© copyright 2005 - amadeus travel technology group s.a. / all rights reserved / unauthorized use...

© copyright 2005 - AMADEUS Travel Technology G

roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbidden

GDSs – facing new challenges

Grach Muradyan Airline Business Group / Moscow

22 November 2005



Agenda

GDS creation – The “Golden era”

Low Cost Carriers – changing business model

Deregulation & MIDT – changing distribution terms

Internet – changing distribution environment

GDS business - changes for survival

What the future could bring



GDSs – the airlines babies…

GDSs were created by the airlines for joint distribution

1962 - Sabre / first real-time inventory system implementation ( AA / IBM )

1987 - creation of Galileo (Covia / UA, BA, KL, SR…) 1987 - creation of Amadeus (AF, LH, IB, SK) 1990 - creation of Worldspan (DL, TW, NW)

* All trademarks respected



GDSs – the golden days…GDSs net margins significantly exceeded those of airlines

4.7%

13.6% 14.3%

12.9%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Airlines Sabre Galileo Amadeus

Net margins of GDS & Airlines / US (1999).



Nothing lasts forever…

GDSs – facing new century challenges

Low Cost Carriers (LCC) use alternative distribution channels / business models and technologies

Traditional carriers ( “GDS Godfathers” and main feeders) loose significant business segment to LCC

Marginal situation in civil aviation in general – the 3rd structural / industrial crisis

End-users learned to book on the airlines sites worldwide

CRS deregulation by DoT & EEC Traditional revenue sources under question

(MIDT issues)



LCC – Southwest Airlines, the classical sample ?

“We weren’t just airborne yesterday…”




“ If you get your passengers to their destinations

when they want to get there, on time, at the lowest possible fares, making sure they have a good time doing it,

then people will fly your airline.”

( Rollin King & Herbert D. Kelleher, Southwest establishers, 1971 )




Southwest - “… being busy these past 33 years…”

Began service June 18, 1971 with head office in Dallas, TX

32 consecutive years of profitability Exceeded billion-dollar revenue mark since 1989 Largest US airline in terms of domestic volume Year 2004 results

Nearly 3,000 flights per day More then 31,000+ employees in the airline Total 70.9m pax 2,287 pax per employee ( SU / 2004: 466 ) Total operating revenue: $ 6.5 billion Net income: $ 313 million




Passenger load factor 69.5% Number of destinations: 60 airports Average trip length: 758 miles; 7 daily flights per aircraft 12.5h average daily aircraft flights length 1.45h average flight length Fleet unification - 429 Boeing 737 (average age - 9 years ):

TYPE NUMBER SEATS

B737 – 300 194 137

B737 – 500 25 122

B737 – 700 210 137




Southwest was the first airline to establish a home page in the internet

$91.15 average one-way airfare (for average 758 miles)

59% revenue generated by southwest.com southwest.com is the number one airline website for

online revenue ( “ PhoCusWright “ / 2004 ) less then $1 cost per booking via internet less then $4 cost per booking via airline reservation

agent less then $6 cost per booking via travel agent 60 full-time employees interactive marketing team



LCC – Southwest Airlines, the booking engine




“Traditional” carriers have to follow Southwest fares


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenRegulations for GDS – some

historyAt the time regulations started all the GDSs belonged

to airlines - as a result, everybody was complaining:

Airlines complained on competitors, e.g. CO stated its discounted fares never shown in Sabre (initially owned by AA). Later a former senior AA staff stated under the oath a feature was programmed into the Sabre that allowed these fares to be suppressed, for the AA management to investigate the viability of matching these fares*

Travel agencies were frustrated at the comparatively laborious & time-consuming of booking on non-owner airline, as well as contracts clauses

* “The History and Outlook for Travel Distribution in the PC-Based Internet Environment”, “Global Aviation Associates Ltd.”, 2001


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenRegulations for CRS – history / USA case

June 1983 the Civil Aeronautics Board (CAB) developed a report (upon Congress request), investigating the charges of anti-competitive behavior in four major arias: display, booking fares, booking data & contract terms.

11 November 1984 CAB adopted regulations for CRS: neutral primary display (Part 255.4, Code of Federal

Regulations, CFR), secondary displays could remain biased; display criteria's to be disclosed upon the request;

all the CRS enhancements to be offered to all participant airlines on the equal level (CFR 255.5);

airline-owners to participate on equal level in the other CRS thus not making an advantage re own CRS (CFR 255.8);

commissions to TA for using particular CRS prohibited, max contract length to be 5 years (CFR 255.6).


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenRegulations for CRS – history / EU case

European Union regulations (“Code of Conduct for CRS”)

24 July 1989 “Council Regulations (EEC) No 2299/89 “ was introduced (amended in 1993 and 1999):

Ranking on the flight options in the principal display …must be in the following order (Annex 1.1)

all non-stop direct flight between the city-pairs concerns all other direct flights, not involving a change of aircraft connecting flights

If a system vendor has decided to add any improvement, … it shell offer these improvements to all the participating carries… with equal timelines and same terms … (Article 3.4)

Loading facilities shell be offered to all parent and participating carriers without discrimination … (Article 4a.1)



Regulations for CRS – “ back to the future ? ”

Major changes had happened since the last DoT revision

for CRS rules (1992): the airlines’ growing use of Internet has weakened their

dependence on the (GDS) systems Sabre (wholly publicly owned since 1999) and Galileo (acquired

by Cendant in October 2001) are not controlled by the airlines anymore (as well as the Worldspan, which was purchased by Citigroup & Teachers‘ Merchant Bank 4.04.2003 )

Thus, from four GDS, three are not airline owned anymore

Based on this & in order to force competition between GDSs, 12.11.2002 US DoT issued Notice of Proposed Rule Making (NPRM) ( http://www.dot.gov/affairs/CRSrule.htm )



Regulations for CRS – “ back to the future ? ”

Key NPRM proposed changes include:

Eliminating the requirement that each airline with an ownership interest in a CRS should participate in a competing system at the same level at which it participates in its own

Eliminating the rules prohibiting discriminatory booking fees Keeping the ranking criteria maintained Keeping internet out of regulation Consideration of shorter contract terms for travel agencies Prohibiting agency cash inducements tied to segments.

The general question - Should the CRS rules be maintained?

( Mr. Bill Mosley, DoT / +1 202 366 5571 / May 5, 2003)


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenRegulations for CRS –

“ back to the future ? ”

American Airlines filed comments to Dot (25 March 2003):

Welcomed eliminating of mandatory participation rules & of prohibition for discriminatory booking fees

Appreciated recognition of CRS contracts “parity clauses” as anticompetitive, thus forcing CRS price competition, “which should drive down distribution costs”

Appreciated non-regulations for Internet sales Urged DoT to maintain its ban on display bias Proposed three-year sunset date on CRS regulations

American claimed net booking fees rate growth was 5.3% to 6.3% yearly (1995 – 2000), while Consumer Price Index growth was just 2.4% yearly



Regulations for CRS – Europe Union Commission

Revision objectives : reduce the obligations under the Code of Conduct (under consideration

now)

Obligations vis-à-vis participating carriers Obligations to end the non-discriminatory policy:

For fees & parent carrier clauses For existing and newly developed services Fees no longer have to be reasonably structured & related to

costs Obligations on neutral display to remain

Obligations vis-à-vis subscribers Obligations to end the non-discriminatory policy:

both for fees and for existing and newly developed services



Internet – a new battlefield ?

Compared with the traditional distribution channels (e.g. travel agency terminals, airline call centers,

ATO/CTOs), Internet has the following specifics:

Widest geography & client base, unlimited access channel No need for end-user tool distribution, support & education Requirement for user-friendly, multilingual & intuitive interface Requirement for advertising of particular site / services No booking / availability checking / abusing responsibility Requirement for payment procedure provision (e.g. credit cards) Requirement for some ticketing solution (e.g. ET, a/p ticket),

etc…



Internet – a new battlefield ?

Compared with the traditional distribution channels

Internet has the following specifics:

The costs for a booking is not fixed, as in case of GDSs The look to book ratio is very low (2% to 5%) Unlike the GDSs terminals, Internet is not targeted for

a specific service request, while providing the general information space

Unless supported (by some consolidator / CRS / GDS in the background ) needs the scope of related services / providers to be created (e.g. interline connections), making end-user to combine these himself

Has a huge permanently growing potential…



Internet – a new battlefield ?LCCs use Internet as their primary distribution channel



Internet – a new battlefield ? Traditional carriers are also increasing direct channel sales

(Qantas site, based on Amadeus FlexPricer )



GDS business: facts and figures -net bookings per year

0

50

100

150

200

250

300

350

400

450

500

2003

2004


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenGDS business: changes for

survival…GDS are adapting to the changing business environment in order to survive (…remember

dinosaurs… :-)

The major survival policy is business diversification, which in particular include:

Finding reasonable / balanced solution for LCC implementation while keeping the “traditional airlines”

E-commerce development for airlines & travel community

IT services development - within a long-term strategy

Non-air revenue increase (hotels, cars…)



Amadeus welcomes LCCs

Some of 30+ LCCs, which are now participating…

Airline name Code Country

AirTran Airways FL USA

Virgin Express TV Belgium

Sterling NB Denmark

Germanwings 4U Germany

Hapag-Lloyd Express

X3 Germany




Amadeus participating LCCs are:

Hosted mostly in “Open Skies” inventory system (Navitair, Salt Lake City, USA - like most of LCCs worldwide)

Implemented in Standard Access (AIRIMP) level only

Tending increasing their fares via GDS versus the ones shown on their proprietary websites, thus covering the GDS booking fee

Using GDS as an complementary distribution channel




April 1st, 2003 – germanwings were implemented in Amadeus



Amadeus welcomes LCC germanwings.com


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenAmadeus welcomes LCC

germanwings – participating, but on the lowest level



Internet – a new battlefield

The two principal ways GDSs use internet

Involving internet as a media to establish the terminal-to-host (or host-to-host) link as a cheap “last mile” (e.g. Amadeus “Proweb” & “Vista” Front office products)

Involving internet as a marketing environment for airline & travel agency web sites to reach the end user for promoting, bookings creating and tracking with graphical intuitive interface (including WAP usage)



Internet – a new battlefield

Portals with GDS behind allow to use the already existing GDS functionality (as well as links with the providers - airlines, hotels, car companies), while ensuring widest internet audience.

Some GDS-powered portals include e.g.:

Travelocity (Sabre) Opodo (Amadeus) Orbitz.com (Galileo / Cendant)


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenInternet – a new battlefield

( Amadeus Opodo )



Internet – a new battlefield…

The global online travel sector is expected to triple in growth over the next few years.

In order to consolidate all kind of internet-related developments and within the business diversification Amadeus dedicated E-travel division was created in March 2002

Amadeus strategic investment resulted in owning of 37.67% in Opodo* (which has more then 20% of European online air bookings).

Amadeus online ventures around the world include shareholdings in travel.com.au (Australia), Rumbo (Spain & Latin America), 1travel.com (US), eviaggi (Italy), Travellink (Scandinavia) and Vivacances (France).

( * Opodo was established & owned by 9 European airlines: Aer Lingus, Air France, Alitalia, Austrian Airlines, British Airways, Finnair, Iberia, KLM and Lufthansa).



No. 1 supplier of e-commerce technology for airlines powering more than 140 websites for over 60 airlines 880+ travel agency sites 255 corporate sites 20+ hotel sites

Growing faster then the online market in general during the year 2004

Worldwide growth in Internet bookings : 30% Amadeus growth in Internet bookings : 72%

42 (of total 454) million online segments in 2004

Internet – a new battlefield…

Amadeus E-Travel division - facts and figures (Sep 2005):



Business diversification – IT services

Hosting market worldwide: 30 % Unisys (USAS based) and 70 % IBM (PARS/TPF based) solutions – “traditional” airlines

Hosting in “OpenSkies” / HP (25+ airlines) - mostly LCCs

Current hosting systems, including SITA Gabriel (“Second Generation”) are based on 30 years old solutions, a lot of patches, not modifiable anymore, not fitting good to revenue management systems

Airlines are demanding the New Generation Inventory, Departure Control, E-ticketing and other IT systems

The IT services are a long-term businesses !




GDS business diversification includes emphasizing hosting and other IT services: Internet is mainly influencing distribution while there is always demand for hosting solutions

GDS IT / hosting services are providing background

for the GDS distribution services, e.g. Sabre entering in Russian market within / due to SU migration

At least two new truly third generation inventory solution offers on the market for full service airlines (not TPF/PARS or USAS based): Amadeus Altea new generation inventory solution UNISYS “AirCore” platform


roup S.A. / all rights reserved / unauthorized use and disclosure strictly forbiddenBusiness diversification – IT

services

In 5 years most of the airlines plan to have retired their legacy systems

14%

29%

23%

18%

16%Within the next year

1-2 years

3-5 years

5+ years

No Answer

Average expected time to retire legacy systems:

3.9 years

Expected time to retire legacy systems



services

Most airlines are now ready to outsource their PSS

59%

58%

31%

26%

15%

15%

11%

11%

9%

22%

18%

9%

5%

10%

18%

21%

28%

37%

56%

56%

56%

12%

12%

19%

19%

20%

24%

23%

Already moved to Plan to move Keep in house No answer

IT functions already moved/planning to move to ASP mode

Source: Airline IT trend survey 2005 – SITA / Airline BusinessSample: 90 airlines from all regions and sizes

Reservation

Departure control

Cargo Reservation

Frequent Flyer Application

Revenue Management

Airline Operation Planning

Financial Systems



services

But they can’t handle any more significant IT projects

on their own Main airlines’ obstacles to achieving their IT strategy

Source: Airline IT trend survey – SITA / Airline BusinessSample: 109 airlines from all regions and sizes

Lack of investment / Reduced budget

Lack of IT people with airline experience

Too much resources on tactical projects

Lack of skilled IT people

Resources focused on maintaining legacy systems

Internal dev. too long/too expensive

Lack of top managt/board level support

Technology is not yet ready

39%

11%

14%

13%

8%

4%

10%

3%




Amadeus product development power

A team of 2,000 experts Skilled in new technologies

Continuous investment on new projects and new solutions

€300 M investment on Altéa Cumulated 2000 - 2004

Allocation of resources

Airline IT35%

Central System21%

E-Commerce12%

Point of Sale22%

Fare Quote10%



services

Amadeus Altéa Plan inventory solution – implementation status

Customer base Implemented in 2004: Qantas Implemented in 2005: BA, dba, Finnair Implementation plan for 2006: SAA, Pulkovo Signed: LH, UA, common platform for Star Alliance

Delighted first customers

“I am writing to all of you to thank you very much for your half of the very excellent team work which has allowed ‘New Generation Inventory’ to be such a success. I have the most delighted customers here at Qantas. Our Inventory Management business areas are very impressed.”

Fiona Balfour, CIO Qantas



services

Amadeus Altea airlines community is already impressive References in all major alliances

oneworld: BA, QF, Finnair, IB Star: LH-LX, UA, SAA SkyTeam: AF-KL

References in each airline segment Major: UA, AF-KL, LH-

LX Network: SAA Medium: Pulkovo

Leading E Ticketing community 35 ETS users (206 M

Pax) 2 Gateway users (48 M Pax) 23 other airlines connected (650 M

Pax)

Altea Sell / Plan

Community:

• 155 FSCs (1/3)• 400 M Pax (23%)

Altea Sell / Plan

Community:

• 155 FSCs (1/3)• 400 M Pax (23%)

E Ticketing Community:

• 60 FSCs (1/3)• 900 M Pax (1/2)

E Ticketing Community:

• 60 FSCs (1/3)• 900 M Pax (1/2)



Witnessing the Future – would you still call this “GDS “ ?

Internet sites are acting as “consolidation / distribution” tool, directly reaching the end-users

Portals using GDSs in background

Portals (same time) where possible trying to bypass GDSs, thus establishing direct link from the web site to an airline inventory systems

(“Orbitz “ “Supplier Link” project )




Distribution model evolution - every option is available now !

GDS

Airline X

Airline Y

TA X TA Y

TA X TA Y TA X TA Y

Internet

Internet

Web Portal Web Portal

Airline X

Airline Y

GDS GDS

Airline Y

Airline Y

Client

Client Client




A future scenario – distribution channels more diversification

Web portals and airline websites (with / without GDS behind):

Simple journeys & fare structure, no connections No discounts / services on board End-user oriented LCCs as providers (short-haul flights mainly)

Traditional GDSs distribution: Complex journeys & fares, online / interline connections Full onboard services Travel agencies & corporate oriented Traditional airlines as providers (long-haul flights mainly)




Are GDS and Portals moving towards each other ?…

Where are we finally going ?

There would still be a place for every distribution channel !

GDS WEB PORTAL

?

E-commerce developments “Supplier Link” developments



Thank you !

© copyright 2005 - amadeus travel technology group s.a. / all rights reserved / unauthorized use...

Documents

unauthorized use

lcc southwest airlines

creation of amadeus

airlines babies gdss

airlines sites

trademarks respected

airborne yesterday slide

southwest establishers