Cendant Corp. and Sabre Holdings remain travel management company consolidators-in-waiting after bidding on TQ3 Americas, which will be snapped up by Carlson Wagonlit Travel in a deal likely to be announced this week
(BTNonline, March 11). It didn't happen this time, but the prospect of global distribution system and online travel companies buying TMCs is real and would represent a huge industry shift.
"In my mind, it's a question of when, not if," said Cendant Travel Distribution chairman and CEO Sam Katz last week. Sabre did not comment on acquisition activity, while Expedia Inc. and IAC Travel president and CEO Erik Blachford recently said buying more agencies is "possible," but not "critical."
"On the surface," Katz said, "it would appear that a vertical integration would be sort of a more dramatic step, even though when you cut through it all, it's not different from what Travelocity is doing right now." He referred to the way Travelocity Business is owned by Sabre, yet is competing with Sabre subscribers, which also can be said of Cendant's Travelport, vis-à-vis Galileo subscribers. "I think the more interesting potential question is, 'How does that set in motion a shifting of some of the traditional alliances and relationships between GDSs and their big customers?' "
Vertical integration, or what some have called the dealership model, is an emerging industry force. Sabre's 2003 annual report indicated that deregulation of global distribution system firms by the U.S. Department of Transportation
(BTNonline, Jan. 5) will enable it to "vary incentives by the identity of the airline," raising the possibility that subscribers can earn more from Sabre on bookings with some carriers than on others.
One corporate agency source called his company an extension of American Airlines and Sabre, since Sabre pays it for converting non-Sabre corporate accounts. Asked how he feels about Sabre competing with him via Travelocity Business or through an acquisition, the source said, "So, it's just another competitor—they just don't have the experience we do." Other travel management company executives also have told BTN they are not uncomfortable with the possibility of competing with GDS firms, but still other sources said the opposite is true.
"We are heavily on Sabre, but on the other side is the major enemy, which is Travelocity," said Dan Bohan, COO of Omega World Travel. "It's bad enough that they're going direct, but I just don't think GDSs should own travel agencies. "
"It's making a lot of people nervous," said TRX Inc. CEO Trip Davis. "In our opinion, the GDSs are now in direct conflict with their customers through these full service solutions," said Credit Suisse First Boston analyst Scott Barry. "TMCs have to come to terms with the GDSs really being a competitor."
"There has been very little expressed by agencies about Travelocity Business," said a Sabre spokesperson, pointing to its realignment
(BTN, Sept. 22, 2003) as the reason agencies can be assured they are getting the same technology as T-Biz without the latter having undue advantage over them.
Worldspan chairman, president and CEO Rakesh Gangwal last month said GDS firms "have all the data. At the end of the day, the executive committee has to run the business, and it's very difficult to compartmentalize your brain and say this should not compete with that, and let me not use this data in my decision making. It doesn't happen." Gangwal said his company would not offer fulfillment services to new corporate clients, partly to distinguish itself from Cendant and Sabre (BTNonline, Feb. 20).
Nevertheless, Gangwal said, "The other GDSs that are becoming an agency will sort out this conflict, create fences in their companies as best they can and, deep down, I believe they will be very successful. They have significant cash flows and are better funded than the travel agencies."
According to one industry veteran from a mega agency, "TMCs have been at a disadvantage for a few years now, so maybe corporate buyers will like the notion of working with deeper-resourced organizations. At the same time, it's validating the TMC model. Maybe this sector has simply been overly competitive."
Cendant's Katz is surprised corporate agencies have not reacted more vigorously to the GDS competition. "It's staggering to me that when you look at something like Travelocity Business, as best we can tell it's having zero impact on them in the marketplace, even as they're going head to head with all the major travel management companies." He said some TMCs might be holding their breath pending the outcome of imminent consolidation. "Maybe they don't want to rattle too much and change GDSs and do gyrations because it could affect the value of their company," Katz said. "Some of these may be the companies that end up getting sold and doing deals."
Meanwhile, as the GDS firms contemplate building versus buying, they are at least trying to cut back on inducements. Profitability for many travel management companies is driven by GDS incentives that can be well more than $1 per booking. Sabre's incentive costs rose by $63 million in 2003. The company last year said the incentives represent its largest cost line, at an estimated $400 million for 2003, and expected the year-over-year increase to moderate to about $50 million in 2004 (BTN, Oct. 27, 2003). Sabre attributed $33 million of 2003's $63 million increase to "increases in the average incentive per booking driven by competitive pressure on renewals and conversions," $20 million partly to low comparisons from 2001 and $10 million to increased Travelocity payments. For smaller and midsize U.S. agencies, Sabre last month announced a structured payment system that it said allows participating subscribers to earn incentives without assuming the risk of delivering volume.
Part of the pressure on Sabre to lower incentive costs comes from its DCA Three-Year Pricing Option, which discounts airline fees in return for full content access. After signing more than 30 airlines, Sabre said it stopped marketing the program to new carriers early last month. "We didn't start DCA," said Worldspan's Gangwal when asked what role Worldspan might play in the changing economic picture. "It was started by Sabre for their internal reasons, and I don't know what their strategy was versus what their stated marketplace observations were. If the marketplace goes in a certain direction, we are going to follow it to stay competitive, but we are not going to lead this charge. I suspect that long term, the inducements probably will drift down."
According to Katz, "We think we're the leaders in that effort, which you saw in our Momentum opt-in discount program last year. Sabre sort of undermined that with a flat discount, but now they're talking—I think appropriately—about changing financial assistance. We're not saying, 'You agencies have to live on less and you're on your own.' We're replacing it with offerings to help them create the agency model of the future. We think the successful, surviving offline or traditional agencies will embrace that, and to enable it, we're changing our business by moving to touchless transactions. We think we're the most automated for online booking transactions, and we'll offer that to agencies."
Katz said the company's investment in Travelport has grown each year since Cendant bought the Highwire booking tool. Moreover, he said, "It's in our blood to deal with conflicts in a business-to-business context and show our customers why it's making them more successful. You have rules of engagement where they're leveraging this tremendous investment we're making in order to help them convert their business, because they are toast if they don't have strong online products."