EMERGING TRENDS IN TRAVEL TECHNOLOGY A MIDDLEMANS

PERSPECTIVE An exploratory note that deals with the changing landscape of the travel

industry from a mid-office connectivity standpoint with specific focus on

the link between customers/passengers and endpoint providers through

a travel GDS system

Virag Padalkar

www.virag.in

Contents Overview ....................................................................................................................................................... 2

Structure ....................................................................................................................................................... 3

History of Travel GDSs.............................................................................................................................. 4

GDS Architecture and Business Model ......................................................................................................... 6

Changing Dynamics ....................................................................................................................................... 9

Evolving Technology ................................................................................................................................. 9

Cost ......................................................................................................................................................... 10

Cloud Computing and Big Data ............................................................................................................... 10

AA Vs Sabre ................................................................................................................................................. 11

Google ......................................................................................................................................................... 12

Conclusion ................................................................................................................................................... 13

Bibliography ................................................................................................................................................ 14

Overview We can say that aviation changed the game for the travel industry. With the onset of commercially viable

air-travel, people could zip from one end of the globe to another in a matter of hours/days rather than

waste ages in uncertain seas and its associated risks. It was therefore no surprise that it also dramatically

changed the landscape of the travel domain and is still doing so. As the aviation industry grew, so did all

ancillary industries that fed it and were fed by it. Right from online travel agents that acted as a link

between the customers and the carriers to computer companies that managed the vast database of

information that the travel industry is based on, everybody rushed to the party. Today, it is ironic that in

the travel world; everybody but the airlines are earning profits (McFarlane, n.d.). Be that as it may, our

note explores the framework of the travel GDS and the recent changes in technology that are shaping the

future of multiple interested stakeholders across the travel industry. The reason that the title of this note

contains a reference to the middlemen of the travel game is because digitization of information has spelt

fresh challenges to the middlemen in any industry. It has enabled connecting the endpoint providers (be

it in travel, insurance, telecommunications, gaming or any other industry that you wish to cite) to the

customers directly. Such a scenario presents a vast vista of opportunity for all stakeholders to keep

reinventing themselves in order to cope with the dynamics that are inherent in such a fast-changing world.

Structure The travel industry today comprises of numerous stakeholders that share information, money, resources

and problems (!) on a mind-boggling scale. Primarily the structure is as follows

To dive one level deeper, we can sum up the business model of the industry in general thus (Sterling L

Miller, Esq., 2014)

In a nutshell, in the world of the middlemen (OTAs, travel agencies, tour operators, etc.), the travel GDS

acts as one more middleman (or middlemen since there are multiple players here too) thus

Essentially, the structure of the overall travel industry is much more convoluted than other industries. No

doubt the inherent complexities associated with the magnitude are a big factor; however, one can say the

same for almost any industry. To set a benchmark, the insurance industry in the United States generated

premiums of USD 1.274 trillion (Federal Insurance Office, 2014) whereas the money spent by leisure and

business travelers for the same year was USD 887.9 billion (US Travel, 2014). While the scope of the travel

industry is quite large and the overall industry amounts to USD 2.1 trillion, this amount includes all

ancillary revenues generated. I have no doubt that the insurance industry with its ancillaries will have a

similar magnitude (could be larger). The point to note here is that the travel industry is no larger and no

smaller than many other competitive markets. With such a large scope, the flow of information from one

stakeholder to another assumes critical importance. Furthermore, since travel itself is a very real-time

activity, this flow of information has to be fast and accurate. Leakages in information are leakages in

revenue and leakages in cost. Thats where the travel GDS comes in to the picture.

History of Travel GDSs The Online Business Dictionary defines a travel GDS as follows (Business Dictionary, 2015)

A worldwide computerized reservation network used as a single point of access for reserving

airline seats, hotel rooms, rental cars, and other travel related items by travel agents, online

reservation sites, and large corporations. The premier global distribution systems are Amadeus,

Galileo, Sabre, and WorldSpan. They are owned and operated as joint ventures by major airlines,

car rental companies, and hotel groups.

The history of GDSs is mired in the travel industry itself. They evolved organically through the interests

of the players therein. For e.g. Sabre was initially cooked up by American Airlines over a meeting

between the then President of AA (C.R Smith) and an IBM salesman (also named Smith) whom he met on

a flight (McMillan, 2012). Originally an abbreviation of Semi-Automatic Business Environment Research,

it was later changed from SABER to SABRE due to copyright issues. Sabre is of course, just one example.

GDSs were created in the 1960s as a way to keep track of flight schedules, availability, and prices. When

the aviation industry was unidimensional, inter-airline agreements were uncommon and coordination

between carriers, agents and other interested parties was not required. Vanilla CRSs (computer

reservation systems) ruled the roost. The burgeoning amount of bookings and interline agreements

between carriers for segments that each carrier sought help for resulted in a massive amount of

information that needed to be exchanged on a near real-time basis if passengers were to be given a

seamless travel experience from point A to point B. All of the most popular GDSs were originally formed

by aviation firms (summary as below)

GDS Founded Parent(s)

Sabre 1960 American Airlines

Galileo 1971 United Airlines

Amadeus 1987 Air France, Iberia, Lufthansa, SAS

WorldSpan 1990 Delta, Northwest, TWA

Before the concept of a GDS was envisioned by Smith and Smith, airline reservationists kept track of

travelers in much the same way that short-order cooks keep track of breakfast orders. They used lazy

susans (a turntable (rotating tray) placed on a table or countertop). It was a clumsy, ineffective system

that was costing money. Airplanes were flying with empty seats, and about 80 percent of them were

because of bookkeeping errors in the lazy susans. Today, more than one billion transactions are carried

out annually using GDSs, and it is estimated that nearly 500,000 travel agencies globally use a GDS to

conduct business every day (Travelport GDS, 2011).

GDS Architecture and Business Model

A GDS creates a mirror image of a booking and maintains this information in its computer system. Lets

assume that a passenger books a ticket from point A to point D across two different carriers. The details

of his travel from point A to point D is called his itinerary and each itinerary has an identifier (either called

a PNR or a locator code)

From To Carrier Visible in CRS

Visible in GDS

A B X X

G B C X X

C D Y Y

To quote Wikipedia, if a passenger books a journey from Amsterdam to London on KLM, London to New

York on British Airways, New York to Frankfurt on Lufthansa through a travel agent and if the travel agent

is connected to Amadeus GDS. The PNR in the Amadeus GDS would contain the full itinerary, the PNR in

KLM would show the Amsterdam to London segment along with British Airways flight as an onward info

segment. Likewise the PNR in the Lufthansa system would show the New York to Frankfurt segment with

the British Airways flight as an arrival information segment. The PNR in British Airways system would show

all three segments. One as a live segment and the other two as arrival and onward info segments.

Sounds quite simple, but its really not. There are multiple changes that are possible in a PNR (either

initiated by the airline or by the passenger himself). In such situations, the GDS must have the agility to

update its own system and inform its linked systems about this change. A delay would cause a hold-up

(much like a bottleneck in the flow of information). GDSs earn money through various channels. They

make money off airlines as well as off travel agents. The GDS behemoth has branched into a holistic IT

solutions provider and they also charge all other stakeholders money to maintain this database and its

related upkeep.

The infographic published on wired.com above shows a rather entertaining version of the global

distribution system conspiracy theory. In structural terms, we can of course call it a bottle-neck; but the

implications are not that easy and not so simple to avoid. Unfortunately, the more people travel, the more

the information that needs to flow seamlessly between industry players; and more entrenched do GDSs

get with this increase.

Changing Dynamics In July 2003, the GAO (Government Accountability Office) presented a report to its congressional

requesters titled, Impact of Changes in the Airline Ticket Distribution Industry (Government

Accountability Office, 2003). It was quite a revealing insight into the evolving world of travel and tourism.

In 2002, when major U.S. airlines posted net operating losses of almost $10 billion, they paid over $7

billion to distribute tickets to consumers. Of these total distribution expenses, airlines paid hundreds of

millions of dollars in booking fees to global distribution systems. Concerns were raised that the assorted

menagerie of GDSs were exercising what is technically called market power over aviation companies

because most of them were and still are largely dependent on these computer systems. Its conclusion was

a study in contradictions. To quote

A competitive airline ticket distribution industry, which includes the airline, GDSs, and travel

agent industries, continues to be important because noncompetitive practices may adversely

affect airlines and consumers. Originally, the CRS rules were focused on reducing the market power

of airline-owned CRSs to prevent owner airlines from using the CRSs to gain a competitive

advantage over non-owner airlines. With the GDSs now independent from the airlines, questions

have been raised regarding the GDSs exercise of market power over all airlines. Among other

things, because GDSs do not compete with each other for airline business, airlines and consumers

may be subject to prices that are higher than in more competitive markets. While our limited ability

to get complete booking cost and fee data from the GDSs did not allow us to independently

evaluate whether GDSs currently exercise market power, the market position of large travel

agencies or the overall performance of the industry, evidence that we developed in this review

provides suggestions of both a functioning market and competitive flaws.

The advent of technology has changed the game. The GDS is now looked at like the dinosaurs were; slowly

becoming obsolete in a fast-changing world. While the issue is much debated, one thing is certain. There

are multiple parties interested in doing away with these ineluctable middlemen (The Economist, 2012)

and the dynamics are changing fast. Lets explore each of these factors in further detail.

Evolving Technology The internet has proved to be a boon for airlines. The direct business model has affected travel GDSs

much the same way as Walmart has eaten into the revenue of various middlemen in its efforts to directly

connect to customers. Though this analogy is a bit stretched, the fact remains that technology and travel

GDSs are not good bedfellows (though they claim to be). Changing technology has eroded the hold that

global distribution systems have on airlines and travel agencies (who are traditionally reluctant bedfellows

with the GDS chaps themselves). The GAO report mentioned above found that between 1999 and 2003,

tickets sold online went up from 7% of the total sales to 30%. The number is vastly different now but the

point being made is that technology brought purchases online. The next big revolution came when airlines

discovered the massive reach of the internet. They came up with internet-only fares which were offered

to passengers booking flights directly from an airlines website. In April 2008, William Brunger submitted

a quantitative research report titled, The Impact of the Internet on Airline Fares Understanding the

Internet Price Effect. He used a multivariate regression in which the dependent variable was the fare

paid and the independent variable was the distribution channel used (Brunger, 2008). He concluded that

the internet was a revolutionary game-changer in the airline industry. Without going into the math here,

he concluded that the internet price effect was statistically significant. In 2015, the effect can only have

exacerbated. More and more airlines are pushing direct sales and are trying to bypass GDSs entirely.

Cost Some of the tastiest margins in the travel business are enjoyed by the global distribution systems (GDSs),

a fancy name for computerized-reservations services. These were originally created by several of the

largest airlines to distribute their flights through travel agencies but have since become independent

firms. Most flights booked through a physical or online travel agent go through a GDS, which charges the

airline a fee of about $12 per round trip, passing a few dollars of that to the travel agent. According to

Take Travel Forward, an airlines lobby group, the worlds carriers pay $7 billion in GDS fees a yearmore

than double their expected net profits this year of $3 billion.

Both sides can claim to be the consumers champion. The airlines argue that the cost of the middlemen

adds to the price of tickets (though the superficial evidence suggests that it is airline shareholders who

suffer). They say they want to reform the distribution system to offer flyers a wider choice and a more

individually tailored service. The GDSs argue that they provide travelers, through their agents, with

impartial comparisons of all available flights, allowing them to get the best value.

Cloud Computing and Big Data The cloud is a disruptive technology (to put it euphemistically). It has proved to be the undoing of

enterprises that work on stashing information and charging for it. It has, on the other hand, also proved

to be a boon for enterprises that need a seamless and transparent flow of information with multiple

stakeholders. A decade ago, the internet posed a big challenge to global distribution systems. It still does.

It forced travel agencies to go online, it cut costs and it squeezed the small fish out of business

(Government Accountability Office, 2003). Today, we are on the cusp of another change. Cloud computing

and big data are poised to create another paradigm shift in the travel industry. It is predicted that through

an alternative distribution model and big data analysis, airline websites will produce 59% of its booking

volume, up from 35% as of 2012 (Harteveldt, 2012). In a special report commissioned by the IATA, Henry

H. Harteveldt postulated that any technological company (he specifically cited Google, Amazon etc.) that

had mass reach amongst consumers through devices and had big data on spending trends and travelling

habits was poised to change the distribution model for airline ticketing. Through meta-searches and direct

connects, global distribution systems are threatened. A potential model might look something like this

Big data holds the next step. True personalization is what all travel agencies and airlines are going for.

Imagine a world where a travel agency is going to be able to suggest the exact hotel that will suit your

needs rather than throw you a plethora of generalized suggestions that are no good. It will be able to do

this based on two things

Your travel preferences and your historical habits

Machine learning

Proliferation in smartphone technology means that an operating system is constantly aware of where you

are, what youre doing, what youre searching for on the internet and which of those products you actually

end up using. This mine of information can easily be used to generate what the big data industry calls

true preferences. We already experience a sample of this when we use search strings on Google.

Backend analytics throw up (or at least try to) throw up exactly what you need.

AA Vs Sabre This is a very significant development in the travel world. After years of being reluctant bedfellows, a wide

chasm has finally appeared in what can only be described as a forced partnership. Once the global

distribution systems spun off into their own entities and airlines divested themselves of stakes therein,

the tussle between airlines and GDSs has only been heating up. Things came to a head back in 2012 with

this anti-trust lawsuit. The details are not available on the public domain, but what we do know is that AA

has alleged Sabre (as of now) of colluding with its competitors to deprive AA of a fair market (Boehmer,

2015)

Building a record of alleged conspiracy, documents filed last year by US Airways in a pending

lawsuit against Sabre and unsealed this month fleshed out how, "for roughly the past decade, the

three GDSs have moved in lockstep," according to the airline, which since filing the suit in 2011

has merged with AA. While the suit names only Sabre as the defendant, US Airways' filings also

cite actions and practices by Sabre's competitors (or co-conspirators, as US Airways would see it),

Amadeus and Travelport.

The origins of this battle are in the history of the travel industry. With so many convoluted interests, the

self-grown monster was bound to get out of hand. AA recognized this and has dealt with it the only way

it can by trying to cut out Sabre from its revenue/cost model. An important step in this direction is the

creation of the Direct-Connect Portal. To use AAs own words, AA Direct-Connect is a direct link into AAs

host reservation system for the facilitation of availability, shopping and pricing, booking, ticketing, and

post-ticketing servicing transactions. The AA Direct Connect utilizes modern technology links, employing

XML messaging which can handle more robust and flexible transactions. No need for a travel GDS. No

need for subscription fees, transaction fees, sales distribution fees etc. If all airline companies throw their

doors open for each other in similar fashion, global distribution systems would actually be at threat. Thats

where the cloud can come in (weve already spoken about this in a section above) to ease the flow of

information from one carrier to another and to enable OTAs to utilize it for customers.

AA has drawn first blood and it will be interesting to see how the fight pans out. Should other players

support AA and their Direct-Connect Portal, Sabre will have a tough time indeed.

Google As is the norm (and it has been insinuating itself at the core of every industry), Google is the latest entrant.

Its made a very small entry and has announced (for now) that it does not intend to compete with OTAs

or other travel agencies.

Google Flights This tool is the equivalent of an OTA. It provides a search feature and has linked

itself to the Google Maps API.

Google Hotel Finder Ditto

ITA Software Google acquired ITA software sometime in 2010. Since then, the fare-search front

has been sluggish on the news.

However, Google made its intent quite clear with this acquisition. The first sign that Google will indeed

not go after OTAs (primarily) is the fact that it is investing heavily in fare-search technology through meta-

searches. It is building up a communications ecosystem using Google Flights as an experimental base.

Using its Maps API, the next step will no doubt be to merge all these recent developments together. What

do we get? A single tool that knows you and your travel habits, is aware of your spending capabilities, is

clued in on your likes and dislikes, is aware of your schedule and your appointments and has the power

to get you the best deal possible by talking directly to airlines and cutting out all other middlemen.

Furthermore, its mobile OS penetration and its reach through its search portal has massive implications

for the travel world (Rose, 2012). Traditionally, Google has always gone after the control of information

rather than outright sales. With its search engine, its operating system, its application ecosystem; the flow

of information is what it seeks to control. Larry Page has been very vocal (Google, 2015) about Googles

objective in the long run too; namely, to categorize ALL the worlds information . . And global distribution

systems hold a small chunk of it which has now caught Googles attention. In fact, Google is fast emerging

as the dark horse with huge implications for everybody else. Take a gander at its offerings:

This view isnt so far-fetched too. Erin Torbensen who is a reporter for the Dallas Aviation Blog recently

pitched an alternative distribution model where Google has the power to customize what passengers

want. This is currently something that no travel GDS can do. With big data at its fingertips, it can rope in

carriers and suppliers to use its own metasearch capabilities (bolstered by its acquisition of ITA) and use

this direct-connect model to disintegrate GDSs (Torbenson, 2015). Googles capabilities with Google

BigQuery (its big data analytics tool) and its vast cloud capabilities means it already has a stronghold in

the technologies that are going to matter most for the travel industry.

Conclusion In conclusion, the travel industry (from a technological perspective) is on the verge of another paradigm

shift. What remains to be seen is how organizations leverage the biggest tools at their disposal today (big

data, analytics, cloud computing, collaborative development, open source philosophy and automation) to

adapt to this evolving environment. An alternative distribution model needs to keep the end customer as

its priority. This shall ensure that the system is as simple and as lean as possible. We can learn from the

convoluted way that the travel industry has evolved hitherto and ensure that the next step is a

simplification rather than a step back. Interesting times ahead.

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