"As Big Airlines Struggle, Computer Booking System Prospers"

Monday, February 10, 2003

As Big Airlines Struggle, Computer Booking System Prospers
By SAUL HANSELL
The New York (NY) Times

 
As the airline industry heads closer to insolvency, it is no surprise that
Sabre Holdings, the world's largest computer reservations system, is having
a tough time.

Not only is overall travel down, but the rapid adoption of Internet travel
booking is causing an even more rapid decline in the number of bookings
through travel agencies, Sabre's main users. Making matters worse,
Travelocity, Sabre's own online travel agency, has stumbled, ceding the
leading position to Expedia.

But financially, Sabre is doing amazingly well. The company, which was
separated from American Airlines in 2000, predicts that its revenue will
fall by only a few percentage points this year. And its profit margins are
still higher in this bleak year than airlines achieve even at their best.
Indeed, Sabre has been able to raise the price it charges airlines to book
each ticket by 3 percent, even as airfares fall.

Sabre in reality may be doing too well for its own good. The airlines have
set their sights on its highflying profits and are seeking to bring them
down.

"They charge exorbitant rates relative to the value they add," J. Scott
Kirby, executive vice president for sales and marketing of America West
Airlines, said of Sabre and its rivals. "It is a cost that we don't find
justified."

The airline industry is fighting a battle on several fronts with Sabre and
other reservations systems. Five big airlines started Orbitz, an online
travel agency that is developing technology to bypass the reservations
systems. Northwest Airlines already has a Web site that agents can use to
book tickets for their clients directly, and America West is building one.

In all these cases, the airlines are pressing travel agents to cooperate by
keeping their best fares off the common reservations systems, an action that
undercuts the systems' big advantage - that they give agents one screen
where they can book nearly any travel arrangement.

At the same time, the airlines have used their considerable lobbying power,
persuading the Department of Transportation to propose eliminating some of
the rules that help Sabre and its three rivals - Galileo, Worldspan and
Amadeus - keep their fees up.

On the other end of this assault is William J. Hannigan, Sabre's chief
executive. No stranger to tough conditions, Mr. Hannigan served as a Navy
radioman on a fast-attack submarine. After a career with phone companies, he
joined Sabre in December 1999, on the eve of its spinoff by AMR, American's
parent.

Things started to deteriorate, with business travel in recession and then
the Sept. 11 attacks and their economic aftermath. Mr. Hannigan responded by
selling much of Sabre's computer operations to Electronic Data Systems and
eliminating one-third of Sabre's jobs.

But he has continued to raise fees, rather than cut them as most airlines
demand. His strategy is to exploit the reservations business, a cash cow,
for as long as he can and use the money to build new lines of business,
especially online travel.

The jury is out on whether this is a wise use of Sabre's cash. A new
high-margin hotel product has yet to prove that it can revive Travelocity.
And a $757 million acquisition of GetThere, an Internet corporate travel
site, is still losing money. Some investors would rather see Sabre pay a
dividend than make more acquisitions.

But there will be little cash for anything if the airlines make good on
their pledges to revolt against the reservations fees. Sabre has introduced
one discount program, but in general Mr. Hannigan asserts that Sabre's fees
are worth every penny. Since Sabre mainly serves travel agencies that book
business travelers, it sells much more profitable tickets than a site like
Orbitz that draws bargain-hunting vacationers.

"I make no apologies for our pricing structure," Mr. Hannigan said from his
office in Southlake, Tex. He said airlines sold $80 billion worth of tickets
on Sabre last year and its total revenue from those sales was $1.5 billion,
or about 2 percent.

But the airlines argue that since 1993, Sabre's fees have increased in some
cases by about 20 percent while airfares have fallen 30 percent. Moreover,
executives at most airlines say they need to be in all the reservations
systems to be available to all the travel agents. "We sell over $5 billion a
year through Sabre," said Craig Kreeger, vice president for sales at
American. "If they increased their fee by 50 percent, I would probably have
to pay it. I have absolutely no leverage."

Mr. Hannigan replies that the industry practices the airlines object to were
all developed when Sabre was owned by American and its rivals were owned by
other airlines. Worldspan and Amadeus are still controlled by airline
groups. Galileo was bought by Cendant in 2001, a few years after it was spun
off from United.

"It is a structure that was created by the airlines," he said, "and you
always have to take it with a grain of salt when they complain about it."

And indeed the airlines are partly responsible for the current state of
affairs. American started installing Sabre systems in travel agencies in
1976. At first, Sabre blatantly favored American flights, listing them
before more convenient flights from other carriers. In 1984, the government
imposed regulations to ensure the reservations systems treated all airlines
alike.

Even after that, the airlines found a kind of "halo effect" - where agencies
booked more flights on the airline that owned the reservations system they
used. That is why the airlines, not the travel agencies, pay for the
systems. Indeed, the airlines instructed their own systems to woo agencies
with free computers and later, cash payments referred to as incentives for
each ticket sold.

The reservations systems paid for these incentives by raising the fees they
charge airlines for each booking. And because of the way the government
wrote its rules, the airlines decided they had little choice but to pay
those higher fees.

Sabre says it has responded to the airlines' criticism with a program in
which it will cut its fees 10 percent for any airline willing to sign a
three-year contract and give Sabre access to all its low fares, including
those that had only been offered over the Internet. So far, only US Airways
and a few small foreign carriers have accepted the deal.

Galileo has introduced a variation on that program that offered a 20 percent
cut in booking fees, but only at agencies that agreed to waive about half of
the incentive payment. In addition to access to Web fares, the agency gets
extra commission on some of Cendant's brands like Avis car rental. US
Airways and United have signed up for that deal.

Most of the other big airlines say that even that the 20 percent cut
proposed by Galileo does not go far enough. "Sabre and Galileo have the most
to lose," said Al Lenza, vice president for distribution and e-commerce of
Northwest. "They are taking baby steps in order to protect 95 percent of
their revenue."

American has proposed its own program that would have agencies pay 50
percent of the booking fees in return for access to its Web fares. It says
that 90 agencies have agreed. 

Analysts say it may fall to the government sort all this out.

"I don't see the two sides coming to an agreement," said Scott Barry of
Credit Suisse First Boston. "The airlines are from Venus and the reservation
systems are from Mars."

Before the airlines commit to long-term deals, they are waiting to see the
final rules proposed by the Transportation Department, perhaps later this
year. The draft regulations, released last fall, read like an airline wish
list - allowing big carriers to use their bargaining power. They would end
the rule that reservations systems charge all airlines the same fee. And
they would ban the incentive payments.

"The proposed new rules would significantly weaken the control of the
reservation systems on the individual airlines," Mr. Lenza said.

Sabre says that a complete deregulation would be fine, but the proposal,
which eliminates some rules and imposes others, does not create the
proverbial level playing field.

"We say `Regulate us: that's fine. Or deregulate us; That's fine. But we
don't want to be stuck in the middle,' " Mr. Hannigan said.

Left unsaid is that those most likely to be disadvantaged are travelers. If
the airlines go through with their threats to pull more of their best fares
off Sabre and its rivals, it will be harder for the agents to find
itineraries at the best prices.

That is one result, Mr. Kirby conceded, of America West's plan to bypass the
reservations systems.

"Unfortunately, it will never be as convenient for travel agents as the
current systems."


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