Expedia late last week said it would diversify its global distribution system supply by supplementing its eight-year Worldspan relationship with a Sabre Travel Network deal, a boon to Sabre and a blow to Worldspan as the latter plans its initial public offering
(BTN, April 26). The exact impact on corporate buyers remains to be seen, but sources speculated that the five-year deal opens up possibilities for certain airlines to remove some or all content from the Worldspan system.
Worldspan said that although the change "will not have a material impact on our 2004 cash flow from operations," it nevertheless is "disappointed with Expedia's strategic decision." According to a statement from chairman, president and CEO Rakesh Gangwal, "We are respectful of their desire to diversify service providers."
Expedia and IAC Travel president and CEO Erik Blachford said in a press statement, "Expedia's rapid growth has created the need for us to diversify our GDS relationships."
The companies did not detail which portions of Expedia's business Sabre may get, saying "over the term of the agreement, Sabre expects to process a meaningful portion of Expedia's GDS bookings."
Speaking last week with Business Travel News, Sabre Travel Network North America senior vice president Hugh Jones had no comment on the "scope or nature of discussions" with Expedia, but said, "There is nothing within the agreement that limits what type of booking comes our way. That said, we would not receive many hotel bookings because the lion's share processed by Expedia are merchant hotel bookings."
Expedia officials could not be reached for comments by press time.
This is not the first time Expedia has worked with Sabre, which provides it with cruise connectivity. Sabre also has various relationships with members of Expedia's IAC Travel family, including Hotwire, Classic Custom Vacations and TravelNow. Hotwire last year converted its airline bookings to Worldspan from Sabre, but still books rental cars with Sabre.
Experts agreed that one benefit for Expedia is to diversify suppliers as it grows, but some wondered whether another factor is concern among airlines about the cost of Expedia bookings processed by Worldspan.
"Worldspan has been trying to leverage everyone to go public," said one GDS company source. "They raised GDS prices 15 percent, and airlines went to Expedia and said this is a bad thing, so Expedia recognized they could squeeze."
According to Sabre's Jones, "This agreement underscores the value of our technology and our DCA Three-Year Option program," which offered carriers discounts for comprehensive content
(BTN, Aug. 11, 2003). Asked whether Worldspan is a more expensive booking channel for carriers, Jones said, "At least in North America, Sabre has signed the six largest domestic air carriers. Worldspan has not. Therefore, based on that, and it's airline by airline, we would be less expensive."
Worldspan has announced discount-for-content agreements with Delta, Northwest and United airlines, but neither American nor Continental. Business Travel News earlier this year learned that Continental was in heated discussions with both Expedia and Worldspan about the costs of these booking channels. Meanwhile, details on the sale of Worldspan by American, Delta and Northwest last year
(BTN, July 7, 2003) indicated that American and Worldspan had contemplated the conditions under which American would entirely leave Worldspan. Theoretically, Expedia's access to AA through Sabre would help make the case for AA to do so. Already, Worldspan's other major online agency subscriber, Orbitz, directly reaches AA content on its own.
"GDS pricing varies among GDSs and airlines," said Carlson Wagonlit Travel North America CIO Loren Brown. "For example, because of their previous equity relationship with Worldspan, we believe Northwest has better pricing from Worldspan. However, that's always held as confidential between GDSs and airlines."
"As an airline, the economics with Expedia are a matter of your deals with both Expedia and with Worldspan," said Northwest Airlines vice president of e-commerce and distribution Al Lenza. "Expedia is no more or less expensive for us, whether it's Worldspan or Sabre. I don't know if that's how some others view it."
According to Worldspan's Securities and Exchange Commission filings, American represented about 8 percent of Worldspan's 2003 revenue. "American entered into agreements with us pursuant to which, among other things, it agreed not to terminate its participation in our GDS. However, these agreements are subject to several conditions, exceptions, time limitations and termination rights."
Consultant and former Navigant International president Thom Nulty thought the cost of these channels borne by carriers may have played a role in the Expedia decision. "Given the choice, airlines would get out of all the GDSs," he said.
Formerly a Worldspan board member, Lenza said, "I think this is more of an indication of a big, growing business that wants to hedge their bets."
Indeed, it is common practice for large agencies to use multiple GDS providers, for a variety of reasons.
"There are two sides to the discussion," said CWT's Brown. "One is commercial, about wanting to have competition among your suppliers, and the other is, depending on where in the world you are, there are significant content differences." For instance, he noted Sabre's larger presence outside of North America.
Former Sabre Group CEO Kathy Misunas, now a consultant with Essential Ideas, also wondered whether there is an international component to the Expedia-Sabre arrangement. "Expedia has been looking at alternatives for the past year or more relative to its GDS relationships," she added. "They don't want to have all their eggs in one basket. They previously had some terms and conditions in their Worldspan contract that probably precluded them from doing things in a certain period of time, but some of those have been lifted. They probably had evaluated buying a GDS and decided that was not in their best interest."
Misunas downplayed one source's view that Sabre teaming with Expedia would affect morale at Travelocity. "I think 'coopetition' or whatever you call it is clearly here. Competitive initiatives are not as big a deal when you're looking at getting your profit and loss in line."
"Clearly it's a world of coopetition," agreed Sabre's Jones. "It's business as usual at Travelocity. They are excited about Sabre Travel Network continuing to build out a more robust platform for online travel. One of our stated strategies is not only to maximize profitability of Sabre, but also of each division. From our perspective, STN is a provider of GDS services to agencies, whether on- or offline. This fits in our wheelhouse of providing services, now to the two largest online travel agencies."
Its inability to make that statement has been eating at Sabre, according to Nulty, who also downplayed the question of morale at Travelocity. "It's a coup for Sabre," he said. "Online was the one strength Worldspan was showing, and that growth, as well as what Orbitz is doing with direct connections was bothering Sabre to no end. They've been plotting for some time on how to get it. One question, though, is what did this cost Sabre?"
Online travel agencies typically command higher incentive payments from GDSs than traditional ones. Asked about that, Jones said, "We believe the deal is competitive with terms offered in the marketplace for similar agreements. We expect additional booking volume that will drive booking fees and will contribute incremental revenue."
That revenue would be diverted from Worldspan. Expedia "represented a substantial amount of our total transactions, accounting for over 10 percent of our total revenues," according to Worldspan's SEC filings.
Orbitz's threat last year to leave Worldspan caused Moody's Investor Service to consider downgrading its rating on Worldspan's substantial debt. Moody's on March 31 reaffirmed the rating after the Orbitz-Worldspan dispute was resolved
(BTNonline, Jan. 29). It's unclear how losing part of the Expedia business—which for Worldspan is larger than Orbitz—will affect the financial community's view of Worldspan as it prepares to go public.
"It probably won't help," Nulty joked with an understatement.
"Providing inventory to online agencies was really Worldspan's area of dominance," Brown said. "Now, the marquee customer has been put in a competitive situation."