The traditional global distribution systems (GDS) are standing firm as lower-cost challenges win more carrier backing.
In its bid to become a major GDS counterweight, upstart G2 SwitchWorks signed commitments with seven major US airlines, winning prepayment of fees for up to eight million tickets from five of the carriers, which in turn gain rights to minority stakes in G2. If they exercise the right to buy, they would join two investors in G2, Norwest Venture Partners and a Texas Pacific Group unit. The prepayments amount to about $20 million. At $2.50 a booking, G2 would cost airlines as little as a quarter of a typical GDS fee.
But Sabre belittled the development, and two groups have objected – the American Society of Travel Agents and the Business Travel Coalition (BTC), which lobbies on behalf of corporate travel buyers. Sabre chief executive Sam Gilliland said of the G2 announcement: "Nothing we've heard is really new at this point. There isn't a lot of definition to what these products are and how they are priced."
The travel groups say that the equity options demonstrate that the airlines would control G2, just as they had controlled the GDSs in the years before the systems were deregulated. The BTC points out that when the GDS rules were abolished, the Department of Transportation said it would "pay particular attention to any airline efforts to establish control over a system". BTC chairman Kevin Mitchell claims that G2 could present opportunities for airlines "to collude on competitive matters". G2 dismissed the accusations.
Of the seven airlines, the five with the investing options are American, America West, Continental, Delta and Northwest Airlines, while United and US Airways are the other two. United has already moved to encourage G2's development with proposed incentives to major travel management companies to use the technology instead of the traditional GDS. United has targeted some $50 million in annual cuts in distribution costs by 2007 in a recent addition to its other savings goals.
Other airlines see G2 as part of a larger strategy. David Cush, a vice-president and sales director for American, says the carrier agreed to support G2 "to ensure a viable alternative" to the GDSs. He stresses that American, which owned Sabre until spinning it off in March 2000, does not see the GDS as about to become obsolete. He stresses that "American Airlines is very satisfied with the products that Sabre and the GDSs provide. It's purely the economics."
Cush says that American plans to cut about a third out of the $350 million a year it spends on booking fees. As much as 5% of the American bookings that are processed from its own website will go through G2 by year-end. This could rise to 20% next year. Cush says American is also working with ITA Software on its GDS alternative which is currently under development.
These projects, he says, will offer "savings in their own right through their compelling economics. They also provide a potential point of leverage as we get into our discussions with traditional GDSs". These discussions come as airline three-year "direct connect" agreements with traditional systems start to expire.
This timing, says Gilliland, is precisely the reason why GDSs such as Sabre would surmount any challenger. With the sunset of government rules, the systems can now negotiate individually with airlines, an advantage that regulation had barred.
Gilliland therefore argues that Sabre plans to stick to its strategy because "we believe we should get a premium from our product, based on our breadth, our reach and our relationships. We clearly want to be the low-cost provider, but that is not necessarily the same as being the low-price provider."
DAVID FIELD WASHINGTON
Source: Airline Business
