Sabre Gets Preview - Business Travel News

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Sabre Gets Preview

October 11, 1999 - 12:00 AM ET


Sabre Gets Preview
GDSs Forge Internet, IPO Strategies

By Cheryl Rosen

The Internet is both a formidable new competitor and an unparalleled opportunity for the global distribution systems, whose strategies for the new year include plans and products to integrate and harness its power.

Clearly the biggest new development by a GDS in the online space is last week's triple header from Sabre, in which it acquired publicly traded Preview Travel and merged it with Travelocity, spun off the two into a separate publicly traded unit and locked in a new five-year exclusive contract with America Online.

In one swoop, Sabre has catapulted into the number-three spot for all online commerce sites, behind only and Ebay.

"This is in effect an IPO, since the combined entity will be publicly traded, and there will be a publicly traded Travelocity stock," said executive vice president of sales and marketing Eric Speck.

AMR CEO Don Carty, who is serving as interim Sabre chairman since Michael Durham left (BTN, Sept. 20), said the combination of Travelocity and Preview "will create the clear category leader in online travel services, the largest category on the Web today," ranking among the 10 largest travel agencies. Between them, Preview and Sabre sold $467 million worth of air, hotel and rental car services in the first half of 1999--nearly matching in six months their entire sales in 1998. They plan to double that again, to more than $1 billion, in 2000.

Sabre, which will contribute $50 million in cash to, will own 70 percent, with the rest going to shareholders of publicly traded Preview Travel. As part of the deal, which is expected to close in the first quarter of 2000, Preview will switch from using Galileo as its booking engine to Sabre. Carty noted that while AMR "has no current plans" to spin off Sabre, "we have been careful to structure this deal so that if we do decide to separate, it can be easily done."

Galileo, meanwhile, will continue to provide services to the balance of its stable of online customers, including, Navigant International and Said senior vice president of Internet and e-commerce David Near, "We have a series of strategic investments in companies in the Internet space and are looking for opportunities to extend those relationships."

Interviewed before the announcement of the Preview deal, Speck told BTN that "there's a lot of shareholder interest in the topic of a spinoff" of either Sabre or Travelocity--or both--since each segment of AMR's business has such different revenue and earnings, and therefore would attract a different type of investor. "The P/E multiple of American Airlines is different from Sabre's, and both are different from the Internet business," he said. "There are three different currencies, and Wall Street wants to make the decision of the value of each." He also reiterated that Durham's departure "had nothing to do with profitablity of the IT business or a decision or lack of decision to spin off Sabre or Travelocity."

A series of presenters at the New Frontiers in Travel Distribution conference in Washington was in unanimous agreement that the Web's user-friendly interface still needs the workhorse transaction processing that the GDSs offer--a sentiment seconded by the Sabre deal. But they also noted that the Internet likely will for the first time offer a real competitor, and begin to constrict the freedom the GDSs have had in foisting annual price increases upon suppliers.

Amadeus vice president of supplier strategies Hans Jorgensen was the first to address that issue and suggest the concept of channel-based pricing, under which the GDSs might charge different booking fees to different customer bases.

BA's head of distribution Pat Gaffey chided the GDSs for a "cost model that does not compute," noting that "IT companies are driving costs down year over year, while GDS costs are going up. The airlines are funding GDS market share wars, and travel agencies receive a large volume of incentives that they now regard as a permanent revenue stream. That's not sustainable; the GDSs should be the most economical model."

The "price transparency of the Internet" is causing downward pressure on airline yields, and "focusing us back on the cost of sale, which is running 15 to 17 percent," he added.

But at the same time, Gaffey acknowledged that the GDSs "have spent millions creating precisely the inter-airline links the alliances will require" and are "ideally placed to be hubs to make the alliances work with new products like alliance marketing displays, integrated pricing, interlining e-tickets, support for customer relationship management and shared PNR access. The GDSs have huge development shops that really understand the airline business."

Jorgensen retorted that 68 percent of GDS costs go to distribution expenses--including travel agency hardware, 24-hour support and the communications network that strings it all together--where "any major reduction would impact the product." Booking fees represent only 1.5 percent of the GDS cost to the airlines, "but it's the number they point to most often--I think because it's an item over which they feel they have no choice."

To that end, and in order to "ensure our value proposition remains attractive, we're thinking about pricing booking services based on the channels," Jorgensen said, so that the booking cost of a reservation coming through an airline sales office might be lower than one coming through a travel agency. "If we have lesser cost, we think it would be fair to share that with our customers."

Galileo senior vice president of Internet and e-commerce David Near agreed the concept is "of interest to us all, and a space to be watched."

The historic GDS-to-agency distribution model is evolving into "a multi-channel one that includes direct online, direct corporate, auction pricing models and cyber-agency relationships, and the GDSs have to look at the value proposition we offer each model," Near said. "If the industry determines that different pricing is part of the value proposition we offer, we might see that develop. But I don't think anybody has resolved that it is. While a cyber-agency may not require the hardware of a traditional agency, for example, it also may have a higher cost due to the ratio of lookers to bookers."

Worldspan also is considering different fees for corporate versus leisure agencies, said spokesperson Patricia Forsyth, noting that "fees for cyber-agencies already are lower than fees for bookings made by traditional agencies."

Sabre, too, finds the "concept of differential pricing interesting," Speck said. "It's one of the models we're evaluating."

Differently priced or not, the GDSs clearly are carving out new businesses from the Internet environment. Amadeus last month signed a deal with Telefonica to provide services to its Spanish, Portuguese and Latin American customers, and. has been investing "large amounts of money" to make its central architecture more flexible and cost-efficient, Jorgensen said. "We're moving away from the old legacy TPF architecture, though we need it to handle the 2,000 to 3,000 transactions per second the airline systems require. But most applications in the middle and front office are changing to Unix and C++."

Also coming from Amadeus is the rollout of its corporate booking system that integrates with SAP's corporate enterprise solution, now in testing at 15 corporations, for release in the first quarter of 2000, and an SAP training and certification program for travel agencies to go along with it. Asked for his projection of sales in 2002, Amadeus sales and marketing vice president Doug Fogwell summed it up in a single word: "Big."

Dan McCarthy of investment firm Neuberger Berman LLC called the relationship with SAP "a coup for Amadeus," and said SAP "has vanquished the competition in the enterprise space and is the clear leader of enterprise software, with 10 million users worldwide and 60 percent of the Fortune 100."

Also in pilot at Amadeus is Corporate Traveller, an online booking system scheduled for release by year-end, and Amadeus Reporter, a pre- and post-trip reporting product for agencies and corporations. Its Web-based Vista system for travel agents will launch in November, and "wrap a lot of other products and services for agencies around it," Fogwell said. "Vista will provide e-mail--which sounds basic, but is not. Seventy percent of agents now have access to the Internet, but in a corner somewhere. We're trying to bring it to the desktop."

Worldspan, too, is carving an online niche with its Worldspan Wired strategy. The engine behind Priceline, Microsoft's Expedia and, its 2000 plan is to take its online savvy global.

"We plan to focus on and grow that line of business outside the United States as the sites enter new markets in Europe and South America and Asia," said sales and marketing vice president Sue Powers. Also on the agenda is growing its airline hosting business from the current 16 carriers. "We want to diversify and serve as the provider of travel industry information to four markets: the corporate market, travel agencies, consumer sites and the airlines," Powers said.

And with more than 500 companies--including its airline owners Delta, Northwest and TWA--now using Worldspan's Trip Manager corporate booking system, the GDS is "in the final stages" of developing an integrated expense reporting module it hopes to begin testing with internal travelers next year. Worldspan now is seeing month-over-month growth of 28 percent in bookings through Trip Manager, "which says to us that it's early in the process and people are just beginning to move into the adoption phase," Powers said. Next on the agenda is a focus on integrating Internet sites with its core system, so that bookings and changes made online are integrated with the passenger name record at the travel agency. It has signed as the launch customer for that service.

Looking further into next year, Worldspan expects to see front-end applications that use speech recognition software to allow travelers to make reservations using their phones rather than their PCs, hopefully by third quarter.
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