How travel distribution and GDS systems are being disrupted: one click at a time

2019 saw more than 800 commercial airlines fly 4.54 billion passengers across the world. The travel was enabled by a fleet of around 25,000 aircraft supported by 65.5 million employees across the value chain. In addition to the operation of the flights, a key element of travel was travel distribution. That is, listing the flight inventory, related options such as hotels, cruises, transfers etc. and prices to travellers across 193 countries. This listing was enabled by a host of systems including Global Distribution Systems (GDS) where there are three large providers. Yet, in a gathering storm, the GDSs and travel distribution itself is being disrupted: one click at a time.

Airlines sell the ability to transport you between two points in exchange for a given price. This information must then be conveyed to intermediaries and directly to the consumer. This is done via multiple channels including the airline's own website and app, ticket offices, online travel agents (OTAs), travel agents and global distribution systems. A GDS system is like an online store where inventory (namely: airline seats and schedules) are displayed electronically. For airlines, GDS systems are the most expensive channel of distribution—but also ones that bring in the highest yielding traffic. That is passengers that pay the highest fares. This demand is for the most part inelastic and thus in spite of a higher cost of distribution, airlines until now have engaged with GDS systems while paying large commissions. But in a brewing storm, several ecosystem changes may just render GDS systems as a relic of the past.

Interestingly GDS systems which are much maligned by airlines as “margin eroders” were first envisioned by airlines themselves. The first GDS to launch was by American Airlines called SABRE which was an acronym for “Semi Automatic Business Research environment.” The system consisted of two IBM mainframe computers and within a period of 5 years, became the largest commercial real-time data-processing system in the world. Other airlines followed suit and the Apollo system was created in 1971 by United Airlines (later rechristened as Gallelio). Amadeus was launched in 1987 by AirFrance, Lufthansa, Iberia and SAS.

As the computing power grew these systems continued to dominate and become a source of competitive advantage. To be successful as an airline especially a global airline, you had to be on these systems. Over the years, these systems saw expansion, consolidation and mergers and evolved to the present day where we are left with three major GDS providers namely: Amadeus, SABRE and Travelport.

GDS systems are particularly attractive to private equity because of the asset-light model, captive customer base, market structure and above all stable and sizeable cash-flows. And this has been seen via mega buyouts and consolidation. SABRE was taken private by PE firms Silverlake partners and TPG in 2007 in a $5.4 billion transaction. It later did an IPO in 2014. The returns realized was around 5X even though the IPO priced lower than what was estimated. Amadeus was taken private in 2005 by Private Equity firms BC Partners and Cinven in a $4.8 billion transaction. It went for an IPO in 2010 and the returns realized were 7X . Travelport continues to be private and in its second stint with Private Equity ownership, the company was acquired by Siris Capital Group and Elliott Management Corporation, for $4.4 billion. An IPO at some future date is almost certain. But the returns this time may not accrue.

GDS revenues depend on long-term contracts, volumes and data monetisation. But increasingly airlines and buyers are moving away from these very aspects. Further, the point-of-sale pricing which was unique to GDS systems is disappearing with the use of technology itself. The only supposed silver lining has been that some large low-cost airlines in the recent past opted for GDS distribution. Yet dig deeper and one sees that this was for incremental cash-flow and not for the capabilities of the system itself.

In an ironic twist, the ubiquity of the interest in travel coupled with a focus on reducing travel expenses has seen GDS providers squeezed from all sides. Indeed, the steep fees charged by GDSs are often a topic of discussion amongst airline management. And efforts towards curbing distribution costs have been witnessed time and again. Within the last decade, Aer Lingus cut costs by removing content from GDS while Lufthansa slapped on a €16 charge on all bookings made via GDS systems; several low-cost airlines in Asia completely circumvented the GDS, and the International Air Transport Association (IATA) in 2012 launched an initiative towards a New Distribution Capability (NDC) towards replacing the messaging standard for travel distribution. The list goes on….

There are also marketplace changes including behavioral changes that stare squarely in the face of the GDS model. This includes the decline in interline and codeshare traffic for airlines, the rise of online-travel-distribution ventures including very niche providers, the advent of proxy servers, security procedures and the decline of exclusive fares. As far as the GDSs are concerned the future will not look anything like the past.

With more than half the world’s population under lockdown, travel volumes have plummeted. The industry has been hit disproportionately but for travel distribution, the impact is amplified. A return to normal anytime soon is fast becoming a distant dream. The lockdown has accelerated comfort with technology and the ongoing consumer sentiment is very telling. China, one of the world’s largest travel markets continues to not allow foreign distribution and thus a large portion of the pie is not even up for grabs.

Even when travel returns, it will initially be via feedback loops and reviews. Ironically, this is an area where GDS systems simply do not compete. This as the travel discovery process includes five distinct segments including inspiration, search and comparison, booking, settlements and feedback and the last one was never seen of much value; the GDS systems figure in the first four prominently. But as technology has progressed, the original USP of the GDS has disappeared. Niche areas like search, comparison, payments, settlements, complex itineraries have all seen the emergence of new ventures which are able to deliver solutions that are extremely focused and more economic and come with a user experience that surpasses GDS capabilities.

And if that wasn’t bad enough, Google has emerged as the ultimate travel disruptor which has positioned itself on the top of the trip planning tools. Map this with scale, analytics, payment processing capabilities and the ability to direct search and flywheel effects. Amazon and Facebook are rumored to be eyeing the market as well and they bring on the added benefit of mapping real identity.

Finally, on the supplier front as well there are many changes. There is a deliberate but decisive move by providers to move to a direct to consumer distribution. The acceleration of mobile connectivity coupled with the declining cost of data further enables travel providers to list directly via application programming interfaces that make it easy for sites to integrate and aggregate content. The costs continue to decline. Transparency continues to grow. And consumers continue to be savvier than ever. Travel distribution is not only looking at a wave of change but a tsunami. When it hits is the question of the hour.