CRSs wrestle with the World Wide Web

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he major CRS companies -- Sabre, Worldspan, Amadeus and Galileo -- have significant problems to address, and one of them begins with three Ws.

Some $13 billion in travel was booked on the World Wide Web in 2000, and that's a 64% increase over 1999, according to the Travel Industry Association. Supplier sites that bypass agents and go direct to consumers accounted for 67% of those bookings last year.

The TIA also found that 71% of online travel planners said they were less likely than before to use agents.

On the corporate side, businesses booked $4.9 billion on line in 2000, and Forrester forecasted that will increase to $20.3 billion in 2004.

Some of this business still goes through the CRS companies -- but much of it doesn't.

Some suppliers have long wished for a way to effectively reach the consumer without going through a CRS, but only recently have technology and economics cooperated to make it possible. And "possible" begins to look "attractive" as CRS booking fees continue to rise.

Those fees, which drive the CRS companies' profit margins, have been rising 7% annually for a decade, according to Global Aviation Associates. Air carriers alone paid $1.7 billion in booking fees in 2000, and the CRS companies all implemented increases this year.

Airlines radically reduce their distribution costs when they sell through their own sites and avoid those fees.

GAA, an aviation consulting firm, estimated that airlines' distribution costs for their own Web sites are 3% to 5% of the ticket value and escalate to 15% to 20% (including booking fees, commissions, clearinghouse fees, and sales and processing costs) when bookings come through agents.

The CRS companies see few alternatives to booking fee increases, although all four have strategies to diversify revenue streams.

Worldspan has experimented with a new corporate booking fee structure, but it has not taken off.

Tony McKinnon, who heads Amadeus' North American operations, said CRS companies should not introduce "lockstep" increases in segment fees, but he said booking fees will continue to rise.

"If suppliers look at the alternative in trying to replicate what the GDS does for them, that would be a very expensive proposition," he said. "There will be a balance. There will be continuing pressure from suppliers to hold those fees down, and there will be efforts by the GDSs to recover their costs and maintain margin."

FIGURING IT OUTGlobal bookings in 2000 Total
Bookings
(millions) %
Change Air
Bookings %
Change Nonair
Bookings %
Change Revenue
(billions) %
Change Sabre 467.1 6.4 422.9 5.9 44.2 11.9 $2.6 7.5 Amadeus 393.9 6.0 363.9 5.8 30.0 7.7 $1.4 15.3 Galileo 345.1 (-1.4) 315.8 (-1.5) 29.3 (-0.1) $1.6 7.7 Worldspan 172.1 11.8 156.2 11.3 15.9 16.1 *N/A N/A


The companies' total revenue for 2000 is before special items.

* Worldspan, a privately held company, would not release revenue figures

In addition to economic challenges, the CRS operators are facing daunting technical issues in the Internet age.

The core technology at Sabre, Galileo, Worldspan and Amadeus is tied to legacy mainframe systems that handle massive data volumes. Galileo's system, for instance, processed 105 billion transactions last year and averaged more than 294 million information requests per day.

While retaining mainframes, the CRS companies are adapting to the Internet.

All four companies have rolled out Web-based agent platforms and other new technologies to interface with those big-box computers. Worldspan and Amadeus, for instance, have introduced client/server-based search engines; Galileo offers XML Select for third-party developers, and Sabre's Virtually There gives agency clients access to their itineraries on line.

With giant computers come sizeable problems. Mainframes use older programming languages and record-based file systems that can't accommodate lickety-split search-and-retrieval operations. Even the simplest mainframe programming alterations can be costly and time-consuming.


But no one says that mainframes are going away soon, and CRS officials, while conceding that Web bookings and new technologies will make gains, are confident that their legacy technologies are here to stay.

"I don't think there really are alternatives to the GDS," said Tammy Bobbitt, Galileo's vice president of Internet business planning. "What we provide is massive transaction-processing at incredible speeds. We have huge databases. This is not something that is easily replicated.

"Many of the Web initiatives or things that are put out there with these new technologies still have a GDS behind them," Bobbitt added. "Their scalability is very questionable. Not that there aren't new technologies. We're looking at them, too."

So, given these economic and technical pressures, which way is the industry heading?

In the near term, Sabre believes that the agency channel will suffer a double-digit decline in its share of global air bookings.

Against that background, Sabre's Ellen Keszler, senior vice president of North American travel agency solutions, said the key to success is to extend "the travel value chain" beyond shopping, selling and fulfillment toward stimulating demand during all phases of the travel process with offerings like net fares, wireless solutions and customer relationship management tools.

Worldspan, a force in providing the back end to high-profile Web sites, projected that the agent channel will continue to be its core business, but the percentage of its revenue from e-commerce will rise significantly.

Worldspan is "looking at any technologies that will enable travel agents to continue to be the aggregator of travel information for their clients," said Cheryl Weldon, Worldspan's vice president of agency marketing.

Some experts, meanwhile, say it's likely that new business models will eclipse the CRS companies' power.

Henry Harteveldt, senior analyst for technology research firm Forrester, said airline-owned Orbitz, if it installs direct-connects to suppliers, could be a "potential new-generation GDS" and the first serious threat to CRS dominance.

Although Orbitz is not focusing on a travel agency option now, Harteveldt said, it could shift its business model to include an agency channel.

Rod Cuthbert, chief executive of destination-activities distributor Viator, said the Web will bring agents more options -- from selling through a CRS or booking through an agency channel on a site like Orbitz. Many suppliers have already established agent sites with commissionable bookings, he noted, and this trend could gain ground.

Viator built an agent area on its site when it found that at least one of its CRS partners couldn't -- or didn't want to -- give agents optimum functionality in booking Viator's theater tickets and scenic cruises through the CRS.

If direct connects increase, one technical challenge would be the creation of "super PNRs" to integrate air, car and hotel bookings from disparate sites, said Harteveldt.

"In the future, there will be an array of different suppliers pushing agreements and new buying arrangements," Cuthbert said. "The market will be much more fractured. Agents will be able to make their own decisions. If there's easier navigation [outside or in addition to the CRS], then marketing through the GDSs will face attrition and their numbers will go away."

The CRS companies, Cuthbert said, are betting that agents will opt for an orderly environment that these companies can create as aggregators. "But as they say back home [in Australia]," Cuthbert said, "that's 'a big ask.' "

Strategizing for the future

The CRS companies are jockeying for position and developing new strategies. The following are some key highlights and developments.

Sabre

Sabre, the largest CRS in bookings and revenue, has a reputation for being forward-thinking and making cagey business decisions.

It has strong positions in other channels through its controlling stake in Travelocity.com, the leading consumer travel site by some measures, and Sabre Business Travel Solutions, which was fortified by last year's acquisition of industry-leading GetThere.

Some competitive hits in recent months have certainly drawn Sabre's attention and will probably elicit a response. USA Networks, the cable giant that already has a majority interest in the Hotel Reservations Network, will purchase a controlling stake in Travelocity's chief rival, Expedia. And, Cendant is pursuing its purchase of Galileo.

As for growing the CRS by acquisition, Sabre believes it couldn't get regulatory approval to purchase another CRS company in North America. So part of its growth strategy is to diversify its revenue stream through European investments. Sabre took a 51% stake in Dillon Communication Systems of Germany and acquired Gradient Solutions in Ireland last year. In the second quarter of 2001, Sabre became a minority investor in a new European travel site, Karavel.com.

In July, Sabre completed its exit of the airline infrastructure outsourcing business by selling it to EDS in a $660 million deal. Sabre's shedding of this low-growth business, along with another facet of the deal, having EDS operate Sabre's data centers and network, means that Sabre can accelerate growth and free up money to focus more heavily on travel marketing and distribution.

Amadeus

A big guy at #2 in global bookings, with particular strengths in Europe and Central and South America, Amadeus was a relative late-comer to the U.S. market in 1998 when it assumed total control of System One.

But, Amadeus, based in Madrid, is aggressively increasing its relatively small agency share in North America through acquisition. On the leisure side, it scooped up Vacation.com's 8,400 agencies in November 2000 and the consortium, in turn, acquired the 2,000-member Action 6 in May.

On the corporate front, Amadeus' strategy is to partner with corporate agencies to get new clients. The Government of Norway recently contracted to use Corporate Traveller. And, earlier this month, Amadeus added to its corporate self-booking tool product line with the acquisition of e-Travel from Oracle.

Travel agency distribution will remain its primary focus five years from now and beyond, Amadeus believes, but its e-commerce and new IT Services businesses will be important revenue sources.

In e-commerce, Amadeus signed a deal to power the proposed European travel portal, Opodo, which is owned, Orbitz-like, by nine European carriers. The CRS company's strategy is to gain Web share through regional alliances with major players. In that regard, Amadeus has several joint ventures with Terra Lycos in Europe and the U.S., including their combined 55% stake in OneTravel.com.

Galileo

Galileo's prospects are debatable because of Cendant's pending $2.9 billion acquisition, which still must clear regulatory overseers in the U.S. and Europe.

On the one hand, Cendant, with its multiple hotel and car rental brands, has considerable marketing clout and deep pockets. But, observers wonder whether the deal will further diminish Galileo's market share and morph it into the mere distribution wing of the first nonairline travel supplier to own a CRS.

In the second quarter, Galileo's global bookings fell 2.6% year over year and that included a 7.1% decline in the U.S. The company pinned the decreases on the slow economy and Galileo's relatively small Internet presence.

That small Web share might be attributed to the company's fiscal conservatism. Officials emphasize that it is not in business to lose money by spending millions of dollars on Internet consumer acquisition. Galileo also vowed never to compete with agencies through an Internet consumer site, although its purchase of Trip.com rendered that position less tenable.

Galileo hopes to leverage its Trip.com booking engine, which will power Cendant's new travel portal, into greater e-commerce market share.

One potential bright spot for Galileo is its foray into telecommunications and enterprise networking. It projects that its Quantitude subsidiary, which is building a virtual private network in 107 countries and targets Fortune 1000 companies as clients, will be a $1 billion business in five years.

Worldspan

Worldspan, privately held by Delta, Northwest and American's TWA subsidiary, is the only CRS company not to own a consumer site. And, that strategy as a technology solutions provider rather than an e-commerce competitor, plus its early Internet focus, has probably helped it reach its status as the largest CRS processor of Internet bookings.

The smallest CRS company in terms of overall global bookings, Worldspan is believed to be "in play" as an acquisition target and is said to be in talks with Cendant and others.

American, which spun off Sabre in 1996, has said it wants to sell TWA's 26% stake in Worldspan.

In March, Worldspan moved marginally ahead of Galileo and became the second largest CRS behind Sabre in terms of net airline bookings in the U.S. A Cendant-Galileo-Worldspan combination, if it ever cleared regulatory hurdles, would challenge Sabre's U.S. leadership.

Despite its Web astuteness and its experimentation with new technologies like interactive television, Worldspan's bread and butter is still agencies. The company believes it can help agencies overcome any revenue loss from air, car and hotel inventory with new sales in nontraditional inventory like golf tee times and destination activities. Worldspan concedes, however, that nontraditional suppliers have yet to post enormous sales through its Worldspan on the Web platform and that nontraditional products may never replace the mainstays.

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