Inside the GDS Wars

Accelerating advances in technology and deregulation of the traditional global travel distribution systems (GDS) have ignited increasingly fierce competition, pitting the behemoth “legacy” companies against a plethora of new tech firms in a battle that promises to reshape the industry’s future.

Recent months have seen debate reflare, with startup technology companies such as G2 SwitchWorks and ITA Software moving aggressively to offer agents and suppliers alternative distribution channels that they say are more cost-efficient and could challenge the long-term viability of the long-established GDS.

Under pressure from such firms and changes in travel distribution channels, facing airline contract renegotiations and in a fast-paced contest among themselves, the big four traditional GDS Worldspan, Sabre, Galileo, Amadeus have launched their own aggressive efforts to diversify and broaden offerings, defend their positions and expand their marketshare.

The two camps often disagree on a variety of claims. But one thing they, and other industry officials, agree on is that more travel distribution changes are sure to come and, ultimately, the marketplace, including agents, will decide the fate of all involved.

“The battle is on,” said Paul Ruden, senior vice president, legal and industry affairs for the American Society of Travel Agents (ASTA).

While the current wrangling began as early as 2004, it has gained pace as Business Week predicted last year that, with many of the major airlines’ GDS contracts expiring this year, carriers will look to cut contract costs estimated by the magazine to amount to as much as 2.5 percent of some airlines’ revenue.

Some say the new technology firms collectively termed “limited travel distributors” (LTDs) or “global new entrants” are playing a key role in the fray as carriers seek to leverage competitors’ and direct Internet and corporate booking channels in their negotiations with the GDS.

But also continuing to drive travel-distribution channel changes are technological and structural shifts throughout the industry, propelled in many cases by the ease of the Internet.

Amid the changes, the decades-old GDS find themselves accused of being “dinosaurs.” While most have diversified and expanded to offer browser-based systems and are integrating webfares into their systems, the newcomers say it remains an inefficient and more costly system amid increasingly fragmented distribution channels.

“Agents today have a very limited tool,” said Derek Lewitton, vice president, sales and product strategy for ITA Software. “The GDS were built in the 1960s ... Computer science is the field mankind has advanced the most in the last 50 years but legacy GDS are still built on a mainframe.”

Still, Ruden notes many of the new firms are in their relative infancies.

“The fact remains agencies are dependent on the GDS. Nothing so far can challenge that dependence,” he said. “GDS continue to provide substantial competitive solutions to agents and their needs. The new entrants clearly have a burden to carry to compete with such entrenched and successful competitors and by that I mean well-regarded, with good products.”

The Future of GDS

Aware of the new young turks in the arena, GDS are ramping up their own tech efforts, but insist the new firms are playing a limited role in their own strategies.

“I think we are much more concerned about each other than with the new entrants,” said Kurt Ekert, group vice president, strategic business development for Galileo-owner Cendant. “The new entrants are not much different than other providers in the marketplace today.”

Added Michael Parks, senior vice president, worldwide operations and customer services for Worldspan: “We call them LTDs because they’re not global distribution systems. They’re very limited in capabilities ... compared with GDS ... We certainly take them seriously, but not in the same league as global distribution.”

And while acknowledging competition is fierce, the GDS defend their position, saying their links to hundreds of airlines and international reach makes comparison with the new entrants like comparing apples to oranges.

“Their claim that we have not changed in 30 years is not true. Much of our core service has migrated to open platforms. Our unit costs are extremely low,” said Owen Wild, director of marketing for Amadeus, North America. “This is not a technology debate it’s about providing a competitive value proposition to customers and suppliers. And proof will be in the contracts.”

The youngest of the four, Amadeus has moved to differentiate itself by repositioning as a comprehensive technology provider. It has nearly tripled R&D investment over the last five years and, this year, changed the name of its holding company from Amadeus Global Travel Distribution to Amadeus IT Group.

“The new name better reflects the scope and diversity of Amadeus’ [offerings] to the travel and tourism industry,” said Jose Antonio Tazon, Amadeus president and chief executive. “While travel distribution remains a significant part of our global business, it is now one element of a broader IT portfolio.”

It also has had successes, announcing late last year that United will shift its internal reservations and inventory management system from the Galileo/Apollo platform to Amadeus in late 2008. This year it announced an Amadeus Call Centre Solution to allow travel companies to operate a fully automated, multinational call center.

“The agency distribution business complete access to content is our most important challenge going forward,” said Wild.

He added that the company expects to make several announcements later this year reflecting its continuing efforts to boost content in nontraditional areas, and will roll out “significant” platform and program enhancements.

Similar expansions and advancements are under way at other GDS.

“We don’t consider ourselves a GDS anymore,” said Ekert, noting Galileo’s broad content including more than 60,000 hotels, with 40,000 merchant properties similar to wholesale prepaid inventory that Ekert said offers agencies more opportunities for increasing their revenue streams.

“Couple GDS with the technology and innovation machine we acquired with Orbitz, and we will have the leading platform in the world,” he said. “Integrating that with our corporate business and our ability to leverage technology across channels is unsurpassed.”

Galileo’s recent gains include being chosen as the preferred global GDS provider for TravelSavers and a partnership with Global Travel International, a privately owned travel company that provides tools to independent agents, and eTravCo, a growing travel agency resource that provides support to over 6,400 travel agent members.

“We recognize that the LTDs are competitors no different than the 2,000 or so competitors already in the marketplace,” said Ekert. “Six, nine, 12 months from now, when we’ve renewed all our air deals, content and technology we don’t see how they will provide value to customers and the marketplace.”
Still, Ekert and others in the industry say that the fierce competition and other factors could put the squeeze on the field.

“I think there is room in the market for anyone who can provide competitive value and content,” said Ekert. “What is possible with the next airline negotiations is that there will be winners, and there will be losers ... We think we are extremely well-positioned to make the tradeoffs needed ... I think it’s very possible that in 2006, 2007, you could see a bit of a shakeup in the distribution landscape.”

Chris Kroeger, senior vice president of Sabre Travel Network, North America, said GDS systems remain cost competitive with any new entrants because of the broader offerings and efficiencies they can provide suppliers and agencies with their global footprints.
In a recent significant announcement, Sabre Travel Network acquired TRAMS Inc., a leading provider of mid- and back-office solutions and marketing services for travel agencies.

Sabre also announced a long-term subscriber deal with priceline.com, and other recent contracts include U.S. Airways, AirTran Airways and Northwest Airlines.

“GDS are more efficient for agencies,” Kroeger said. “We have found that agencies need ... aggregated content embedded in an aggregated workflow. We have a track record of doing that ... The new entrants say content will fragment. Quite candidly, they need to say that because that’s their main value proposition. But if there is no fragmenting, new players are not bringing anything new to the market.

“It’s not about technology ... it’s about the marketplace and combining technology, suppliers and agents.

“We all have vested interests. But if you separate all the interests out, it becomes a pure business proposition: Is fragmented information efficient or inefficient? Forget all the players. The basic tenet is fragmentation is inefficient. Who is in the best position to give consolidated information GDS or new entrants?”

Kroeger said company plans include adding content this year, growing business on the existing infrastructure and investing in efficiencies for the company’s agency desktop solution.

Worldspan also has ramped up offerings recently, noting its more than 30 percent market share and the fact that it is the only GDS that does not compete with its customers by taking ownership in a retail travel agency or other travel entity.

“There is some fragmentation in the industry, no doubt,” said Worldspan’s Parks. “But I’m not sure the new entrants have a big impact on that. So far, they only have major carriers ... But if you look at Worldspan’s announced deals [and other GDS’], major carriers are putting their long-term vote of confidence with GDS because of the reliability and security we offer.”

This year, Worldspan has announced deals with Spanish low-cost carrier Air Madrid and AirTran Airways, as well as a five-year agreement with its longstanding distributor partner Stargate Cyber Active, giving Stargate exclusive rights to distribute Worldspan travel technologies and services to agencies in South Africa.

Worldspan also plans to launch several new products for traditional travel agencies this year, Parks said, including the fifth generation of its base platform, entirely browser based with a number of agency upgrades including better connectivity with the help desk and an entire refresh of its booking tool.

The Competition

Still, competitors are persistent in their belief that there is room in the market for them.

“I kind of see our vision as a solution for travel sellers,” said Ellen Lee, cofounder and vice president, business development for two-year-old, Chicago-based G2 SwitchWorks.

“I don’t see myself as competing product by product. What we offer are solutions, additional choices. The largest agencies are all multi-GDS ... We’re just another outlet for suppliers. It’s not an either/or decision. GDS do a lot, don’t get me wrong. But they don’t do 100 percent and neither do we.”

The company said its G2Agent, a Web-based travel reservation and management solution, can save suppliers as much as 80 percent compared with GDS channels.

The company has offered G2Agent for free to agencies with no long-term deals, minimums, terms or conditions, and Lee said it is now in place at about 55, though she declined to identify them, citing competitive issues.

She said G2 gets paid by the carriers and, in turn, can extend up to $3 per ticket in incentives to agents.

Late last year, StarAlliance signed deals with G2 SwitchWorks and ITA Software designed to reduce the $2 billion the 16 member carriers spend annually on GDS fees. Last year, G2 also signed a deal with AirTran to distribute the airline’s ticket inventory to key travel agencies and corporate clients. The company also has a deal with seven U.S. airlines American Airlines, America West Airlines, Continental Airlines, Delta Air Lines, Northwest Airlines, United Airlines and US Airways that designates G2 as a provider of choice for alternative-GDS distribution services between them and key agency clients.

The company is getting ready to start more aggressively marketing its G2Agent, Lee said, and has started to hold seminars for agents across the country, and expects to roll out additional enhancements this year including a plug-in for the GDS so agents can get all information in one interface.

G2 also plans to roll out more functionality for the system soon, and is working on hotel and car content.

“It’s an economics question: The GDS like to say all we are is a mechanism for airlines to turn off inducements,” said ITA’s Lewitton. “That’s complete nonsense. Our costs are so much lower than legacy GDS so there is ample room for agents to receive the same or better inducements whether from airlines or us.”

“They tried to characterize this as something that only benefits the airlines,” said Lewitton, who notes Orbitz is powered by ITA Software. “Nonsense. Agents are cognizant, intelligent beings. There’s going to have to be benefits for agencies what we will get eventually is a product that agents need and that airlines need. And we expect it to be highly competitive.”

ITA recently announced a $100 million venture-capital infusion from a consortium of investors to help it refine its software and aggressively meet what Lewitton said is demand from airline and agency partners to build out more and better tools.

Lewitton said the company tested the waters with an early GDS product and now is developing out functionalities for agencies, releasing upgrades nearly quarterly.

“We do a lot of things in this market. There’s room for 1,001 definitions of ITA,” he said. “We power airline Web sites Alaska, Americawest.com ... We power competitors G2, their search engine is ours. We [even] power [certain] GDS.

ASTA’s Ruden is cautious about suggesting what the future holds, but noted, “There are forces in the market that suggest there will be consolidation.
“Six months to two years from now, we’ll see how it shakes out,” he said. “The market will determine it. I think [the new entrants] will play a role, but I don’t imagine they’ll displace any GDS.”

Added Lewitton: “I think it’s a little premature to predict what will happen. Maybe it’ll take five years to see where it’s going. I don’t think I’m suggesting the future holds no place for existing players, we wish them all the best. But to turn a blind eye to the inevitability of technological advancement in this space is probably foolish.”