Whither the GDSs?

Stanley Slaughter, in the first of two articles, looks at the survival prospects for the GDSs.

There used to be an enjoyable parlour game among industry enthusiasts in which the contestants tried to guess when the travel agent would finally disappear. New technology, self booking tools, direct access to the Global Distribution Systems (GDSs) all seemed to be conspiring to blot out the dear old agency. After all, who needed someone to book your tickets when you could do it yourself, and if the airlines were no longer paying them commission just how long would they last?

There were even prominent consultants (no names, lads, to protect your reputations) who considered their day to be over. As we can see, travel agents slickly re-invented themselves as travel management companies (TMCs) offering a range of services to the hard pressed corporate travel departments. Talk of their demise is rarely heard now.

ABTN is beginning to wonder if the same fruitless parlour game has now shifted to the GDSs. The first and most obvious point is that they do not command the same dominant position as they did a decade or so ago. It was the airlines who spawned them (e.g. American Airlines created Sabre and must now be wondering why) and for many years even after their separation from carriers, they were the only and also the best way for agencies to book airline tickets. The expansion into hotels, rail, and car hire has come later. As long as that situation lasted, GDSs ruled the roost and could and did name their price.

Actual figures were hard to come by – the GDSs for some reason were too shy to say how much they charged. But industry analysts estimated that up to one third of the fee was pure profit. The cat was let partially out of the bag in 2005 when a Star Alliance executive said GDS fees were $12 a booking of which some went straight to the agents as commission. This was just as airlines were ending commission payments to agents as part of their drive to cut distribution costs.

But the arrival of new technology, notably the internet and direct booking, fundamentally changed the balance of power. The position of GDSs as top dog was lethally undermined. Newcomers began snapping at their heels – remember the GNEs, the global new entrants which promised an alternative to the traditional GDS? At the same time, airlines began their battle both to cut GDS prices and to expand their own self booking appeal. This was through schemes like Direct Connect (American Airlines) and/or by making it cheaper to book by avoiding the GDSs (numerous airlines). These are wars that still rage.

But looking rationally at the situation, the GDSs are holding on. The GNEs, companies like ITA Software, and G2 Switchworks, proved to be a false dawn. They enjoyed some success in America but made less impact in Europe. They had only one notable global success when in December 2005, the Star Alliance contracted these two companies to make its members’ inventories available through their systems.

They were also never treated with anything other than disdain by the GDS which said they were neither global nor new and finally dubbed them Limited Travel Distributors. There was also a feeling that Star was cosying up to the GNEs to concentrate GDS minds on the need to cut fees.

The GNEs faded from the scene but it is interesting that ITA Software was bought this year by Google for $700m, although on the condition that it made the travel data available for third parties. But this is a transaction which is likely to have far more impact on the purchase of leisure travel than on business trips.

A second talking point has been that Cinven and BC Partners, two London-based venture capitalists which bought heavily into Amadeus when it went public in 2005 have, this year, steadily been selling off their holding. The last tranches of shares owned by the two companies, amounting to 6.84% of the equity, went last month. Cinven pocketed $193m for its 3.4% stake in the sales of these shares.  This, said GDS detractors, indicated the money men were pulling out, the GDS model’s day was limited.  This may not hold much water as Cinven made seven times its investment on the sale of its shares and the sale was also oversubscribed.

It is the direct connect schemes and the ruthless determination of airlines to corner the market in bookings which is the main threat to the GDSs as they now exist. Moshe Rafiah, founder of a London-based aggregator Travelfusion, told a recent conference of ITP – the International Travel Partnership, direct connect systems are a “game changer”.

Companies like his – and there is a growing number of them – aim to bring content from suppliers to agents without intermediaries, i.e. GDSs. Founded in 2000, Travelfusion has more than 80 employees, is working with 300 suppliers including 150 airlines and also with 150 travel agents. (It should be noted that most of these airlines are not on the GDSs.) Rafiah is also hopeful of bringing rail and hotel content onto his business.

He claims that it will cost nothing for suppliers to use his company and that the fee he charges agents can be passed onto the client or customer. It is an attractive proposition for both suppliers and agents.

On top of this, GDSs face the threat that airlines want more and more of their customers to use direct booking. AA’s Direct Connect scheme is likely to be just a start. But major carriers like Lufthansa have been scheming for years to persuade, cajole, bounce agents into going direct to them by a variety of carrots and sticks. 

If you combine this with the coming generation of business travellers, increasingly what are known as digital natives who have grown up using computers and who will use their smart phones to book or change itineraries, there seems to be ample evidence that GDSs will get left behind in the technological rush.

But this is not happening - yet. The next article will look at how and why TMCs still value GDSs and whether this is enough to keep them as major players.