ATLANTA -- When a teachers' pension fund in Canada and a major New
York venture-capital operation took over the controls at Worldspan
on July 1 in a leveraged buyout, the travel industry collectively
wondered: What's up with that?
Rakesh Gangwal, Worldspan's new president and CEO, is ready to
answer. After months of public silence, Gangwal and other top
executives opened their doors to talk exclusively with Travel
Weekly, and laid out what Gangwal called "a very simple story." The
former US Airways CEO said, "We are a technology provider; we are
an agnostic GDS."
That's it.
Gangwal and other Worldspan officials use the word "agnostic" to
underscore the company's unique status as a stand-alone entity.
Other GDS vendors are linked to numerous other enterprises.
Sabre owns Travelocity, GetThere and the Sabre Travel Network.
Cendant owns not only Galileo but everything from Avis Rent a Car
to Days Inn and Century 21 Real Estate. Amadeus owns Vacation.com
and a stake in the Opodo online travel portal -- and it is
majority-owned by European airlines.
In other words, competitors can expand vertically and
horizontally, but Worldspan will concentrate on a single point and
go deep, according to company executives.
A simple story?
A simple story, perhaps, but being a GDS is hardly a simple
business anymore. Between the ever-expanding online market,
shrinkage of traditional travel agent market share and airlines and
other suppliers aiming to directly connect their reservations
systems with travel agents and consumers, the entire GDS business
model is under question.
Relationships between parties are proliferating, with marriages
and breakups, it seems, announced every day. A recent example: US
Airways quit Expedia after Expedia raised the fees it charges
consumers from $5 to $8.99 a ticket, while complaining that Expedia
would not set up a direct connection with the airline -- a
connection that would bypass Worldspan.
After a standoff, Expedia and US Airways came to terms, and the
carrier's inventory is again available to Expedia users.
Given the ever-shifting nature of the GDS-airline equation,
Gangwal believes, the simple story will translate into business
success for Worldspan. Fundamentally, Worldspan has three
goals:
• Hold down prices for airlines and other suppliers to attract
their business.
• Remain a technology "infrastructure" company, eschewing
expansion into the consumer market.
• Extend its lead as a provider of information to online travel
agencies and other online travel properties.
Worldspan now controls two-thirds of the fast-growing online
market, according to Gangwal, serving as the backbone database for
Expedia, Priceline, Hotwire, eBookers.com, Lastminute.com and -- at
least for the time being -- Orbitz.
Many of those deals are long-term: The contract with Expedia
runs until 2010.
Reality check
In a tumultuous, shape-shifting marketplace, it is far from
clear that Worldspan's approach -- or the approach of any other
GDS, for that matter -- will prove to be the right one.
Some critics even wonder whether Worldspan might be denying
reality, behaving as if supplier-direct connections to travel
agencies offline and on won't totally upend the GDS business.
Ninan Chacko, who recently joined Worldspan as senior vice
president for product planning after nearly 14 years at Sabre,
remains coolly confident that Worldspan is on the right path.
While not dismissing the threat posed by direct connections,
Chacko is confident something like a GDS model will prevail in the
end, given the complexity implied by hordes of direct connections
and travel agents' limited time.
"Nobody has come up with a way to put together a GDS at a
fraction of the cost of a GDS," he said.
"It's like saying if you could shop at a dedicated store for
oranges, another for milk, another for meat products, there would
be no need for a supermarket."
Chacko adds that the direct-connect issue "isn't a 100%
black-and-white argument." He and Worldspan know that travel agents
will have more choices, more platforms and tools to use when
booking trips outside traditional GDSs.
But there are hundreds of airlines out there with maybe hundreds
of thousands of fares, never mind the other suppliers, so it's hard
to see how travel agents could possibly use more than a few direct
links and still stay in business. They'll always need some kind of
central database repository.
Chacko also said he believes the drama over charging fees to
travel agents in return for Web fares -- an approach Worldspan has
not embraced -- is overblown.
Web fares represent a tiny piece of the airline fare structure,
he said. "There's a lot of noise being made about a small segment
of fares."
The key for Worldspan is getting costs down and getting the
technology right, melding the GDS information-aggregator approach
with the Internet.
"We really see ourselves as a technology company serving the
travel industry," said Sue Powers, senior vice president and chief
information officer, a Worldspan veteran kept on by Gangwal.
"I think the new ownership probably now makes things clear to
the marketplace. It had been difficult to say, 'We're not
[strictly] a GDS anymore, we're a technology company.' People would
say, 'Oh yeah, what about those three airlines?' "
Those three airlines are Delta, Northwest and American, which
collectively sold Worldspan this year to the Ontario Teachers'
Pension Plan and Citicorp Venture Capital for nearly $954 million.
Worldspan thus became the last major U.S. GDS, after Sabre and
Galileo, to free itself of airline ownership.
A debt to pay
The private equity deal, known as a leveraged buyout, piles on
debt and forces a company to focus on cash flow. That means a lot
of cost cutting.
Lower costs, Gangwal said, will enable Worldspan to aggressively
compete on supplier fees with other GDSs, with the idea of further
boosting market share.
To understand what kind of decisions Worldspan is making, take
the elevator up to the 21st floor at 300 Galleria Parkway in
Atlanta and enter the hushed executive suite. The walls and ceiling
are paneled in thick, dark, rich Brazilian mahogany. The carpet is
plush, the lighting is dusky, the mood is quiet, genteel.
"Take a look at this building -- this is unbelievable," said
Gangwal, sweeping an arm around his capacious corner office, done
up in an old-fashioned, handsome, Southern style that appeals to
the kind of man who reads Cigar Aficionado magazine.
"This is the old RJR Nabisco headquarters," Gangwal said. "Ross
Johnson sat right there."
Ross Johnson? The 1980s business guy, the quintessential
wheeler-dealer? The chief beast in the best-selling 1980s business
book "Barbarians at the Gates"? Yes, that Ross Johnson.
Gangwal walks to the window. "You see that building? The one
with the flagpole there? That's an empty, see-through building.
There are no cubicles in there."
Atlanta, overbuilt, is loaded with buildings like these, Gangwal
said.
So why, he wondered, was Worldspan about to construct a fancy,
new headquarters building at a cost of $100 million?
"I put my foot down," Gangwal said. "I said, 'Absolutely no way
are we going to spend this money to build this building.' "
Instead, the company cut deals with distressed building
developers to cut annual lease costs by 35%.
"We have to get our costs down," said Gangwal. "That's the
bottom line. If we can't get our costs down, the viability of the
company comes into question."
Wielding the axe
Gangwal is on a cost-cutting tear: Since January 2003, 320
employees have been let go. Even local Atlanta community funding is
under the microscope -- for the first time in years, Worldspan
won't sponsor the "Nutcracker" this season.
Marketing costs are under the axe, too: "We used to spend a lot
of money promoting our brand to John Q. Public. The problem is, I
don't see how that person is going to 'buy' Worldspan. He can't,"
Gangwal said.
Addressing the end consumer didn't take just take resources away
from the company, it sapped executive energy, too.
"Having to show your face to the traveler is monumental task in
itself," Gangwal said. Not having to do that gives Worldspan an
advantage in building its business.
The company's top executives are quick to point out, however,
that the cost cuts are meant to feed future growth, not just
current profits.
With lower costs, Worldspan aims to compete aggressively on
price for airlines, cars, hotels and other suppliers; as new online
channels proliferate while cost pressures rise -- especially for
the airlines -- suppliers are looking for ways to lower costs and
see the GDSs as a particularly high-cost option. In recent years,
the GDSs have increased annual price hikes at lower rates, but
prices are still rising.
Worldspan plans to address the issue squarely.
"The GDS booking fees are now starting, for the first time, to
go through what I would call an uncertainty period -- in other
words, the historical stability that existed is not going to be out
there," Gangwal said.
He noted that alternative channels are not costless for the
airlines: "If you make a booking on their Web site, they think
nothing of giving 1,000 bonus miles, yet they spend a penny to a
penny-and-a-half to credit-card companies."
In effect, Gangwal said, the airlines "are spending $15 to $20
to save $10 [in GDS] booking fees." Short-term, the airlines pick
up market share, but "long-term that strategy doesn't work," he
said. "There's something wrong if you're willing to spend more
money to save less money."
By putting a lid on prices and eventually bringing them down,
Worldspan believes it can cement supplier relationships on its GDS
-- "if we can bring the value proposition back that booking fees
are reasonable," Gangwal said.
'A step ahead'
In the meantime, Worldspan, which sees itself as the industry's
technology leader, plans to stay out front. In fact, the company is
the most aggressive in moving systems off big mainframes and onto
cheaper, more-flexible server systems that have made it by far the
leading GDS supplier to online travel sites.
The other GDSs are working hard to catch up with Worldspan's
ability to, say, package travel into thousands of different options
in seconds or provide caching systems for quicker access to airline
fares.
"People definitely can replicate this, but we're staying a step
ahead," said Powers.
The company said its ability to offer technology to travel
agents and online sites -- in modular pieces that can be assembled
to suit a customer offers more flexibility in both function and
price than the all-in-one packages offered by competitors.
The real test is whether Worldspan can convince travel agents
that, as a technology leader, it can help them do their jobs better
and cheaper -- both online and off.
The basic strategy at Worldspan is not changing dramatically
under the new owners. In broad outline, it's following the course
set by former CEO Paul Blackney. What will change dramatically is
the operating approach, the means by which the strategy is carried
out.
Worldspan's new capital structure -- which loads on debt, or
"leverage," and concentrates ownership among a small group of
private investors, including top managers -- fundamentally changes
incentives for those owners.
The idea is to align the incentives of the owners and management
with the health and growth of the core business. With top managers
owning equity in the company, the equation is clear: The better
Worldspan does, the better they do.
Theoretically at least, the goals and incentives are clearer for
the new owners than they were for the airlines, which have plenty
of other issues to worry about.
Financing a private company with debt can mean handsome profits
for owners. The cost of debt is fixed. Once debt-holders are paid
off, all remaining profits go straight into the pockets of a small
group of owners. At a public company, by contrast, those same
profits must be spread among legions of faceless stockholders. The
danger of taking on debt is that you won't be able to pay it off --
but the GDS business is known for its rich cash flow.
At their best, leveraged buyouts turn companies into lean, mean,
cash-flow machines by carving away all unnecessary costs while
channeling investment and growth into what a business does best.
The danger is that managers will cut away the good stuff.
At their worst, leveraged buyouts are no more than
get-rich-quick schemes, where managers hack away costs with little
regard to future growth and then do an IPO, dumping the company on
a naive public for huge gains.
Gangwal said he's committed to the former.
"There are two broad categories of private equity groups," he
said. "One restructures the company and quickly flips it, gets out
of it and makes big money, regardless of what happens to the
company. I had zero desire to be involved in that.
"I was looking for an environment where private equity investors
understand the value proposition of the company and build and grow
with it."
The long haul
Jim Leech, senior vice president at Teachers' Merchant Bank, the
private equity arm of the Ontario Teachers' Pension Plan, also
insists he's in it for the long-term.
He notes that many private equity funds are created with limited
time horizons -- typically about seven years -- which all but
forces leveraged companies to be sold or taken public.
"We don't have to do that," says Leech. "We have a longer time
horizon."
Most pensions passively invest in private equity funds.
Teachers' takes direct investments and sits on the board of
directors -- besides Worldspan, Teachers' investments include
Samsonite and Yellow Pages of Canada.
To Sue Powers, the change in philosophy was evident in the first
board meeting she attended under new ownership.
"I said, 'Wow, this is different,' " she recalled. "In the past,
our board consisted of airline executives. Their charter was to
think about their companies first and us second. When we had the
new board with Teachers' and Citicorp, they'd talk about 'our
company' and they meant us, not Delta or Northwest or
American."
The definition of "us," however, is a work in progress. Major
forces are roiling the GDS business, and each one is attempting to
meet them in its own way. No one knows yet what's going to
work.
As Powers put it, "What will be surprising is how different [all
of the GDSs] are a year from now, as we all focus on different
strategies. We're all taking the companies in different
directions."