Analysis: Travelport-Worldspan deal could have huge implications

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For agencies, changes mean less incentives, better technology

By Nadine Godwin

Agents said they see two prospects in the current GDS ownership changes: a likely reduction in GDS-paid incentives and the prospect of better technology. They said those good news, bad news scenarios are not mutually exclusive.

Harold Stevens, the president of Stevens Travel Management in New York, described himself as "simplistic" when he said that everyone in the buying or merging mode "wants to be bigger and stronger, to have more assets and to cut costs."

With fewer GDSs, he said, each vendor becomes more powerful and the trade's position becomes weaker, so incentives could drop and contract conditions would be "much tougher." The only "open factor" for each agency, he said, will be its clout with the GDSs.

His agency uses three systems: Amadeus, Sabre and, primarily, Worldspan.

Michael Dixon, president of Travelink, an American Express rep firm and a Sabre agency in Nashville, was less concerned about the potential for lost income, figuring the three survivors would be very competitive.

In any case, he said, the ownership changes to Worldspan and Sabre could yield owners "with stronger financials to develop the technology."

To contact the reporter who wrote this article, send e-mail to Nadine Godwin at [email protected].

Travelport's $1.4 billion proposal to acquire and merge with Worldspan would be a massive undertaking that could have ripple effects across the GDS, online and airline hosting industries.

Although the full impact could take a couple of years to be felt, Travelport could eliminate one or two of its GDSs, forcing agencies to switch vendors and alter long-held business practices. Phasing out a system could also force an airline or two to transition to a new host for internal reservations systems.

And given Worldspan's prominence in the online world, any changes could spur new alliances and alter supplier relationships and other partnerships.

On the integration front, Travelport's predecessor, Cendant's Travel Distribution Services, had a poor record in selecting, pricing and blending acquisitions.

For example, Cendant acquired Cheaptickets in 2001 and tried to operate it alongside a kindred enterprise, Trip.com. But the two-brand strategy flopped, as the inventory and customer base were overlapping.

With losses piling up, Cendant shuttered Trip.com in 2003.

Travelport still is engaged in a prolonged effort to integrate under-performing e-Bookers in Europe with Octopus Travel, Orbitz and Cheaptickets.

So if the Blackstone Group's deal to acquire Worldspan closes, as projected, in the second or third quarter of 2007, Travelport will face huge challenges.

With $953.8 million in revenue in 2005, Worldspan, a leader in travel e-commerce and powering online agencies, has been bleeding customer share as its clients diversify GDS vendors.

Headquartered in Atlanta, Worldspan has more than 1,700 employees and provides GDS services to clients in more than 60 countries and territories around the world.

Meanwhile, newly independent Travelport notched 2005 revenue of $2.4 billion while still part of Cendant, and its Apollo and Galileo GDSs have around-the-world ties to 52,000 travel agencies.

Travelport is the No. 2 player in the U.S. among traditional agencies, with Sabre sitting at No. 1. Worldspan, with a weak presence outside the U.S. and a relatively small presence among traditional agencies in the U.S., is probably the leading player globally in providing booking engines to online agencies.

By 2006 standards, pairing the bookings of Galileo and Worldspan would give the beefed-up Travelport 52% of the U.S. GDS market share, besting Sabre's 41%. Globally, Travelport would command 40% of GDS market share, compared with 31% for Amadeus and 29% for Sabre.

Travelport President and CEO Jeff Clarke, who came on board this year with a reputation as an accomplished integrator at CA (formerly Computer Associates), said two weeks ago that Travelport would not rush to make changes and would keep the three GDSs, Apollo, Galileo and Worldspan, up and running for now.

Travelport agencies in North America use the Apollo system, while Travelport agencies outside the U.S. largely use the Galileo system.

In theory at least, merging the systems would generate significant cost efficiencies, but it could also threaten to cause massive disruption among agencies.

One industry source, who declined to be identified, said he did not believe Travelport executives had yet made a decision on the fate of the three systems.

"I expect Travelport will undertake a prudent review of the platforms," the source said. "You can't rush from three to two to one."

If Travelport should ultimately decide to phase out the Worldspan system for travel agencies, those customers might get inducements to switch to Apollo.

"The Worldspan agencies are Travelport's to lose," said Douglas Quinby, a PhoCusWright analyst. "Travelport needs to tread lightly."

An opportunity for the competition

Any transition could be an opportunity for competitors.

"I don't see any reason why Amadeus and Sabre wouldn't jump in," Quinby said. "If an agency is forced to switch its GDS platform, there's no reason necessarily to go to the new owners of Worldspan. Agencies could go anywhere."

Still, observers noted that one of the key value propositions in the Travelport-Worldspan transaction would be economies of scale and consolidating staffs and facilities.

Phasing out Worldspan could complicate things for Delta and Northwest, which are hosted by Worldspan.

Analysts agreed that more strategic moves would come into play.

Blackstone might consider selling or going public with some of Travelport's online businesses as it considers which of the hodgepodge of 21 businesses fit into its strategy and which don't.

"Some pieces make more sense than others," Quinby said. "Some are holdovers from Cendant's muddled acquisition strategy."

To contact reporter Dennis Schaal, send e-mail to [email protected].

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