When US services giant Cendant first bought the Galileo distribution system, it seemed a deal full of potential. Almost two years later, the synergies have yet to materialise and some question Galileo's ability to adapt in a constantly changing landscape
When the Cendant corporation added Galileo to its impressive portfolio of big name franchises in mid-2001, the move seemed full of potential for both the global distribution system (GDS) and its new parent. So far, though, the transaction has failed to live up to its early promise.
The acquisition seemed to brim with synergies. Cendant, a multi-billion dollar group based in New York, already holds an array of travel and service businesses. The group has claim to be the world's largest hotel franchisor, with Ramada Howard Johnson and Days Inn among its brands. It is also the largest in estate agency with the Century 21 franchise, and takes second place in the car rental business with both Avis and Budget Rent A Car, which it saved from bankruptcy last year. The acquisition of Galileo for $2.9 billion was to add a new strength in travel distribution.
At the time the deal was announced, Henry Silverman, chairman of Cendant could not wait to start taking advantage of the potential synergies. He cited the "excellent strategic fit" that Galileo had with Cendant, with its "fee-for-services business model" and customer relationships within the travel business.
However, the deal was struck just months before the 11 September terrorist attacks changed the landscape. Since then, airlines have become increasingly resistant to GDS rate hikes and sharpened up the search for alternative distribution channels. The clout of the GDS will shrink even further if the US Department of Transportation (DoT) is able to see through its new proposed rules on distribution, which would essentially deregulate the relationship between carriers and the GDS providers.
So Galileo, along with GDS rivals Amadeus, Sabre and Worldspan, faces a set of challenging, industry-wide circumstances to which it must learn to adapt. Analysts believe that to survive and thrive, it must also be more aggressive in exploiting the synergies it claims exist among Cendant's many travel companies. It must also beef up its e-commerce and Internet initiatives, where it lags far behind US rivals. Worldspan now powers Orbitz, Expedia and Priceline, while Sabre owns Travelocity.
"Galileo has always been a poor second to Sabre," says Bill McFarlane, a California-based management consultant. "There were hopes and expectations when Cendant bought it that there would be a lot of new activity and creative deals that would propel Galileo forward. We have not seen this yet."
Instead, airline cost-cutting has dominated, with distribution seen as an area of expense over which they still have some control. Carriers continue to whack away at distribution fees, eliminating travel agency commissions and seeking ways to sell tickets directly to consumers, preferably through their own web sites. Orbitz, the online travel agency created by five US majors, is developing a direct-connect process to allow it to enter airline inventories to sell tickets and bypass Worldspan entirely: thus avoiding the GDS fee.
Flexible approach
Pending regulations will also push change, McFarlane predicts. The proposed DoT rules give the airlines the opportunity to negotiate, rather than be told, the deal. "They will allow carriers to pick and choose which GDS they'll be in," he says. "It all boils down to revenue. GDSs won't be able to charge the kind of rates they have in the past, they won't be able to increase rates annually. The financial models will change, and GDSs will have to be a lot more flexible with pricing."
Heeding airline displeasure with the current fee structure, both Sabre and Galileo introduced new pricing plans last October. Both gave those carriers that agreed to provide access to their entire inventory - including web fares - a 10% discount on booking fees, fixed for three years. In January, Galileo took this a step further, offering 20% on distribution fees in exchange for web fare access.
Despite these initiatives, some believe that the GDS providers must more radically revise their fee structures if they hope to retain their ever-shrinking share of airline business. Henry Harteveldt, of Forrester Research, says: "GDSs every year have been handing airlines price hikes of 2-3%, regardless of the economic environment. But airlines can't afford to sell through GDSs when the average ticket price is 20% less than two years ago."
Besides launching pricing initiatives, Cendant has also purchased further travel and technology companies including travel websites Trip.com, Cheaptickets.com and Lodging.com, plus Highwire, an online booking tool for corporations, similar to Sabre's GetThere. It has also created what it calls a "Business Builders" programme, which offers Galileo travel agents various goods and services - such as discounts on new home loans from its mortgages arm - in exchange for increased bookings of Cendant hotels and car rentals.
Sam Galeotos, president and chief executive of Galileo International says that the GDS underpins the entire operation. "It's the main content aggregator and processor of transactions. It is the key technology that acts as the link between suppliers and associated distribution outlets online and Galileo agencies," he says.
Cathy Schetzina, associate editor of the newsletter Travel Distribution Report, says: "Cendant is beginning to find ways to reap the benefits of owning businesses in so many sectors of the industry, but it could be doing more to pursue more aggressive cross-brand partnerships."
Others say Cendant lags far behind its rivals both in e-commerce and agency technology. "Cheaptickets and Trip.com are going nowhere; they have no clear market value or proposition," says Forrester's Harteveldt, pointing out that rivals Travelocity, Orbitz and Expedia have "more consumers, high consumer awareness and strong supplier relations".
In the e-commerce arena, Cendant faces "an uphill climb" says Paul Keung, analyst for CIBC World Markets. "It's going to be a real challenge. There's definitely room for another player in the online business, there are some decent growth opportunities, but they won't ever move into the top three."
Equally troublesome, according to one well-placed distribution-industry observer, is Galileo's inability so far to develop a web-based engine for travel agencies, as all of its competitors have. Until it develops a solution for agencies that is delivered directly over a browser and does not require a CD to be loaded on each workstation, Galileo will continue to be behind the other GDS companies, the observer believes.
Like its rivals, Galileo is affected by declining fortunes of air transport. Depressed traffic means fewer agency bookings, which translates into less GDS revenue. Galileo is more vulnerable than the others due to its long-standing ties to United Airways, now languishing in bankruptcy protection. The airline is one of Galileo's top three booking customers and its only hosting client, so its demise would potentially major financial impact on the GDS.
Overseas expansion
One bright spot on Galileo's horizon is its continuing expansion into overseas markets; today, approximately 65% of its revenues are generated outside the USA, a number Galeotos expects will climb to 70% within five years.
To that end, Galileo this year said it had entered an alliance with electronic ticketing company Et-China, and is increasing its stake in Webjet, an Australian online retail travel site.
Another transaction this year should serve as a wake-up call to Cendant - the sale of Worldspan to two venture capital firms by its three airline owners, Delta, Northwest and American Airlines. But Samuel Katz, chairman of Galileo International and chief strategic officer of Cendant, predicts the sale will "place a big debt burden on Worldspan and prevent it from investing in technology the business needs".
However, Galileo may be underestimating Worldspan's potential. "Galileo perceived Worldspan was for sale because it was in financial trouble, but that was never it," says one observer. "It was about Worldspan's owners getting out of their investment and putting their money into their core business. Galileo will realise that Worldspan will be around for a while, that this was not a bailout."
Source: Airline Business
