Many have predicted the extinction of the global distribution system suppliers. Yet far from accepting their demise, they are diversifying their product and firming up their plans for the future. Linda Fox finds out more
[On 7 December, three days after this article went to press, Galileo-owner Travelport purchased Worldspan for $1.4 billion. Sabre Holdings, parent company of Sabre was acquired by a private equity consortium for $5 billion on 12 December]
Picture this – it’s early 2007 and senior executives from the global distribution suppliers are sat sweating around the table with a leading European scheduled carrier. The discussion on one side is centred on cost reduction while the other side is intent on demonstrating its value. Stalemate!
Or is it? Rewind to 2003, and those same senior executives sat with more or less the same team from the airline discussing the same issues when the seed of a new fees structure was agreed between British Airways and the GDSs.
The demise of the GDSs has been predicted many times in the past five years and yet all four – Amadeus, Worldspan, Galileo and Sabre – are still here. Faced with the threat of the Internet, low-cost carriers, pressure from the airlines to cut costs or lose content, and the GDS new entrants (GNE), they have managed to survive, evolve and turn situations to their advantage.
Galileo Europe, Middle East, Africa and Brazil managing director Bryan Conway says: “Our strength is the breadth of coverage we offer the carrier. It has other channels in its own market and can justify significant web development there but that’s very hard in markets where it has a frequency of one or two times a week. We have to make sure our value to the carrier is properly reflected in the fee.”
A decade ago no-one in travel guessed the impact the Internet would have on the distribution landscape. The GDSs were well placed to take advantage of it by already aggregating a huge amount of airline, hotel and car rental content in one place.
However, what they did not foresee was that the channel they were powering on the one hand would become a weapon against them on the other. Ryanair and EasyJet set a precedent, but more traditional airlines have followed suit and been successful in driving consumers direct to their websites.
As a result these high-profile low-cost carriers have consistently refused to display their fares on any of the GDSs. Despite moves from the GDSs to create a low-cost GDS – a stripped down ‘Lite’ version of the main system – many budget airlines are standing firm and refuse to participate because the vast majority of their business is already booked on the web.
EasyJet is the only one to have made noises in the past 12 months to look at other channels as a means to increasing the volume of business travellers it attracts.
Booking low-cost airlines has become travel policy for many large corporations now and the unmanaged small to medium-sized market use them almost by default so the GDSs still struggle to encourage their participation or find other ways to integrate that content.
Conway says: “From an agency perspective the key is having the broadest possible range of content. That means trying to encourage airlines that do not participate to do so, and to make sure we continue to add content and maintain our relevance.”
The more traditional airlines quickly responded to pressure from the low-cost model and today British Airways says 25% of all segments worldwide are booked through its website. The success of the web hangs over the GDSs each time they renegotiate the fees structure. And this time round will be no different.
BA senior manager global distribution and BA Miles Deborah Dickens says: “We have been in negotiations with the GDSs since the start of the calendar year and we won’t be extending agreements as they currently stand. We’re not at a stage where there is anything to announce and conversations are difficult.”
This is a clear sign from BA that further change is on the cards and costs will be reduced.
Dickens continues: “We want to work with them and get an agreement that meets our aims, but at the moment we’re worlds apart.”
Historically, airlines have paid the GDSs a handful of dollars per segment booked. The GDS have then passed a portion of that back to travel agencies as an incentive to use the systems. It sounds like a strange business model but the irony is that the GDSs were originally created by the airlines to distribute fares to the travel trade.
Dickens says: “At the moment we see ourselves paying the whole cost of the booking but we see value there for the end customer and the travel agent so the cost should be shared.”
Simultaneously, or more likely because of pressure from low-cost airlines and subsequently the airlines on the GDSs, GNEs began to appear in the US in the form of Farelogix, ITA and G2 Switchworks. However, these have arguably yet to justify any hype that they be a significant threat to the GDS model. If anything the GNEs have realised the complexity of the distribution model and moved in a different direction.
Worldspan vice-president EMEA and Asia Graham Nichols says: “Some of the hype came from them and some from airlines because it was convenient to put pressure on us and say they were moving to the new entrants but they offer very little. Even they have realised they are not an alternative to the GDSs.”
The threat of new business models and the changing travel landscape has forced the GDSs to look for new revenue opportunities. All four seem to agree that the hotel sector is a future growth area and maintaining hotel GDS sales reaps a far higher yield than other channels.
Conway says: “On the Internet the average daily rate is $100 versus the GDS booking of $140 even if they pay $5 a booking the sale could be for five days so from a cost perspective hotels are less critical.”
However, here ends their common ground as they all squabble over differentiation and grapple for share. Amadeus and Sabre are making some success out of offering their services as the in-house technology partner for the airlines. Meanwhile, Galileo and Worldspan are newer to the airline hosting game.
Amadeus and Sabre have also gone down the online travel route purchasing the Opodo and Lastminute.com online travel agencies respectively.
Amadeus UK managing director Stephane Durand says: “Opodo has allowed us to understand and look through the eyes of an online brand to the consumer. It has been a great driver of Amadeus’ research and development and every solution developed for Opodo is instantly proposed to everyone else.”
Durand also justifies the Opodo purchase by saying it was a relatively cheap investment to get into the online space. Given the Opodo relationship Durand is sure that the Internet and the GDS go hand in hand.
He says: “It is a mistake that GDSs are one side of the equation and the Internet is another. The future is a multi-channel blend.”
Amadeus has also repositioned itself as the industry’s technology partner providing software to streamline businesses and improve efficiency. Sabre has taken a similar route in terms of technology provision and online acquisitions but the GDS side of the business argues its point of differentiation is its advocacy role for customers.
Sabre Travel Network senior vice-president EMEA Richard Adams says: “It is about providing value to all your partners. We have become a good advocate for travel management companies. We have stood strong with negotiations with the airlines. Listening to what travel agencies need is top priority.”
The GDS claims to have taken this principle into negotiations with airlines to ensure choice and continue to retain the value of booking through the channel.
Adams says: “We identified three priorities for the travel agencies – full content, protection from service fees from the airlines so they can compete with direct channels, and long-term deals – and it was important that we held out for those goals.”
He adds that according to Sabre research carried out in the US, content fragmentation could cost the industry up to $1.5 billion in terms of service fees, technology and integration.
Sabre believes it has successfully managed to marry the online travel agent side of the business with its more traditional GDS business so far and that the two complement each other. The multi-channel strategy also makes for stronger negotiations with suppliers, it claims.
Adams says: “Our travel agency subscriber base is increasing and travel sold through the GDS is growing.”
Rival Worldspan takes a different view. It was arguably in the lead when it came to the Internet and powered many of the first travel websites. The online sector is still one of Worldspan’s strengths but not, Nichols claims, at the expense of its customers.
He says: “We are beginning to have tangible evidence that our independence is important. We have seen more people seriously interested in that this year than ever before. The threat of competition is bigger as rivals buy more and more travel agencies. I have had discussions with people who say their position has changed and there are a couple of big opportunities on the go where independence is the biggest factor.”
With Worldspan sticking to its roots and streamlining the business to maintain its competitive edge, and Sabre and Amadeus protecting their revenue by developing technology and buying up chunks of the online market, where does that leave Galileo? Like its three rivals the GDS has taken steps to secure its future.
BA.com head Carsten Willert says: “If you look at the core GDSs, as they used to be, their value has diminished because of alternatives or the GNEs – and they have realised that. They have also realised that the incentive model is broken, so each is trying to explore new markets. Galileo has made an effort to aggregate content and is less dependent on transaction fees.”
Nevertheless, a few years ago Galileo started positioning itself as a content warehouse for the travel industry.
Conway says: “Looking at where we have come from, we have always been a distribution route and only very recently moved into the airline hosting environment. Our traditional focus has always been on distribution, so in order to be valuable we have to have the broadest possible range of content.”
Galileo has also focused on ways of getting that content to travel agents through tools such as Galileo Leisure and to the consumer direct through Ebookers and affiliate partnerships with airline websites for the Octopus accommodation and ancillaries’ content.
Whatever the strategy, the GDSs are putting up one hell of a fight for a channel that was meant to expire. And, despite the diversification they predict, the majority of revenue will still come from the traditional fees model for years to come.
Conway says: “We will still move away from fees but they will continue to be the main contributor to GDSs for the next five years. That will vary by market and channel. I don’t see them going away completely but they will more accurately reflect at local market level.”
And Nichols adds: “The greater part of revenue has always been from airline bookings and still is. Revenue from other technology has been increasing but it is still a small percentage.”
But, Conway adds: “There is no question that a different financial model is in place now and that will evolve. Airlines can no longer sustain the fee if there are alternative distribution models. Opt-in is a great start and the way it will progress will be a more clear-headed assessment of where the GDS brings value – from the airline availability being on the shop window to the agent having access to that content. We need to achieve a new equilibrium.”
That will be good news to the airlines as hard negotiations continue in the coming months and we are unlikely to see any early Christmas presents as, faced with external pressures, both sides hold fast.
Increased pressure often leads to market consolidation, as observed in almost every other sector of the travel industry. Although the rumours about GDS consolidation have been frequent in recent years, there has been no deal so far. The latest speculation from across the pond suggests Galileo and Worldspan as likely partners because of their private investor ownership.
Nichols says: “The pressure is there for any industry where there is four players and some part is commoditised. It would not be surprising but it is a very big market and big enough for us each to have a business.”
Meanwhile, as pressure from the airline sector continues and they strike back with their own content and value argument, it seems to be in the driving seat.
BA’s Dickens says: “The relationship between GDSs and airlines is changing. Airlines generally recognise that content is of value and we are using this to rebalance some of the economic pressures.”
Areas where GDSs have diversified
The Galileo Leisure desktop tool for agents has made $15 million in the year since its introduction. The technology gives agents access to a broad range of hotel content as well as transfers and tours. The GDS says 9,000 agents are connected to the system in 53 countries. The average transaction per booking is £500 of which agents earn 10% commission.
MasterPricer Calendar, enabling online agencies to simultaneously display prices, multiple carriers and a range of dates, was launched earlier this year. The product could replace the lists of offers travel sites currently present after a search. The technology could improve conversion rates by enabling surfers to compare dates and prices from international carriers in a calendar-style grid.
E-pricing low-fare technology introduced in the spring is a shopping system enabling retailers to search through thousands of air fare options. The software enables agents and other travel providers to search and book point-to-point fares on a set date or on a more flexible basis. The system also allows retailers to search for fares across a series of weekends for short-break bookings.
As part of its strategy to listen to agents the GDS is trying to provide a rounded travel product combining all fare types, leisure content such as Holidayandmore.com and Holiday
Autos car hire on the GDS. Sabre Travel Network is also planning to launch a European cruise booking tool.
What about the future?
Graham Nichols [Worldspan]: “The total revenue, with booking fees reducing, is going to decline and there is going to be an impact on our travel agencies – there has to be. In the US agents were given the choice whether to carry or secure their content. The vast majority have chosen content and taken a reduction on their incentive.”
Stephane Durand [Amadeus]: “The BA content surcharge was ahead of the worldwide game so we expect it to be very creative in its proposition.”
Bryan Conway [Galileo]: “The point about the BA opt-in three years ago is that it recognises that content has a value to the GDS, airline and the agency. If you get into a situation where fares have been sufficiently depressed they can no longer contain the fees, it becomes uneconomic for them to be distributed by the GDS. The question is how valuable is that content to the people who book it.”
Richard Adams [Sabre]: “The majority of revenue will come from the fees that suppliers are willing to pay for the distribution value, but it will be complemented by other streams.”
Deborah Dickens [British Airways]: “The agreements have worked very well for us but cost pressures have increased and we have reduced cost per sale around the world. We are looking for significant reduction this time as well.”