Could the global distribition systems be about to change their role from travel intermediary to airline technology partner? Amadeus, for one, believes that it is on course to effect just such a shift
As the race continues to reinvent the airline distribution chain, the Global Distribution System (GDS) seems more often than not to be painted as villain rather than hero. The reasons are perhaps understandable. While carriers have scored early victories in slashing travel agency commissions, GDS booking fees remain stubbornly in place. More frustratingly, carriers find themselves with little or no pricing power over the middlemen which they themselves created. Thus the race to go direct to the consumer.
But consider the world from a different perspective. Under this view, the GDS is no freeloading intermediary, grimly hanging on to the past, but that most modern of concepts - a technology business partner. Far from blocking progress, the GDS provides a fast-track to the new world of Internet sales and open systems, capable of handling multiple sales channels and offering seamless sharing with alliance partners. Naturally, the GDS requires a reward for its expertise and investment, but spreads this across its user community over time, thereby offering an economy of scale that any individual airline would struggle to match.
Such is the vision being crafted by Amadeus. It is hardly surprising, given the self-declared determination of Europe's largest GDS to avoid the ugly fate of disintermediation. Significantly, however, such a vision appears to have been winning an airline audience. Over the past year or so both British Airways and Qantas have signed up deals under which they are handing over whole swathes of their commercial systems to be run by Amadeus. Others too are interested.
While Amadeus is hardly alone in attempting to develop an outsource role, it believes that it has something of a head start which ultimately stems from how and why the GDS was first set up. That dates back to the late 1980s when tense discussions were taking place among the European majors as they looked for a local computer reservation system to match the rapid advance of Sabre in the USA. Air France, Iberia, Lufthansa and SAS were working up their own confidential plans, under the code name Amadeus, apparently named after a catchy pop song of the day or so says Hans Jorgensen a veteran from SAS, who was there at the early meetings and now heads the company's airline business group.
Airline users
It was important that there was some real commitment to this new project. "We didn't want the airline partners to compete with us through their own distribution channels, or there was a risk that we could have become the step child that no-one wanted," says Jorgensen. From the start, then, the founders agreed to turn over their sales and distribution operations to be run out of the new project's data centre in Erding, near Munich.
When it went fully operational in 1992, the system was therefore already set up to be used by the airlines in their airport and city ticket offices - effectively giving them the same access as travel agents. "That turned out to be extremely important but we didn't know it at the time," jokes Jorgensen. "We did all the right things for all the wrong reasons."
This concept of airline "systems users" has since mushroomed. There are today 110 carriers using the Amadeus booking system as their own. "You join a community system which is top of the trade," says Jorgensen, pointing to the economies of scale and the technical sophistication that pooling can bring. Not least is the ability to leapfrog "lowest common denominator" TPF programming in favour of a modern Unix open architecture. In most cases, there is no individual charge for new system development since the results will be made available to the community at large.
An obvious potential benefit is that alliance members find themselves already on the same platform and able to interact. When bmi british midland became a systems user in November it joined six of its fellow Star Alliance members. When BA discussed real-time data links within oneworld, it apparently found that some of the smaller partners were already ahead of it, given their capabilities as systems user.
David Jones, executive vice-president commercial at Amadeus, concedes that alliances could form their own internal IT solutions, but he believes that in practice it is likely to remain more a "theoretical possibility than a reality", especially given the internal politics of sharing out work between members.
The community also gets access to multiple channels. Alongside the travel agencies and ticket offices, Amadeus has had to make itself busy building links to new online and corporate sales channels. "We can be the user's window on the world through all channels - web, call centres, corporations or whatever it might be," says Jones. He adds that talk of the GDS being driven out of business by the Internet revolution "was always nonsense".
Despite the crusade by airlines against the old intermediaries, some analysts have been bold enough to argue that there could well be greater rather than less demand for the type of neutral information platforms that the GDS represents. Jones points out that it is a myth that by building a website airlines can somehow avoid booking costs. The risk is that they will simply end up building some other, potentially expensive reservation solution in-house. "This is still an area where there are tremendous scale economies," says Jones. "It makes you wonder whether those airlines which are absolutely intent on direct contact have got it right. In effect, people may be trying to build a new GDS."
Jorgensen adds: "Any airline that wants to go direct will have to compete with the GDS. It's a losing business proposition."
The death of travel agencies may also have been announced somewhat prematurely, comments Jones. For certain there will be consolidation, but that itself may lead to a significant change in the dynamic of the agent-airline relationship. Until now, airlines have had power over the agencies, at least in their own back yard. In effect they have been agents to the airlines. To survive, Jones believes that they will have to become agents to the end user and more sharply focused on their role as travel consultants and advisers. In this newenvironment, it may no longer be a case of airlines paying commissions to the agents, but of agencies being remunerated for their services as providers of managed travel.
"The airlines become indifferent to the channel," says Jones. The change in relationship could also see a breakdown of the old certainties that all inventory is sold through every outlet. "The airlines will be more choosy over who they distribute through and the agencies may become more selective too," he adds. The GDS role is to make sure that all channels are equally available - in effect removing the "agonising" over new technology investment or facing the fear of being "left behind".
Online investments
For its part, Amadeus has already forged links to a host of online travel offerings, such as the partnership deals signed mid-year in Europe with ebookers.com and the fledgling Opodo offering from the region's major airlines. It already owns a share in OneTravel.com, a top ten US travel site, and Australia's leading travel.com.au. In all, its reservation system is available to 3,000 online travel agencies and 40 corporate travel sites, as well as driving over 100 websites for close to 40 airlines. In fact, over 85% of Internet bookings come via airline sites, compared with only 2-4% from agencies.
The buzz around the Amadeus corporate headquarters in Madrid is about the work on the Qantas website. That was set up in summer 2001 and only half a year later is rumoured to have hit not far from a quarter of a million bookings in a single month, or more than 10% of the airline's total sales. The expectation is for that proportion to double over the next year, driven in part, perhaps, by the open competition between Qantas and new domestic rival Virgin Blue. Albeit from a small base, Jorgensen also notes that Internet bookings using the Amadeus web engine from South-East Asia grew 40-fold in 2001.
Corporate travel too is in focus. Besides its own corporate traveller reservation tool, Amadeus is available on the travel management module of the SAP R/3 enterprise-wide computing solution and has also partnered IBM to embed its solution in Lotus notes. In July it also acquired e-Travel, the US-hosted corporate travel business.
Given the growing complexity of channels, prices, codesharing, alliances and more, Jorgensen says that the company was keen to reach beyond the bookings systems which it already captures through the systems user concept. Plans were drawn up for a new generation platform that would go further into the heart of the airline: allowing the inventory and departure control systems (DCS) to be moved into the Amadeus user community. The three airline board members (now minus SAS) have approved the blueprints, which should start to materialise in 2003-4, although they have not yet committed themselves to this degree of outsourcing.
That is more or less where BA entered the frame. It needed to upgrade from BABS, its ageing in-house reservation system, as did Qantas with its related Cube system. However, as discussions progressed BA began to ask why it should not go further and move inventory and DCS over too. And that is what the carrier is now in the process of doing, with a large slice of the BA passenger management system moved to the Erding data centre in early November. BA chief information officer Paul Coby described it as performing "open heart surgery on the airline's core systems" - a metaphor which captures the psychological wrench of outsourcing technology held so close.
David Jones acknowledges that only 3-5 years ago airlines would have held onto such systems as key differentiators "Today you have to accept that these are going to be community systems," he says, although conceding that even now the DCS may still be a step too far for some since it touches so closely on customers. "What we could envisage for example is having a large community for the reservation and inventory systems and a series of sub-communities for the DCS possibility run by us." It is also possible that in sensitive areas such as customer relationship management airlines could ask for exclusive modules.
BA is clearly convinced that it has struck a canny deal. "We have turned a large portion of our IT fixed costs into a variable cost at a highly competitive price," as Coby puts it. Just what the saving is, only BA knows. Jorgensen confesses that he would love to know. However, Qantas has already signed up for a similar deal and 22 other carriers are in talks. The downturn seems to have prompted more interest in these outsourcing solutions, believes Jorgensen.
However, he concedes that the GDS is still not universally loved. As a long-time airline executive, he admits to some sympathy with airline suspicion and occasional frustrations at the sight of the GDSs continuing to make healthy profits (at least by airline standards) and to push through rate rises apparently at will. "I understand the sentiment even if its more emotive than fact," he says. In fact Amadeus has held its 2002 rate increase to 2% at least until May.
He acknowledges that carriers can "feel handcuffed by the GDS" which under European law is obliged to charge all users the same price. However, Amadeus has pushed the channel pricing concept whereby it hands back the savings made by going through direct online sales rather than the more expensive travel agency route. That produces a fee of around €1.50 ($1.36) which is roughly half the normal charge.
Jones comments that while airlines may complain about distribution costs, for Amadeus they make up a staggering 70% of expenses, including agency equipment and training costs. Perhaps that might make airlines look a little more kindly on their brethren in the global distribution business.
Source: Airline Business
