Global distribution system (gds) providers and their shareholders are jostling for position in a world where their traditional business model is under threat
The world's leading global distribution system (GDS) providers are under pressure. Changing patterns of consumer behaviour, pressure from airlines to cut costs and new technologies all mean that standing still is not an option. Amadeus, Cendant (parent of Galileo), Sabre and Worldspan have all been positioning themselves to make sure that on the day when the last legacy system is finally switched off, GDSs are still playing a major role in the airline industry.
If they were in any doubt that they need to adapt their business plans to a fast-changing airline industry, the recent moves by several major us carriers to begin processing bookings through G2 Switchworks, the new GDS-bypass offering, was a timely reminder.
It is perhaps not surprising then that GDSs have been on the acquisition trail, making sure their business strategy is the right one for a world in which the future of the traditional legacy model is unclear. Cendant, accused by some analysts in the past of lacking a strong online presence to sit beside Galileo, has been the most active on this front.
In June last year, the real-estate to car-hire conglomerate brought Orbitz, the travel site set up by the major US carriers. This was followed by agreements to buy US wholesaler Gullivers Travel (which owns online travel agency Octopustravel.com) and European travel website ebookers. The buying spree has cost Cendant around $2.7 billion, with Orbitz coming in at around $1.2 billion, Gullivers at around $1.1 billion and ebookers at £209 million ($370 million).
Most analysts agree that Cendant had little choice but to hit the acquisition trail in order to establish a successful online strategy. "This was the only way they were going to get into this market," says Lorraine Cileo, analyst at PhoCusWright.
Online acquisitions
Henry Harteveldt, US-based analyst at Forrester Research, says that Cendant has struggled to make a success of online acquisitions in the past, but adds that "they now at least have a couple of tools in their distribution arsenal in a world increasingly shifting away from the GDS". Harteveldt says Orbitz will provide the successful online strategy that Cendant could not create itself and will also provide improved links with suppliers. Orbitz sources content from both Worldspan and Galileo, but now has the opportunity to move more of this business over to its in-house GDS.
Cendant owns a range of travel-related businesses, including timeshares, hotels and car rentals (including both Avis and Budget), and has developed a strategy based around the possible synergies of owning both content and distribution channels. Now that the group has built up a considerable market share in the online sector, Cileo at PhoCusWright sees opportunities for Cendant to develop more dynamic packaging: the process whereby consumers put together separate components (such as accommodation, flights and so on) of their travel programme.
Others caution that there are dangers in a policy of cross-selling Cendant-owned content through in-house distribution channels. "They will have to be really, really careful," says Harteveldt, warning that other agencies are not going to be happy if they feel they are suffering from discrimination in favour of Cendant-owned content suppliers. Cileo at PhoCusWright argues that this problem can be overstressed. "After all, Sabre owns Travelocity. It was probably the best thing they ever did."
In any case, Harteveldt sees the move by the GDS to buy up online travel websites as a relatively short-term strategy: "They are propping themselves up, trying to build a Berlin wall around themselves, but these walls will come tumbling down." He adds that, in the long run, suppliers are going to want to sell directly to their customers, thus driving down distribution costs.
However, analysts agree that having a foothold in the online sector at the moment is crucial. This does not necessarily mean owning an online site. Worldspan has set itself apart from its peers by concentrating solely on being an IT supplier to the industry, providing the booking engines behind Expedia, Orbitz and Priceline, although the company's long-term involvement in the latter is in doubt now that the site is owned by Cendant. "To some extent they've been lucky," says Jaap Favier, Europe-based analyst at Forrester Research, noting that other GDS were worried about giving former Expedia-owner Microsoft "access to the crown jewels".
Sabre, meanwhile, has also been on the acquisition trail. "They are beginning to look a little bit more like Cendant," says PhoCusWright's Cileo. Last year, Sabre brought SyNxis, a provider of reservation management, distribution and technology used by 6,000 hotels. "They have been building up their b2b business," Cileo says, adding that buying into the hotel servicing sector also provides Sabre with diversification. Sabre's online portal Travelocity has also been extending its geographical reach, buying up the 50% of Travelocity Europe it did not already own (although this excludes the German market) and reaching agreement to take a majority stake in Asia-Pacific online travel website Zuji.
Richard Adams, Sabre Travel's vice- president for Europe, sees this acquisition strategy as the way forward for the industry. "The reality in this business is that content is king," he says.
Late last year, Travelocity won a contract from the world's largest travel agency, American Express, to outsource much of the latter's online leisure travel to Travelocity.com. "This move proves that even leading offline incumbents can't beat the online agencies at their own game," says Harteveldt.
Amadeus, meanwhile, has also been branching out into the online sector. the purchase of a majority stake in European travel site Opodo last year was a move away from its core business of providing services to airlines, whether through GDS provision, IT services or e-commerce. As such, the decision to take a majority stake in European online travel website Opodo is something of a break with tradition. David Jones, executive vice-president commercial at Amadeus, admits that owning an online retailer represents something "a bit different", although the GDS already provides the booking engine for Opodo, as well as other websites including the UK's Lastminute.com.
"What we've learnt is that the needs of online travel players are very different from the needs of our other customers," Jones says, adding that Opodo provides Amadeus with an important foothold in a very important segment of the market. "We can use our experience, our knowledge and our solutions to serve our current and future customers," he adds. As well as being a strategic move, Jones believes that Amadeus can use its travel background to the benefit of Opodo. "We are a travel and distribution specialist with a proven track record. There are clearly ways in which we can help Opodo develop into a successful, rounded travel product." this seems to include acquiring tour operators, judging by Opodo's recent acquisition of France's Karavel.
The plan by Amadeus shareholders Air France, Iberia and Lufthansa to sell majority stake to a group led by venture capitalists BC Partners and Cinven is not expected to have a huge effect on the Madrid-based company, at least in the short term, and was no real surprise. "Amadeus no longer has strategic value, so they decided to cash in," says Favier.
The fact that Amadeus has been sold to venture capitalists has left many analysts pondering what the next moves will be, particularly in a business where a number of observers see only limited growth potential given the move towards direct selling to consumers. "I expect the first priority will be to maximise cashflow by reducing capital expenditure and to seek new clients to leverage the IT business," says Fernando Cordero, investment analyst at Fortis Bank-beta capital.
In the longer term, however, the sale opens up the possibility of consolidation, something that has proved elusive in the sector in recent times. "I believe a final round of consolidation is likely," says Forrester's Favier.
Merger options
Cordero sees US-based Worldspan as the most suitable fit, as there will be too many anti-trust concerns surrounding Sabre and Galileo. Favier agrees, pointing to the near monopoly in Europe that would be produced by a merger between Amadeus and Cendant-owned Galileo. A merger between Sabre and Amadeus would raise similar issues.
On the other hand, Worldspan's strength in North America and relative weakness in Europe is a mirror image of that of Amadeus, which is the number one player in Europe, but has less than 10% of the US market. "It would be a merger of semi-equals," says Favier.
Merging two GDS providers will undoubtedly be a complicated task, although there are precedents. In 1995, Amadeus acquired US-based GDS provider System One, migrating the latter's customers over to the Amadeus system in 1998. In a similar vein, Galileo took over the Apollo GDS (part-owned by United Airlines) in 1993.
Despite the massive technical challenges that consolidation would entail, there may be little choice if the sector is to match the strategic moves unfolding among their airline customers.
"In the longer term, the issue of global alliances is looming in the background," says Favier. Star Alliance partners Air Canada, Lufthansa and United Airlines are in discussions with Amadeus on the possibility of a joint IT platform that would see other star partners join at later dates. Other alliances still have major partners wedded to divergent strategies. At Oneworld, for instance, American Airlines is closely tied to Sabre, while British Airways has thrown its lot in with Amadeus. In a similar vein, Skyteam partners Air France and Delta Air Lines are a long way from finding common ground. However, analysts warn that the GDS providers need to prepare themselves for the day when the first alliance-wide it tender is issued.
In the meantime, Expedia parent InterActiveCorp (IAC) has decided to spin off the travel website, along with 13 other travel brands, into a separate unit. These include Hotels.com, Hotwire and TripAdvisor. "This intelligent move will allow Expedia to operate in a more efficient and focused manner," says Harteveldt, "providing the company repairs its cantankerous supplier relations and succeeds at recent cross-selling efforts."
By bringing all the brands under one roof, Harteveldt expects Expedia's limited efforts at cross selling to increase substantially. However, he warns that relations with suppliers need to be repaired. "Suppliers and agencies have a love-hate relationship with some of the IAC travel brands," he cautions, warning that a sometimes inflexible approach can harm supplier relationships. IAC has said it is working to rectify this problem.
Harteveldt adds, however, that the new standalone unit, which will be made up of businesses that are either number one or two in their respective fields, will have more flexibility, including the ability to raise money for acquisitions, and setting incentives for staff and management. "As a separate unit, the new Expedia will be able to plan its business strategy without distractions."
Expedia, along with Cendant (through the ebookers acquisition) can claim a strong presence on both sides of the Atlantic. In Europe, the top five agencies – lastminute.com, ebookers, Expedia, Opodo and Travelocity Europe – control around 60% of the market according to PhoCusWright. In contrast, IAC, Sabre and Cendant control 93% of the US market, suggesting there is room for consolidation in the European online sector.
While consolidation in the GDS sector has been much talked about, whether this becomes a reality remains to be seen. What is not in doubt is that the major players will continue to jostle for position in a fast-changing marketplace. And, for the time being at least, the GDS will be the main distribution channel, even if its market share is gradually eaten away by online players. "Suppliers have multiple channels to go to market," says Sabre's Adams. "But the reality is that on a global basis, there is no more cost-effective form of distribution, especially for high-yielding passengers."
REPORT BY COLIN BAKER IN LONDON
Source: Airline Business
