Relationships among travel distribution vendors are becoming more complicated as the industry's traditional segmentation breaks down. BTN executive editor Jay Campbell last month spoke with TRX Inc. president and CEO Trip Davis about the new competitive dynamics.BTN: When you were seeking financing in mid-2001, you said a GDS relationship would be "complex," but last week BTNOnline reported that Sabre Holdings accounted for most of the $20 million invested in TRX later that year. Has it been as complex as you imagined?
Trip Davis: In 2001, we set out with a financing goal, and in August we were very fortunate to be considering four different proposals. September 2001 came and went, and our management team was ecstatic to be able to close the financing in November successfully. It was a major vote of confidence about the resilience of the business and the prospects for the future, so that made us feel good about what we're up to and where we're going.
As far as the participants in that financing, we ended up working with several institutions and individuals, including myself. It was a strategic decision on the part of TRX to include Sabre in that financing, and it's been a fantastic collaborative effort since that time. We've been very pleased and hope they are also, and it's something we think provides another element of a very solid foundation for TRX and for the future.
BTN: Is this Sabre relationship characteristic of the way the industry is going in terms of cooperation and competition?
Davis: That's a fair way to look at it. We look at it in two ways. One is that we were very cautious about perception and took special care with several dozen big clients or other big partners in the travel industry prior to even signing any documents for the financing to make it a non-event and not make it news. We've continued to proceed with that sort of caution and special handling with those partners, and that seems to be working well. The second part is that we have full latitude in terms of our strategy, product offerings and our clients. There's a very clear understanding that TRX being an agnostic and independent provider is core to the strategy and key to the future. The moment we are biased in one way or the other, we end up denigrating the whole program.
BTN: What were you able to do with the invested money?
Davis: The infusion of cash enabled us to pursue strategies that already were underway: number one, the heavy-duty investment in transaction processing infrastructure to continue to drive low-cost fulfillment, reporting, back-office and data services. Also, the opportunities to invest in and continue the universal desktop program that we now call Selex and to expand our ventures in Europe and Asia with key clients that are growing nicely in those areas for us.
BTN: Orbitz recently updated its SEC filings
(see story). Is an IPO an option for TRX?
Davis: We definitely have an IPO as one option for TRX in the next few years. It depends entirely on the company's growth curve, development market conditions and other things that might develop.
BTN: Traditionally, TRX competitors have included Aqua and Cornerstone and other agency automation firms. Then you bought ISP Software, and so there you're competing with Hi-Mark, Prism and others in data. Is it fair to say that, to a certain degree, just about anyone in the travel industry is competing with TRX on something?
Davis: (laughter) That is a very complex question. We all feel like we're in the midst of a good shakeup in terms of the sets of services and the competitive forces—who is competing with whom and what will it be like in two or three years—and that's pretty exciting. At TRX, we segment our solutions very clearly and know that we have different competitors for the different solutions.
The one area of confusion we continue to want to clarify is the travel agencies. We go to great lengths to be sure these players know we have no intention of competing with them. On many occasions, the mega travel agencies and other super-regionals have made the comment, "You are competing with us," and we respond—sometimes with bewilderment—"Absolutely not. We want to be your client, your vendor, your partner, and we will not sell directly to your customers." As a result, we've come out with our promise and commitment to be behind the scenes. We've come out with our distributor program, which is a legal document where we sign up with the agencies to distribute our services through them. You've seen evidence of that with WorldTravel BTI, American Express, Hickory, Navigant, and you can go down the list.
BTN: Looking on the surface, one might say that what TRX does in fulfillment seems like a travel agency.
Davis: We do not have that direct traveler or corporate customer relationship. That's the definitive line we do not and will not cross. At the same time, we view ourselves as the supercharged or highly productive agency operations and transaction processing outfit. That's the game. We're talking about volume, scale, efficiency and cost curves. We have discovered and demonstrated during the past four years that volume matters, reengineering matters and that we can demonstrate definitive cost-curve reductions on a regular basis.
BTN: Worldspan last month reiterated that it would not compete with travel agencies and criticized other tech companies for doing so
(BTN, Aug. 25). It also said it is not offering everything a real agency does. But are people getting comfortable with the idea of working with a company that also is a competitor?
Davis: There's a difference between hiring a company that is a competitor and hiring a company that services some of your competitors. Folks still are reluctant to hire a company that is a competitor, or an outsourcer if they are competing in some form directly. If that company is a service provider and has one or two other clients that are competition, that issue is becoming more muted.
One GDS is servicing Expedia, Priceline, Orbitz and Hotwire. You can look at, say, First Data, which is processing something like 75 percent of all consumer credit card transactions in the U.S. There's a comfort with these behind-the-scenes data and processing providers that makes sense, because it's based on volume and pricing and expertise.
One of our goals was getting our major clients comfortable with our confidentiality, our independence and our security in the marketplace. It has taken two or three years to develop that track record and confidence. We're questioned regularly and in a healthy way by our clients, and we feel compelled to respond by delivering.
BTN: Offers from some vendors, say Carlson Wagonlit Travel
(BTN, Sept. 9, 2002) and Cendant's Travelport
(BTN, Aug. 25), are more proprietary, so it seems there still are multiple ways to think about it.
Davis: That's what we mean when we say we're in the midst of a shakeup, in terms of how the sets of services are developed and offered or bundled. There are some who believe they want to own and control the end-to-end solution, and those who believe they can get more value in finding the right player for each component. I don't think one way is right and the other wrong, but there are pretty clear limitations to a proprietary approach that would like to be independent. It's one thing if you say "It's proprietary, and if you like it, buy it from us." It's another thing if it's a proprietary approach and you have intentions of selling it to other players. There's a huge perception hill to climb if you are going to do the latter.
BTN: New technologies and concepts like automated exchanges or instant ticketing are replacing some demand for certain services, and then there's the potential of lower-wage offshore labor. Are these trends and services also competitors?
Davis: We think about competition holistically, so that could be discreet companies and offerings or just market trends and developments. We have every intention of embracing opportunities on the people and technology fronts and are investing heavily to do that. On people, we plan to be operational in several offshore markets in 2004. On technology, we're a leader today in automated refunds, voids, exchanges, Interactive Agency Reporting—we file the largest ARC reports on a weekly basis of anybody on the planet.
We've been working with ARC to do that and, by doing that, we're reducing the ratio of headcount to data or headcount to reports on a pretty staggering basis. It doesn't mean we're eliminating heads, but we're able to manage more data and more reports with either the same or a smaller number of people on a linear basis. Even though we might be eliminating certain revenue opportunities through automation, we're also able to offer it to our clients and, most importantly, we aggregate their volume across several of them, so you have the efficiency of both technology and volume. Having looked at the results since 2000, we know we're on to something.
BTN: TRX can do a lot of processing and operational work on an outsourced basis, particularly for midsize agencies that pay you on a unit basis rather than buying a technology license. Are smaller and midsize agencies buying into it?
Davis: The focus for the agency market is turning to the cost base, and it's tough. We recognize and appreciate that this is not only an operational or a technological change, but it's also a pretty emotional change. What we need to demonstrate is, one, trust, and two, the economics that give them the conversion from a fixed cost base where they are entirely exposed to seasonal and cyclical changes to a variable cost base that we intend to drive down over time through that reengineering and those people and tech opportunities.
The checkpoint as we sit here in August 2003 is that there is fantastic buy-in on the "why" and the "what," but then you turn to the "how," and it's a pretty big task. Changing what might be a highly customized client-by-client operation to a more configured operation doesn't mean the operation has to be entirely standardized for all clients, but there might be configurations A, B and C. You pick the one you want, and there are different price points for the customers based on the configuration. While the configuration dilemma is certainly delicate, there's a difference between customization in the sense of responsiveness for the traveler and the client and running, say, four GDSs across different back offices. That stuff already is transparent to these people, so if you have an agency that's not necessarily configured on one or two PNR structures, that's something you can change without necessarily changing the perception of the traveler or the corporate customer.
BTN: So how well has this initiative gone?
Davis: The focus on travel process outsourcing and the idea of going to a number of agency and supplier prospects is going extremely well. Expectedly, the sales cycles are long because these are intense and complex decisions, and the early signs are promising.
BTN: Does this change the line of thinking that bigger agencies have the money to invest in technology and others do not?
Davis: There's no question that buying technology or services on a per unit or variable basis is very affordable for a small-midsize agency. It is an absolute myth that licensing is less expensive than transaction-based pricing, because the all-in costs of licensing is overlooked. There are recurring maintenance charges, then you get into where it's hosted, which machines it runs on and who owns them, who is responsible for the telecom, the data centers, the human resources, the desktops, the cubicles, the benefits.
We're very early in the whole cycle of a conversion from fixed to variable costs. It seems like the major players are benefiting earlier than smaller ones because of scale, and it makes sense for us to have several major players because we can increase scale more quickly. One of the challenges as we look at going to smaller players is whether there's enough scale to offer similar price points. We're working closely with a number of prospects to determine what are the right scale numbers and whether we can aggregate scale by having solutions sold through maybe a consortium or another player that mimics a big player. You'll see the same benefits go to the smaller players but, ultimately, it's no different from other types of categories where the bigger benefit goes to the larger buyers.