Transcript GDS - responding new challenges

Grach Muradyan
Airline Business Group / Moscow
22 November 2005
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GDSs – facing new challenges
Agenda
 Low Cost Carriers – changing business model
 Deregulation & MIDT – changing distribution terms
 Internet – changing distribution environment
 GDS business - changes for survival
 What the future could bring
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 GDS creation – The “Golden era”
GDSs – the airlines babies…
 1962 - Sabre / first real-time inventory system
implementation ( AA / IBM )
 1987 - creation of Galileo (Covia / UA, BA, KL, SR…)
 1987 - creation of Amadeus (AF, LH, IB, SK)
 1990 - creation of Worldspan (DL, TW, NW)
* All trademarks respected
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GDSs were created by the airlines for joint distribution
GDSs – the golden days…
16.0%
14.0%
13.6%
12.0%
14.3%
12.9%
10.0%
8.0%
6.0%
4.0%
4.7%
2.0%
0.0%
Airlines
Sabre
Galileo
Amadeus
Net margins of GDS & Airlines / US (1999).
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GDSs net margins significantly exceeded those of airlines
Nothing lasts forever…
 Low Cost Carriers (LCC) use alternative distribution
channels / business models and technologies
 Traditional carriers ( “GDS Godfathers” and main
feeders) loose significant business segment to LCC
 Marginal situation in civil aviation in general – the 3rd
structural / industrial crisis
 End-users learned to book on the airlines sites worldwide
 CRS deregulation by DoT & EEC
 Traditional revenue sources under question (MIDT
issues)
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GDSs – facing new century challenges
“We weren’t just airborne yesterday…”
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LCC – Southwest Airlines,
the classical sample ?
“ If you get your passengers to their destinations
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when they want to get there,
on time,
at the lowest possible fares,
making sure they have a good time doing it,
then people will fly your airline.”
( Rollin King & Herbert D. Kelleher, Southwest establishers, 1971 )
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LCC – Southwest Airlines,
the classical sample ?
Southwest - “… being busy these past 33 years…”
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Began service June 18, 1971 with head office in Dallas, TX
32 consecutive years of profitability
Exceeded billion-dollar revenue mark since 1989
Largest US airline in terms of domestic volume
Year 2004 results
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Nearly 3,000 flights per day
More then 31,000+ employees in the airline
Total 70.9m pax
2,287 pax per employee ( SU / 2004: 466 )
Total operating revenue: $ 6.5 billion
Net income: $ 313 million
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LCC – Southwest Airlines,
the classical sample ?
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Passenger load factor 69.5%
Number of destinations: 60 airports
Average trip length: 758 miles;
7 daily flights per aircraft
12.5h average daily aircraft flights length
1.45h average flight length
Fleet unification - 429 Boeing 737
(average age - 9 years ):
TYPE
NUMBER
SEATS
B737 – 300
194
137
B737 – 500
25
122
B737 – 700
210
137
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LCC – Southwest Airlines,
the classical sample ?
Southwest was the first airline to establish
a home page in the internet
 $91.15 average one-way airfare (for average 758 miles)
 59% revenue generated by southwest.com
 southwest.com is the number one airline website for online
revenue ( “ PhoCusWright “ / 2004 )
 less then $1 cost per booking via internet
 less then $4 cost per booking via airline reservation agent
 less then $6 cost per booking via travel agent
 60 full-time employees interactive marketing team
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LCC – Southwest Airlines,
the classical sample ?
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LCC – Southwest Airlines,
the booking engine
“Traditional” carriers have to follow Southwest fares
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LCC – Southwest Airlines,
the classical sample ?
Regulations for GDS – some history
 Airlines complained on competitors, e.g. CO stated its
discounted fares never shown in Sabre (initially owned by
AA). Later a former senior AA staff stated under the oath
a feature was programmed into the Sabre that allowed
these fares to be suppressed, for the AA management to
investigate the viability of matching these fares*
 Travel agencies were frustrated at the comparatively
laborious & time-consuming of booking on non-owner
airline, as well as contracts clauses
* “The History and Outlook for Travel Distribution in the PC-Based
Internet Environment”, “Global Aviation Associates Ltd.”, 2001
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At the time regulations started all the GDSs belonged to
airlines - as a result, everybody was complaining:
Regulations for CRS – history / USA case
 neutral primary display (Part 255.4, Code of Federal Regulations,
CFR), secondary displays could remain biased; display criteria's to
be disclosed upon the request;
 all the CRS enhancements to be offered to all participant airlines on
the equal level (CFR 255.5);
 airline-owners to participate on equal level in the other CRS thus
not making an advantage re own CRS (CFR 255.8);
 commissions to TA for using particular CRS prohibited, max
contract length to be 5 years (CFR 255.6).
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 June 1983 the Civil Aeronautics Board (CAB) developed a
report (upon Congress request), investigating the charges
of anti-competitive behavior in four major arias: display,
booking fares, booking data & contract terms.
 11 November 1984 CAB adopted regulations for CRS:
Regulations for CRS – history / EU case
 24 July 1989 “Council Regulations (EEC) No 2299/89 “ was introduced
(amended in 1993 and 1999):
 Ranking on the flight options in the principal display …must be in the
following order (Annex 1.1)
 all non-stop direct flight between the city-pairs concerns
 all other direct flights, not involving a change of aircraft
 connecting flights
 If a system vendor has decided to add any improvement, … it shell offer
these improvements to all the participating carries… with equal timelines
and same terms … (Article 3.4)
 Loading facilities shell be offered to all parent and participating carriers
without discrimination … (Article 4a.1)
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European Union regulations (“Code of Conduct for CRS”)
Major changes had happened since the last DoT revision
for CRS rules (1992):
 the airlines’ growing use of Internet has weakened their dependence
on the (GDS) systems
 Sabre (wholly publicly owned since 1999) and Galileo (acquired by
Cendant in October 2001) are not controlled by the airlines anymore
(as well as the Worldspan, which was purchased by Citigroup &
Teachers‘ Merchant Bank 4.04.2003 )
Thus, from four GDS, three are not airline owned anymore
Based on this & in order to force competition between GDSs,
12.11.2002 US DoT issued Notice of Proposed Rule
Making (NPRM) ( http://www.dot.gov/affairs/CRSrule.htm )
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Regulations for CRS –
“ back to the future ? ”
Key NPRM proposed changes include:
 Eliminating the requirement that each airline with an ownership interest
in a CRS should participate in a competing system at the same level at
which it participates in its own
 Eliminating the rules prohibiting discriminatory booking fees
 Keeping the ranking criteria maintained
 Keeping internet out of regulation
 Consideration of shorter contract terms for travel agencies
 Prohibiting agency cash inducements tied to segments.
The general question - Should the CRS rules be maintained?
( Mr. Bill Mosley, DoT / +1 202 366 5571 / May 5, 2003)
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Regulations for CRS –
“ back to the future ? ”
American Airlines filed comments to Dot (25 March 2003):
 Welcomed eliminating of mandatory participation rules & of
prohibition for discriminatory booking fees
 Appreciated recognition of CRS contracts “parity clauses” as
anticompetitive, thus forcing CRS price competition, “which should
drive down distribution costs”
 Appreciated non-regulations for Internet sales
 Urged DoT to maintain its ban on display bias
 Proposed three-year sunset date on CRS regulations
American claimed net booking fees rate growth was 5.3% to 6.3% yearly
(1995 – 2000), while Consumer Price Index growth was just 2.4%
yearly
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Regulations for CRS –
“ back to the future ? ”
Revision objectives : reduce the obligations
under the Code of Conduct (under consideration now)
 Obligations vis-à-vis participating carriers
 Obligations to end the non-discriminatory policy:
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For fees & parent carrier clauses
For existing and newly developed services
Fees no longer have to be reasonably structured & related to costs
Obligations on neutral display to remain
 Obligations vis-à-vis subscribers
 Obligations to end the non-discriminatory policy:
 both for fees and for existing and newly developed services
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Regulations for CRS –
Europe Union Commission
Internet – a new battlefield ?
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Widest geography & client base, unlimited access channel
No need for end-user tool distribution, support & education
Requirement for user-friendly, multilingual & intuitive interface
Requirement for advertising of particular site / services
No booking / availability checking / abusing responsibility
Requirement for payment procedure provision (e.g. credit cards)
Requirement for some ticketing solution (e.g. ET, a/p ticket), etc…
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Compared with the traditional distribution channels
(e.g. travel agency terminals, airline call centers, ATO/CTOs),
Internet has the following specifics:
Internet – a new battlefield ?
 The costs for a booking is not fixed, as in case of GDSs
 The look to book ratio is very low (2% to 5%)
 Unlike the GDSs terminals, Internet is not targeted for a specific
service request, while providing the general information space
 Unless supported (by some consolidator / CRS / GDS in the
background ) needs the scope of related services / providers to be
created (e.g. interline connections), making end-user to combine these
himself
 Has a huge permanently growing potential…
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Compared with the traditional distribution channels
Internet has the following specifics:
Internet – a new battlefield ?
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LCCs use Internet as their primary distribution channel
Internet – a new battlefield ?
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Traditional carriers are also increasing direct channel sales
(Qantas site, based on Amadeus FlexPricer )
500
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100
50
0
A
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S ab
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Gal
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ve l s
rl ds
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A ba
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A xe
ss
T op
as
ni
I nf i
2003
2004
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GDS business: facts and figures net bookings per year
GDS business: changes for survival…
The major survival policy is business diversification,
which in particular include:
 Finding reasonable / balanced solution for LCC
implementation while keeping the “traditional airlines”
 E-commerce development for airlines & travel community
 IT services development - within a long-term strategy
 Non-air revenue increase (hotels, cars…)
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GDS are adapting to the changing business environment in
order to survive (…remember dinosaurs… :-)
Amadeus welcomes LCCs
Airline name
Code
Country
AirTran Airways
FL
USA
Virgin Express
TV
Belgium
Sterling
NB
Denmark
Germanwings
4U
Germany
Hapag-Lloyd Express
X3
Germany
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Some of 30+ LCCs, which are now participating…
Amadeus welcomes LCCs
 Hosted mostly in “Open Skies” inventory system (Navitair,
Salt Lake City, USA - like most of LCCs worldwide)
 Implemented in Standard Access (AIRIMP) level only
 Tending increasing their fares via GDS versus the ones
shown on their proprietary websites, thus covering the GDS
booking fee
 Using GDS as an complementary distribution channel
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Amadeus participating LCCs are:
Amadeus welcomes LCCs
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April 1st, 2003 – germanwings were implemented in Amadeus
Amadeus welcomes LCC
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germanwings.com
Amadeus welcomes LCC
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germanwings – participating, but on the lowest level 
Internet – a new battlefield
 Involving internet as a media to establish the terminal-tohost (or host-to-host) link as a cheap “last mile” (e.g.
Amadeus “Proweb” & “Vista” Front office products)
 Involving internet as a marketing environment for airline &
travel agency web sites to reach the end user for
promoting, bookings creating and tracking with graphical
intuitive interface (including WAP usage)
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The two principal ways GDSs use internet
Internet – a new battlefield
 Travelocity (Sabre)
 Opodo (Amadeus)
 Orbitz.com (Galileo / Cendant)
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Portals with GDS behind allow to use the already existing
GDS functionality (as well as links with the providers airlines, hotels, car companies), while ensuring widest
internet audience.
Some GDS-powered portals include e.g.:
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Internet – a new battlefield
( Amadeus Opodo )
Internet – a new battlefield…
( * Opodo was established & owned by 9 European airlines: Aer Lingus, Air France, Alitalia,
Austrian Airlines, British Airways, Finnair, Iberia, KLM and Lufthansa).
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 The global online travel sector is expected to triple in growth over the
next few years.
 In order to consolidate all kind of internet-related developments and
within the business diversification Amadeus dedicated E-travel division
was created in March 2002
 Amadeus strategic investment resulted in owning of 37.67% in Opodo*
(which has more then 20% of European online air bookings).
 Amadeus online ventures around the world include shareholdings in
travel.com.au (Australia), Rumbo (Spain & Latin America), 1travel.com
(US), eviaggi (Italy), Travellink (Scandinavia) and Vivacances (France).
Internet – a new battlefield…
 No. 1 supplier of e-commerce technology for airlines
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powering more than 140 websites for over 60 airlines
880+ travel agency sites
255 corporate sites
20+ hotel sites
 Growing faster then the online market in general
during the year 2004
 Worldwide growth in Internet bookings : 30%
 Amadeus growth in Internet bookings : 72%
 42 (of total 454) million online segments in 2004
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Amadeus E-Travel division - facts and figures (Sep 2005):
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Internet – a new battlefield
(VV / Amadeus API)…
Internet – a new battlefield (AF/Russia by NMC)
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 Hosting market worldwide: 30 % Unisys (USAS based) and 70 % IBM
(PARS/TPF based) solutions – “traditional” airlines
 Hosting in “OpenSkies” / HP (25+ airlines) - mostly LCCs
 Current hosting systems, including SITA Gabriel (“Second Generation”)
are based on 30 years old solutions, a lot of patches, not modifiable
anymore, not fitting good to revenue management systems
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Business diversification – IT services
 Airlines are demanding the New Generation Inventory, Departure Control,
E-ticketing and other IT systems
 The IT services are a long-term businesses !
Business diversification – IT services
 GDS IT / hosting services are providing background
for the GDS distribution services, e.g. Sabre entering in
Russian market within / due to SU migration
 At least two new truly third generation inventory solution
offers on the market for full service airlines (not TPF/PARS
or USAS based):
 Amadeus Altea new generation inventory solution
 UNISYS “AirCore” platform
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 GDS business diversification includes emphasizing hosting
and other IT services: Internet is mainly influencing
distribution while there is always demand for hosting
solutions
Business diversification – IT services
 Expected time to retire legacy systems
Within the next year
1-2 years
16%
14%
3-5 years
29%
5+ years
23%
Average expected time to
retire legacy systems:
3.9 years
No Answer
18%
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In 5 years most of the airlines plan
to have retired their legacy systems
Business diversification – IT services
 IT functions already moved/planning to move to ASP mode
Reservation
59%
Departure control
11%
58%
9%
18%
12%
21%
12%
Cargo Reservation
31%
Frequent Flyer Application
26%
Revenue Management
Airline Operation Planning
15%
15%
22%
28%
18%
9%
37%
56%
5%
19%
19%
20%
56%
24%
Financial Systems
11%
10%
Already moved to
56%
Plan to move
Source: Airline IT trend survey 2005 – SITA / Airline Business
Sample: 90 airlines from all regions and sizes
23%
Keep in house
No answer
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Most airlines are now ready to outsource their PSS
Business diversification – IT services
Lack of investment / Reduced budget
39%
Lack of IT people with airline experience
11%
Too much resources on tactical projects
14%
Lack of skilled IT people
13%
Resources focused on maintaining
legacy systems
Internal dev. too long/too expensive
8%
4%
Lack of top managt/board level support
Technology is not yet ready
Source: Airline IT trend survey – SITA / Airline Business
Sample: 109 airlines from all regions and sizes
10%
3%
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But they can’t handle any more significant IT projects
on their own
 Main airlines’ obstacles to achieving their IT strategy
Amadeus product development power
 A team of 2,000 experts
 Allocation of resources
 Skilled in new technologies
 Continuous investment on
new projects and new
solutions
Airline IT
35%
Central System
21%
Fare Quote
10%
 €300 M investment on Altéa
 Cumulated 2000 - 2004
E-Commerce
12%
Point of Sale
22%
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Business diversification – IT services
Business diversification – IT services
 Customer base
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Implemented in 2004: Qantas
Implemented in 2005: BA, dba, Finnair
Implementation plan for 2006: SAA, Pulkovo
Signed: LH, UA, common platform for Star Alliance
 Delighted first customers
“I am writing to all of you to thank you very much for your half of the very excellent
team work which has allowed ‘New Generation Inventory’ to be such a success.
I have the most delighted customers here at Qantas. Our Inventory Management
business areas are very impressed.”
Fiona Balfour, CIO Qantas
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Amadeus Altéa Plan inventory solution –
implementation status
Business diversification – IT services
 References in all major alliances
Altea Sell / Plan
Community:
• 155 FSCs (1/3)
• 400 M Pax
(23%)
E Ticketing
Community:
• 60 FSCs (1/3)
• 900 M Pax
(1/2)
 oneworld:
 Star:
 SkyTeam:
BA, QF, Finnair, IB
LH-LX, UA, SAA
AF-KL
 References in each airline segment
 Major:
 Network:
 Medium:
UA, AF-KL, LH-LX
SAA
Pulkovo
 Leading E Ticketing community
 35 ETS users
(206 M Pax)
 2 Gateway users
(48 M Pax)
 23 other airlines connected (650 M Pax)
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Amadeus Altea airlines community is already impressive
 Internet sites are acting as “consolidation / distribution”
tool, directly reaching the end-users
 Portals using GDSs in background
 Portals (same time) where possible trying to bypass
GDSs, thus establishing direct link from the web site to an
airline inventory systems
(“Orbitz “ “Supplier Link” project )
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Witnessing the Future –
would you still call this “GDS “ ?
Client
Client
TA X
TA X
Client
TA Y
TA X
TA Y
Internet
Internet
Web Portal
Web Portal
TA Y
GDS
Airline X
GDS
Airline Y
Airline X
GDS
Airline Y
Airline Y
Airline Y
Distribution model evolution - every option is available now !
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Witnessing the Future –
would you still call this “GDS “ ?
A future scenario – distribution channels more diversification
Web portals and airline websites (with / without GDS behind):
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Simple journeys & fare structure, no connections
No discounts / services on board
End-user oriented
LCCs as providers (short-haul flights mainly)
Traditional GDSs distribution:
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Complex journeys & fares, online / interline connections
Full onboard services
Travel agencies & corporate oriented
Traditional airlines as providers (long-haul flights mainly)
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Witnessing the Future –
would you still call this “GDS “ ?
Are GDS and Portals moving towards each other ?…
GDS
WEB PORTAL
?
E-commerce developments
“Supplier Link” developments
Where are we finally going ?
There would still be a place for every distribution channel !
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Witnessing the Future –
would you still call this “GDS “ ?
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Thank you !