The GDSs were once watched and regulated by
the government because it was felt that they wielded market power.
And for a long time it seemed that the government had it right,
that the GDSs really did have the airlines over a barrel.
Recent events
suggest that the balance of power has shifted markedly. The
airlines entered into negotiations this year to renew their
expiring GDS agreements, and they got what they've always wanted --
a price cut.
Even though the
GDSs are sharing the pain with travel agents in the form of a
reduction in incentives of 80 cents per segment, it is becoming
increasingly likely that the chain of events won't end
there.
Not so long ago,
the three U.S.-based GDSs were either publicly traded companies or
owned by publicly traded travel enterprises. Soon, if current deals
are consummated, all three will be owned by private equity funds,
the kinds of owners that demand performance. Two of them will most
likely be merged.
The shift in the
airline-GDS balance of power that brought about this year's price
reductions may be the same seismic force that is making them ripe
for buyout offers and changing the industry's structure.
It could be a
coincidence that the GDS industry is now poised for a makeover by
private equity firms so soon after yielding to airline demands for
price concessions, but we don't think so.
We also think there
is every reason to believe that the GDSs of 2008, 2009 and 2010
will be fewer and leaner and meaner than those of 2006.
" " "
GDS distribution
costs represent just a fraction of the many billions of dollars of
costs that the airlines have squeezed out of their systems since
9/11, and while that has been a great achievement, it now
represents an enormous challenge going forward.
For one thing,
there is no longer any low-hanging fruit in the orchard of airline
costs, no quick and easy opportunities for further significant
savings. Second, fuel costs, the one input airlines have the least
control over, now have an even greater leveraging effect on bottom
lines because other expenses have been cut to the bone. Fuel, in
fact, has overtaken labor as the biggest single operating expense
for many carriers.
In this
environment, austerity as a survival strategy may have reached the
point of diminishing returns.
And that is perhaps
why airlines are looking at new approaches to create value: new
investments in passenger comforts and taking a renewed look at
mergers and acquisitions.
Again, look for
fewer and leaner, but maybe not meaner.
" " "
If you subscribe to
the wave theory, you believe that the airlines tend to do things in
waves. You have much historical data on your side. You can point to
fare hikes, fare wars, aircraft orders, bankruptcies, labor strife
and mergers. They all come in waves.
The industry
appears to be on the threshold of a new wave of airline mergers,
and that's OK. We've been mentally preparing ourselves for it. You
might even say we're resigned to it.
But wouldn't it be
odd if there was only one merger? One big airline merger, and then
nothing more. Does anyone believe that could happen?
We would need a new
theory.