Change: The Only Constant :Change: The Only Constant David Cerino Chief Marketing & Product Officer Farelogix Nothing endures but change. Heraclitus, from Diogenes Laertius, Lives of Eminent Philosophers Greek philosopher (540 BC - 480 BC)


The GDS Story :@ Copyright 2005 Solutionz Group International 2 The GDS Story Global Distribution did not begin with the advent of the Internet It began as a way for four airlines to reach their best customers And initially, they were NOT global - they were Computer Reservation Systems (CRS)


The Origins :@ Copyright 2005 Solutionz Group International 3 The Origins Reservations were extremely difficult for airlines to handle manually The original systems were developed in the early 60’s and used IBM Selectric typewriters as input devices


The GDS Beginnings :@ Copyright 2005 Solutionz Group International 4 The GDS Beginnings The airlines and their offspring: AA Sabre United Apollo TWA PARS Eastern SODA The year was 1976 when they first made their way into travel agencies with Sabre and Apollo leading the way


The Fast Followers and the Change from CRS to GDS :@ Copyright 2005 Solutionz Group International 5 The Fast Followers and the Change from CRS to GDS Delta Airlines launched Datas II in 1982 In the mid-80’s United and American began their expansion into Europe Apollo and Sabre followed and redubbed themselves GDSs Amadeus and Galileo emerged in Europe in the late 80’s, founded by two separate groups of European carriers Amadeus was based on the System One platform Galileo was based on Apollo


The Base :@ Copyright 2005 Solutionz Group International 6 The Base Airline bookings were key to GDS distribution due to the ownership by the airline community Bias was common in displays unless you believe that alphabetical (AA showing first in Sabre) or reverse alphabetical (UA showing first in Apollo) were the algorithms of the day Bias was eliminated by the Department of Transportation in 1984 when the CRS Rules came into play At the turn of the millennium the CRS Rules were eliminated and bias is now allowed, though all GDSs claim that they have not reintroduced it


Product Expansion :@ Copyright 2005 Solutionz Group International 7 Product Expansion In the early 80s as penetration of the GDSs in the US continued, corporate travel became a key revenue stream and the GDSs added hotel and car suppliers and ancillary product such as travel insurance Back office systems were very important as well, as ARC reporting (then BSP) was complicated The late-80s brought early corporate travel booking systems and also the early foray into the online systems (Prodigy and CompuServe) The 90s brought a focus on leisure and the addition of cruise and tour product to the GDS Once the Internet was on the scene it was then a race to see who could port to a browser based booking engine The new millennium brought on the content battles and the search for the holy grail - the Super PNR


Have we come full circle? :@ Copyright 2005 Solutionz Group International 8 Have we come full circle? And the airlines are aggressively pursuing new distribution models….


The Original CRS Companies :The Original CRS Companies How they morphed into the companies you know today


AA Sabre is now :@ Copyright 2005 Solutionz Group International 10 AA Sabre is now Sabre began as a part of AA Marketing Automation Group in 1976 In 1985 it became its own division of AA In 1993 it became a division of AMR as its own company Sabre completed its IPO in 1996, becoming the first publicly traded GDS In 2000, American divested itself of its remaining shareholdings and Sabre became the first GDS without airline ownership/influence The company now operates as Sabre Holdings


What does Sabre Holdings include? :@ Copyright 2005 Solutionz Group International 11 What does Sabre Holdings include? Corporate and Consumer Travel Distribution IT Services Investments and Business Extensions


UA’s Apollo is now :@ Copyright 2005 Solutionz Group International 12 UA’s Apollo is now Galileo began life as Apollo, a part of United Airlines Apollo spun off from United in 1986 as Covia Covia merged with Galileo in 1992 Galileo began in 1987 as a multi-airline CRS in Europe Galileo International went public in 1997 United retained a portion of its ownership stake until 2001 when Galileo was purchased by Cendant Corporation Galileo now operates as a part of Cendant Travel Distribution Services The original Apollo system is still marketed in the US, Japan, Canada and Mexico and is still in use by United Airlines as their central reservations system


What does Cendant TDS include? :@ Copyright 2005 Solutionz Group International 13 What does Cendant TDS include?


TWA PARS is now :@ Copyright 2005 Solutionz Group International 14 TWA PARS is now TWA implemented PARS in 1971 to handle their internal reservations In 1976 PARS was installed in the first travel agencies In 1986 TWA sold 50% of PARS to Northwest In 1990 Worldspan was formed as a merger of PARS and DATAS II In 2003 the original airline founders sold their interest to a group called Worldspan Technologies, Inc., made up of Citigroup Venture Capital Equity Partners and the Ontario Teachers’ Pension Plan Board, making Worldspan the last US GDS to be free of airline control


Worldspan’s business is online :@ Copyright 2005 Solutionz Group International 15 Worldspan’s business is online Travel Distribution business is core, generating 93% of revenues eCommerce generates over 50% of all bookings and is largest growing sector Traditional agencies still generate 50% of bookings, but are shrinking as a percentage of total Airline Hosting generates only 7% of all revenues


Eastern SODA is now :@ Copyright 2005 Solutionz Group International 16 Eastern SODA is now SODA (System One Direct Access) began in 1981 as the data processing department of Eastern Airlines and later transitioned to EAL Automation Systems As Eastern entered bankruptcy in the mid-80s, System One transitioned to CCS Automation, a subsidiary of Continental In 1987 System One was selected as the base system for Amadeus In 1995 EDS and Amadeus joined Continental as equal owners of System One and System One became the North American marketing company of Amadeus In 1997 Amadeus bought out the interests of Continental and EDS In 1998 Amadeus completed the consolidation of the System One users into Amadeus Amadeus completed an IPO in 1999 and then was taken private again in 2005 by a private equity firm


Amadeus Lines of Business :@ Copyright 2005 Solutionz Group International 17 Amadeus Lines of Business IT Services Travel Distribution eCommerce Services


Market Share :@ Copyright 2005 Solutionz Group International 18 Market Share Source: The Solutionz Travel Distribution Library


The Economy :The Economy The impact of the travel industry and how the face of distribution is changing


Global Volume Growth :@ Copyright 2005 Solutionz Group International 20 Global Volume Growth Massive industry growing globally at 4% Asia – Pacific could drive further exponential growth


Online Growth :@ Copyright 2005 Solutionz Group International 21 Online Growth Dramatic growth of online travel purchasing – 20% year over year By far the largest ecommerce category Source: PhoCusWright


Consolidation :@ Copyright 2005 Solutionz Group International 22 Source: The Solutionz Group Consolidation Average weekly sales is up 19% year over year for remaining agencies


Concentration :@ Copyright 2005 Solutionz Group International 23 Concentration Consolidation Suppliers TMCs Technology Providers GDS Owning the enterprise Concentration Dramatic at the top end sellers of travel Differentiation challenges Source: TRX Estimates Based on PhoCusWright and Forrester Research Online Agencies Suppliers Large Agencies Other Agencies Travel Segments - CAGR (2001-2006) Top 15 Sellers of Travel 2001 = 50% 2006 = 75%


Cost Pressure :@ Copyright 2005 Solutionz Group International 24 Cost Pressure Commoditized traditional market Pricing transparency Competition from OTAs Procurement focus Airline economics Trends Favor Low-Cost Providers Source: Runzheimer International Source: Airlines Reporting Corporation, TRX Declining Agency Commissions Declining Average Air Fares


Job Impact :@ Copyright 2005 Solutionz Group International 25 Job Impact $158 billion travel generated payroll in the US from 7.2 million direct travel generated jobs US residents generated 1.2 billion person trips and 668.3 million household trips in 2004 Leisure travel accounted for 71% of all US domestic trips Business travel accounts for 22% of all US domestic trips Business combined with pleasure accounts for 6% $555 billion direct travel expenditures per year in the US - $1 million a minute! Source: TIA


State of the Economy :@ Copyright 2005 Solutionz Group International 26 State of the Economy The impact of 9/11 and SARS are diminishing TIA predicts that leisure travel will grow 3.4% this year and business travel 4.6% (first gain since 1999) Business travelers are more price sensitive than pre-9/11 and more dependent on the Internet in making their selections Leisure travelers are demanding more and also using the Internet more The world economy is growing, but there is a growing competition for international travelers International travel to the US will increase 5.3% with spending up 6.6%


Existing Distribution Economics :@ Copyright 2005 Solutionz Group International 27 Existing Distribution Economics


Where are we going? :Where are we going?


Impacts :@ Copyright 2005 Solutionz Group International 29 Impacts GDS DCA3 agreement expiration Deregulation Alternative systems G2 Switchworks ITA Software Farelogix Direct connect Meta searches Mobissimo Kayak


The Internet - Culprit or Hero? :@ Copyright 2005 Solutionz Group International 30 The Internet - Culprit or Hero? “Any intelligent fool can make things bigger, more complex and more violent. It takes a touch of genius -- and a lot of courage -- to move in the opposite direction. Albert Einstein (1879-1955) Transparency Yield Agency value Corporate choice


Distribution Myths :Distribution Myths


Distribution Myths(1) :@ Copyright 2005 Solutionz Group International 32 Distribution Myths(1)


Distribution Myths(2) :@ Copyright 2005 Solutionz Group International 33 Distribution Myths(2)


Current GNE Economic Models :Current GNE Economic Models


Airline Perspective :@ Copyright 2005 Solutionz Group International 35 Airline Perspective Today’ airline perspective: GDSs have been buying agency loyalty using airline dollars Airlines want a strengthened and direct relationship with agency customers Willing to pay more than “published” amounts for adoption


Gain Share Model :@ Copyright 2005 Solutionz Group International 36 Gain Share Model Gain share model (United) Airline willing to pay $x to GNE distribution provider Agency receives ($6 - $x) Airline willing to pay more than $6 for an initial term and willing to contractually agree to pricing for multiple years Another recent model (AirTran) Airline pays agency directly (e.g. $6) Agency pays GNE


New Distribution Economics :@ Copyright 2005 Solutionz Group International 37 New Distribution Economics


An Ideal Vision :An Ideal Vision


Slide 39:@ Copyright 2005 Solutionz Group International 39 Best of the new with the convenience of the old


An Ideal Vision(1) :@ Copyright 2005 Solutionz Group International 40 An Ideal Vision(1) Multi-source inventory w/independent faring: Multiple GDS access / GDS agnostic Direct connections to travel suppliers Negotiated/contracted rates Web content Proprietary data (e.g. Private Fares, independent hotels, etc.) Consolidator fares


An Ideal Vision(2) :@ Copyright 2005 Solutionz Group International 41 An Ideal Vision(2) No internal TMC operational disruption Agency workflow disruption costs you money One desktop / no data fragmentation Protection from industry upheaval Sophisticated rules engine that allows control, integration, and management of travel supply sourcing to the individual itinerary level


Slide 42:@ Copyright 2005 Solutionz Group International 42 Change can be evolutionary… doesn’t have to be revolutionary


At the end of the day… :At the end of the day…


Today, travel is a necessary evil :@ Copyright 2005 Solutionz Group International 44 Today, travel is a necessary evil Critical to your role as a travel manager is: Fiscal responsibility Safety and satisfaction of your travelers Data to support decision making Prepare for the future storm of distribution dynamics by preparing: Multi-access inventory Independent faring engine Operational excellence (full life cycle of PNR) Protection from industry upheaval


Questions and Discussion :Questions and Discussion