Worldspan is creating new economic models with its largest agency subscriber and second-biggest airline customer and collaborating with its former airline owners to go after traditional agencies both here and abroad, according to a document filed last month with the Securities and Exchange Commission. The filing provides the most detailed available picture of the new Worldspan, which is second to Sabre Holdings in U.S. transactions processed.
According to the Sept. 24 document, Worldspan and American Express have adopted a new model in which the former pays the latter for travel segments booked, instead of the other way around as per standard industry practice. "Although the substantial majority of our electronic travel distribution revenues are derived from booking fees paid by travel suppliers," recent agreements, including a deal with Amex, Worldspan said, "do not follow this traditional business model. Under our agreement with American Express, which will be implemented in the latter half of 2003, we anticipate charging a transaction fee to American Express—rather than the travel supplier—based upon travel segments booked or messages processed by us."
While reluctant to provide additional details, an American Express spokesperson confirmed that the new economic model with Worldspan "is TravelBahn DS," Amex's name for a program, launched in December, that brings to clients full content from airline participants in exchange for undisclosed savings. American and Continental airlines are participating
(BTN, May 12).In August, American Express Corporate Services Corporate Travel Solutions vice president and chief technology officer Michael Laughlin said TravelBahn represents the company's "single largest investment over the past three years." At the time, he said, TravelBahn's virtual private network was available in 90 percent of offices around the globe, while the agent desktop application and traveler portal were "in various stages of rollout." The VPN has "no dependencies on a single GDS provider" and accesses all of them, according to Amex's Web site.
Although Worldspan may have a more significant role than other global distribution system providers within the TravelBahn technology umbrella, the mega agency continues to work closely with Worldspan competitors. For example, Sabre in July said Amex had signed a multi-year extension to its distribution agreement with GetThere.
Worldspan said Amex, Northwestern Travel and WorldTravel BTI are its largest traditional corporate agency subscribers. "Bookings from our top 10 traditional travel agencies accounted for approximately 11 percent of our total bookings in 2002," Worldspan added. "No one traditional travel agency accounted for more than 5 percent of our total bookings in 2002."
The Amex arrangement flips a model in which suppliers pay segment fees to the GDS firm, and it pays a portion of those to agency or corporate subscribers in the form of incentives. That model is under fire as airlines continue to leverage GDSs into lowering their fees in exchange for access to inventory, including Web-only fares. Meanwhile, it remains to be seen how successful GDS companies have been in throttling incentives.
In Worldspan's case, incentives were a primary contributor to a 2002 increase in the company's costs relative to revenues. The company cited a 32.4 percent increase in "inducements paid to travel agencies." Further, it said, payments to online travel agencies "tend to be higher than those paid to traditional travel agencies."
That GDS companies use their money as a sales tool irks the airlines, which see GDSs and distribution in general as one of their most controllable cost categories. This is part of the reason several carriers put the heat on GDSs by developing such alternatives as Orbitz, their own agency booking sites and AA's EveryFare program. Pressed by these developments, Galileo and Sabre have signed several, typically three-year agreements in which they discount their fees in exchange for access to non-GDS content.
Worldspan, however, is taking a different tack, actually paying Northwest Airlines for fair fare access. "We recently entered into a fare content agreement with Northwest pursuant to which Northwest will give us the same access it gives to Galileo and Sabre in exchange for monthly fee payments from us to Northwest and subject to us keeping steady the average booking fees paid by Northwest for traditional travel agency bookings in the U.S. and the Caribbean," the SEC document revealed. "We believe that obtaining similar fare content from our other major airline travel suppliers is important to our ability to compete. Consequently, we plan to pursue agreements similar to the Northwest agreement with certain other major airlines, which may require significant payments or other concessions to those airlines."
It's difficult to read whether the Northwest arrangement is a harbinger of what Worldspan has in mind for other carriers since the Minneapolis-based major, like other former owners American and Delta, has a special relationship with the Atlanta-based GDS company. The filing seems to indicate Worldspan already has content deals with AA, Delta and Northwest. Worldspan said AA for three years and Delta and Northwest for four years will provide it "no less functionality, inventory, inventory controls or information related thereto in any given country than such airline provides to any other current GDS in that country and to provide to us all fares that it makes available to any other current GDS for distribution to all of such other GDSs' subscribers on the same terms and conditions as such airline makes available to such other GDS, in each case subject to us satisfying certain GDS booking fee pricing and functionality requirements."
The filing also confirmed details about Worldspan's airline relationships that were uncovered earlier by Business Travel News
(BTN, July 7), including commitments from Delta for three years and Northwest for four years to resist terminating their participation in Worldspan if they have not already done so with each of its three major GDS rivals. For American, that requirement applies only to Galileo and Sabre. All three carrier agreements are "subject to Worldspan satisfying certain GDS booking fee pricing and other requirements."
Delta and Northwest also will continue to use Worldspan as their internal reservation system provider under contracts with a 15-year term. Further, each of the three former airline owners agreed to not compete with Worldspan "as a GDS" for at least three years and, in a nod to Orbitz, to "not own 2 percent or more of any entity whose principal business at the time of the initial ownership is the ownership and operation of a GDS for a period of three years."
In terms of agency and corporate sales help, the document said Delta in North America and South America for three years and Northwest in the United States and Japan for four years exclusively will market Worldspan to travel agencies "subject to Worldspan satisfying booking fee pricing requirements for GDS services." In exchange, Worldspan will pay each airline a minimum of $1 million annually in inducement payments based on "contractual commitments" at designated travel agencies.
While its airline relationships "provide us with a strong competitive advantage in the GDS industry," Worldspan also said, "we have historically focused on selected geographic markets where the seller airlines have had significant operations. We intend to aggressively compete for traditional travel agencies in geographic markets in the United States and throughout the world where we have not previously concentrated."
In general, Worldspan said it "will largely continue the airline services and marketing arrangements historically in place between us and Delta and Northwest."
The nature of marketing relationships between GDS firms and airlines is one of a handful of issues with which the U.S. Department of Transportation is grappling as it reviews its rules governing GDSs
(see story). According to Worldspan, "It is unclear at this time what changes, if any, will be made to the U.S. regulations. DOT has announced that it anticipates that its review will be completed by Dec. 31."
Worldspan said its three former owners generated about 43 percent of its revenues in 2002.