"This is the future of the industry." That's what Lufthansa chairman and CEO Carsten Spohr said during the Global Business Travel Association's European conference in Frankfurt in 2015. That year, Lufthansa Group imposed a surcharge on tickets purchased through global distribution systems, breaking from full content participation in the GDS distribution model and motivating travelers 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 Computer Reservation System
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In the mid-1950s, IBM developed a data processing system, dubbed SAGE, for the U.S. air defense 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 U.S. and Canada and by 1964 could process 7,500 reservations per hour. On each terminal, an American Airlines ticketing agent could search American's inventory of flights, make reservations and receive confirmations in seconds. The error rate was nearly zero. They also could 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. Other carriers realized they'd better follow suit.
Big players like United and Trans World Airlines worked with partners on customized systems with ambitious features like the ability to access 3,000 terminals and incorporating management information, flight planning and market research, but neither carrier realized its vision. IBM introduced a solution for midsize carriers in 1964, with a standardized airline computer reservation system called PARS. Initial customers included Delta, Continental, Braniff, Northeast and Western.
Eastern Air Lines took advantage of PARS, as well, but partnered with IBM on customizations. Eastern rolled out System One in 1965. TWA and United got the memo, scrapped their projects, purchased Eastern's software and contracted with IBM to implement. United enhanced System One to create Apollo in 1971. The following year, American implemented a version of Sabre underpinned by Eastern's System One. By the end of 1972, nine out of the 10 biggest U.S. carriers had a CRS based on PARS.
1970s: Travel Agency Contracts & Airline 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 inquire about seat availability and reservations.
Airlines, platform providers and the American Society of Travel Agents put forth a major effort to create a unified CRS dubbed the Joint Industry Computerized Reservation System, but it fractured as the group established commercial terms for participating airlines. United, the largest airline and thus the carrier that would have shouldered the most financial burden under the JICRS, announced in 1976 its intent to sell agency access to its own CRS. American adopted similar plans and installed its first terminals in 130 travel agency offices the same year. TWA and Eastern jumped in the mix soon after.
CRS providers & commercial terms. Under an exclusive, long-term contract, a CRS provider would equip the 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 noncompeting airlines, CRSs established cohost agreements, which allowed the cohost airline to pay the CRS for favorable placement in content displays. Along with biasing fees, the CRSs also charged cohosts a booking fee for each reservation made on the system. CRSs did not offer cohost agreements for competing airlines. Rather, they charged competitors higher booking fees, without advantages.
Airline deregulation.The landscape in which CRS providers operated changed dramatically in 1978 when the U.S. 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 inquiries, 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. A CRS became essential for a travel agency to do business, creating a lucrative market for American's Sabre, United's Apollo and others.
1980s: CRSs Regulated
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 CRS providers; United and American jointly controlled nearly three-quarters of total agency revenue, according to the widely cited Department of Justice's 1985 Report to Congress on the Airline Computer Reservation System Industry.
In 1983, 60 percent of all airline ticket sales were made by travel agencies and 90 percent of those sales were made using a CRS, according to the Department of Justice. As CRSs' importance to distribution rose, CRS owners leveraged their position, benefiting greatly from agents' tendency to book flights on the airline providing the CRS. Competing airlines accused CRSs of employing additional tactics to lock in that advantage. They claimed CRSs boosted their own flights on agent terminal displays, delayed content loading times for competing airlines and delayed schedule updates for competing airlines to make the content from those airlines seem less reliabile. Competitor airlines also called foul on the higher booking fees they paid.
Travel agencies complained that exclusivity in their CRS contracts locked them into one system for too long. They cited overly punitive fees for subscribing to other CRSs, clauses that required high system usage and agency commissions that were tied to bookings on the contracted CRS. They also complained that the process of booking a flight from a non-CRS owner was laborious and time consuming.
The Civil Aeronautics Board, which regulated the airline industry at the time, investigated and in 1984 issued rules to regulate CRS providers’ relationships with airlines and with travel agencies. The rules banned display bias, functionality bias and discriminatory booking fees. CRS providers could no longer tie travel agent commissions to use of their system. Agency contract terms could not exceed five years and minimum-use requirements could not preclude agencies from subscribing to other CRSs.
In practice, the rules were ineffective. In November 1984, nearly a dozen airlines sued American and United for violating antitrust laws. For the rest of the decade, CRSs endured scrutiny from a Congressional subcommittee, the General Accounting Office, the DOT and courts, most of which found excessive market power concentration.
In spite of the controversy, over 95 percent of travel agents subscribed to a CRS in 1989, and 75 percent of airline tickets were booked through a travel agency, according to the DOJ.
1990s: Global Distribution Systems Emerge & the Internet Changes Everything
In 1992, the DOT addressed gaps in the Civil Aeronautics Board's 1984 rules. 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. CRS providers' contracts with travel agencies had to permit agencies to purchase their own equipment and use any given terminal to access more than one system. The DOT banned minimum-use clauses and required CRS providers to offer agencies three-year contract terms.
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, 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. Major airline mergers, acquisitions and bankruptcies formed mega carriers that expanded into global markets. With routes covering the world, CRSs transformed into today's global distribution systems: Amadeus, Galileo, Sabre and Worldspan. Corporate travel agencies that specialized in complex and often international business travel itineraries depended heavily on GDSs to serve their clients.
The internet. 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, GDS Deregulation & New Business Terms
GDSs weren't the only ones finding new opportunities via the 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 like Orbitz and Hotwire.
A number of third-party technology developers like Farelogix, G2 SwitchWorks, ITA Software and Travelfusion offered travel agencies and carriers direct connect technologies that funneled 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 OTAs. 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; it now plans to sunset in favor of a newer tool, Cytric. Given the growing competition and the fact that airlines were divesting their ownership in CRSs, the DOT eliminated some of its CRS regulations and let the rest expire.
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—yes, the contract condition banned in 1997—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 subsidize GDS incentives to travel agencies and don't provide enough distribution value. Strategy pivots from the likes of low-cost carrier JetBlue contradicted that claim. The former GDS opponent rejoined Sabre, Galileo and Worldspan in 2006 and in 2007 strongly underscored the value of the GDS channel for its access to high-yield business travelers, for benefits of scale and for better interlining with codeshare partners. These benefits, along with reliable and efficient technology connections in a complex world, continue to be the GDS value proposition.
2010s: Direct Connects & Lufthansa's Break
What's An Aggregator?
GDS New Entrants emerged as low-cost carriers splintered traditional distribution pathways, preferring direct website bookings over paying global distribution fees. Yet, LCCs still wanted to participate in corporate agency and online travel agency marketplaces, and travelers wanted that content. Aggregators answered the demand by providing direct connect technologies into their third-party systems and pumping that content into the agencies.
As airline merchandizing heated up, aggregators expanded their capabilities to get fare families and ancillary content into their pipes. New Distribution Capability has put a finer point on their connectivity skills, as players like Travelfusion and Farelogix are highly engaged in the transformation and as so-called NDC New Entrants like Atriis and AirGateway get in the game. Farelogix has gone beyond the aggregator "box" and supplies display technology to agencies for easy access to direct connect content. Not every player wants to go there; Travelfusion CEO Moshe Rafiah told BTN sister publication The Beat display technology isn't a central part of that company's vision.
However, NDC creates a new dynamic between traditional GDSs and newer aggregators, as some GDSs now refer to themselves as the original aggregators. Where the industry may see the technology race heating up is in transformational technology that is able to get content that's not in the traditional passenger name record reformatted and serviceable in a TMC environment. Travelfusion is chasing that goal, as is Farelogix, alongside all the GDS players.
By the late 2000s, however, a new issue had grabbed the spotlight: the lack of options provided by GDSs for airlines to merchandize 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 American Airlines picked them up in 2008, introducing the first charges for the first checked bag, and other legacy carriers quickly followed. In 2010, American experimented with a fee for passengers reserving the first few rows of economy class. The carrier dubbed them Express Seats and bundled them with priority boarding. Delta followed with new fare families in 2012, including stripped-down Basic Economy fares in certain markets to compete with LCCs. 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; little if any of that was transacted through the GDS. The firm estimated that ancillary airline revenue in 2017 reached $82.2 billion worldwide.
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 merchandizing 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 GNEs 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 the International Airline Transportation Association's New Distribution Capability, but GDS providers offered considerable opposition to those who sought other pipes for transmitting content between airlines and travel programs.
American attempted to bring direct connect technology developed by Farelogix to Expedia and Orbitz in 2011, the latter of which was partially owned by Travelport. Orbitz refused the connection, and American pulled its content off the OTA, which at the time included corporate travel agency Orbitz for Business. Expedia also removed American's content, and Sabre biased the displays of American content on agency screens. American, Sabre and Travelport settled privately in court.
Four years later, Lufthansa Group broke away from GDS content parity agreements and pursued a direct distribution strategy that imposed a 16-euro booking fee on tickets purchased through GDSs. The airline continues that strategy today, despite controversy, and has developed agency portals to support corporate business. Major corporate clients Siemens and Volkswagen adopted the direct connect in 2016. Lufthansa has said it intends to offer "tailor-made" products to corporate clients that adopt such connections. 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.
–Additional reporting by Elizabeth West