Business in a competitive environment - Global Distribution System "GDS"

• Travel agents:

• Non-price competition exists between GDS systems in the approach to travel agents. A CRS provider is chosen on the quality of service i.e. reparation time in the event that the server crashes or the link is severed; “Worldspan guarantees a maintenance response within four hours”.
• Contract clauses are also highly competitive; the larger the offer of ‘free segments’, or greater time to sell a given number of segments whilst maintaining free access to the CRS are both grounds for competition as well as the different tools and services available on each system and number of airlines the GDS holds on its CRS.
• The GDS companies also compete on the number of airlines each system has access to or is able to provide as Fig 2 shows, the greater the number of airlines the system has access to the more appealing it is for the travel agent, due to increased customer choice, which in turn is beneficial to the travel agent.

• In light of Sabre Holdings posting a “fourth quarter net loss of $14million compared to a profit of $1million for the same period the year before”, exit barriers come to bear. Were Sabre to continue to lose revenues, it would not necessitate exiting the market. Barriers to exit include high sunk costs and expertise gained permitting diversification into other sectors which would be undermined by an exit from the market.  

Supplier power:

• It can be determined that the suppliers are powerful due to the fact that there are only four major global distribution systems in the world, hence the market is highly concentrated.
• The supplier power is further enhanced by the fact that for a large company such as “Thomas cook” which currently uses Worldspan to make its reservations, and operates in 5 or more locations; it makes it exponentially costly the larger you are to switch from one supplier to another. This is due to the fact that you would have to retrain all your staff to use the new system, which is estimated at £150 for “33 lessons, 8 exercises, 10 quizzes, 1 final exam per person” to switch to sabre.  
• In addition while you switch from one supplier to another the productivity of the employee suffers, as the graph below shows, this is due to the fact that it takes approx “2 months in order for an employee to reach the same productivity level as before” as a result it further amplifies supplier power making bigger companies such as Thomas cook more price inelastic than smaller travel agents, and makes the GDS system highly sticky and less likely to change “churn rates mentioned below”.
  

• Strong regulation by the “FAA” and the European commission has restrained supplier power hence the GDS’ in the sense that it only allowed to supply its products to the airline industry and to travel agents that are IATA bonded.
• However after continued pressure from the GDS’ companies on the FAA (Federal aviation authority), the “FAA is expected to deregulate the GDS industries” opening the door for providing its GDS systems to IBM and coca-cola hence they can book flights in house.

Buyer power:

• Travel agents:

• Buyer power in the market appears to be really weak in theory; the travel agents are highly fragmented giving them no bargaining power whatsoever.

• However in practise it is interesting to observe that companies such as “Thomas cook” with segments over 15,000 a month are able to bargain a better deal with the GDS companies to the extent that they provide free hardware for them.

• Airlines

• The airline industry have a much stronger bargaining power than travel agents in the sense they generate huge revenues e.g. Airlines with a segment count similar to “Qantas can expect to pay between USD90-120 million per financial year, “Mega” carriers such as UA and AA have costs in the order of USD300 million per annum”. Due to the high importance of volume to the supplier (GDS) which some airline industries can provide, the more able they are to barter a much better deal with the GDS.
• Buyer power has been further enhanced by the threat of by-passing the GDS industry as mentioned below.

Threat of substitutes:

• There are currently 4 rivals within the GDS industry competing for market share. Hence:

•  Internal substitution “switching from one GDS provider to another”.
• As a result of buyer inclination to substitute being relatively high hence for a small travel agent the “churn rate is estimated to be between 25-30%” the GDS industries have tried to lower churn, by the introduction of “contracts” which essentially lock in the travel agent, and by “differing the entries” on each system making retraining necessary, however switching costs for small travel agents remains relatively low and churn remains unchanged however this is not true for larger travel agents such as Thomas cook where “churn is about 5%”.

• External substitution “Alternative means of distribution outside the industry”

• With the introduction of the internet, airline companies are fighting back in that they now have an alternative means of distribution direct to the consumer, in essence bypassing the GDS market e.g. “BA website” which allows bookings to be made via the website, provides lower prices than the travel agents, and in turn the airlines cut down on distribution costs paid to the GDS.

• Response

• The GDS industry is fighting back, for example worldspan has introduced a system called “GO-RES” which essentially is worldspan’s one off fee of 100 pounds however it uses an internet line rather than its own ISDN line to display information for the travel agent essentially cutting costs for the travel agents and enticing them to remain in the market.
• “Passkey announced today that the company has secured $14.4 million in Series D funding from several sources, including three of the four major Global Distribution System (GDS) providers in the travel industry”. Race is on between the GDS companies and the airline companies to try and create a GUI which the public can use combining all the airline industries together, if the GDS succeed they will patent the technology and sell it to the airline, if the airlines succeed then the GDS system will collapse and would render the travel agents in essence useless.

Barriers to entry into the market are extremely high due to a number of factors:

• Firstly the GDS systems currently in the market are well established in terms of service and expertise, and have been in the market since it first originated in essence creating the market in the first place, for example “Amadeus the youngest of the companies was established in 1987”.
• Secondly huge capital requirements are needed in order to enter the market in terms of fixed assets costs, costs for research and development of the distribution system, marketing which in essence are sunk costs if the system fails, and extremely specialised technology which is hard to sell on if the venture fails.
•  Costs are so huge that in order to develop  the “Galileo system it took 11 major North American and European airlines: Aer Lingus, Air Canada, Alitalia, Austrian Airlines, British Airways, KLM Royal Dutch Airlines, Olympic Airlines, Swissair, TAP Air Portugal, United Airlines, and US Airways” to fund it.
• Government policy and heavy regulations that have to be met further enhance the difficulty of entering the market under the “FAA” a GDS has to meet certain criteria ranging from “security procedures”, “international laws and guidelines”, etc.
• Due the sheer size of the companies they have absolute cost advantages, and are able to exploit huge economies of scale when it comes to distribution costs.
• Extremely strong brand identities as mentioned in rivalry.
• They have accumulated a wide access of inputs from the differing airline industries “Fig2” some exclusive to them such as the “Syrian Airlines” only appears on the Galileo system, so even if they enter the market the airline industries might not deal with them.
• A new company is most vulnerable when it first enters the market as a result due to strong market presence the GDS’ might temporarily drop prices and step up marketing campaign to oust them out of the market.
• The GDS’ industry as a whole is starting to shrink as airlines now have an alternative means of distribution via the internet and website bookings, e.g. BA website.
• Total worldwide travel bookings processed through the Sabre GDS including direct bookings and joint venture bookings for which Sabre or its distribution partners earn a booking fee, were 366 million, down 8% on 2002.’ 
  
  

BIBLIOGRAPHY

http://www.hotel-online.com/News/PR2002_4th/Oct02_GDS.html

http://www.britishairways.com/travel/globalgateway.jsp/global/public/en_

Ceo Freddy Magdalani relax travel

http://www.amadeus.com/en/5020.jsp

TTG (Travel trade gazette, 18 February 2004)