It`s not a big secret, but it seems to be an increasingly likely possibility that could have a powerful impact on travel agents and the travel industry: a merger among global distribution system providers, or GDSs.
There are currently four: Fort Worth, Texas-based Sabre, which leads in U.S. market share by both agency locations and bookings; Atlanta-based Worldspan and Chicago-based Galileo, which are in a tight race for the number two spot; and the Madrid, Spain-based Amadeus, a distant fourth that has been aggressively trying to capture market share through last year`s acquisition of agency consortium Vacation.com
and investments in e-commerce players 1travel.com,Uniglobe.com
Why would there be a merger and which of the companies would most likely merge? One major driver, according to Paul Keung, executive director of equity research at CIBC World Markets, is the sweeping consolidation that`s taking place among the major American airlines: United and US Airways, American and TWA, and the reported talks between Delta and Continental. “Continued consolidation among the airlines would dramatically change the landscape of the travel industry by reducing the number of suppliers, rationalizing capacity and consolidating power. [This] could encourage mergers among the major GDS companies,” wrote Keung, in a January report, adding that “fewer suppliers results in fewer distributors” and a merger among GDS companies this year would be “highly likely.”
Other analysts concur that the industry is ripe for consolidation, although they may disagree on the reasons why. “The issue is, in the U.S. marke,t do there really need to be four GDSs? All they`re doing is cannibalizing each other`s market share” said Chicke Fitzgerald, founder of consulting firm MTech Strategies and author of “Global Distribution Systems: Outlook for the 21st Century,” a management study of the GDSs. She pointed to the travel agency market which, although still the GDSs` “bread and butter” is shrinking as the number of agencies dwindle. And, as suppliers in all segments look at ways to go direct to consumers or to travel agents, the pressure is on for the GDSs to consolidate their market position.
“What would happen if the airlines dropped commissions down to zero and made everything a net business? What ripple effect would that have on the GDS channel?” asked Fitzgerald. “And what if suppliers were increasingly effective in moving business off the agent channel? I wouldn`t want to have all of my revenues dependent on what remains a very uncertain channel.” GDS executives, however, downplay the talk about consolidation. “Discussions amongst and between and about the GDSs have gone on as long as I`ve been in this business,” said Paul Blackney, president and CEO of Worldspan, former chief executive at Apollo and a 30-year industry veteran, during an interview a few months ago. “There were at one time 10 or 11 of us, now we`re down to four.”
Steve Diffley, Galileo`s vice president of airline sales and marketing, discounts the assertion that airline mergers might fuel GDS consolidation, observing that “Airlines merge all the time ... It takes a little coordination in the [GDS] system, changing some coding. It`s really a non-event.” Still, it is well known in the industry that Amadeus and Worldspan came very close to a deal just a few years ago, while Galileo publicly stated last year that it was exploring strategic alternatives, including the possible sale of the company.
Who, then, would be most attractive to buy? Galileo and Worldspan are certainly the most likely acquisition targets. The former, in addition to “exploring strategic options,” has a strong balance sheet, yet is also relatively “cheap” with its depressed market valuation, note analysts (Galileo`s shares, trading at $22 at presstime, are off more than 50 percent from their high in mid-1999). Worldspan, meanwhile, is the smallest of the GDSs and the only one privately- held, yet it has a very strong position in the U.S. market, and particularly in e-commerce.
“They`re the smallest, but they`ve had great traction in the e-commerce world,” said Fitzgerald, noting that the company is the GDS behind Expedia, Priceline and the yet-to-launch Orbitz. “It makes them more attractive to another, and I`m certain they`re not sitting back waiting for something to happen to them. Their management team is very seasoned.” The likely buyer? While a deal between Worldspan and Galileo itself could not be ruled out, analysts look first to Amadeus, pointing to the company`s aggressive efforts to improve upon its 13-15 percent share of the U.S. market.
“Amadeus is the number one player in Europe and has been aggressively trying to break into the U.S.” said Keung, pointing to the acquisition of Vacation.com and investments in ITA Software and other travel technology firms. “However, Amadeus needs to also build its corporate and online booking channel in the U.S., and an acquisition of Galileo or Worldspan would do the trick.”
Analysts also don`t discount the possibility of a Sabre/Amadeus combination because Sabre`s appetite for European market share is as keen as Amadeus` is for the U.S. There are, however, plenty of caveats to deals of such complexity. Several sources, including some of Galileo`s own filings, suggest that the company`s market share in the U.S. has eroded slightly. While Karen Hannon, the recently appointed vice president of U.S. subscriber sales and service, asserts that there have been major market share gains last year for the GDS that would only be reflected in 2001 reports, analysts noted that a big concern for a potential buyer—whether another GDS or a financial buyer—would be the ability of the company to maintain its position in the marketplace and shore up its share price.
Another caveat is e-commerce, a crucial area for the GDSs to cultivate, according to Dan McCarthy, managing director, Neuberger Berman.
“I view online agencies [and the GDSs] as the vipers nurturing at the mother`s breast, because the GDSs are supplying them the technology ... and in a very short period of time [agencies] are becoming ubiquitous consumer brands. They own the consumer, and ultimately they will aggregate enormous purchasing power,” he said, adding that these agencies could wield powerful leverage over the GDSs. “The GDS and the partially owned agency both have their eye on the same ball, which is a win-win for everybody, so here Sabre is uniquely positioned.”
The drive for that market and the uncertainty surrounding the traditional travel agency channel were certainly behind Galileo`s acquisition of Trip.com last year, Worldspan`s efforts to position itself as a back-end processor for several major travel Web sites, and Amadeus` investments in several dot-coms, but the Internet`s fall from grace over the past year has raised more questions about strategic options for the GDSs—as well as their attractiveness to potential buyers. “A few years ago, e-commerce was thought to be the savior, but now you have the demise of a lot of those [dot-coms] going on,” said Fitzgerald. “The moral of the story is, you have to be diversified across many channels.” And it`s just that desire for diversification that may well drive a merger.
One of the immediate effects on the retail community could be the forced migration of thousands of agents to a new platform, which some warn could be extremely complex, expensive and painful. “In order to get the economies of scale and benefits of a merger, you have to get everybody operating on the same system so you don`t have separate training efforts and different PNR bases,” said Fitzgerald, who had overseen a system integration several years ago and had to train 10,000 individual agents in 2,500 different locations. “Getting there could be very painful.” Not every GDS merger, however, has resulted in complete system integration. Galileo`s Diffley pointed out that Galileo—itself the product of a merger—continues to operate the Galileo and Apollo systems.
“We have two different systems—Apollo and Galileo—and they can communicate today. Both systems use the same global fares system. Availability and schedules are both fed into a single source ... They`re tied together. They share data, they share PNRs.”
And, Fitzgerald added, a system integration would certainly be much less painful for an agency than for the GDSs. “When you take a look at the impact of a merger, it`s no different than agencies switching GDSs, and they do it all the time,” she said, noting that the differences in core systems could be relearned in a week, and many larger agencies actually use more than one system—or even all four—in their offices. “The only difference is [when they switch] it`s their choice, as opposed to someone else forcing it on you.” Still, for smaller and mid-sized agencies, switching technology platforms is hardly an incidental consideration. One agent who`s participated in contract negotiations with GDSs on behalf of a consortium and declined to be named, said that agencies sometimes have to turn down very attractive offers from other GDSs because the switching costs ultimately outweigh the benefits of the signing bonuses.
“Every time we go to negotiate, we`re looking at a very large cost operationally when you change systems because of the training involved,” he said, adding that his group has chosen to decline “very aggressive” offers because the majority of their agencies would have had to switch vendors. “For us to have to move that many agencies over would have [created] too many problems.”
And with fewer competitors, some of those offers GDSs make to attract new agencies may become less aggressive.
“It would mean one less party to negotiate with at contract time,” continued the agent. It would be fewer “opportunities to negotiate a better deal and play one of them off the others. I don`t think you`d see as many aggressive offers to agencies in contract negotiations.” CIBC`s Keung agreed. “GDS mergers are only good for the GDSs. The larger travel agents are increasingly dependent on ... rebates or incentives for GDS usage. Less competition could mean less leverage in getting those segment fees.”