GLG News by Chicke Fitzgerald

Implications: With the economy as a clear priority of the new administration, the world markets reacted to the election of Barack Obama, with investors voting with their wallets. In Asia, the Nikkei, the major index for the Tokyo Stock Exchange, closed up 4.5%. South Korea's Kospi composite index finished with a 2.4% advance, according to Dow Jones. The Hang Seng index in Hong Kong ended up 3.7%. The Australian All Ordinaries index was up almost 3% at its close and the markets in Taiwan and the Philippines ended lower. European stocks and U.S. futures fell after Democrat Barack Obama was projected to have been elected President of the United States. London's FT-100 and Paris' CAC-40 eeach fell more than 2%, while Germany's Dax was about 1.5% lower. It remains to be seen how the markets will close today in Europe and how the US markets will react. But it is the longer term results that will matter.

Analysis:

In the Obama camp, optimism is the order of the day, but it will still be over two months before he will be able to personally impact the economy through the implementation of his various programs. But the behind the scenes work will begin now. First with the formation of his cabinet and firming up various key appointments so that he can hit the ground running on January 20th.

One thing is for sure. The travel industry will benefit if our economy improves. And Obama did make a number of promises that we hope that he will keep:

1. Revitalize transportation infrastructure by
   

• strengthening the core infrastructure
• adding new jobs through a new national transportation infrastructure
• improving and modernizing air traffic control
• strengthening airline safety and regulation
• supporting Amtrak funding
• supporting the development of high speed freight and passenger rail networks
• strengthening air transportation in underserved areas
• modernizing our water infrastructure
• improving transportation access to jobs

2. Safeguard transportation from terrorism

• Bolster airport security
• Safeguard mass public transportation
  

We wait with bated breath, particularly interested to see the plans for strengthening air transportation in underserved areas at the very same time that airlines are reducing capacity and frequency and outright eliminating service to a number of cities in our great land.

Implications: Airlines are enjoying much lower fuel costs than they did in the summer of 2008.  Perhaps the use of the word "enjoy" and the notion that recovery is around the corner is a bit like a weatherman in the middle of a hurricane talking about tomorrow's sunshine.  At least that was the observation of a writer in Airline Weekly this week.  When the prices were high, the airlines kicked into high gear, cutting costs, trimming schedules, parking aircraft in the desert and finding ways to charge passengers for various services, previously offered gratis.  Now that the prices are low (remembering that everything is relative), will they hand off a slice of those profits to consumer?  Not likely! And what will be the impact on the other sectors of the industry?  The GDS companies depend on airline ticket sales for 90% of their revenues.  And the hospitality industry also caters to the air traveler as their primary market.  What will become of them?

Analysis: It is an interesting conundrum that must face airline executives at this juncture.  The dire situation that they found themselves in this summer has subsided.  They reacted, adjusted and are now even predicting profits in early 2009. 

To Wall Street, they will be heroes. 

To the consumers, well, it is a mixed bag of reactions. For the business traveler, it is nice to have empty center seats on their frequent trips.  Frequent travelers have adjusted their packing habits to reduce the need for checking extra bags for a fee, they have figured out that they can buy a bottle of water in the airport versus paying $5 on board for the precious H20 and most of them have received a pair or two of high quality noise-cancelling headphones  

Implications: Airlines are enjoying much lower fuel costs than they did in the summer of 2008.  Perhaps the use of the word "enjoy" and the notion that recovery is around the corner is a bit like a weatherman in the middle of a hurricane talking about tomorrow's sunshine.  At least that was the observation of a writer in Airline Weekly this week.  When the prices were high, the airlines kicked into high gear, cutting costs, trimming schedules, parking aircraft in the desert and finding ways to charge passengers for various services, previously offered gratis.  Now that the prices are low (remembering that everything is relative), will they hand off a slice of those profits to consumer?  Not likely! And what will be the impact on the other sectors of the industry?  The GDS companies depend on airline ticket sales for 90% of their revenues.  And the hospitality industry also caters to the air traveler as their primary market.  What will become of them?

Analysis: It is an interesting conundrum that must face airline executives at this juncture.  The dire situation that they found themselves in this summer has subsided.  They reacted, adjusted and are now even predicting profits in early 2009.  So what do they do now?  How will they be seen by their peers and by the press and by their customers.

To Wall Street and their Board, they no doubt will be heroes.  Perhaps the chief executives will even be dubbed "turn around artists" and awarded bonuses, much to the chagrin of furloughed employees. 

They will take a significant amount of criticism from the press and perhaps even be accused of greed as they pocket the difference in the fuel prices of the summer and now, versus handing it to the consumers as has happened at the pump.

To the consumers, well, it is a mixed bag of reactions. For the business traveler, it is nice to have empty center seats on their frequent trips.  Frequent travelers have adjusted their packing habits to reduce the need for checking extra bags for a fee, they have figured out that they can buy a bottle of water in the airport versus paying $5 on board for the precious H20 and most of them have received a pair or two of high quality noise-canceling headphones on a birthday or on Christmas, so they aren't having to pay to listen to the audio or a movie.  For the leisure travelers, perhaps they aren't flying as much due to the high fares and enjoying family time in the car instead.

At the end of the day, if the airlines do not pass on the cost savings to the consumer, we will have fewer flights, translating into fewer seats for sale, online and offline. 

The GDSs will suffer a decline in bookings, travel agencies will see (and in fact have already seen) a decline in tickets issued and hotels and restaurants will have fewer guests.

And of course as we wait for consumer confidence to be restored, we keep one eye on the price of a barrel of oil, as who is to say what will happen to it moving forward?

In the meantime, is the onus is on the airlines to play their proper role in stimulating the economy by lowering prices?  Would you if you were in their shoes?

If we are in fact just on the upside of the jet fuel roller coaster ride and another downturn (in the form of higher oil prices) is around the bend, then perhaps they are wise about banking the profits and storing up for a rainy day. 

Implications: Orbitz stock fell 7.2% on Thursday, largely attributed to the fact that 87% of its bookings are US domestic and 74% of their product sold is comprised of air tickets. Priceline also fell, but not as substantially.  Only Expedia reported a rise in value. The following facts substantiate this observation about the online industry being myopic in its approach to the travel marketplace. •  Just 15% of US overnight travel is by air •  85% is by car, motorcycle, RV or other •  Just 8% of all travel in the US is for pure vacation travel to top 100 destinations •  Just 26% is business travel • That leaves 66% that do day trips, weekend jaunts close to home, visit friends and family and "life event" travel (weddings, funerals, sports tournaments, graduations, family reunions, etc.) to the other 86,900 cities, towns and villages in the US. The online players (and their offline counterparts alike) virtually ignore all but the vacationing and business travelers.

Analysis: In 2006 there were 2 billion trips taken in the US.  Of those, just 15% were by air, and 85% are by car, motorcycle, RV, taxi or other.  Yet the online players still cater primarily to the air traveler in positioning their products.  Their technology and the rigid "where and when" dialogue makes it so. Source:  Travel Industry Association.

Air travel in the 4th quarter of 2008 is set to decline by a minimum of 10% and possibly as much as 20%.  Online sites that are dependent upon air travelers are set to experience a large part of this decline in both their top line revenues and in their bottom line if they don't make cost cutting adjustments between now and then.

Of the 2 billion trips taken in 2006, just 8% of those were for vacation and 26% for business travel.   The other 66% (1.2 billion trips) are day trips, weekend getaways, visiting friends and family or what we call "life events" (weddings, funerals, graduation, births, etc.) which include travel to the 86,900 other cities, towns and villages in the US. 

If the travel industry remains myopically focused on the air traveler and more specifically on just vacation and business travelers that use air as their primary mode of transportation, they face certain revenue declines in the 4th quarter.

It is the author's contention that the next disruptive application, will be systems that marry trip planning, content, consumer feedback, booking, mapping and routing together.   Without these tools, the online players will be doomed to serving a declining market.

Consultations on the subject with author Chicke Fitzgerald should be arranged through GLG. 

Chicke Fitzgerald
Solutionz Group
www.solutionz.com

Implications: We are still in the world of Search 1.0 at best.  As long as search engines don't care what my intent is or what my current circumstances are, then I will still get 563,000 results when I enter Travel Tampa in a search bar.  Is there anyone out there that really thinks that this is effective search?

Analysis: I watch these major companies (Yahoo, Google, Microsoft) churn away at their search engine products, spending millions and perhaps even collectively billions, on development.

Yet, in reality, if I am typing in Travel Tampa, chances are I have a set of circumstances (e.g. driving from Boston, traveling with the kids, plenty of time to stop along the way and see the sights and wanting to do theme parks, kids museums and aquariums when we get there).

Today's search is wholly inadequate to do this kind of filtering.  Hence the 563,000 results.  Worse, if I enter Driving Directions Tampa, I get 5 million responses.  Come on.  At best we have 100 tools that might be able to help me with that, but 5 million???

Search has to move to 2.0, or even jump past that to 3.0 and 4.0 so that we can set up multi-dimensional, multi-faceted profiles that can be invoked at the time of search to do the filtering for me. 

My company has built this for travel, mapping and navigation, but I would love to see this embedded in general search as well.  We call it having an electronic twin (e-Twin™).

I believe the big guys can do this.  Consumers want relevant results.  Quality guys, not quantity!

Implications: Following Nokia's recent investment in Navteq and Apple's announcements last week about having full GPS on the iPhone, T-Mobile announced an investment in DeCarta, a leading provider of mapping tools and location based services. In the article, DeCarta CEO Kim Fennell states that he believes that Nokia and Apple will introduce their own set of location based services, but that they will be tied to a particular device.  Since T-Mobile is device agnostic as a carrier, it will be interesting to see what they have planned to leverage the investment in DeCarta.     

Analysis: I am an expert in Consumer Services, specifically in the travel and hospitality industries, an industry group that has largely ignored the importance of location based services.  I also have an entrepreneurial interest in the mapping, navigation and location based services sector in my role as CEO of LeisureLogix.

Over $137b in travel is sold online in the US, out of a whopping $1.4 trillion market.  Another $129b is sold via travel agencies.  That leaves $1.1 trillion in spending by Americans within our borders that is not addressed by the current players in the travel industry. 

7 out of 10 of the top keywords used for search in the travel category involve mapping and driving directions.  It would appear in the analysis of these keywords (as provided by that Mapquest is the only one that is cashing in on the travelers that are asking for help in getting to their destination. 

The online sites (Expedia, Travelocity, Orbitz, Priceline) have incorporated a mashup of maps and their hotel databases, but have done precious little else to leverage the availability of location based, content rich search.  These systems are largely driven by the technology and databases of the Global Distribution Systems, where there has been in excess of $30b in private equity investment in the past 36 months (Sabre owned by TPG and Silverlake, Travelport's Apollo, Galileo and Worldpsan brands owned by Blackstone and Amadeus owned by BC and Cinven).

The GDS systems are largely used by travel agencies, who do not have tools today to assist those that are driving on their trips versus flying.  Air travel represents just 12% of all travel in the US, with 88% driving.  With the crisis facing the airline industry today, it would appear that there is a significant market to marry travel planning tools, with location based services and the mapping/navigation elements.

My company built our product using DeCarta technology, so I am hoping that with T-Mobile's investment in DeCarta, T-Mobile will begin to realize that the usefulness and relevance of the actual applciations that are offered to the traveler over their services, irrespective of the device used, is what is going to drive utilization.

The applications have to be practical and a part of our every day lives in order for them to be used and the content must be relevant and personalized. 

I enjoy Google Earth as much as the next person, but have yet to really see a practical application of it that would compel me to use it on a mobile device.  I know that these applications are coming and I anxiously await them.

It is my hope that 2008 will be the year that convergence between these industries begins to occur.  I believe the mapping and navigation industries, as well as location based services companies must wake up to the opportunity in the travel industry.  And conversely that the travel industry will see that they are missing a big piece of the pie by focusing on a shrinking air traveler market.

When they all wake up, we'll be there, as will rising profitability for all.

Implications: All key metrics are still up (occupancy, demand, supply, average daily room rate), but what impact  will the economic downturn and reduction in airline supply have on the hospitality industry? Air travel represents less than 12% of all travel in the US today by Americans, yet all tools in the industry are air-traveler centric. Hospitality executives cite reduction in weekend demand and softening of business travel midweek.  They do not look at tools (other than online itself) at playing a role in driving traffic to their brands.

Analysis: Speakers at the 30th Anniversary NYU International Hospitality Industry Investment Conference discussed the challenges facing the industry.  The focus was the current economic downturn and the impact on travel in general.  There was mention that demand is down on weekend travel, as well as transient business travel.

What they do not discuss is that the industry currently only has booking tools for the traveler that are focused on the air traveler, so as air travel demand declines, so does the potential occupancy rate. 

According to the Travel Industry Association, over 88% of all travel in the US is done by car/vehicle, versus just 12% by air.  Total spending by US travelers is $1.4 trillion.  Just $137b is spent online with online travel agencies and suppliers and $129b is spent with traditional travel agencies.  That leaves $1.1 trillion in spending that is not managed electronically.  How are these transactions handled?

As an example, if you are flying from New York to Tampa, it is easy to book your hotel for that trip.  Simply go to your favorite online travel agent or hotel site or even to an offline travel agency and tell them your arrival date and that you want a hotel in Tampa.  But try that same trip if you are driving.  How far will you get each day?  How far off your route are you willing to stay?  And what do you want to do along the way?  
The technology for the travel industry has its roots in the airline industry.  The Global Distribution Systems that power travel agencies, both online and offline (Sabre, Amadeus, Galileo and Worldspan) were originally founded by the airlines.  They each use a buying metaphor of where are you going and when.  This metaphor does not work with the road traveler.

I liken the change needed to the restaurant industry’s changes over the last 30 years.   When time was more plentiful, people were served sitting down in a restaurant by servers.  As the restaurant industry recognized that there were people that were either in a hurry, or wanting prepared food but wanting to eat it at home, carry out and fast food emerged as a trend.  The food was the same, but the method of presentation had to change.  Carry out containers, counters, cash registers all had to change.  Then as the drive through market emerged, restaurants had to “punch a hole in the wall” and further add technology (remote ordering systems) and rearrange their product for more efficient window service. 

The travel industry is at this crossroads as well.  The product is there, but the tools are old and outmoded and do not serve the mass market traveler, but instead have been tooled to focus on the niche (air) traveler.  Since September 11th air travel has grown to be more of a hassle with each passing month.  With the cuts in capacity, it is not expected to improve.  So it is not surprising that people continue to choose to travel by car.

As airline capacity continues to decline, it is time for the hospitality industry to look at how to attract the road traveler.  Rather than turn to discounting, I think it is time to "knock out the wall".

Implications: The GDS industry, which earns its money primarily from the travel agency community (both online and offline) booking airline tickets, has been said to be totally commoditized and destined for decline.  In 2005 (the last year that all reported their earlings publicly), globally the GDSs processed 1.3b bookings and earned $8.7b in Gross Revenues and yielded $774.1m in EBITDA collectively. The interesting statistic behind all of this is that out of the total US Travel market, which in the same year yielded 1.4b trips, of those trips, less than 10% of them were by air.  The balance of travel was by car, motorcycle, RV, train or bus.  Yet, the GDS companies do not have a product that addresses the drive market. For 2007 the Travel Industry Association reports that US spending on travel was $733.9b.  Of that, just 35% was sold electronically (which includes travel agencies and online agents). 

Analysis: The investment community has shown a penchant for investing in travel technology companies and their online counterparts.  Over 20 large transactions have closed over the last 18 months in the industry, including the entire GDS industry being purchased by private equity players.

In August, Travelport's parent Blackstone paid $1.4b for Worldspan, merging it with rival Galileo.  In July of 2003, Citigroup had paid $745m for the company, purchasing it from founder carriers Northwest and Delta and TWA's successor American Airlines. 

In 1997, Galileo went public, raising $784m selling 32% of its stock.  It was then purchased in October of 2001 by Cendant for $2.9b.

In December of 2006, TPG and Silverlake bought Sabre for $5b.  Sabre had gone public in 1996, after American Airlines sold 18% of the company's stock for $500m.

Amadeus went public in December 1999, raising $900m.  In January of 2005, BC and Cinven bought the company for $5.7b. 

Clearly the investment community believes that there is value in the Global Distribution System business.  But is the GDS business truly a shrinking, commoditized business or is there still milk to be extracted from these cash cows?

If you analyze the size of the road trip market in the US alone (over 88% of all leisure travelers drive versus fly and 62.5% of business travelers drive), you will see that the GDS business has not even begun to scratch the surface of the potential of the travel industry.  For that matter, neither has the online travel industry.

In the spirit of full disclosure, the article cited is announcing a company in which I am the founder and an investor.  Lest this been seen as totally self-serving, it is used to make a point about the GDS and online travel market. 

Technology in our industry has been air centric for nearly 30 years.  In February Sabre and Galileo's predecessor Apollo will celebrate their 30 year anniversaries.   The GDSs and the online travel systems that spawned from them 10 years ago have primarily served the point to point air business, as well as destination centric hotel business and today still only garner a small percentage (less than 10%) of their revenues from non-air activity. 

Tools, such as the one launched today by LeisureLogix, that address the intricacies of planning and booking road trips open up the GDS and online travel pie to a new market.  They allow penetration of the 65 percent plus of all travel is still sold by phone and via walkup to hotels and attractions/ entertainment venues.  The launch of new technology into the industry can open up this previously inaccessible market and spawn growth.

I'm confident that the pie is larger than what has currently been penetrated by the GDS oligopoly and I'm equally sure that the online travel market can graduate from its focus on commodity travel planning. 

Now we wait to see what the industry will do now that tools are beginning to emerge.

Implications: In July of this year TomTom acquired TeleAtlas for $29.39 per share or $2.7b USD (28x EBITDA).  Today, Nokia paid $78 USD per share or $8.1b for Navteq (35.7x EBITDA). What value can they both now extract?   With mapping services like GoogleMaps, Mapquest, Yahoo!Maps and even AAA's TripTik available via web enabled phones of all brands, what kind of differentiation is possible for Nokia in making this move.  Who is the real competition and what is the size of the pie that they are all after. Like any acquisition, the proof will be in the integration post transaction and the plans to make their tools ubiquitous.   The other challenge is to tap into the 88% of all Americans (and untold international users of Nokia's platforms) that use a car for the $1 trillion in leisure travel spending annually.  Less than $100b of this spending in the US is currently done by traditional online travel sites, such as Orbitz, Expedia and Travelocity. 

Analysis: The battle is clearly on.  Content is king and today the subject is that of maps and aggregated points of interest.

The question is "What incremental value is there in these elements of the Navteq acquisition for Nokia that makes Navteq worth $8.1b USD?".  This question is particularly relevant as Navteq rival TeleAtlas was acquired by TomTom in July of this year for $2.7b USD.

The move was clearer for TomTom, as maps are the heart and soul of a GPS unit and paying for maps on a transaction basis doesn't make much sense as you sell millions and millions of units to consumers.

It is less clear with Nokia, as their competition may not be TomTom or any of the classic GPS firms (whether indash or portable).  It is interesting to note that Garmin shareholders voted this morning with their wallets, with Garmin stock declining by over 12%.  The point is that the battle is in how and where these products are used and what new user experience is down the road that can render the legacy applications totally irrelevant.

Anyone owning an iPhone knows that Apple just set the bar on mapping applications on a handheld with their touch screen implementation of GoogleMaps.

But the big challenge whether you look at the mapping industry itself or at the GPS or mobile phone industries, is that these products are all commodities.  There is virtually no differentiation (unless you count the cool iPhone Googlemaps interface, including satellite mapping) and while now ubiquitous, mapping and delivery of location based service information is still highly impersonal.  You get the same points of interest that I get when I use my Garmin GPS and when we ping Googlemaps on our iPhone, there is no difference is what is returned. 

They don't acknowledge that I am looking for different restaurants when I am with my children than I am when I'm with my husband or that I shop differently when I am alone than when I'm with my shoe-obsessed friends.  I am one dimensional to the mapping and navigation industries.

So, the next generation of these solutions isn't about content or even about devices, it should be about the relevance of what I see on MY device and not just who I am (demographics and even browsing behavior) but who am I right now - what is my intent? 

And why is it that we need navigation devices (whether embedded in the dash of my car or a portable in my car or my rental car, or whether it is in my handheld device)?  Could it be because we are traveling?  Whether taking a day trip, tooling around town or going on holiday or a business trip, this is when folks need to navigate.  Look to the reason for the use of the technology to see how to make it relevant.

In the US in 2006 over $1 trillion was spent on leisure travel, yet less than $100b is planned and booked online.  This is largely due to the fact that todays online systems were built on legacy availability and booking systems built by the airlines.  They were not built to serve people planning a journey, involving roads, maps and driving directions but to deal with point to point travel. 

Hitwise reported in September that 6 of the top 10 travel search terms used involved mapping and driving directions.  The online travel players have not focused on this gap in their product offerings.

I am waiting to see companies like Nokia and TomTom and their compatriots invest their billions in technology that will get them beyond "par" to truly achieving an "eagle" in this high stakes game. 

Actually in my research of golf terms in trying to set up the winning analogy, I came across a little known term of "albatross", which as a rare bird is actually three under par in the game of golf. 

What I am hoping is that neither company finds that these legacy mapping providers become more of the traditional albatross, i.e. something that impedes action or progress.

Lastly I hope that the travel and navigation industries begin to see the links between them (dare I say "synergy").  I have a passion for both industries and believe there is a frontier that we are about to cross that holds profits that previous were only dreamed about.

Implications: BBC Worldwide bought Lonely Planet in a deal that insiders value at over $203m.  The question is whether content alone is enough to propel BBC Worldwide into the forefront of the $2.8 trillion global leisure travel market? Founders, Maureen and Tony Wheeler, will keep a 25% stake and presumably have been given a reason to stay around long enough to help BBC Worldwide figure out how to integrate it into their media empire.   Their take from the sale is reportedly  $143m.  This is the BBCs first major foray into the travel industry, but interestingly enough, they see themselves as just being in the content business, which could sell them short on monetizing the investment.  The deal will help the BBC become "one of the world's leading content businesses," BBC Worldwide Chief Executive John Smith said. The broadcaster also aims to grow online brands and to increase its operations in Australia and North America, Smith said.

Analysis: The first challenge is that BBC doesn't have a travel presence, other than publishing travel news and providing real time feeds on road conditions and public transport information.

While Lonely Planet is content, it is decidedly travel content and it feeds travel planning.  So will the BBC introduce a new service to take advantage of this new asset?

My hypothesis, which covers this acquisition and online travel and content in general is that although travel is one of the leading products available for sale via the Internet, it is tremendously under leveraged. 

After 10 years less than 10% of all travel is booked online.  Content can surely help that along, but unless companies can figure out how to put the content into context, delivering relevant results based on intent, we will have accomplished little else than guidebooks available electronically.

The underlying tools used to book travel, both online and offline, are flawed as it relates to capturing the 90+% of leisure travel that is booked online.  Hitwise reports that 6 of the top 10 search terms in the travel category relate to mapping and driving directions, yet the major online players are still hopelessly focused on the air traveler.

This is not surprising, as the underlying systems used to "power" the major online players were all built by their airline founders with one focus - allowing people to quickly and easily say "where they want to go" and "when".  That doesn't lend itself to a dialogue that uses rich content, such as what BBC now owns via its Lonely Planet asset.

As always, time will tell as to whether BBC as the purchaser of this asset has greater aspirations of integration over simply adding Lonely Planet into its global stable of businesses, bolstering its profits.  While profitability is a laudable goal, business growth and capturing new markets is even better and one that shareholders generally applaud as the top line grows and keeps pace with bottom line growth.

Implications: Iberia is one of the owners of Amadeus, currently the #1 Global Distribution System in the world.  TPG most recently purchased Sabre, the #1 Global Distribution System in the largest GDS market in the world, the US.

TPG also has an interest, through its venture arm, in G2Switchworks, one of the early GDS New Entrants (otherwise known as GNEs). 

So could this be a back door move to buy a share in Amadeus, in order to merge Amadeus, G2 and Sabre?d

Time will tell.

Analysis: Founded in 1987 by Air France, Iberia, Lufthansa and SAS, Amadeus is the youngest of the four global GDS companies and the only one based in Europe.

An early believer in European economic unity, Amadeus has its main offices throughout Europe, is present in over 200 markets and has a workforce of 3,950 people made up of over 25 nationalities.

The company merged with Continental’s System One in 1995, thus expanding into the United States and Asia-Pacific. Continental was an Amadeus shareholder until 1999, when it sold off its 12% stake in Amadeus’ initial public offering (IPO). SAS is also no longer a shareholder.

At the end of 2006 the company was in more countries than any other GDS and had the greatest number of billable bookings.


With the pending merger of Travelport and Worldspan, Amadeus is in danger of losing its #1 position globally.  Likewise Sabre is in danger of losing its #1 position in the US. 

With TPG's new ownership of Sabre, the Iberia move makes sense, as it would then own two of the largest GDS companies, but also the GDS New Entrant. 

We will stay tuned to this story and report our observations.

Implications: All four GDS companies are now operating on a similar playing field, all owned by private equity companies.

Cost cutting and surfacing operating efficiencies is generally the order of the day for the companies purchased by private equity firms. 

The industry is watching with a careful eye to see the impact of TPG and Silver Lake's purchase of the Sabre Group.

Analysis: The four global distribution system companies (Amadeus, Galileo, Sabre and Worldspan) all had the same genesis - ownership by the airlines.  

Three of the four companies (Sabre, Amadeus and Galileo) went public in the late 90s.  

In 2001 Cendant Corporation purchased Galileo, then in the summer of 2006, Blackstone purchased Galileo and the balance of the Travelport organization.  During Cendant’s ownership of Galileo there were significant reductions in headcount and offshoring of key functions, including development and customer service.

Worldspan was the last of the GDS companies to shed 100% airline ownership, being purchased by Citigroup Venture Capital and Teachers’ Merchant Bank in March of 2003.   Worldspan scrubbed their expenses post acquisition and some say perhaps went too far, in that they were then faced with the announcement that two of their largest customers, Expedia and Priceline were going to begin shifting bookings to Sabre and Amadeus.

In December of 2006 Worldspan and Travelport announced a merger.  The two firms are waiting for regulatory approval.

In 2005, Amadeus was purchased by Cinven and BC Partners, although three of its founders, Air France, Lufthansa and Iberia still hold on to just under 45% of the company.  Amadeus seemed to have escaped the cost cutting ax, which may be characteristic of the European private equity approach, particularly for an industry leading company that is acquired.

The latest acquisition, originally announced in December 2006 is that of Sabre Holdings.  Today the transaction was completed, following an affirmative vote by Sabre’s board and shareholders yesterday.   

All four companies still provide some level of financial reporting, but it will be increasingly difficult to find the level of detail that has previously been available.

Implications: On the B2B side, this will make the combined entity the #1 player in the global GDS space, based on both revenues and billable bookings, the traditional measure of success in the GDS world.  Once the merger is approved by regulatory authorities, the combined entity will have 63,000 travel agency locations and will service over 750 travel suppliers.

When the merger is final, it will put Sabre in the #2 spot in the US for the first time in its nearly 30 year company history and will knock Amadeus out of its #1 global spot.

Travelport also owns Gullivers Travel, Orbitz, eBookers, Trust/Wizcom, aiRes and Cheaptickets and provides IT services to United Airlines.  Worldspan powers Expedia, Priceline and Orbitz and provides airline IT services to Northwest and Delta.

Analysis: Travelport was recently spun out of Cendant Corporation and purchased by a group led by Blackstone for $4.3b in cash.  Worldspan is owned by Court Square Capital Partners and Ontario Teachers’ Pension Plan.

Travelport's 2005 revenues were $2.4b and Worldspan produced $953.7m.  the previous industry leader Amadeus had 2005 revenues of $2.8b.   Sabre's revenues for the same period were $2.5b.

Bookings were 288m and 203m respectively for the two entities.  In the same period Amadeus produced 473m and Sabre 343m.

There are still a number of markets (in Europe primarily) where Amadeus will remain in the number one slot and Abacus (partially owned by Sabre) will remain in the number one slot in most Asian markets.

“Traditional" GDSs face increasing competition from a number of travel distribution alternatives, including supplier websites, supplier distribution centers,  supplier direct connections to offline and online travel agents, and other emerging distribution technologies.  With GDS alternatives now representing around half of all travel bookings, the merged company will continue to face significant competitive pressures not only from other GDSs, but also from all of these other competitors.

Transaction has been valued at $1.4b.  In addition to the numerous customer benefits, Travelport and Worldspan expect the proposed transaction to deliver financial benefits capitalizing on natural operational synergies.

The completion of the transaction is subject to satisfaction of customary conditions to closing, including the receipt of applicable regulatory approvals.

Implications: For over a quarter of a century, travel agencies have used the Global Distribution Systems (GDS), including Sabre, Worldspan, Galileo and Amadeus for access to airline inventory.

BCD is the world's 5th largest travel agency, and the 4th largest brick and mortar agency in the US.  They are responsible for $12 billion in global sales and have 12,000 employees.  They previously operated as World Travel BTI.  They are part of one of the largest privately held family owned companies in the world, BCD N.V., a Dutch company.

Farelogix is part of a group known as "GDS New Entrants" or GNE's for short.  They provide connectivity to all four GDS companies, a number of airlines directly and airline consolidators.  Their economics are significantly more appealing to suppliers than the GDS.

Analysis: After the recent negotiations with the GDS companies, who were recently pressured by the airlines to pass on fees to the agency community, BCD made a decision to take its future into its own hands.

They made the decision to select Farelogix as their inventory access partner.    They cited the key benefit as the access to many channels, including supplier-direct, GDS, as well as private and internet fare sources.

Farelogix is a privately held technology firm based in Miami.  Its CEO is former CEO of Amadeus North America, Jim Davidson.  The company's primary funding is from Sandler Capital in NY.

BCD now joins Amex and Carlson (#1 and #2 Corporate Travel companies in the US at $20.6b and $16.5b respectively) in having a technical solution to bypass the GDS companies.

Implications: Yesterday's hostile bid by USAir for Delta has significant implications on the GDS business. 

Today USAir uses the Sabre system as it's inventory and operational system.  Delta has its own system, Deltamatic, which is hosted and operated by Worldspan. 

Should USAir succeed in its bid for Delta, Worldspan will lose yet another customer, as USAir has stated its intention to migrate the reservations system to a single environment (which would no doubt be Sabre).

Analysis: Delta is the last holdout of the US Majors to operate on their own, homegrown reservations system environment.  Known as Deltamatic, the operation of this system was outsourced to Worldspan in 1995.  At the time, Delta was one of three owner/founders of Worldspan.

In 1998, Sabre Airline Solutions completed the largest system migration in the airline industry's history when 200 US Airways systems were shut down and shifted to Sabre systems.  With the investment in time and money made in their implementation of Sabre, it is highly unlikely that Deltamatic would be the surviving system.

The migration would likely occur in the 1st quarter of 2007.  The revenue basis used for the hosting systems is on a per passenger basis, so Sabre would likely see an increase it revenues in 2Q07 as a result.  Just over 9% of Sabre's revenues come from airline hosting.

SITA Gabriel has the largest number of hosted carriers at just over 170, but they represent just 4% of total passengers boarded globally.  Sabre is next at 71, with 14% of the total passengers boarded globally. Amadeus affiliates host over 120 carriers that use AlteaRes as the front end, representing 15% of all passengers boarded.  32 of those use Amadeus’ new inventory system.  Open Skies has 25 customers, Shares 19 (7% of passengers globally) and Worldspan 15 (4% of all passengers boarded globally).   Figures aren’t available for Open Skies.


Worldspan is privately held.  Sabre trades as TSG.

Implications: After a summer of "beating" by the airlines in contract negotiations, the GDS' are finally getting some much deserved recognition as a channel.

Last week JetBlue's CEO David Neeleman hailed the GDS channel for the opportunity to attract new customers to the airline and more importantly, to extract higher ticket prices. 

JetBlue is seeing two-thirds of the traffic coming from the GDS channel as new customers and more importantly, is seeing higher yield per ticket.

Analysis: JetBlue had previously not distributed its product through the GDS systems (Galileo, Sabre and Worldspan).  It recently decided to re-enter those systems this summer.

GDS bookings are yielding $35 more per ticket, net of GDS fees, and are booking on "off-peak" days in the middle of the week, filling out JetBlue's flights at much needed times. 

JetBlue's CEO David Neeleman believes that the incremental business should help JetBlue's margins and boost revenue by as much as $100 million in 2007.

At the same time that JetBlue is getting closer to the airlines, Air Canada announced intentions to move even further away from the GDS.   Air Canada's changes are centered on a new menu of options available for the consumer (lounge access, advanced seat assignments, in-flight meals, etc.) that the GDS cannot support for the travel agent.

The airlines have made the mistake of looking at only the cost side of the equation in the past and have not taken into consideration the upside of both the variable cost nature of the GDS channel and the higher average revenues.  Those that miss out on the upside will be left with a commoditized product and continually cost cutting - a mediocre growth plan at best.