of the story. "We are seeing tremendous growth outside the US market," says Sue Powers, vice-president, sales and marketing, at Worldspan. At the end of last year, the wholly airline-owned company established a joint venture in Peru servicing a "significant" proportion of Latin America with another similar initiative in the region imminent.
Sabre is also spreading its coverage in the Far East, with more bookings coming from the acquisition of a 35% share in the region's largest GDS, Abacus International, in 1998. More is set to come in mid-year when All Nippon Airways' Infini reservation system migrates to Sabre. Amadeus, meanwhile, has benefited from a contract to power the Korean Airlines Topas reservation system, and also benefited from its strong position in the European travel market.
Car rental, hotel and other leisure bookings, although accounting for just 10% of all bookings, have also been growing rapidly. Galileo, for example, saw this segment grow at three times the rate of overall bookings.
But it is not just booking volumes that are robust. The CRS providers are also successfully defending individual booking fees - part of Amadeus' 12% increase in airline booking revenues last year was down to a price increase.
E-commerce growth
The CRS providers justify their pricing policy in terms of the improved services they are providing, services they say more effectively target customers through new technologies and in particular, new on-line distributions channels.
Far from being a threat, online distribution appears to be opening up a land of opportunity for them. Take any well-known Internet-based travel provider, and you'll find a GDS "Most online search engines are connected into a GDS. [Others] are not able to duplicate the functionality of the GDS," says Jim Libinsky, executive vice-president, operations, Galileo.
Airline web sites - which account for about 98% of online air travel bookings - are included. Galileo is behind the web sites of United Airlines and Sabena. Worldspan provides the search engine - or transaction engine - for 80 airline web sites. Amadeus claims to provide the search tools for 55 airline sites.
All four GDS are also bidding to do the same for the joint airline website planned in Europe. Worldspan has already won the contract for T2, a similar initiative in the USA, according to industry insiders (they add that the company's success may be linked to the fact that some of the website owners, Delta Air Lines and Northwest Airlines, are part-owners of Worldspan).
"For airlines that want a full-service web site - hotel, car rental and other leisure services - a GDS provides the perfect transaction engine," says Powers.
Going for the consumer
CRS providers are also providing the travel search backbone for online travel agencies such as Microsoft's Expedia, virtual consolidators and auction sites such as Priceline.com. But their ambitions do not stop there.
Sabre, with a 70% stake in leading online travel agent Travelocity, has led the charge into direct participation in the online travel market. After the merger with Preview, officially approved in March, Travelocity.com has become the world's third-largest e-commerce site and global leader in online travel sales. With $1.2 billion in sales, it is also one of the top 10 travel agents in the USA, according to Sabre. A distribution deal with Internet service provider AOL will enhance its market strength.
Sabre does not see any contradiction between its dual role as supplier to the travel industry and a competitor. "We are concerned with the distribution of travel. Therefore, we are going to be in any channel that is in the business of distributing travel," says Pam Craig, vice-president of marketing for Sabre electronic travel distribution.
She believes the rules of the game have altered dramatically: "In the past, GDS companies competed over the provision of content. Increasingly competition will be for the [end] customer."
Amadeus, Galileo and Worldspan have taken note. The other CRS providers originally said they were "never going to own a travel agency. That was a wrong decision," says O'Neil. "They are now saying they have got to get into the Internet travel business. When you have a fragmented distribution system, you cannot rely on a single distribution channel to control your business."
A late starter compared with Sabre, Amadeus is keen to establish itself rapidly and at a relatively low cost. It plans to do so by setting up "e-travel" joint ventures with e-commerce companies.
In February, Amadeus launched e-viaggi.com with Italian newspaper publisher Gruppo l'Espresso. By mid-year a similar venture will be set up with Terra Networks of Spain, the e-commerce subsidiary of Spanish telecoms firm Telefonica. Amadeus provides the search engines for each of these companies, which target Italian, Spanish and Portuguese-speaking markets, says Hans Jurgenson, vice-president, airline partners.
Amadeus also recently signed a five-year agreement with Vacation.com, which, with 9,400 affiliated travel agents, is said to be the largest travel agency consortium in the USA. The plan is to develop a "leisure platform" based on its own search engine.
Galileo, meanwhile, finalised in March the acquisition of the 80% it did not already own in virtual, mainly business, travel agency Trip.com, the "third most travelled web site" in the USA, says Libinsky. "Trip.com goes after the consumer," he says. "We tried to stay away [from the consumer market] as long as possible," he adds. The outcome of this acquisition is a soon-to-be announced "consumer Internet offering" which already has the participation, in principle, of British Airways and US Airways.
Worldspan is more cautious. "Our strategy is not to compete for the consumer. We are the enabler behind the scenes," says Powers. Worldspan provides the engine behind Expedia and Priceline.com, a role it claims makes it the leading GDS in terms of the number of online bookings. But it, too, has been buying stakes in online ventures.
Going mobile
The next distribution channel coming into focus for the GDS is wireless. Their aim is to provide travel data and booking capabilities via wireless networks to telephone handsets, personal digital assistants and notebook computers.
To this end, Sabre recently signed a deal with Vodafone of the UK, while subsidiary Travelocity clinched a separate deal with BT Cellnet. In March it added Oracle.com to its growing partnerships in the wireless applications protocol (WAP) market. Amadeus, meanwhile, has partnered with Swedish mobile phone company Ericsson and, in March, was to have begun a WAP pilot programme with Norwegian regional carrier Wideroe for reservations and bookings.
But despite their bid to establish their own presence online, the GDS suppliers have not forgotten their traditional "bricks and mortar" travel agencies, which still account for the lion's share of bookings and, with the exception of Sabre, sales. One major online initiative is to entice the travel agents to GDS-hosted web sites such as Galileo.com. The continued loyalty of travel agents is also being sought with increasingly sophisticated corporate travel products.
Linking to ERP
By linking internal cost and revenue management systems into their corporate booking capabilities, staff make reservations using a GDS from the desktop while fullfilling cost-reducing company travel policies. In return, CRS providers promote "their" travel agencies.
The partnership struck last year between Amadeus and enterprise resource planning (ERP) system provider SAP, which is the information technology platform for 80% of Fortune 500 companies, was in line with this strategy. The move has also helped to close the gap with Sabre and its long-established 'business travel solution' (Sabre BTS), which appears to be going from strength to strength, adding new major blue-chip companies to its client list last year.
Sabre says each new customer boosts bookings through "a preferred travel agent" and this bloats its slice of an estimated $4.2 billion corporate travel market. "We are encouraging people to use Sabre travel agencies. This in turn encourages agencies to become Sabre agents and travel providers," says Craig.
So is it all really plain sailing? Certainly new entrants attempting to cut CRS out of the travel distribution chain have fallen on their faces in the past. "Arthur Andersen put a new booking product on the market a couple of years ago, and pulled back 18 months ago," says Worldspan's Powers. "Their value proposition was to go directly to individual airlines and bypass the travel agency and the GDS. It turned out to be a bigger undertaking that they anticipated." In the end the US-based new entrant was forced to go to a CRS supplier to provide the pricing engine for its system - and was refused.
Yet airline reservation systems are no longer monopolised by the CRS. US information technology (IT) supplier EDS entered the airline hosting business with its Continental contract in 1991 This was extended last September for a further eight years and, apart from reservations management, will include network and voice systems. EDS also runs Aeromexico's reservation system.
GDS continue to argue, however, that they are uniquely placed to offer the combination of distribution services airlines and travel agents need. Central to this is booking technology.
Last year, Sabre stole the limelight with its online Flight Finder product, which searches for flights at specific fares. Worldspan and Expedia are due shortly to announce a new Internet-based engine. And the USA - with WalMart's own online travel service favourite - is soon to embrace Amadeus' "intelligent" search engine, developed by Massachusetts-based ITA Software, of which it owns 20%. Amadeus claims its new product will lead the pack with one-stop multiple queries which integrate all the disparate data involved in a fare search.
O'Neil-Dunne is unimpressed. "The ITA product is not new, not unique and not integrated with what Amadeus is doing."
Diversification
To maintain their current market position and hedge themselves in a rapidly changing business, GDS have clearly diversified considerably.
Sabre is the most extreme example of this strategy. It is positioning itself as a leading information technology provider to the travel industry - a business its believes will grow in double digits over the next few years - and, as a result, has reduced its reliance on travel distribution to 60% of its $4.3 billion revenues. Bookings now contribute to less than 50% of sales.
"Sabre has a 50% share of the [airline industry] global outsourcing business," says Matthew Fassnacht an equity research analyst specialising in Internet and e-services at JP Morgan. But 80% of the potential IT outsourcing market is still in-house, he adds, and Amadeus, Galileo and Worldspan are also "looking at that market". Galileo was at one stage intent on ending its hosting of United's reservation system, but has "done a 100% turnaround", he says.
Amadeus, which generated sales of less than $200 million in IT-related services last year, frames its ambitions in the terminology of e-business. "The question driving the airline view is this: how well is the supplier committed to become our partner in e-commerce? Anyone can take on an inventory and or departure control system. But who can add value in the e-commerce sector?" asks Jurgenson.
Time will tell if the GDS have stolen the march on would-be competitors. Salomon Smith Barney's Light believes cutting the remaining equity links with airlines will help: "GDS now have more in common with companies like Microsoft and Oracle than with airlines."
O'Neil-Dunne is not convinced that CRS providers have figured what economic model they will follow now that the old one is collapsing around them. The current approach of "locking up a lot of distributions channels" is a good start, he says, but "the ultimate threat is that the value that GDS give is less and less. People want better and better access to the primary source of data. You really need more functionality than can go through a GDS mainframe."
If they want to provide that, he adds, then "the GDS suppliers better get their dancing shoes on fast".
|
Number of bookings in 1999 | ||||||
| Booking type | Amadeus millions | % growth | Galileo millions | % Growth | Sabre Millions | % growth |
| Air | 343.9 | 5.3% | 320.6 | 1.0% | 331.1 | 4.1% |
| Non-air | 28.8 | 2.5% | 29.3 | 3.5% | 38.8 | 9.5% |
| Total | 371.7 | 5.1% | 349.9 | 1.2% | 370.1 | 7.1% |
| Non-air booking include car, hotel and other leisure activities. | ||||||
| GDS financial results 1999 | ||||||
|
| Amadeus $ million | Change | Galileo $ Million | change | Sabre $ million | change |
| Revenue | 1,272.2 | 14.5% | 1,526.1 | 3.1% | 2,435 | 5.6% |
| Operating income (EBIT) | 215.4 | 18.3% | 384.8 | 11.6% | 399 | 10.9% |
| EBIT margin | 16.9% | - | 27.1% | - | 16.4% | - |
| Net income | 109.2 | 58.4% | 223.0 | 11.0% | 264 | 15.2% |
Source: Airline Business
