Sabre, Travelocity & the Future of Travel Distribution | In Practise

Sabre, Travelocity & the Future of Travel Distribution

Founder of Travelocity, Former Chairman at Kayak.com and Former CIO at Sabre

Learning outcomes

  • The history of Sabre and formation of the GDS business
  • Potential impact of coronavirus on Sabre and Amadeus
  • GDS pricing structure and bargaining power with airlines
  • Core differences between hotel and air travel distribution
  • The founding of Travelocity and how Expedia stayed closer to the customer to own the transaction
  • Strategic analysis of Google in the travel value chain
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Executive Bio

Terry Jones

Founder of Travelocity, Former Chairman at Kayak.com and Former CIO at Sabre

Terry was part of the founding teams of Sabre, Travelocity, and Kayak.com, all multi-billion dollar travel companies. He started his career with 24 years at American Airlines in marketing and IT, capping his career as Chief Information Officer of its SABRE division from 1998-02. While at SABRE he led a team of six working on a project that became Travelocity.com. Terry served as CEO of Travelocity for seven years transforming it to a public company with $3bn sales. Travelocity was taken private in 2002 and Terry moved to become a founding member of Kayak.com. He served as Chairman of the company from its founding until it was sold to Priceline for $1.8 billion dollars in 2013. He is a venture capitalist with General Catalyst and Sierra Angels.Read more

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A great place to start would be to take a step back and for you to provide some context to the founding story of Sabre, in the early days?

Sabre was the internal reservation system in American. When airlines deregulated, travel agents were going nuts because, suddenly, they didn’t know the price of anything. They didn’t have computers. I was an agent at the time and it was very, very hard to make a booking. You had to do it all by phone; call five different airlines. The airlines got together and decided to form a joint company to put reservation terminals into travel agents. At the last minute, that fell apart and United said, “We’re going to do it ourselves.” Every airline tried to do it themselves. At American, we put ours out. United did, Eastern did, TWA did, many carriers put them out. They charged below cost because the idea was, if I have my system in a favorite travel agency, I’ll get more share. That actually worked. There was a halo effect because the displays were biased, so that if you had the American system and you said, “I want to go from New York to LA”, you saw 27 American flights before you saw one from anybody else. That’s the way they started. Airlines spent lots of money. American spent hundreds of millions of dollars putting it out. They thought it was a good investment.

What were the dynamics between the airlines and the travel agents and how the GDS sat in the middle of those two suppliers?

It wasn’t a GDS then because they were each airline owned. It was okay because, let’s say, I own an agency and most of my business was on American; I wanted the American system. At my agency for example, we had TWA’s system because we were mostly international and, in those days, the systems didn’t do international pricing, so the people themselves at TWA would do the work for us and that was helpful. The big change that happened was the government filed an anti-trust lawsuit against the carriers saying, you cannot display your flights first. American said, it’s alphabetical order. That didn’t work as an argument. That’s a joke, of course. United didn’t like that. In the end, we fought hard, but we lost. What happened was, the Justice Department said, you have to list by some impartial feature. By price, by time, but not by name. So we listed by time. '

They said you have to let everybody in, you can’t preference people, because we were preferencing other airlines too. They said we could charge for participation. Overnight, Sabre became a billion-dollar business. Eventually, it was more profitable than the airline for a good many years. There’s a great quote that I use in my speeches, which says, if the start-up gets the distribution before the incumbent gets the innovation, then the game is over. That’s what happened here because we were installed everywhere. Sabre was dominant, United was second. Therefore, the other systems over time, left and the GDSs were born. Because they had the distribution and they were a gatekeeper, they could charge a fee.

I’m curious about the Sabres or the GDSs today and how they’re going to perform in this type of environment with Covid-19. How did the GDS companies or those systems perform 9/11 or in the early days in previous crises, compared to what you would see today, do you think?

For 9/11, at Travelocity, I remember the numbers. Our business was down 70%, initially, for the first few months. Then it leveled off about 30% below, for the next year. It was terribly difficult. The same was true with Sabre and Amadeus and the other GDSs. This is even worse. Airplanes are 98% down, I think. Now, they’re coming up; I see numbers from airlines and hotels coming up every day. It’s getting better, but they’ve had to take out more debt. Some of them have laid off people. Certainly, Expedia have laid off people. So have peripheral companies that I know of; one of the advertising companies I work with laid off half of their staff. It’s been very hard. It’s a tough time. These companies have cash and they can survive a while. They’re not getting bailed out like airlines are. It’s a very difficult time for them.

You expect a much slower recovery than obviously 9/11, which was more of a US-based shock to the system?

Exactly. That was US based, although international travel certainly went down for a while. It’s unclear as to how fast things will come back. The US is opening but it’s opening in the middle of a pandemic and a lot of people are not practicing social distancing. Nobody is really convinced yet about what social distancing means on an airplane. I think the carriers are doing a good job of cleaning and coming up with process and procedures. I thought United was brilliant this week. They forged a partnership with Clorox, which is the name in cleanliness. It doesn’t matter if it’s real or not, what matters is, people say it’s cleaned by Clorox, that must be good. They are clean; more people are flying. One of the things that’s going to be interesting to see is that airlines have asked, through IOTA and the ATA, for a government rule on wearing masks. They want masks to be required. Just like you’re required to show off your laptop. They can’t get the performance they want voluntarily. Costco here in the US requires masks and they throw you out of the store. I don’t think we’re going to throw somebody out of an airplane. They want a law.

Terry, what’s your view as to how the industry has evolved, following the deregulation of the airlines 20 or 30 years ago? We’ve seen a great consolidation, specifically in the US. How have you seen that more structurally change the value chain, the landscape of air travel, in the US

I think the GDS has helped a lot during deregulation. They certainly have helped with the consumer, as have the OTAs, in allowing price transparency because there wasn’t any before. Earlier, everybody charged the same price, then there was deregulation without transparency, because you couldn’t see the price. Now, every consumer can see the price. Airfares are an unbelievable bargain. You can fly coast to coast in the United States today, for the same price you could 20 years ago and adjusted for inflation, it’s even gone down. People complain about baggage charges and change fees and those things. Look, before airlines did those, they all went bankrupt. They had to find a way to make money. Air travel is a great bargain and the GDSs and the OTAs have helped with that price transparency.

Now, the flipside of it is, as carriers market more things – let’s say a more expensive seat in coach, the ability to check your bag in advance, the ability to pre-buy a meal – those were a problem for the carriers because they did them pretty well on their own websites and the OTAs had a communication system that didn’t allow for it. That’s caused a lot of this push to direct booking because the airlines are saying, we can’t display our product on your shelf the way we want to. It’s also a price war; they want to get around the GDS, so they don’t pay. They also were pushing hard for the GDSs to have a better store shelf, if you will, so they could display all of their products.

Maybe we can take a step back and look at how an airline specifically looks at the value of the GDS and compare that, obviously, to the direct distribution that they’re been pushing for the last decade or so?

They’d all prefer to have direct booking, all the time. They don’t want to pay the fee. Just as they cut the fee of travel agent commissions to zero, they would like to reduce their distribution fee to zero, because they can’t control many other costs. The oil is out of their control. Labor is unionized. Airplanes cost what they cost. There’s not much more to cut. Distribution costs are always the sacred cow that they go after to cut their costs. Now, in business travel, they seem pleased. Most of the business travel goes to the GDSs; those are high-paying passengers. As a proportion of the cost, the distribution cost is relatively low. For a $200 ticket, they don’t like it because the distribution cost is fixed by flight. It’s charged by flight segment, not by the price. On low-price tickets, they don’t like it, which is why they want direct connects to the big OTAs because, mostly, they sell leisure travel. If we look back at other crises, after 9/11 was the time the airlines finally decided to cut commissions to travel agents. I think Delta did it first. The big travel agent associations and American Express said, we’re not going to book you anymore. Then three days later, all of the other airlines did it. That was that. Crises are times when companies make decisions that they hadn’t been able to make before, particularly if the quarter is a disaster anyway. We might see some interesting changes during Covid, you never know.

What do you think could happen?

There could be one side action in refusing to pay fees or cutting fees or finding some other way to act. I think the carriers won’t do that right now because they just got bailed out by the government. It’s very hard to take action and they’re not allowed to take action on many things, under the governmental rules. If we get past September, when those rules lapse, and somebody is flat on their back, then we’ll see. Some of these airlines have done something that I really don’t like. I’ve served on 17 corporate boards, I think 6 of them public companies. Some of them have been buying back their stock like crazy to raise their stock price and, in some cases, reward employees. Then they go out and take massive amounts of debt. Those two things don’t work. Stock buybacks, if you have the cash like Apple does, that’s one thing. If you’re going to do a buyback and load up on debt, that’s something different.

Therefore, some of the carriers are in difficult positions with that. We’ll see what happens coming out of this. I heard Robert Crandall, who was the chairman of American – I worked for Bob – say that this the second or third-time airlines have been bailed out by the government. Maybe there needs to be some type of re-regulation here. They are an essential facility. They’ve been given permission now to drop some routes, under this bailout agreement. That’s good. They don’t have to fly to cities where nobody is flying. Maybe there’s something that says, in exchange for this, the government will allow you to do that. I don’t know. A lot of people are saying, oh, they shouldn’t charge bag fees and they shouldn’t charge change fees; I think that’s bunk. I think if they didn’t do that, the ticket price would be higher. That’s the way it goes. It’s always interesting to see. Hotels, for example, did not stop paying commissions when the airlines did. The big hotel chains have rumbled about that, but they’ve never done it. I don’t think they’ll pull it off this time either, but maybe they’ll make some other changes to distribution costs.

Let’s take the position of the airline then. Clearly, like you mentioned, most of the business travel does go through the GDS and that’s fine for the airline because it’s a higher ticket price. Therefore, it’s less of an issue. How does the airline try to claw back as much direct distribution from both leisure and business travel from here?

Of course, in leisure travel, they’re trying to make people loyal. They’ve done that with the AAdvantage Program and the frequent flyer programs. They try to make their websites attractive. It’s very hard in leisure, because leisure travel is price driven. People travel a couple of times a year for vacation. They rarely go to the same destination. They need to search, broadly, for price. It’s a pain in the neck to go to eight websites. I think it’s just not going to change customer behavior. It’s even more true with hotels, where there’s less loyalty and many more choices. On business travel, it’s somewhat easier because there is price negotiation; there are corporate discounts. There are large travel management companies who control most of the business. They are trying to put direct links into the large travel management companies. Most of those companies don’t control their own technology, except for the biggest ones like American Express, so that’s hard to do, as well. I’m not sure they’re going to be able to get a lot more direct business from the corporations during this time.

They have put in some direct links just so they can sell a little better. I made a speech on direct links for one of the GDSs last fall. For this interview, I went out just to refresh my memory and see what news stories there had been about direct links. There haven’t been many. Even before Covid, it quieted down. It’s very hard to get all of the airlines to change their technology at the same time. That’s what they’re being asked to do here. The big airlines want to do it right now, BA, American, Lufthansa. All the little guys say, no.

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Sabre, Travelocity & the Future of Travel Distribution

May 28, 2020

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