It's a brave new world out there for the global distribution systems. Competition - from traditional rivals to online new entrants - is swirling about them; government rules that regulate them are being rewritten; and in some cases their relationships with their two most important customers - airlines and travel agents - are in disarray. No one knows for certain how everything will ultimately shake out. About the only constant right now for the GDSs seems to be change.
A prime catalyst for this turmoil was the decision by the airline owners of the two largest systems - Dallas-based Sabre and Chicago-based Galileo - to go public, an admission, in part, that the airlines were ready partially to sever their ties with the GDSs. Sabre and Galileo are respectively the number one system, with 32.8 per cent of global computer reservations market share by air segments booked and the number two, with 30.7 per cent. Their owners no doubt also wanted to cash in on investors' growing enchantment with technology stocks, which significantly outperform their own.
AMR, American Airlines' parent as well as Sabre's, sold 18 per cent of Sabre's common stock to the public in 1996 and still owns 82 per cent. The 11 airline owners of Galileo sold 35 per cent of that system's stock in 1997. Today United is the largest airline shareholder, with 32 per cent, followed by KLM with 10 per cent, British Airways, SAir Group and USAirways each with 7 per cent, Alitalia with 1.5 per cent and Aer Lingus, Air Canada, Austrian, Olympic and TAP each with less than 1 per cent.
Initial public offerings have had positive effects on Sabre and Galileo. Most importantly, going public has given them access to new investment capital. Galileo has used its funds to acquire its distribution companies like Apollo Travel Services in the US. Sabre has invested $139 million in cash and $100 million in assets in a new venture with Abacus, the Asian GDS, which had had an exclusive marketing relationship with Worldspan. The latter is suing Sabre over this. Sabre owns 35 per cent of the joint venture.
Sabre's move to strengthen its foothold in Asia, which until the region's recent economic woes was the world's fastest growing aviation market, looks like a wise strategic move. Richard Park, a computer services analyst for Merrill Lynch, says the new joint venture will give Sabre control of 40 per cent of the Asia-Pacific market. And it also gives Sabre a leg up in the contest to win China's as yet unawarded contract to develop a CRS for its giant market, believes Tom Woodall, publisher of the Travel Distribution Report.
Officials of Air France, Lufthansa, Iberia and Continental, owners of Madrid-based Amadeus, the third largest system by air segments booked, have also been talking for months about taking their GDS public. However, the move is apparently on hold as the company decides whether to merge with Atlanta-based Worldspan, the fourth largest system, owned by Delta, Northwest and TWA. It is rumoured that an IPO and merger could occur simultaneously. Woodall says an Amadeus-Worldspan combination would be a good fit, since Worldspan would give Amadeus the US presence it sorely needs and Amadeus could fill Worldspan's gaps outside the US. The combined system would overtake Sabre as the largest GDS.
These financial transactions notwithstanding, the GDSs are still, as London-based David Guillebaud, chairman of the travel and transportation industry practice at Arthur D Little says, 'half-pregnant', when it comes to severing totally their ties with their airline owners. And that is one reason why relations between the two parties have grown so rocky. There are signs that each side is in some way trying to distance itself from the other. For the GDS, this can be seen in Galileo's move to end its marketing agreements with United and US Airways, under which the two carriers sold its Apollo product to travel agents in the US market, an action being challenged in court by United. Galileo evidently feels it can handle the job more cost-effectively than the airlines.
Fed up with ever-increasing fees imposed by the GDSs, the airlines are even more vocal in their criticisms. Carriers say the GDSs are not justified in raising fees annually, because telecommunications and computing costs are falling and not rising. The GDSs counter that they have to increase fees because they must create new products, like custom-made electronic ticketing programmes, to satisfy their airline customers' needs. Many carriers are asking the US Department of Transportation, which recently issued a notice of proposed rulemaking as a preliminary step towards revising GDS regulations, to rein in GDS pricing. US Airways, for example, has asked the DOT to institute similar guidelines for GDS fees to those created by the European Commission for its market. Meanwhile, the Council of Ministers of the European Union was slated to be studying proposed changes to its GDS code of conduct. According to Sefik Yuksel, Association of European Airlines general manager of trade affairs, the new code will probably require travel agents and online travel providers to follow its regulations and will institute the joint display of rail systems with those of airlines. The EC code is expected to go into effect by next year.
Other signs of airlines' disenchantment with GDSs are moves by America West - not a stakeholder in any system - and Continental, which owns 12.4 per cent of Amadeus, to set up systems to allow travel agents or corporations to deal directly with the carriers, bypassing GDSs entirely. America West said last year it would develop such a system with Microsoft, which has since backed out, says Bill Spilman, America West's senior director of product distribution. Spilman says the airline is 'looking at other options for developing a travel agent booking product that would bypass the CRSs'. However, he admits 'it will not be quite as easy as it sounds to build this. And I don't know how much business could shift with it. I don't think it would change the business radically.'
Continental has been more militant about its concerns. Earlier this year Galileo said it would impose a US50 cent surcharge on each electronic ticket it issued. Incensed, Continental said it would turn off its electronic ticketing option in Apollo or Galileo, thus preventing travel agents from using these systems to issue its tickets electronically.
Galileo ultimately rescinded the surcharge, claiming Continental's action 'would have caused undue difficulties for travel agencies.' Despite this, Continental has said it will set up a 'menu of solutions that would make electronic ticketing available to everyone in the distribution chain,' including an Internet connection that would allow a travel agent or a corporation to go directly into Continental's inventory to book an electronic ticket.
Rusty Tunnard, an Arthur D Little principal, is not sanguine on the Continental proposals, especially if they involve giving a travel agent a new piece of equipment to access its inventory. 'If the new system can't be picked up easily on a PC, the minute you talk about another box, you're dead. Ease of use will be a major issue,' he says.
Yet another sign of airline moves to establish some independence from the GDSs lies in the active efforts being made to encourage online booking through web sites and promote directly booked electronic tickets. These are rapidly gaining favour in the US.
Bill McFarlane, a San Rafael, California-based consultant who was formerly general manager of Galileo in North America, predicts that, by the end of this year, every US airline 'will have a web site with booking capability. This is a first step toward moving away from total reliance on CRSs.' McFarlane also believes the rising popularity of electronic ticketing, booked directly with an airline either by phone or through its web site, makes GDSs 'extremely vulnerable. With electronic ticketing, you don't need a GDS to drive a ticket. It allows the carrier's host to handle the whole transaction; the airline doesn't need an intermediary to handle it.'
Some airlines - including Northwest, US Airways and TWA - have also signed agreements with Via World Network, a Minneapolis-based alternative distribution system and a wholly owned subsidiary of Andersen Consulting. Via, whose only clients so far are Andersen's 30,000 staff, offers booking and travel management services both online and offline through a voice recognition system. Its contracts with the carriers give it direct access to their inventory. However, it also uses Worldspan to issue paper tickets when required and to access all other carriers' inventories.
Via president Elmer Baldwin says the company is working 'diligently' to win over American, Delta and United, but he declines to quantify Via's performance.
But the GDSs have not been sitting back and letting the online revolution pass them by. Sabre has been especially proactive, developing a series of Internet products for use by both travel agents and corporate customers. In addition, it has created an online booking system called Travelocity that passengers can use to buy their own tickets directly. Some believe this could alienate travel agents.
Galileo's efforts to move into the online world include the development of special disks that travellers can use to book their own trips. It also is acting as a booking engine for the Internet Travel Network and Preview Travel, two online travel agencies. Worldspan is doing the same for Expedia, Microsoft's online travel agency, and for Priceline, a new online service that auctions off airlines' tickets. Amadeus is creating internet-related products both for travel agents and its airline customers.
What the future holds for both the GDSs and their dealings with airlines is unclear. The trend towards multi-airline alliances is certainly muddying the waters. The six members of the Star Alliance are customers and/or owners of differing GDSs, as are Northwest and KLM. Would-be partners British Airways and American own two different systems, Galileo and Sabre. And American's newest alliance partner is USAirways, another Galileo owner which late last year signed a 25-year contract with Sabre to buy information services. Park estimates that contract to be worth between $3 and $4 billion.
Many officials expect the growth of alliances to create little change in the carriers' relations with GDSs. However, Steve Cossette, Continental's vice president of distribution planning, expects this growth eventually to lead to dealership relationships between large travel agencies and alliances, in which the two parties would deal directly with each other. Jean-Claude Guez, a Paris-based partner with Andersen, predicts that alliance partners may one day choose to go with only one GDS (if they work with more than one), or form a totally new system that only serves the alliance. 'The business of global alliances today is to cover a wide portion of the globe with the network, to serve clients in a seamless fashion. They need to go into a sophisticated customer relationship approach with a lot of information systems behind them, and there will be complications if they must interface with two GDSs,' he believes.
Sources say Northwest and KLM are heading in this direction, with KLM's North American reservations services reportedly about to be taken over by Worldspan, also host for Northwest, following the shut-down of KLM's North American reservations operation.
Also unresolved is whether or how much the GDSs can or should diversify, to lessen their reliance on the ever-restive airlines or simply boost revenues. Sabre is the most active in this arena. According to Park, by the end of this year 68 per cent of Sabre Group's business will be CRS-related, while 32 per cent will be from information technology outsourcing. This compares to 70 per cent CRS and 30 per cent IT in 1996. It appears it will remain in the lead here. James Barlett, chairman of Galileo, says his company feels 'the CRS's business has much potential for growth. Also, it is our core business; we know it well and do well in it.'
Longer term, the GDSs do not appear headed for extinction. Some predict they will look largely as they do today. Others, like Woodall, expect them to become 'more diverse entities than they are today, using new channels of distribution.'
Andersen's Guez thinks the GDSs will ultimately resemble an onion, 'with the inner circle the core GDS system. The GDS will have to realise it's not just dealing with airline providers and travel agents. There will be new animals in the zoo, corporations as direct clients, electronic distribution tools like Via and others. The GDSs may become tools to help travel agents, marketing arms for alliances, and service providers.' Guez even believes they could move into the logistics business, offering tracking services to cargo carriers and other shippers.
It is a brave new world for GDSs, with vast stretches of unexplored territory. The challenge is to chart it wisely.
Source: Airline Business
