{audio:0:00:04} 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?

{audio:0:00:15} 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.

{audio:0:01:34} What were the dynamics between the airlines and the travel agents and how the GDS sat in the middle of those two suppliers?

{audio:0:01:45} 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. '

{audio:0:02:53} 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.

{audio:0:03:45} 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?

{audio:0:04:07} 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.

{audio:0:05:12} You expect a much slower recovery than obviously 9/11, which was more of a US-based shock to the system?

{audio:0:05:19} 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.

{audio:0:06:42} 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

{audio:0:07:08} 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.

{audio:0:08:02} 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.

{audio:0:08:53} 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?

{audio:0:09:03} 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.

{audio:0:10:45} What do you think could happen?

{audio:0:10:47} 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.

{audio:0:11:58} 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.

{audio:0:13:19} 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?

{audio:0:13:37} 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.

{audio:0:14:46} 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.

{audio:0:15:27} I’ll tell you a funny story. In the old days, the really old days, the airlines communicated, initially, by teletype, which you may not even know. Teletype was a very old technology. We still called it teletype even though we’d moved to computers. One day at Sabre, we had a bug and we sent out millions of teletype messages to all the carriers. Most of the carrier’s computers just threw them in the bit bucket. I got a letter from a carrier in Africa who still used a teletype and I burned up their entire paper budget for the year because their actual physical teletype printed out thousands of pieces of paper. We didn’t know anybody that was still using that. It’s an example of how long it takes people to catch up with technology and move from EDI to XML to what’s next?

{audio:0:16:25} If there was going to be one existential risk to GDSs and that business and airlines really boycotting them, what would be the step? Would it have to be some regulatory approach from the government or how do you look at it?

{audio:0:16:39} I don’t think there’s an existential threat. It’s just too hard for the airlines, particularly when they’re cash-strapped, to suddenly say, everybody has to book with us. It’s a very hard step to take. The GDSs are embedded in the process. They have titanic arguments about price, usually veiled in an argument about technology. They’ll say, well, you don’t have good technology, I can’t distribute my product, which is true, but really what they want to do is lower the price or get more value. It’s always a price/value discussion. It’s been going on for years and it will continue to go on. Over time, the technology will improve, and it will get more direct links. That will happen. I don’t think there’s the moment today for that giant move by somebody. Unless somebody says, I’m only going to pay you this and if the GDS responds, well, we’ll cut you off, if everybody else doesn’t follow – and we’re not allowed to coordinate between companies under law –  then you’re hung out and you have to retreat. Somebody may make a stab or two at that on the price. Crises are a time when people make those decisions, because when you’re 98% empty, you don’t have a lot to lose.

{audio:0:18:06} How is price typically set for the GDSs and the airlines?

{audio:0:18:12} Again, I haven’t been in that business for a long time, so my comments are probably out of date. They set a price and a contract term, and those prices are generally comparable between GDSs, for various levels of service. Then when the contract expires, they’ll come in and say, we’re going to raise the price X% and the customer says, I don’t want to pay that. Then they haggle and reach some kind of agreement. It depends on size and volume. They could have a rack rate, but it doesn’t always work.

{audio:0:18:52} If we’re seeing the decline in travel cost over the next 2 years, does the GDS have less bargaining power or more bargaining power, typically, in the value chain?

{audio:0:19:01} I think the price doesn’t really impact it. The airline is trying to make it impact it. The GDSs have a cost of processing. They have tremendous computing power, large networks to maintain. The real argument has been that the GDSs, in many cases, give part of the fee they charge to the airline back to the travel agent, in a loyalty payment. The airlines really don’t like that. To get you to use one GDS over another, there’s always some kind of rebate involved. They don’t like that, so they negotiate about those things. When you have somebody who has captured the distribution chain, and these days, Amadeus and Sabre and to some extent some other smaller players have captured all of it, it’s tough.

{audio:0:19:56} Obviously, the whole travel agent pie shrank after 9/11 and after the big OTAs came into the business. The OTAs are a huge consumer of bookings. They play in this game. That’s why you see the carriers trying to connect directly to the OTAs and they’ve had some success there. For the OTAs, they look at the problem this way: you don’t pay us any commission for selling airline tickets. We do sell millions and millions, hundreds of millions of them. Now you want us to pay more money to sell them in a way that’s more convenient for you. We don’t want to do that. Now, the OTAs very much need to sell airline tickets because they’re the front door of travel. Even though they don’t make much money on them, they get commissions on some and overrides on some and their fees and those things and they get fees from the GDSs. Really, they make all of their money in hotels and tourism cruises and those things. They can’t afford not to sell air. It is irritating to sell it without making much money. Therefore, they don’t want to invest a hell of a lot in it, if they don’t have to. It’s a very interesting argument.

{audio:0:21:19} Consolidation works in many industries. I was surprised to meet with the folks from Gallo Wineries, recently, in the United States. Gallo represents a low-price wine but actually, they’re the biggest wine seller in the United States and they own maybe 100 different wineries, many of them of great quality. They also run a business, where for some of the biggest grocery chains in the United States, they outsource the wine department. They will come in and put all the wine on the shelf, figure out the pricing, understand which needs to be at eye-level and which needs to be at low-level. They run it for the grocery store. It’s very much like Sabre. It’s totally divorced from the wine-making business. It’s just a distribution business and they make a ton of money on it. Wine, in the US at least, is second after drugs, as the most profitable part of a grocery store. We have the GDS of wine going on here. There are many other businesses like that, where somebody is taking it over and just outsourced it for the end retailer. This is not an unusual thing. It turns out to be a Harvard Business case because it really was one of the very first electronic means of automating the distribution channels. Now, of course, many companies and industries have this same thing and have copied Sabre.

{audio:0:22:48} What do you think is the biggest risk to businesses like Sabre that have distribution, have penetrated the market and now are at risk of huge fundamental shifts in the industry or just trying to bargain on price?

{audio:0:23:10} There’s always technological risks, that you get too far behind and somebody comes in with a new widget. That’s interesting in that it really hasn’t happened here, over the many years that Sabre has been in business. I started with them in 1978, so a long time ago. The technology has evolved but it hasn’t evolved geometrically or exponentially. It’s very hard for a new entrant to come in and spend the amount of money to do this. The last one to do this was Amadeus, who came in in the 90s and nobody else has cracked it or found a way to crack it since then. I think they have a risk of complacency. I think they always need to be reducing costs. Some of these companies have gone private and public twice. Piled up too much debt; gotten in too much trouble. The small ones have all dropped away. Amadeus, I think, has done a really good job because over half of their business is outsourcing airlines. They’re an airline outsourcer and a distributor. They’re able to balance those two things. That’s been helpful to them, although, obviously, they’ve been hit hard because both the travel agents and the airlines have been hit in this particular crisis.

{audio:0:24:33} The big IT companies have looked at this. IBM almost bought Sabre once. Others have approached these companies. They’ve been taken private by people who thought they could reduce their costs or chop up the businesses. Didn’t happen. They ended up loading them up with debt and taking them public again. It’s a funny thing. I don’t think they have an existential risk that I see on the horizon, but they always need to keep innovating to keep the airlines happy and particularly, the hotels and the OTAs because they power most of the OTAs, still. The OTAs rely on them and they are huge customers, so they have to really focus on them. Travelocity started inside of Sabre and that seemed to make sense. We didn’t know that in the beginning, but eventually we thought this is going to be big. We took it public; I took it public. They bought it back and they couldn’t really figure out how to run it. They ran it down from a billion-dollar company to a $200 million company, until they eventually dumped it to Expedia. It’s interesting that GDSs didn’t become OTAs. They could have, but it was just not in their DNA to do so.

{audio:0:25:53} What did Amadeus do so differently from Sabre to enter the market and grab such a share?

{audio:0:25:54} Amadeus started when several airlines in Europe got together and said, we don’t like the fact that these GDSs are American – at the time, there was a very large one in the UK – we want to control our own destiny. We want to build our own GDS and we want to outsource our technology to it. Lufthansa, Air France, Iberia, and Scandinavian Airlines, I think, were the original partners. They got together and it was surprising to an American to say, they’re building a company where the chairman lives in Sweden, the corporate headquarters is in Spain, the programmers are in Nice, on the Mediterranean actually, almost on the beach, and the datacenter is in Munich. How the heck is that going to work? It worked exceptionally well. They bought their software from Eastern Airlines. They invested a huge amount of money in it.

{audio:0:27:06} At one point, in their lifetime, Sabre and Amadeus attempted to merge. I was involved in those discussions. Long, tedious, almost a year of discussions and then it fell apart. Couldn’t agree on some things. I think Amadeus ended up with a very balanced approach between airline outsourcing and they outsource something like 100 airlines. They’re very good at it. They build other software programs. They captured travel agent share, all around the world. Very little in the US, but in every other country in the world, they are the leaders. They’ve done a great job. Had a good management team; been private and public a couple of times, but a very successful balanced IT company.

{audio:0:27:50} What do you think it is about the GDSs? Like you said, about going public, private, loading with debt, taking in public again. It seems like no one actually knows really what to do to create value or grow the business.

{audio:0:28:05} That happens in businesses over time.  Lots of businesses have had that problem. The car rental companies have done that. You get attacked, if you’re public, by activists today, certainly, in the United States, who think they can run the business better than you. It turns out, in the ones I’ve watched, they haven’t. People came to us and said, “We’re going to consolidate all of your datacenters.” I said, we only have one. We can’t do that. We’re really pretty good at cost. There isn’t a lot to cut in some of these companies. That’s normally the activist rule; either cut or separate. Sell off on profitable divisions. Create a better one. Put a new coat of paint on it. They always load it up with debt and pay themselves a huge dividend and then take it public again, which is what happened to Hertz a couple of times.

{audio:0:28:52} It’s not unusual, in this day and age, for that to happen to companies, particularly companies as they age. These are companies that have been, in many times, quite profitable. As I said, American was less profitable. The airline was less profitable than Sabre for a few years. Not always; it’s cyclical. I think the Sabre business had a tough time when they went private. They came out with lots of debt. It’s been tough for them. They’ve had a couple of CEOs. They’ve done better now; they’re doing okay. I think they’re looking at this trend toward direct connections and saying, we want to take a lead on it. We want to change our technology. We want to have a better shelf for the airlines to sell their products. They’ve worked on hotels and cars and tours and many other products. They’ve tried to make a really good product for the travel agents that are still around. Remember, almost half of the ones in the US went out of business. It’s a very different market than it used to be.

{audio:0:30:08} How did that change the landscape, when you had that shift in the physical travel agents toward online?

{audio:0:30:15} Obviously, the OTAs became exponentially more important to customers. They could be quite demanding in terms of what they wanted to receive from the GDSs, and they did, and they do. They had to rescale the size of Sabre and Amadeus as they lost a lot of agents. They were still getting the same amount of segments, pretty much. They lost some, as the airlines got more direct business. What was lost to the travel agents on the low-end leisure side generally went to the OTAs. Their business is segment based and more people are travelling now than ever before. Over time, it’s been okay. They continually have to rationalize their cost and try to shift their technologies to lower costs.

{audio:0:31:09} I think it’s been quite interesting to watch what’s happened with Google and Google’s entrance into the market. Google, many years ago now, bought ITA, a big innovative software company who had a better way, they felt, of determining price. They were a pricing engine. We could have bought them at Sabre. I recommended we did. Wasn’t able to sell that idea. They bought ITA and everybody though they were really going to be their own OTA. They never did that. It seemed for a while they’d forgotten they owned it. I look at Google as a company that’s torn, because they’re an advertising company at their core. Their biggest single customers are travel companies. When it gets to the point of competing with your biggest customer, I envision these meetings in the old days with Eric Schmidt and he goes, “What are you doing? Return on advertising is like 98%, so why do we want to be an OTA? They’re a lousy business.”

{audio:0:32:22} Then it goes away for a while. I wonder, will that change as we move from search-based shopping to voice-based shopping. It’s going to be interesting to see. I don’t know if it can work with travel, but if you say, “Alexa, I want to buy toilet paper.” She’ll recommend one brand and won’t read you ten. If you look at Google shopping or Amazon shopping, you’ll see 20 brands above the fold. If shopping goes to voice more and more, I think we’ll see Google move more from an advertising company to a transaction company. We’ll have to see if that happens. It’s very hard to do in travel, because there are so many choices that you really have to have a screen. I don’t know what will happen there. If most of their business is transactional, maybe they’ll try to jump into the transactional business in travel, as well. It could happen. I think what will happen with voice and AI, over time, could be the biggest threat to how distribution works. We’ll have to see. I had an AI company in travel for four years. It failed. We never could get anybody in travel to get really excited about AI, which is shocking because travel is the biggest part of ecommerce. You think they’d want to lead, but the OTAs and the airlines have done almost nothing with AI, in terms of focus on the customer.

{audio:0:34:03} The question of distribution and Google’s role is fascinating. One that comes up is, where is the value accruing in the value chain? Who is capturing the most value? Arguably, like you said, Booking and Expedia, they paid $8, $10, $12 billion, depending on who you look at in Google Travel spend a year. How do you see the real value being moved around a chain, as distribution moves?

{audio:0:34:40} I think what’s interesting is that people are fighting to get closer and closer to the edge. The edge is where the customer is. The edge now is right here, it’s on the edge of your glass. It’s in your phone. When we started Kayak and I know we’re going to talk about this in a subsequent episode, we were just doing search. People said, all you’re doing is focused on price. The OTAs complained about us – which I thought was hilarious – that we were just price focused. That’s the same argument the airlines had used to the OTAs. We were closer to the edge. We wanted mobile – I think Kayak has more than 60 million mobile downloads - by moving out a little closer in the process to say, we’ll help you search in a different way and then lets you buy where you want.

{audio:0:35:39} There’s a company that I’m an adviser to called Sojern. Sojern started by getting the airlines to give them search data and they said, if you have a passenger searching, let’s say, from Chicago to Orlando and Chicago to Hawaii. We can retarget them with ads for Orlando and Hawaii. Retargeting had never worked in the airline business before, like it does with that lamp that stalks you from Amazon. You look at a lamp once and it follows you for a year. That never worked in airlines because you needed the data and the price in order to retarget. They had the date and the price. They started doing those ads.

{audio:0:36:17} Then they said to the airlines, “If you will let us, we will make you some money because as soon as that guy buys a ticket in Orlando, we’ll sell them a Marriott in Orlando and we’ll sell them a car in Orlando and we’ll sell them a ticket to Disney World.” The airline said, that’s a pretty good idea. Then Sojern got even closer to the edge because the edge now becomes the ad that’s following you around the internet, as opposed to you taking action and going to an OTA or directly to an airline or going to Kayak. There are more iterations we can talk about maybe in the next segment, but it’s interesting to watch people clip a little more of the transaction on the value chain, by getting closer and closer to the edge.

{audio:0:37:05} In my book, Disruption OFF, I talk about a concept called owning the edge, which I think is critical for business today, to understand the edge moved. The edge used to be being on the High Street. The edge today is the edge of the glass. What did Airbnb do? They captured the edge away from hotels. Uber captured the edge away from taxis and limos. Companies like Kayak and Sojern capture the edge from the OTAs and the airlines. It continues to happen and it’s fascinating to watch people move farther out on the edge and take a piece. Look at Grubhub working with ghost kitchens and taking business from restaurants who are physical. They just snatch it and deliver the food. You think it came from a restaurant; it really came from an industrial kitchen.

{audio:0:38:06} I think that goes back another term out there, aggregation theory, where you aggregate and own the customer demand.

{audio:0:38:14} Yes. Look at Alibaba. Look at Alipay. Totally focused on the customer and they’re a finance company, an insurance company, and a payment company, and a loan company, and an investment company. The customers are at the center of the circle. Companies that don’t do that are having real problems. Of course, Facebook has done that, and Uber is trying to do that with other products, like Uber Eats. Even Airbnb, who started experiences because they understood you go somewhere for an experience, not to sleep. Marriott had to respond with Marriott Experiences. I believe hotel companies think we want to go to a hotel. Generally, we don’t. We have to go to a hotel to do what else we’re doing. Not if it’s a resort. If I’m going skiing or if I’m going camping or if I’m going to New York to see a play, I had to stay in a hotel. Why aren’t they the experience seller? I’ve tried to convince airlines for years that they’re the front door of travel. They should really be making a ton of money selling hotels and tours and other things. Why is Booking.com worth more than the airlines? Because they create more value out of the customer. Airlines are just in the airline business and they have a hard time selling other things. They don’t do a good job of it.

{audio:0:39:50} I want to move on to look at the OTAs and your time at Travelocity. A question before that is, why do you think Sabre failed to work with the B2C businesses? Like you said, they acquired Travelocity, it didn’t really work out. What didn’t work about that transaction or time?

{audio:0:40:09} They started Travelocity. We had a small team, for many years, who had an online product on AOL and CompuServe. Eventually, the travel agents wanted to shut it down. Our leadership said no. They gave it to me, I was over in IT. I took it over just as the internet was starting. We created Travelocity out of it. Eventually, it got so big and we’ll tell the longer story in the next episode, but we took it public. We needed to take it public to compete with Expedia. Eventually, for a number of reasons, Sabre said it’s too important to our future and they took it back. It’s a story we’ve seen over and over again about start-ups that get spun out or large companies attempting to run start-ups. When they brought it back in, they kind of broke it up. They sent IT to IT, sales to sales, marketing to marketing. Nobody was in charge. They were competing against a highly focused company at Expedia. They got their head beat in because they tried to run it like a big industrial B2B company, Sabre, instead of a small, nimble-focused B2C company, Expedia. They burned up the value.

{audio:0:41:29} It was quite sad for me because I led the team that created a billion dollars of value there. I left when they took it private because I knew what was going to happen. It’s a movie that’s been rerun many times. They weren’t nimble enough to run start-ups. In fact, it’s one of the reasons I wrote a book there behind me, on innovation, which is the story of Travelocity and how it was built and how it spun out, which is a good story for corporations who want to incubate small ideas. The bad part was when they bought it back and couldn’t figure out what to do.

{audio:0:42:12} What did you learn most about incubating the idea of Travelocity inside a big organization?

{audio:0:42:15} There are several things. It’s mostly centered around, put it in the greenhouse and protect it. It’s like a rose in the spring. The corporate antibodies would like to surround it and kill it. It sucks away their money. I moved out of the building and that was important because we created our own culture. We were in a separate building. We stopped wearing suits when everybody at American still had to wear suits. Nobody saw us, so we could get away with that. We had a separate budget and that budget was held at the CEO of Sabre because everybody else wanted to steal our money. We were still part of the marketing department at American Airlines for a while. We were losing a lot of money. People didn’t like that because they could have made more return to the shareholders than we did early on, but later we made a billion dollars. We created our own organizational structure where my marketing guy finally didn’t report to marketing, he reported to me. It became a company within a company. That was very hard to do. We were allowed to go outside and not use purchasing and not use IT, which was a mandate inside big companies.

{audio:0:43:24} I hired people from the outside. Normally, inside American Airlines you had to hire from the inside first. I eventually broke that rule because I wanted people who came out of the IT world or the internet world and that was not allowed. Budget, organizational structure, location, team were all very important in making that a success and creating a culture around Travelocity, instead of around a committee or a project. Small things can be a project or a committee, but if it’s going to be big, it has to have focus and you’re going to have people who fight you. We eventually had an internal debate about selling Travelocity. I was not allowed to participate. It was an actual debate with 40 VPs, something like that. We won, so we kept us. That was very useful in getting all of the belly aching out. All of the arguments were displayed on the table. I asked my boss many years later what he would have done if we’d lost the argument. He said, “I would have kept Travelocity, but I don’t know how the hell I would have pulled it off.” It’s not easy.

{audio:0:44:50} What was the biggest challenge in Travelocity, in the early days, in shifting to distribute hotel inventory as quick as the larger OTAs, like Expedia?

{audio:0:45:00} Expedia wasn’t larger; we were the largest actually, at that time. We were, essentially, the first large one. Expedia started about six months later. At one time, we actually talked about Microsoft and American Airlines doing that together. We were just two big bristly companies who couldn’t agree to do that. Bill Gates and Bob Crandall had those discussions. I was in on some of them. It really wasn’t about competing with Expedia; it was about competing with a telephone. Our competitor was the old way of doing business. We had to convince people that they should book online. The stock market and the stock analyst did not believe travel would end up the largest segment of ecommerce at all. I went out and played to empty rooms of analysts because they didn’t believe it.

{audio:0:45:50}Eventually, it really took off because it was a high volatility, price-driven industry. People take vacations not to the same place over time. Highly visual, so the internet was great with images. There were a lot of reasons that it worked. It was an unusual industry, not like many others, because all the suppliers were already in a big system, Sabre, or Amadeus. You didn’t have to go out and run wires to everybody to connect to a thousand wineries to sell their wine. Everybody was already connected. Which, in 1996, wasn’t generally true of most industries.

{audio:0:46:30} Our challenge was bringing people in the door. There was no search at the time. We used television and radio and print ads and banner ads to get people. People were definitely afraid of the credit card. Not because there’s been any big credit cards break ins, but the rumor was, that there were hackers out there stealing credit cards during transmission. I don’t think it’s ever happened. Incredibly hard to do. Why would you try to listen to a million phone calls to get one credit card? You steal money from a bank because that’s where the money is. We actually had an ad that ran and was on the websites that said: Call this 800-number and we’ll put the credit card in for you. We didn’t tell them that we put it in over the internet; we don’t want to let them know that.

{audio:0:47:18} Those were the kinds of problems you had, and the technology was pretty brittle. It was basically Netscape and, eventually, Microsoft build IE. The biggest scare we had was that Microsoft, at the time, started building services into the browser. They had a jobs company and several other companies. Started building it as little buttons on the browser. We thought they built in travel. We knew if they did that, we’d die because IE by that time, it captured all the share from Netscape. We went out and did a huge deal with Yahoo and a big deal with Netscape to carry all of their traffic. We became Yahoo Travel and Netscape Travel. We went public to become AOL travel. AOL was huge at the time. That cost a couple of hundred million dollars. It made a lot of bookings, but it didn’t help our stock price because, even then, the analysts figured out, it’s better to own your own customers than to be a white label for somebody else.

{audio:0:48:20} Expedia eventually did better because of that. The money we spent on AOL, they spent on advertising. We had a stronger brand for many years. The big change that happened was that Expedia got into the hotel business and the tour business differently than we did. We outsourced our hotel business to Hotels.com, who was very big, and we made a lot of money; more money than Expedia made, I think. We made a lot of money in options and warrants. Wall Street looked at it and said, “Once again, you don’t control all the pieces of the transaction, you’re not valued as highly.” All of those deposits that Expedia got helped their cash balance a lot.

{audio:0:49:11} They got this idea of bundling air, car, and hotel together in dynamic packaging. We had gone a different way. We went into cruising; making a lot of money with cruises. We bought an agency that did that. We thought cruises would be big. Turns out, we zigged, they zagged. The dynamic packages were rocket fuel for them. It really helped them and the way they did hotels. They guessed right and they passed us eventually to become number one. I don’t have any regrets. We ran a great business. It was worth a billion dollars. It was doing fine. There’s so much room in the travel market that there’s room for more than one. At that time, there were many players, now, of course, there are just two. Who would have thought that the then Priceline would win –  I don’t think anybody would have guessed that – by becoming Booking.com.

{audio:0:50:00} It’s a good lesson again, back to that owning your distribution, owning your customer, owning the full steps to transaction.

{audio:0:50:09} Yes, the full stack is pretty important. The more pieces you can own in any business. Now, it’s interesting to watch because you look at Tesla, which is way more vertically integrated than other manufacturers of cars. It doesn’t outsource as much. They have a single software platform, which allows them to innovate with more speed than the traditional car companies. You wonder, particularly after Covid, we’re hearing discussions of people blowing up long supply chains and going back to an old 19th century plan of stockpiling, where they’re going to control more parts of their destiny, not outsource. I’ve heard companies who couldn’t close their books because they outsourced part of their accounting to somebody who was struck by Covid in another country and didn’t have any workers. There’s been a lot of problems. I’ve heard other companies who’ve said, we’re going to break up our departments into different geographical areas. If one area is hit by a virus or something, the other area will continue to operate. Very interesting to see how companies are looking at their aggregation or disaggregation strategy, based now on health.

{audio:0:51:30} When you look at the distribution of both air and hotel travel today, firstly, how do you see the differences in how the industry has evolved and the role of the OTAs today and how they can grow from there? Booking and Expedia, the highest value businesses almost in travel, excluding Google Travel. How do you look at the role they play and really how distribution is going to evolve in hotels?

{audio:0:52:03} I think what’s interesting is that hotels did become number one and we all should have seen it. Of course, back then there were many more airlines too than there are today. There are, I don’t know how many, 100,000 hotels in the world. Maybe 200,000. It’s a huge number. Their products are highly variable. They’re very different from airlines. Airlines are pretty much all the same. Yes, Emirates is different from EasyJet, but the Ritz in Paris is pretty different than a pension. There’s a lot in between. There are maybe ten levels in between. There are resort hotels and there are business hotels and there are luxury hotels. That’s a perfect market for an aggregator because there’s so much differentiation.

{audio:0:53:00} Between having the product and having the reviews about the product and having comparative price around the product, I think that’s what’s made the OTAs successful. It’s all about hotels. People start with air and that’s great. Airlines are many of the peas in the pod when it comes to leisure travel and people are just driving for price and they’re in an aluminum tube for a couple of hours with a sandwich. There are lots of people who fly Southwest or EasyJet and stay in the Ritz because they say, it’s only two hours, I’m going to spend my money on the hotel.

{audio:0:53:36} They’ve been very successful at doing it. I think the biggest threat to that, of course, is something like Airbnb. As more people move to alternative accommodations, they don’t need an OTA. That’s why the OTAs have snapped up Airbnb competitors, obviously, and try to mix that together. We saw a big hotel chain, Accor, begin to try to sell competitor hotels. Then they drew back from that. They did it for a while. It wasn’t in their DNA maybe or didn’t work the way they thought. I thought that was fascinating. It could work. You do see now just the beginnings, where large chains like Wyndham and even Marriott sometimes, you book at the Marriott X and that’s sold out, so they push you to the Marriott Y. They have to be very careful because these are franchise organizations. Why are there 20 types of Marriotts? Not because anybody needs 20 types of Marriotts; it’s because they want to sell another franchise in the city. They can’t sell two identical Marriotts in the same location, so they sell two slightly different Marriotts in the same location.

{audio:0:54:52} That was an interesting battle that happened after 9/11 because the hotels, the individual units, the properties started selling directly to Priceline and Expedia, at very low price and allowed the OTA to mark up the price. The OTAs made tons of money and that’s when they captured the hotel business. The chains eventually saw that the only value of a chain – because they don’t own their hotels anymore most of them – was the brand and the brand statements about quality and what they were going to deliver; obviously, they were going to operate the hotels. And the res systems. They were losing all of the reservation fees because Expedia had a lower price than Marriott.com. Then they implemented a rule that said, you cannot give a lower price to anybody but us. It has to be price parity. They had to fight back to stay around. That was an interesting war. Maybe some kind of war like that can happen again. I don’t know. I’m not seeing it right now. ### {audio:0:55:55} What about the hotels though? Do you think they’ll claw back distribution themselves, like the Marriott is driving loyalty directly?
{audio:0:56:00} They’re trying hard, of course. They try hard to do that, but again, with a leisure traveler, it’s tough. Now, they could do a better job of selling and getting people in using points. Here’s an example, when I had an AI company the last four years, we pitched to airlines and hotels. We said, look, it’s almost impossible to use your points. We had one large hotel chain who used an experiment we did in voice. As opposed to the way every OTA and hotel works, what city do you want to go to and what day, you could say to your phone: I want to go to an island in February with my wife. It needs to have a spa, golf and amazing things for kids to do. You can’t do that anywhere today. What we found was if people were searching that way, they increased conversation rates up to 35%. It was amazing. If they’re at Marriott or Intercontinental or Hyatt, they don’t know that you have that hotel and they want to use their points.

{audio:0:57:07} We said the same thing to the airline, why don’t you allow me to say, I want to go to the Caribbean using points in January. The only way you get to do that is if you also sell them the hotel. You can make as much money on the hotel as you make on the airline ticket, if you sold it, Airline X. They haven’t done that. Maybe they’ll figure that out. We tried to teach them. They weren’t buying. We were selling to the wrong customer. We were selling to IT mostly. That can happen. I think if they understand a little more about the value of the whole vacation, which certainly the OTAs do, they could change distribution because the loyal customers they do have, or the business guys who have all the points, will hang out there and spend more money there, if it was only easier.

{audio:0:58:01} Last question, Terry. What do you think is the biggest risk to the OTAs, like Booking and Expedia?

{audio:0:58:10} I think they have to continue to watch the evolution of the edge. Booking bought Kayak. Kayak is still quite successful because there were a whole set of customers who said that’s a better user interface and we want to search everywhere and book direct, because we believe mostly, they get better customer service if they book direct. I think generally, that’s true because the airlines, if you say you booked at Expedia, they go, call Expedia and work it out. They blow you away. That was a big change. Innovative companies like Sojern and Andara, who are running these ad networks, could they become the next OTA because they are actually closer to the customer? I think they desperately have to watch out for Google; Google is a very rich, smart company. Right now, in the United States, we don’t have an anti-trust environment at all, so Google can do what it wants. Although, we have a President who writes declarations every once in a while. He’s apparently attacking Twitter today. Don’t make the President mad.

{audio:0:59:21} The bureaucratic organization of anti-trust is moribund; they’re not doing much. Although, they did really whack Sabre, who was trying to buy an interesting company that they didn’t allow. That’s an unusual move. I think they have to watch the edge. They have to watch the evolution of the cell phone. They have to watch the evolution of voice. They have to watch the evolution of shopping. They have to watch the evolution of AI, which they’re way behind on, I would say, because these little companies could come out and do something they haven’t thought of. They have such strong brands now and there are only two of them. It’s hard to change consumer behavior. It’s going to be hard for a start-up to come in and kill them. We’ve seen that in the business travel market, where people like TripActions have come in with a good, new product and they’re doing quite well.

Sabre, Travelocity & the Future of Travel Distribution

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

Sabre, Travelocity & the Future of Travel Distribution

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

inpractise.com/articles/sabr-travelocity-travdistribution

Why is this interview interesting?

Executive Bio

Terry Jones

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

Interview Transcript

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Sabre, Travelocity & the Future of Travel Distribution(May 28, 2020)

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