SETTING THE SCENE

In 2015 the Lufthansa Group shook up the European travel industry when it imposed a surcharge on tickets purchased through global distribution systems, breaking from full content participation in the GDS distribution model and motivating travellers and agents to book direct on Lufthansa Group websites.

There were few carveouts on that surcharge and plenty of consternation that Lufthansa had not fully accommodated corporate travel interests before forcing the move. As with many dynamics in managed travel, there’s a significant backstory.

1960s
CREATING A CRS

In the mid-1950s, IBM developed a data processing system, dubbed SAGE, for the US air defence system. The story goes that a chance meeting on an American Airlines flight between an IBM salesperson and then-American Airlines CEO C.R. Smith resulted in a pitch for IBM to build an airline reservations solution based on learnings from SAGE technology. Smith understood the opportunity and partnered with IBM to introduce Sabre in 1960.

Sabre ran on two IBM mainframes connected to 1,500 terminals across the US and Canada and by 1964 could process 7,500 bookings per hour. On each terminal, an American Airlines ticketing agent could search American’s inventory of flights, make bookings and receive confirmations in seconds. The error rate was nearly zero. They could also access a passenger’s name, itinerary and contact information – the origin of today’s passenger name record, or PNR. Sabre instantly became a competitive advantage for American Airlines. Other carriers realised they’d better follow suit.

1970s
CONTRACTS AND DEREGULATION

By the early 1970s, all the major carriers experimented with bringing the CRS to travel agencies. At the time, travel agents manually checked their books for flight schedules and fare information, then called airline ticket agents, to enquire about seat availability and reservations.

Under an exclusive, long-term contract, a CRS provider would equip an agency with hardware, installation, software and training. They charged a monthly subscription fee based on usage. To lower the monthly fee, the agency had to make more bookings on the system.

Travel agencies, however, wanted access to broad airline content, not just one airline’s. CRS providers saw the opportunity to open their content platforms to other carriers. For non-competing airlines, CRSs established co-host agreements, which allowed the co-host airline to pay the CRS for favourable placement in content displays. Along with biasing fees, the CRSs also charged co-hosts a booking fee for each reservation made on the system. CRSs did not offer co-host agreements for competing airlines. Rather, they charged competitors higher booking fees.

The landscape in which CRS providers operated changed dramatically in 1978 when the US government lifted restrictions on fares, route coverage and market entry. Airlines could fly wherever they wanted and charge whatever they wanted for flights, and airfares and schedules could fluctuate monthly, weekly or even daily. Passengers now demanded seats at the best prices. To stay on top of customer enquiries, travel agents needed real-time access to airfares and flight schedules. Wanting to cut costs, airlines started shifting the bulk of their ticket distribution from city ticket offices to travel agencies.

1980s
THE BIG FIVE

The significant capital required to build and maintain a CRS, combined with lengthy, exclusive travel agency contracts, resulted in an air distribution market dominated by five large CRS providers: Amadeus, Apollo, Galileo, Sabre and Worldspan. All were owned by airlines. Amadeus was created as a neutral GDS by Air France, Iberia, Lufthansa and SAS in 1987 in order to offer a European alternative to Sabre.

1990s
GDSs EMERGE… AND SO DOES THE INTERNET

In 1992, the US Department Of Transportation addressed gaps in the Civil Aeronautics Board’s 1984 rules which had been introduced to try and regulate the CRSs. The DOT compelled CRS providers to share service enhancements to their systems with other airlines that were participating in the CRS. It also compelled the airlines that ran CRSs to participate in competing CRSs, as well.

Five years later, the DOT amended the rules again to prohibit CRS providers from including ‘parity’ clauses in their airline contracts. These clauses required airlines to give whatever inventory they shared with one CRS provider to others, as well.

At the same time, airlines were divesting their ownership in CRSs. Sabre launched an IPO in 1996 and became fully independent of American Airlines in 2000. Galileo, the forerunner of Travelport, which had merged with Apollo, went public in 1997. Amadeus, which had absorbed System One, went public in 1999.

CRSs gained more influence as independent and increasingly global entities. Corporate travel agencies that specialised in complex and often international business travel itineraries depended heavily on these global distribution systems (GDSs) to serve their clients.

As a backdrop to this transformation, the internet was emerging. GDSs offered travel agencies internet access and the software necessary to build and maintain their own websites. GDSs also targeted consumers directly through new online travel agencies: Sabre launched Travelocity in 1996 and Worldspan provided content for Microsoft’s Expedia startup that same year.

2000s
ALTERNATIVE CHANNELS

GDSs weren’t the only ones finding new opportunities via the worldwide web. Online commerce gave airlines an avenue to bypass GDS booking fees and to pursue customers directly rather than through agencies. Carriers developed websites and gave consumers access to schedules and discounted web fares. They also invested in search engines such as Orbitz and Hotwire.

A number of third-party technology developers such as Farelogix, G2 SwitchWorks, ITA Software and Travelfusion offered travel agencies and carriers direct connect technologies that funnelled content directly from airlines to the agencies. These companies became known as GDS new entrants, or GNEs.

GDS market share fell significantly for the first time in this internet-powered environment, but GDSs diversified their products and services. They began supplying IT tools to airlines, as well as tech infrastructure and content to online travel agents. Critical to their growing concentration of corporate travel clients, GDSs also invested more heavily in corporate online booking tools. Sabre acquired GetThere in 2000, and it launched corporate OTA Travelocity for Business in 2003 as an online competitor to its corporate travel agency clients. Amadeus acquired e-Travel in 2001, gaining a corporate online booking tool, and now offers a newer booking tool, Cytric.
Agencies continued to contract with GDS providers for access to travel inventory, but the dynamics changed. GDS providers began paying agencies signing bonuses and incentive payments based on how much volume an agency could push through the GDS channel. On the airline front, content parity became standard between GDSs and large, legacy carriers in exchange for reduced booking fees.

The perception of outsize booking fees remained a frustration for carriers, on the grounds that the hefty charges subsidised GDS incentives to travel agencies and don’t provide enough distribution value. But there was widespread appreciation of the value of the GDS channel for its access to high-yield business travellers, for benefits of scale and for better interlining with codeshare partners.

2010s
DIRECT CONNECTS AND LUFTHANSA’S BREAK

In the 2000s, however, a new issue grabbed the spotlight: the lack of options provided by GDSs for airlines to merchandise to customers and differentiate their products. After 9/11, many airlines dropped their meal services, and in 2005, Delta began selling snack packs and meals in economy class. Then came checked bag fees; ultra-low-cost carriers had introduced them early in the millennium, but legacy carriers quickly followed. In 2010, American Airlines experimented with a fee for passengers reserving the first few rows of economy class. A number of carriers introduced stripped-down basic economy fares to compete with low-cost carriers. Revenue from ancillary fees skyrocketed.

Worldwide, ancillary airline fees hit $2.29 billion in 2006, according to IdeaWorks, which tracks ancillary sales annually. By 2008, it was $10.25 billion and in 2019 it hit a record $109.5 billion. The figure was expected to come in at around $102.8 billion worldwide in 2022.

The ability to grow that revenue and target the right customers with rebundled offers has become a constant drumbeat behind airline strategy. GDSs have made strides in accommodating merchandising efforts, but the persistence of legacy technology and green screen interfaces and the lack of rich visual content and options to recombine ticket attributes has challenged the channel and the agents who access it. Airline websites, on the other hand, have transformed the consumer shopping and booking experience.

Some carriers have turned to aggregators as a viable way to bypass the GDS and incorporate richer, more flexible content with systems based on extensive markup language, or XML. The industry has recently coalesced around XML technology standards of IATA’s New Distribution Capability, but GDS providers offered considerable opposition to those who sought other pipes for transmitting content between airlines and travel programmes.

That all changed when Lufthansa Group broke away from GDS content parity agreements and pursued a direct distribution strategy that imposed a €16 booking fee on tickets purchased through GDSs.

Will the GDSs survive? To answer that, look behind the curtain at Lufthansa Group’s technology partner. There you’ll find Amadeus IT Group, the IT solutions sibling of the Amadeus GDS.