Entering 2006, travel industry constituents expected significant changes in distribution economics. The impact of those changes--on airlines, global distribution systems, travel management companies, managed-travel clients and other players--only materialized this fall. Now, exiting 2006, more substantial changes are afoot in the travel distribution sector following an announced sale of Sabre Holdings to private equity firms and the proposed merger of Travelport and Worldspan.
In discussions this week, few sources were willing to assess the immediate impact, if any, on managed travel. Commentators suggested the long-term implications could range from improved competitiveness to weaker service, and everything in between.
Pressures on the GDS model throughout the year led to skittishness on the part of public investors, partly resulting in private equity money taking over this cash-rich sector. Across all industries, the value of private-equity buyouts has almost tripled year-over-year, according to Thomson Financial.
Silver Lake Partners and Texas Pacific Group agreed to pay $32.75 per share in cash for Sabre Holdings (a "30 percent premium" over Sabre's average share price during the 60 previous trading days) as part of a $5 billion "definitive merger agreement" expected to close "early in the second quarter of 2007." Sabre expects to maintain its current management team and headquarters in Southlake, Texas.
As the North American GDS market leader, Sabre Travel Network operates alongside such other brands as Travelocity and Lastminute.com within Sabre Holdings. By becoming a private company, Sabre expects to achieve "greater flexibility to invest with a long-term perspective rather than managing to short-term Wall Street expectations [and] compete more effectively with our private competitors and give us the opportunity to have more flexibility in our customer interactions."
Silver Lake Partners focuses on technology firms while TPG has invested in various entities from a number of industries, including travel, where it has been involved with America West Airlines, Continental Airlines and Hotwire. Their planned purchase of Sabre is "subject to customary closing conditions, including receipt of stockholder and regulatory approval."
Sabre's proposed sale followed last week's announcement by Travelport that it agreed to acquire Worldspan in a $1.4 billion deal which would reduce the number of primary GDS companies to three. Travelport is owned by an affiliate of The Blackstone Group; the tie-up was not unexpected as customer defections this year eroded Worldspan's market position.
Following regulatory reviews in the United States and Europe, the transaction should close in mid-2007, the companies said. Worldspan president, CEO and chairman Rakesh Gangwal would then leave the business.
"Through this transaction, we are combining Worldspan's state-of-the-art distribution technology and low-cost infrastructure with Travelport's massive global distribution network," said Travelport CEO Jeff Clarke during a conference call last week. "The combined business will capitalize on certain natural economies of scale, significant operational cost-savings opportunities, synergistic cross-selling opportunities and an expanded global footprint." Specifically, Travelport anticipates savings of $50 million by combining the two companies. Also, ongoing litigation between the two companies would end.
Such consolidation in an already oligopolistic sector might prompt some to expect constrained competition, but Clarke--who would be CEO of the combined company--suggested the opposite. "You'll have three very strong GDSs all about the same size--Amadeus, Sabre and the combined Galileo-Worldspan," he said, speaking about global market shares. "From a GDS perspective, you'll have very robust competition among the three of us. We believe this is a critical move for us to stay competitive in a very robust, competitive environment today that is being 'disintermediated' by new technologies, and one that faces very difficult competition against a supplier base."
About the new entrants, Clarke contradicted his own comments from a few weeks earlier ( see 5Q), but many sources nevertheless did not expect the merger to fail regulatory review. Some did say that if service quality falls as a result of the deals, new entrants could get another look from some travel managers. Some sources expressed concern that fewer players means lower segment incentive payments, but others disagreed. Others pointed out that the airline agreements which GDS firms signed this year might contain "change of control" elements.
Clarke sought to assure clients about consistency in hard-fought content access. Asked whether there would be an impact on long-term airline agreements signed this year, he said, "Both companies have existing contracts that for the most part will hold going forward." He also said no decisions had been made about merging core technologies.
"I don't think in next two or three years there will be dramatic impact on travel managers," said TRW Consulting's Tom Wilkinson. "But agencies will look for new ways to secure content. Sabre talks about a five- to seven-year lock on comprehensive content. It seems that there will be a new paradigm after that for multi-GDS content."
Travel & Transport president Bill Tech welcomed the merger. "We needed consolidation in the GDS industry," he said. "Four were too many; none were strong enough in all areas to be effective, and the merger definitely strengthens Travelport's position and makes it more competitive with Sabre."
About 92 percent of Worldspan's business is electronic travel distribution. While it operates reservation systems for Delta, Northwest and 20 other airlines, it does not offer travel agency services directly to corporations or consumers, as does Travelport through Orbitz and other online entities. Travelport also operates a wholesale travel unit called GTA and has a "long-term United relationship," according to Clarke.
Just over 20 percent of Worldspan's business is outside the United States, while over half of Travelport's revenues are derived outside the U.S. today. ( See U.S. market share chart.)
The fourth major GDS, Madrid-based Amadeus, is partially owned by European equity firms, along with three airlines. In the United States, Amadeus is now launching a content access program similar to those previously established by Galileo, Sabre and Worldspan.
Effective Jan. 1, 2007, all Amadeus GDS subscribers in the United States will be "automatically enrolled" in Amadeus Content Plus, which would provide access to full content from America West, Delta Air Lines, Northwest Airlines, United Airlines and US Airways. In return, subscribers would be charged a fee of "80 cents per net segment" on those carriers.
Travelport and Sabre have said their similar programs put significant pressure on margins. As they become private entities, one industry downside is that the GDS firms will be required to disclose less than before about how their models impact profitability.