Amadeus last week said it would raise supplier segment pricing at a lower-than-usual 2 percent rate effective Jan. 1, 2002, signaling welcome news for suppliers seeking any break they can get. Wall Street analysts expect all GDS increases to be relatively low this year.
The increase reflects "more than 60 percent suspension of the full annual price increase until at least May 1, 2002," according to a news release issued Friday by Amadeus. The Madrid-based GDS acknowledged a "difficult operating environment for airlines" and promised at least 30 days notice of any variations.
Galileo also has determined its 2002 pricing, but late last week had not yet informed some suppliers and would not reveal the details to BTN. Sabre and Worldspan can be expected to follow shortly, and analysts expect all the increases to be about 3 percent or lower.
Suppliers, particularly airlines, for years have protested GDS price increases. Following several agency commissions slashes, some carriers said their GDS costs now approach those associated with paying travel agencies. For corporate buyers, fees paid by suppliers to GDSs are an enigma. While such costs are built into the fares and rates they pay, buyers tend to have difficulty seeing whether and how potential new models might address them.
"Airlines are looking at every variable cost they have, and GDS and credit card costs are among the most obvious," said Jeff Kurn, global strategic sourcing manager at Hewlett-Packard in Palo Alto, Calif. "If the airlines decide GDS fees are too high, the alternative is to ask corporations to go to Web sites for bookings. But when that happens, travelers have no access to shopping or policy compliance tools."
Major carriers and third-party developers have failed to deliver a widely accepted alternative to the GDSs for the corporate market (BTN, May 7). Nonetheless, GDSs this year are showing restraint.
"You need to be sensitive to what the airlines are going through," said Matt Fassnacht, analyst with JPMorgan Chase in New York.
All the GDSs initiated booking fee credits for suppliers following Sept. 11, even as all of them faced lower quarterly profits and initiated layoffs. Still, as painful as it is for GDSs to be booking roughly 20 percent lower volume this quarter over the same period last year, the companies themselves are in relatively good shape.
"GDS companies have very strong balance sheets, pricing power and high margins with a business model that's highly leverageable," said Paul Keung of New York-based CIBC World Markets. "GDSs will be the first in the industry to come out of this in terms of pricing and earnings growth."
Another advantage, according to Fassnacht and Jake Fuller of Thomas Weisel Partners, is that GDSs don't suffer from lower yields as do airlines and hotels. They charge the same for a transaction, whether it's a $200 or $800 rate.
"The lower capital intensivity favors the GDSs as the travel participants most likely to earn a respectable return on invested equity in good times and bad," added Dan McCarthy, analyst at Neuberger Berman. "To us, they've always represented a safer play in what is arguably the world's largest business."
The one wild card, noted Keung, is airline bankruptcies, which could have a dramatic effect on airline capacity and, thus, GDS transactions.
Short of such damage to the airlines, though, GDSs could emerge from this period stronger than ever, said Fassnacht. "In general, they are probably the strongest constituent in the entire travel industry, and they can turn that to their advantage," he said. "They could reach out a helping hand in a 'partnership' fashion, and as the one with the upper hand, that will benefit them. I think you'll start to see more interesting relationships between airlines and travel agencies."