Worldspan's sale closed last week, but the global distribution system provider will remain tightly tied to its former airline owners, particularly Delta and Northwest airlines, for at least the next few years. Sources said there will be almost no practical change in Worldspan's market behavior vis-à-vis its two largest carrier clients.
These ongoing relationships protect both Worldspan's buyers and sellers, allowing the airlines to retain GDS services even as they grow their own Web sites. Employing the rationale that they did not have to own Worldspan to derive value from it, the carriers sold it for $745 million in cash, plus tens of millions of dollars each in longer-term considerations.
New ownership by Travel Transaction Processing Corp., formed by a Citigroup subsidiary and Teachers' Merchant Bank of Toronto
(BTN, March 10), does bring changes to Worldspan. President and CEO Paul Blackney was replaced by former US Airways executive Rakesh Gangwal, who hired Sabre's M. Gregory O'Hara as an executive vice president. Blackney retains an advisory role and a board seat.
"No airline will exert control over Worldspan, directly or indirectly," including equity interests and board or management representation, Worldspan told the U.S. Department of Transportation last month. However, "Worldspan will continue to have marketing arrangements with Delta and Northwest, under which the airlines promote Worldspan to subscribers."
American, Delta, Northwest, Worldspan and Teachers' Merchant Bank officials declined to comment on a June 13 document related to the acquisition that was obtained by BTN. According to the document, Delta in North America and South America for three years and Northwest in the United States and Japan for four years will exclusively market Worldspan, "subject to Worldspan satisfying booking fee pricing requirements for GDS services." In exchange, the document said, Worldspan will pay each airline at minimum $1 million annually in inducement payments based on performance at designated travel agencies.
Worldspan told DOT it is not privy to marketing deals between Sabre and American or Galileo and United, but it "assumes that there are not material differences between those agreements and Worldspan's marketing agreements with Delta and Northwest." Several sources familiar with the other agreements and the market behavior they engender said Worldspan's assumption was false, with the most substantive difference being how actively the carriers' sales forces are selling their respective GDS offspring.
Official statements from the parties involved also are inconsistent with the assessment. Sabre said its marketing deal with AA allows AA and Sabre sales representatives to "participate in joint marketing calls or presentations to subscribers." However, AA has said its "interest in maximizing airline sales, particularly at a time when it is losing millions each day, far, far outweighs any interest it has under the Sabre marketing agreement."
AA and Sabre continue to maintain "certain software applications development and maintenance services," but IT assets and personnel related to the hosting of AA's reservations system were transferred to Electronic Data Systems. Sabre's annual report said 11 percent of revenues from continuing operations in 2002 were related to American and other subsidiaries of AMR, but ongoing legal action between them relating to AA's commitments under its Sabre participation agreement show the pair have a love-hate relationship.
Sources described the Galileo and United relationship as amicable following a few years of nasty legal wrangling under prior managements that left Galileo devoid of a sales force for some time. "They are on friendly terms, but the United sales people are not paid to work together with Galileo as Worldspan's airlines are," said one travel executive familiar with Galileo.
For corporate buyers, alliances between GDS companies and airlines often have meant that obtaining discount deals from the carrier requires signing on to use its preferred system. It is nearly impossible to find a huge corporate account that cites Worldspan as its primary GDS but does not also say either Delta or Northwest or both are preferred carriers.
In March, Sabre had noted Worldspan's heavy presence in Delta's and Northwest's hubs as evidence that Worldspan benefited from the support of its carrier owners, briefly referring to the practice of tying a corporate-airline discount agreement to the usage of the carrier's own GDS. Responding to DOT questions about such arrangements, Worldspan last month said, "The airlines are not victims of anti-competitive tying arrangements and they provide no evidence that any such arrangements are harming competition for air transportation."
While the impact of such deals on competition is debated, the U.S. Department of Justice's statement on the GDS rules now under consideration by DOT
(BTN, Dec. 9, 2002) argues that enforcing a rule against them would be so cumbersome and evidence of abuse is so scarce that no rules should govern so-called tying. Like many others, Justice is advocating deregulation of the GDSs.
Going forward at Worldspan, a Gangwal statement cited opportunities in "global expansion" and "information technology and hosting services for airlines and other travel suppliers." The company's global presence, limited relative to rivals, could best be expanded by stepping off Worldspan's clearest domestic marketshare advantage as an e-commerce backer. The reservations hosting market is highly competitive, featuring other GDS providers, some airlines, SITA and EDS, among others. Worldspan's two largest such clients, Delta and Northwest, will stick with it for at least three years, according to the June document. Delta announced it will receive "credits totaling about $125 million over nine years against future Worldspan-provided services," and Northwest referred to "additional credits for future services from Worldspan."
Other details of the June document contemplated prohibitions on all three former airline owners' freedom to compete with Worldspan as GDS providers, to invest substantially in a company known at the time of investment as a GDS or to provide content or functionality to another GDS that they do not also offer Worldspan. Also "subject to Worldspan satisfying certain GDS booking fee pricing and other requirements," the document said Delta and Northwest are prevented from terminating 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.
Delta owned 40 percent of Worldspan and received about $285 million and "a $45 million subordinated promissory note, which matures in 2012." Thirty-four percent owner Northwest said it gained approximately $280 million, and American, which owned 26 percent of the company, was paid $180 million and a $39 million promissory note. "The cash infusion will bolster American's cash position, but it will not alter the airline's need to fully implement its turnaround plan, which includes the removal of $4 billion of annual costs," AA announced.