One-On-One: Sabre Holdings Chairman And CEO Bill Hannigan

BTN: Getting the big six carriers into the Direct Connect Availability Three-Year Option (BTN, Aug. 11) seems to be quite an accomplishment.

Bill Hannigan: We were skeptical along the way. We started the program more than one year ago, and it took nine months for the wave of the last five majors after US Airways signed up last fall—and we had been in negotiations with US Airways for quite some time. What we weren't skeptical about was the value proposition and the opportunity to create a win-win with the carriers and really make it clear to the world that the industry is ripe for deregulation, that the agency channel is the carriers' highest yielding channel and that we were reempowering the agencies with all content.

It really supports a consumer's desire to find product no matter how or where they shop with a Sabre-powered online or offline agency. That's pretty cool and will make for a more logical rate of channel shift. Channel shift has been accelerated over the past couple of years because content has been extracted, pulled to the side, whatever. While there's a natural shift going on as people move more online, I don't think that it's five points a year.

BTN: Access to content is not a new issue even with Web fares. Sabre over the years has been effective in selling its system because Southwest was part of it and not part of some other channels. There are other airlines and rail providers that do not participate in the global distribution systems, and if GDS deregulation happens, there could be more. What's the next step in attaining the goal of saying, "You can just come to us, we have everything?"

Hannigan: That is the goal. The first step was creating a sustainable model valuable to the agencies and the suppliers, which is difficult to pull off when you really are, if you think about it, running the exchange. It is a multilateral negotiation, which goes to the complexity and implications of the offer, because it really did affect the distribution strategies of the players that were at the table.

The next step for our Sabre Travel Network GDS business is a variation on the content play, which is merchant content, and that's what we're doing with Sabre Exclusives. It's still less than half of 1 percent of the hotel rooms, but it's growing quite nicely.

BTN: Hotel is the next challenge, not other airlines?

Hannigan: No, other airlines also. There are multiple challenges of course. We would like to find a way to create a value proposition that is very interesting to the low-cost carriers, and that's kind of a catch phrase that doesn't appropriately define them, but they certainly are the growers.

BTN: Content seems to be one element of what might be described in general as competition in the industry from all different types of distributors. There is also, of course, product and service quality and some financial issues, like incentives paid to agencies. Are there more things that define what Sabre is competing on?

Hannigan: It's definitely product, service, technology and economics, and I would say it's pretty close to that order because the technology and the economics really enable you to compete from a product and service perspective. Keeping in mind that Sabre people make all those things work, that is the basis for competition.

Incentives have been a big part of the economic mix for several years, and that is an element that has to change because of the price that we're now paying for content. We've stabilized the model and we created long-term arrangements with the carriers—but at a pretty meaningful price discount—so we won't be able to absorb the kind of incentive growth the industry has seen during the past several years when we have a declining unit revenue model. The time was right, for lots of reasons, to create the next-generation value proposition for the airlines, but it did come at a pretty meaningful cost.

BTN: Obviously you'll be talking with key distributors case by case about slowing the growth of incentive payments, which you have said is in the high teens, but is there a company statement that can be made on how that will happen?

Hannigan: Yes, and it's kind of multifaceted. One is that the superiority of our product relative to competitors needs to be at the table now in contract negotiations. As 20 percent to 30 percent of our contracts come up for renegotiation every year, it's going to take time.

I don't think there's a good flash-cut answer. We tried that in the corporate space with Corporate Connect (BTN, July 18, 2002); again, very complicated, even more of a multilateral renegotiation. Yet, even though it was 1 percent or 1.5 percent of bookings in the industry, it was too much of a shock for the travel management community because incentives are a meaningful revenue stream to them, and it doesn't make sense for us to shock our partners. It's the negotiations and also the opportunity to think about new models, such as merchant hotel, where you're able to change the incentive and rewards system and say, "If you sell this, we will pay you this." There's a win-win opportunity and there are several things we have on the drawing board. Similar to DCA-3, while it is a closed loop system to some extent when you think about the economics, I think we can make strides.

BTN: There was a little bit of a sign in terms of how a standardized incentive reduction program may not work in that Cendant's Momentum, like Corporate Connect, did not gain acceptance.

Hannigan: It's too hard. It was a valiant try. Their offer created an automatic mechanism where you get this for that. The problem was, traction is difficult because it's a multilateral negotiation and it's deeper than that. We never criticized their offer because we're all trying stuff, which is what you would expect when you think about an industry going from a regulated to a deregulated environment.

BTN: On the shrinking of incentives, we hear some agencies make analogies with airline commission cuts, which really were across-the-board moves. Yet, this isn't really the same situation. Can you say how?

Hannigan: It's different because of the interdependency between the agencies and our GDS business. Certainly, all of that is very close to home. We have the GDS business and also Travelocity, and a meaningful part of Travelocity's economics also are incentives, no different from Travelocity's online competitors. But I think the shocks that took place in the industry before 9/11 were typically related to commission cuts. That was an interesting dynamic and I don't think that's a good model.

BTN: There was also more of a sense of a standard in commission in that they had a publicly known base for airline commissions.

Hannigan: Right, but on the other hand what might be a decent analogy is what we can do with travel management company partners and merchant content and changing how we pay. To some extent, commission cuts were offset with override programs, and there's a way to go about it to pull off the same thing and make it work for the TMC but avoid the shocks along the way. The biggest difference, when you kind of step back, is that our relationships between our GDS company and its agency customers are very different from the airline side in a lot of ways. A very basic difference is we have a contract that we will continue to abide by. The TMCs had to adjust to the shocks of commission cuts, but if there had been one single commission cut to zero, that would have been a lot more devastating than adjusting in an incremental way.

BTN: It seems that the percentage of Sabre's bookings covered by DCA-3 could be higher than your statement of about 40 percent by year-end.

Hannigan: We have to be careful about the numbers we discuss, because there are significant financial implications, so until it happens we don't say it. We said 40s, and that's about where we are now. We're negotiating with many airlines now. You might be right that it will be a bigger number by the end of the year. Also, we're offshore with most of our discussions right now, pretty specific to European flag carriers, and as far as the percentage of bookings involved for each carrier, they are smaller in a pretty meaningful way—as far as tranches of new bookings covered by the program—than the six majors are. When we signed up American, we were at 19 carriers I believe, but the percentage of bookings in the program other than the six majors was 1 percent.

BTN: How is the European environment different in terms of what led us here toward reduced fees in exchange for more content, given the carriers' exploration of direct channels?

Hannigan: It's at a different rate, and it's a different regulatory environment. Between the European Union and North America, after January 2004 it will probably be pretty different. The big reason is there is absolutely no reason for the GDS industry in the United States to be regulated anymore. The only reasons why there were rules in the first place are now long behind us, which is not the case in Europe. You still have Amadeus owned by three flag carriers. Here, it's definitely an industry ripe for deregulation and, with a Republican administration, you would expect that to happen.

It was in anticipation of deregulation—at the same time having a program that fit within the rules, reflecting the complexity of the negotiation—that we offered DCA-3, and we believe we're well positioned for it. It is interesting when you talk about how many lessons are being learned globally, even if you don't have to learn them yourself. It was easy for me to say two years ago that the greatest value proposition for suppliers in the distribution world are traditional agencies, especially after commissions went to zero. It's the highest yielding channel, facilitated by the GDS. At the same time, it was not irrational for a supplier to say—and depending on who you talked to, sometimes this was the case—"Yeah that might be true now, but if you're going to continue to raise prices every year, at some point it's going to make sense for me to have a substitute. I'd better get working on it now." What is the crossover? I'm not sure. So we thought it was right to take the heat off the relationship in that regard.

BTN: GDS deregulation would impact all of us. We've talked about how the DCA-3 program addresses that, but aren't there other ramifications?

Hannigan: I think they are all behind us. The industry is positioned for it and while we all follow the rules, the models as they exist now after DCA-3, without change, could be the models tomorrow.

BTN: So the key outcome is securing content?

Hannigan: We have in place commercial agreements now with sophisticated buyers, so many of the rules' safeguards on the GDS are irrelevant. There are elements of what the U.S. Department of Transportation proposed that are wrong-headed and could still damage the industry, but it's hard for me to believe the administration would allow for DOT to, for instance, abrogate contracts, which is one of the things DOT wrote about. I can't see abrogating contracts between private parties happening in America without an uproar. It's not good for anybody, but I have faith.

BTN: Will the merchant model resemble Web airfares where business travelers modify their behavior to take advantage, and what will happen if hotels start filling up again?

Hannigan: Yes, for some companies it works. It's more of an Office Depot model. For many companies, it doesn't. Many have their own deals with suppliers and that's why you won't see the uptake in the merchant business for the traditional travel agency network that we do see with online leisure. It's a different set of buyers with a different set of requirements, but there is uptake. It's the rate that matters, and the size of the market, which I don't think anyone knows yet.

As far as hotels, occupancy rates have been pretty darn low. Although they're improving a bit, there's plenty of pressure on hoteliers to fill those rooms. Between current vacancy rates and with the construction that continues to take place, it will be some time before hoteliers feel differently about how they market their product. If you think about a 300-room hotel where 10 to 40 rooms are put aside with three or four different providers to sell those rooms in a merchant model, that's a part of their distribution strategy but it's not overwhelming. You can get occupancy rates that are pretty darn high before you would think about that differently.

I think the hoteliers worry about dilution in the corporate space and transparency of their price. It's something the airlines will be dealing with for some time. Everybody wants to avoid pricing transparency, undermining yield management tools, and certainly that's a concern. There's a view that there's some level of inevitability to it. Again, the question is, "How do you continue to adjust your business model?"