Global Aviation Associates, Ltd.

Global Aviation Associates, Ltd.
The History and Outlook

For Travel Distribution
in the PC-Based
Internet Environment
2001
TRAVEL DISTRIBUTION
FEBRUARY
Prepared by: Prepared for:

Global Aviation Associates, Ltd. (ga2) ORBITZ
200 S. Wacker Drive
In conjunction with: Suite 1900
Aaron Gellman, Professor of Transportation Chicago, IL 60606
Northwestern University
Chicke Fitzgerald, President
MTech Strategies, Inc.
89
Special Note for the Reader

Patent and copyright issues: The use or depiction of the name, trademark, service mark or other
identifying information of any person or entity is used in this report solely for informational purposes.
No such use is meant to convey or imply that any such person or entity endorses, approves, agrees
with or is the source of any information contained in the report, nor is it meant to communicate that any
such person or entity is in any way connected with Global Aviation Associates, Ltd.
Terminology: Throughout the report the reader will note that the terms Computer Reservation Sys-
tem (CRS) and Global Distribution System (GDS) are used interchangedly, particularly when referrring
to events after the early 1990s. CRSs evolved in the 1970s after several major U.S. airlines released
specialized versions of their internal reservation systems for use by travel agencies. The term "GDSs"
evolved from CRSs in the late 1980s and early 1990s when the CRS companies expanded their
presence from the U.S. to Europe and other parts of the world.
1
Table of Contents
EXECUTIVE SUMMARY ........................................................................................................... 2
ES.1: BACKGROUND ..................................................................................................................... 2
ES.2: OBJECTIVES OF THE STUDY .................................................................................................... 3
ES.3: STUDY CONCLUSIONS ........................................................................................................... 4
SECTION I: HISTORY AND EVOLUTION. .............................................................................. 11

I.1: THE DEVELOPMENT OF COMPUTER RESERVATION SYSTEMS BEFORE DEREGULATION ......................... 11
I.1.1: History of Early Manual Reservation Systems .......................................................... 11
I.1.2: The Introduction of Punch Card Systems .................................................................. 13
I.1.3: The IBM and American Airlines Partnership ............................................................. 14
I.1.4: Other Airlines Join the Fray ....................................................................................... 16
I.1.5: Joint Industry Computer Reservation Systems .......................................................... 18
I.1.6: Sabre Emerges as the Leader ................................................................................... 19
I.2: DEREGULATION TRANSFORMS THE INDUSTRY ............................................................................... 21
I.2.1: Securing Competitive Advantage .............................................................................. 22
I.2.2: Display and Architectural Bias................................................................................... 24
I.2.3: Booking Fees and Other Methods To Disadvantage Competitors............................. 26
I.3: THE CRS REGULATIONS ARE INTRODUCED. .............................................................................. 28
I.3.1: Anti-Competitive Behavior ......................................................................................... 28
I.3.2: Enter The Regulator .................................................................................................. 28
I.3.3: Congress and General Accounting Office (GAO) Enter the Picture ........................... 31
I.4: DEVELOPMENTS SINCE THE FIRST CRS RULES .......................................................................... 33
I.4.1: Airlines Divest CRSs ................................................................................................. 34
I.4.2: Globally Competitive GDSs Emerge ......................................................................... 35
I.4.3: Alliance Partnerships ................................................................................................ 37
I.4.4: The Internet Threatens the Status Quo ...................................................................... 37
I.4.5: Consolidation ............................................................................................................ 40
I.4.6: Market Structure & Inefficiencies ............................................................................... 40
I.4.7: Enter Orbitz ................................................................................................................ 42
I.4.8: Best Practices of Joint Ventures ................................................................................ 43
SECTION II: DEFICIENCIES OF GLOBAL DISTRIBUTIONS SYSTEMS IN THE NEW

ECONOMY ......................................................................................................................... 46
II.1: BACKGROUND ...................................................................................................................... 46
II.2: THE INTERNET REVOLUTION .................................................................................................... 46
II.3: MAINFRAME BASED SYSTEM LIMITATIONS ................................................................................. 47
II.4: GDS LIMITATIONS ................................................................................................................ 49
II.4.1: Design Limits and Processing Capabilities .............................................................. 49
II.4.2: Limited Fare Availability for Consumers ................................................................... 51
II.5: WHAT IS NEXT? .................................................................................................................... 51
II.6: THE DISTRIBUTION COST DEBATE ............................................................................................ 52
II.6.1: The Travel Supplier Perspective .............................................................................. 52
II.6.2: The GDS Perspective ............................................................................................... 53
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II.7: WHAT’S DRIVING CONSUMER DIRECT DISTRIBUTION? ..................................................................... 54

II.7.1: Customer Perspective .............................................................................................. 55
II.7.2: Supplier Perspective ................................................................................................ 56
II.7.3: The Challenge .......................................................................................................... 56
II.8: CRS/GDS AGENCY RELATIONSHIP ........................................................................................ 58
II.8.1: Retention/Conversion Incentives .............................................................................. 58
II.8.2: Onerous Contract Terms........................................................................................... 59
II.8.3: Productivity-Based Pricing ....................................................................................... 59
II.8.4: Agency Override Agreements With Suppliers Impact Travel Choices ...................... 36
II.9 DISPLAY BIAS ....................................................................................................................... 61
II.9.1: Bias in Agency and Corporate Use of the GDS ........................................................ 61
II.9.2: Airline Manipulation of Bias Rules ........................................................................... 63
II.9.3: Bias in Online Agency Websites .............................................................................. 64
II.9.4: Featured Airlines ...................................................................................................... 65
II.9.5: Missing Airlines ........................................................................................................ 65
II.10 MARKETING PRACTICES ........................................................................................................ 66
II.10.1: Use of Multiple GDS Systems ................................................................................ 66
II.10.2: Tying of Corporate Account Discounts to Use of GDS ............................................ 67
II.10.3: Availability and Pricing of GDS Marketing Information ........................................... 68
II.10.4: Dynamic Pricing ..................................................................................................... 69
II.10.5: New Fare Technology ............................................................................................. 70
II.11: LACK OF COMPETITION ........................................................................................................ 70
II.11.1: Lack of New GDS Competition ................................................................................ 70
II.11.2: First-Mover-Advantage ........................................................................................... 72
II.11.3: Agency Perspective ................................................................................................ 72
II.11.4: Understanding the Relationship Between GDS Companies and Internet Sites ...... 73
II.12: BOOKING FEES ................................................................................................................... 74
II.13 INDUSTRY ECONOMICS .......................................................................................................... 74
II.13.1: Market Penetration and GDS Profit Margins (publicly traded) ................................ 74
II.13.2: Sample Profit Margins for Agencies (publicly traded) ............................................. 75
II.14: CONCLUSIONS .................................................................................................................... 75
APPENDICES ......................................................................................................................... 78
A.1: DEFINITIONS ........................................................................................................................ 78
A.2: GDS BASED INTERNET TRAVEL SITE MATRIX ........................................................................... 82
A.3 SEARCH ENGINE MATRIX (TOP 25) ......................................................................................... 85
List of Figures
EXECUTIVE SUMMARY
ES-1: DISTRIBUTION CHANNELS ....................................................................................................... 2
ES-2: 1999 NET PROFIT MARGIN COMPARISON ................................................................................ 5
ES-3: AIRLINE COSTS COMPARED TO GDS BOOKING FEES .................................................................. 7
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SECTION I: HISTORY AND EVOLUTION

FIGURE 1: A TYPICAL AIRLINE RESERVATION OFFICE BEFORE AUTOMATION ............................................. 11
FIGURE 2: AN EARLY IBM PUNCH CARD SYSTEM .............................................................................. 14
FIGURE 3: SABRE CAPABILITIES CIRCA 1962 ..................................................................................... 15
FIGURE 4: THE SABRE MAINFRAME COMPUTERS ................................................................................ 16
FIGURE 5: IBM SELETRIC TERMINAL SETS ........................................................................................ 16
FIGURE 6: AIRLINES WITH CO-HOST AGREEMENTS AS OF 1982 ........................................................... 23
FIGURE 7: COMPARISON OF FLIGHT RANKINGS BY CRS SYSTEM ......................................................... 25
FIGURE 8: PERCENT OF DOMESTIC TICKETS SOLD BY TRAVEL AGENCIES ................................................ 26
FIGURE 9: SABRE PROFITABILITY: 1976 – 1986 ............................................................................... 32
FIGURE 10: 1988 REGIONAL MARKET SHARES BASED ON BOOKINGS .................................................... 32
FIGURE 11: SABRE GEOGRAPHICAL MIX OF BOOKINGS ........................................................................ 36
FIGURE 12: AMADEUS GEOGRAPHICAL BUSINESS MIX .......................................................................... 36
FIGURE 13: PERCENT OF TRAVEL AGENCIES THAT OWN THEIR OWN EQUIPMENT ..................................... 38
FIGURE 14: PERCENT OF TRAVEL AGENCIES THAT HAVE INTERNET ACCESS ............................................. 39
FIGURE 15: MARKET SHARE OF ONLINE TRAVEL AGENCIES 1999 GROSS BOOKINGS ................................ 40
FIGURE 16: RESERVATION AND SALES EXPENSE PER DOLLAR PASSENGER REVENUE IS FALLING DESPITE THE
INCREASE IN GDS BOOKING FEES .............................................................................................. 41
SECTION II: DEFICIENCIES

FIGURE 17: OWNERSHIP AND GDS AFFILIATIONS OF MAJOR ONLINE TRAVEL AGENCIES ............................ 47
FIGURE 18: LEGACY SYSTEM ARCHITECTURE ..................................................................................... 48
FIGURE 19: THE NEED FOR INTERNET BOOKING ENGINES .................................................................... 50
FIGURE 20: GDS RATE INCREASES 1998-2001 ............................................................................... 53
FIGURE 21: DISTRIBUTION CHANNELS ............................................................................................... 54
FIGURE 22: MAJOR REASONS FOR CHOOSING A SITE ......................................................................... 57
FIGURE 23: BOOKING FEE REVENUE TO THE GDSS FROM A MID-SIZE AGENCY ...................................... 58
FIGURE 24: COMMISSIONS EXPENSE PER DOLLAR PASSENGER REVENUE IS FALLING DESPITE THE INCREASE IN
GDS BOOKING FEES ............................................................................................................... 60
FIGURE 25: GDS DISPLAY BIAS EXAMPLES ....................................................................................... 62
FIGURE 26: METHODS OF INTRODUCING BIAS .................................................................................... 63
FIGURE 27: DIFFERENCES BETWEEN BRICKS AND MORTAR AGENCY AND ONLINE AGENCY DISPLAYS ............ 64
FIGURE 28: THE NEED FOR MULTIPLE GDS SYSTEM ACCESS .............................................................. 67
FIGURE 29: PRICING CAPABILITIES OF THE GDSS .............................................................................. 69
FIGURE 30: BARRIERS TO ENTRY .................................................................................................... 71
FIGURE 31: MAJOR BARRIERS TO ENTRY ......................................................................................... 71
FIGURE 32: THE AFFILIATION OF TOP TRAVEL SITES ........................................................................... 74
FIGURE 33: OPERATING STATISTICS OF SELECTED GDSS .................................................................... 75
FIGURE 34: OPERATING STATISTICS OF SELECTED TRAVEL AGENCIES ..................................................... 76
88
EXECUTIVE SUMMARY
ES.1: BACKGROUND
Over the past twenty years, the distribution of travel products and services has been increasingly
dominated by “brick and mortar” travel agencies, supported by Computer Reservations Systems
(CRSs)/Global Distribution Systems (GDSs) acting as intermediaries and booking engines. In the
last fifteen years, the CRS/GDS paradigm has exerted considerable power over both the travel
agency distribution channel and travel suppliers, as exhibited by severe contract terms and increas-
ing booking fees. These booking fee costs are first borne by the suppliers (the airlines, rental car
and hotel companies that provide the service) and are ultimately passed on to consumers in the form
of higher prices.
Figure ES-1: Distribution Channels
Due to the steadily increasing
booking fees, the existing CRS/ Suppliers
GDS dominated channels have

proven costly for airlines. In 2000, Global Distribution Systems
these booking fees cost airlines

Supplier
upward of $3.50 per segment, Reservation Supplier Internet Travel
Bricks & Mortar
Consolidators Travel
Centers & Ticket Websites Agencies
which approximates 2.7% of the Offices
Agencies
average ticket price. All GDSs

have announced further in-
creases for 2001.
Consumers
Recently, with the evolution of the Note: Suppliers include airlines, hotels, car rental agencies, cruise lines, etc.
Internet, a new and user-friendly

distribution channel, it has become obvious that the balance between channels is shifting towards
lower-cost alternatives. For example, various studies suggest that booking travel through a tradi-
tional travel agent can cost an airline 15%-20% (including distribution fees such as GDS booking
fees, travel agency commissions, clearinghouse fees, and other related sales and processing ex-
penses) of the revenue generated while travel booked directly by the consumer on the air carrier’s
website can cost the carrier as little as 3%-5% of the value of the ticket (at a minimum, the carrier’s
website eliminates agency commissions and booking fees). Despite these high costs, travel agen-
cies continue to sell the vast majority of airline tickets. Internet sales are growing rapidly as consum-
ers become increasingly accustomed to online purchasing. This being the case, and given the
pressures created by consumers for lower fares, it is clear that airlines will ultimately want to con-
tinue shifting the distribution of their products to channels, such as the Internet, that are the most
2
economically efficient.
To this end, five airlines have formed a joint-venture company, Orbitz, which will improve the situa-
tion for both consumers and service providers alike. Consumers will benefit from a more efficient
and neutral search engine created by using state-of-the-art technology. Airlines, especially smaller
carriers that have been priced out of effective GDS participation, will benefit from the lower costs
and neutral displays that will be provided by Orbitz.
When the Orbitz venture was announced, the incumbent competitors, such as Travelocity and
Expedia, attacked Orbitz. Two principle charges have been levied against Orbitz: first, it will
provide a vehicle for the equity investor carriers’ to fix prices, and second, it will create an uneven
playing field by allowing carriers to distribute e-fares only through Orbitz and not through the more
costly incumbent online travel agencies.
2
In view of this history, Orbitz has retained Global Aviation Associates, Ltd., (ga ), to undertake a
study of the CRS/GDS market environment. Working with Global Aviation Associates, Ltd. on
this study are professionals with extensive experience in the global distribution system environ-
ment, Chicke Fitzgerald, President, MTech Strategies, Inc., and Aaron Gellman, Professor of Trans-
portation, Northwestern University and former Director of Northwestern’s Transportation Center.
ES.2: OBJECTIVES OF THE STUDY
The study has been designed with the following objectives:
1. Describe the history and evolution of the airline distribution system.
2. Establish and frame the deficiencies of the existing system, including the technology
and regulatory environments.
3. Draw conclusions relative to if, when, how and why Internet-based, PC platform sup-
ported technology will a) add competition in an oligopolistic market structure, b) pro-
vide the consumer with more efficient and user friendly schedule and fare choices through
the availability of new search technology, and c) lower the cost of air travel to the con-
sumer by lowering the cost of distribution to the supplier air carrier.
In order to achieve these objectives, it has been necessary to rely on a great deal of research into
the history and development of the industry and to assess the role and effectiveness of the regula-
tions governing CRSs.
3
ES.3: STUDY CONCLUSIONS
Internet travel distribution is growing at a rate that is unparalleled in the brick and mortar world.
PhoCusWright, a leading strategy and research firm that specializes in the online travel industry,
reports that online consumers spent $8.9 billion on airline ticket purchases in 2000, representing
approximately 69% of all online travel purchases and 7% of all travel purchases. Traditional travel
agencies continue to dominate distribution of most travel products, and in particular, airline seats.
Over 75% of all airline tickets are still sold through the traditional travel agency channel.
Despite the dynamic environment of Internet sites opening and closing and the proliferation of
information options available (brick and mortar travel agencies, online agencies, newspaper/tele-
vision/radio ads, Internet banner ads, faxes from travel suppliers), the Internet is cited as the most
desirable place for consumers to find the best/cheapest fares. The Internet is an information rich
environment that can quickly and efficiently provide consumers with the details they need to make
informed purchasing decisions. Although it can frequently take longer to make a booking online
than calling an agent, the perception of convenience (e.g., 24/7 availability) and the power of
having access to more information is still an overwhelming argument for this mode of purchasing.
With the exception of the pure travel supplier sites (e.g., Delta.com, Hertz.com and Marriott.com
to name a few), none of the existing travel booking sites on the Internet work completely indepen-
dent of a GDS system. The GDS systems provide access to rich content and real time informa-
tion, such as fares and inventory availability, but due to their legacy architecture, they can also limit
the speed and the search capabilities of Internet engines. However, this problem presents a
growing opportunity for technological innovation in the Internet travel arena, a relatively young
industry segment. Open competition and the opportunity to test options and new technologies is
undoubtedly the best direction for this valuable extension of the travel industry distribution chain.
Compounding the pressure to advance technologically, there is considerable pressure on the

travel suppliers to reduce costs related to travel distribution. GDS booking fees charged to U.S.
carriers have risen by close to 7% per year over the past decade and currently approximate $1.7
billion per annum. These bookings fees have accounted for a significant redistribution of income
from airlines and travel agencies to GDS companies, leading to profit margins for the three pub-
licly traded GDS companies that measurably exceed those of airlines and travel agencies (Figure
ES-2). GDS booking fees are oligopoly driven due to the number of competitors and the barriers
to market entry. These fees are being paid by the consumer since airline costs ultimately are
passed on to the individuals and corporations that purchase travel.
4
Figure ES-2: 1999 Net Profit Margin Comparison

The Net Margins for GDS Companies Significantly Exceeds
Those of Airlines and Travel Agencies
16%
14% 14.3%
13.6%
12% 12.9%
10%
8%
6%
5.7%
4% 4.7%
2%
2.2%
0%
U.S. Sabre Galileo Amadeus Navigant Cheap
Airlines Tickets
Average*
*Source: ATA 2000 Annual Report; company reports
Pressure to reduce airfares and the underlying distribution costs are prompting travel suppliers to
reject the notion that GDS booking fees must continue to increase at the same time that they are
witnessing significant reductions in both communication and processing costs. Moreover, airlines
have been able to maintain average fares at levels in 2000 of only slightly above (5%) those of ten
years ago while the consumer price index has risen by an average of 3.0% per annum and GDS
booking fees have increased by close to 7% per annum. Clearly, the GDSs have been able to
extract extraordinary rents and, thus, substantial profits. The latter is evident from an examination of
GDS company net profit margins which are three times that of the airline industry.
The GDS companies are being forced to fight for the survival of their core business — marrying
buyers and sellers in the travel distribution channel. This demands that they invest millions to up-
grade outmoded legacy mainframe system environments while, in the process, justifying their busi-
ness models.
Industry organizations, such as the American Society of Travel Agents (ASTA), seemingly spend
more time and energy fighting “change” in the industry than in helping their constituents manage that
change and understand the opportunities it presents. Many travel agencies fear that the Internet will
5
erode their business, as opposed to being proactive and learning what it can do to help them
grow. They fear that their clients will end up knowing more than they do, which undermines their
credentials as travel consulting professionals.
Despite the shift of some bookings to the Internet, travel agents have a significant opportunity to
grow if they adapt to the changing needs of their clients. In fact, although the number of agency
locations has decreased over the last four years, total sales for the same period have actually
increased. The competitive advantage that the agencies still hold over their Internet counterparts
is in customer service. For the most part, the brick and mortar agency can offer a more personal-
ized travel experience — at least theoretically. And they are still unmatched by their electronic
counterparts in their ability to plan complex vacation or business itineraries and in assisting small
and medium-sized companies with travel program management. Yet the dichotomy is that most
travelers will still want the comfort of having a travel consultant, but prefer the choice and ubiquity
of the Internet. Only the agency community can combine the benefits of both.
One of the continuing adverse impacts of CRS/GDS legacy architecture is that it contributes to
increases in the cost of distributing the travel product, notwithstanding that other distribution costs
have been reduced, particularly over the last five years. These increased costs tend to limit the
ability of suppliers to offer distressed inventory or e-fares through channels that require CRS par-
ticipation.
The Internet will continue to grow rapidly as a preferred outlet for low cost fares and distressed
inventory, as consumers enjoy the shopping experience and the thrill of finding a deal. Others are
not motivated by price but are attracted by the sense of control that Internet shopping provides
them, vis-a-vis calling and talking to a travel or airline agent. But, in the near term, the Internet will
not become the dominant channel and it may never become the dominant distribution channel, as
consumers continue to demonstrate their preference for the personal interaction, expertise and
advice a travel agent provides.
The power of choice is, and has always been, in the hands of the consumer. They will buy prod-
ucts and services how and when they choose. Even for a given individual, there can be different
motives that impact specific purchases — low price, high quality information, service or brand
loyalty; nevertheless, it is very difficult, if not impossible, to shift buying patterns to a given channel
100% of the time.
From the supplier perspective, the current distribution system represents outdated technology
that is no longer providing the unique value it once did. The technology and economics are bro-
6
ken and need to be fixed.
From the customer perspective, the Internet provides the promise of near-perfect choice based
on near-perfect information. The challenge for the travel industry is to come up with technological
innovations and business models that capitalize on the breadth and reach of the Internet.
New entrants in travel distribution are being met with substantial opposition from the old guard
and from leaders in the online travel marketplace. More specifically, the agency community is
opposing consumer-direct distribution by travel suppliers and, in particular, attempts to aggre-
gate multiple suppliers onto a single site. Those suppliers that dominate Internet travel,
Travelocity and Expedia, are also opposing new entrants. However, new, aggregated supplier
sites are emerging not just in the U.S. but in Europe and Asia as well.
In summary, then:
1. GDS vendors are extracting oligopoly rents from airlines in the form of excessively
high booking fees. These fees, estimated at $1.7 billion in 2000 to U.S. carriers, have
been increasing by roughly 5% per annum since 1995 and are ultimately being passed
on to the consumer in the form of higher airfares (Figure ES-3).
Figure ES-3: Airline Costs Compared to GDS Booking Fees

Airlines Have Reduced Distribution Costs, However Booking Fees
Charged By CRS Vendors Continue To Spiral Upwards
12.0%
10.0%
Average Annual Percentage Change
8.0%
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
1990-2001E 1990-1995 1995-2001E
Reservations & Sales Expense Per Dollar of Passenger Revenue
CRS Booking Fees Per Segment
Note: CRS Booking Fees are Estimated On a Linear Trend From 1990 to 1995
Sources: Airline Proprietary Data, U.S. DOT Form 41
7
U.S. airlines currently pay GDS vendors roughly $1.7 billion per annum in booking fees. These
booking fees hit low-fare new entrants particularly hard. The average fare per segment flown for
U.S. carriers is $132. Consequently, the $3.54 booking fee is 2.7% of the revenue generated
for the carriers. However, the average segment revenue for the low-fare new entrants is only
$100. Therefore, their booking fee cost is 3.5% of revenue generated, or 30% higher than for
all U.S. carriers.
The power of GDSs to price at oligopolistic levels derives from a number of conditions:
a. There are only four GDSs in the world, and effectively three in the U.S. (Sabre,
Galileo, and Worldspan).
b. GDSs primarily serve the travel agent. Since the agent is locked into a GDS, and
travel agencies sell roughly 75% of all travel, airlines must offer their product in each
GDS. Since there is no choice, airlines have no leverage. They absorb and ulti-
mately pass on the booking fee costs to the consumer.
c. The GDS/CRS technology is expensive and archaic legacy architecture. The in-
surmountable barriers to entry to the GDS market are two fold: a) extremely high
capital cost, and b) an inability to place a GDS with the agency community since all
major agencies are locked into existing GDS vendors. Essentially, market pen-
etration is impossible.
This being the case, U.S. airlines have looked to other vehicles for cost and ultimately fare level
control. They have lowered their Reservations and Sales expense per dollar of revenue gener-
ated by an average of 3.2% per annum since 1995 and held their total unit cost increases to only
2.0% per annum during this same time frame (notwithstanding a doubling of fuel costs). GDS
booking fees have increased by 5.1% per annum during the same five-year period. Had booking
fee rates remained unchanged during this five-year period, they would have been only $1.3 billion,
a saving of $400 million to the airlines, and ultimately the consumer.
2. Many existing Internet-based travel agencies, GDSs and some traditional travel agen-
cies, fearful of “disintermediation,” are trying to block Orbitz’s entry into the marketplace
by creating legislative and regulatory hurdles to the Orbitz joint venture. These competi-
tors, if successful in their efforts, will cost U.S. consumers tens of millions of dollars in
increased airfares.
8
Ventures such as Orbitz, if successful, will significantly reduce the cost of travel to the ultimate
consumer.
The GDSs, Internet travel providers, and some travel agencies have undertaken protectionist
measures, apparently under the hypothesis that they either cannot compete, or it would be pro-
hibitively expensive to do so. Consequently, they have mounted an aggressive legislative and
regulatory program aimed at either blocking or unreasonably regulating Orbitz. Interestingly, the
majority of opposition to Orbitz seems to derive from the two firms that control over 70% of non-
airline Internet bookings, Travelocity and Expedia. Moreover, notwithstanding its efforts to thwart
Orbitz’s entry into the market, Travelocity has now been selected as the booking engine behind
the Asian version of Orbitz.
According to the Progressive Policy Institute’s policy paper, “The Revenge of the Disintermediated:
How the Middleman is Fighting E-Commerce and Hurting Consumers” (authored by Robert D.
Atkinson, January 2001):
“The economic history of the United States is rife with business, labor, and professional organizations
attempting to use the powers of government to protect their economic interests. As economic histo-
rian David Landis states: 'Technological change is never automatic. It means the displacement of
established methods, damage of vested interests, and often serious human dislocations.' And during
periods of rapid technological change that produce new sets of winners and losers, political opposi-
tion to economic change increases significantly.”
And further,
“However, as these new forms of e-business flower due to their lower cost and often higher quality,
they threaten to bypass or replace traditional intermediaries standing between producers and con-
sumers. Not surprisingly, these intermediary businesses and professions are using their political and
economic influence to try to stymie these new competitors. It is not at all clear which side will win:
The threat to e-commerce from vested off-line interests is real. It is incumbent upon policymakers at
all levels of government, and in all branches, to resist the pressure from the disintermediated and
ensure that e-commerce competitors are allowed to compete on a level playing field and are not
burdened with unfair and discriminatory rules, regulations, and laws.”
3. The Internet is transforming the purchasing of travel from a supplier-controlled to a

consumer-driven paradigm.
Airline sites, pure-play Internet travel sites (such as BizTravel.com) and niche services such as
Priceline.com, Hotwire.com, and Cheaptickets.com, provide the consumer with more information
and choice than was ever possible with conventional travel distribution. Technology is changing at
breakneck speed and with increased processing power, speed, lower costs, and better search
software, next generation sites such as Orbitz are providing the consumer with near-perfect choices
through the availability of near-perfect information. Surveys also suggest that the consumer is
becoming increasingly price driven, and that same consumer is increasingly using the Internet to
9
shop for travel, among other things.
4. Many joint ventures are being established within the airline and travel related industries,
and there has been no indication that these entities are, or should be, treated any differ-
ently than any other business.
The general attitude of regulators and legislators seems to be that if these joint ventures are ap-
proved as established, or modified in form through negotiation with the Federal Trade Commission
or Justice Department, there is no reason for further interference in the marketplace. Consequently,
it makes little sense, and would be discriminatory, to regulate new joint ventures in airline travel
distribution.
10
Section I: History and Evolution
Airlines realized very early that their capacity management and reservation systems were the
proverbial weak link. In an industry where even the smallest incremental revenues could deter-
mine the difference between profit and loss, every seat leaving an airport empty is a valuable
commodity wasted. Therefore, efforts to improve capacity management through enhanced reser-
vation systems have been an airline industry priority for years.
I.1: THE DEVELOPMENT OF COMPUTER RESERVATION SYSTEMS BEFORE DEREGULATION
I.1.1: History of Early Manual Reservation Systems

Timeline Of Major Events
In the 1920s, airmail planes only had one seat available for
1996 – The Travel Industry
sale to a passenger. And, accordingly, the reservation system Enters The Internet Era
was simple. The passenger would contact the airline office in 1992 – The CRS Rules Are Revised
the departure city and, if the seat was available, reserve it for
the desired day. This task became increasingly difficult with 1984 – The Original CRS Rules
the introduction of multi-passenger cabins. The reservation

1978 – The Airline Deregulation Act
process then evolved into a formalized three-step procedure 1976 – Airline CRSs Are Offered
to Travel Agencies
(determining availability, modifying the inventory and recording
the passenger record), which, though fully automated, remains
1964 - Sabre Becomes Fully
relatively the same today. Operational
Pre-1960 – Electromagnetic Devices
During the 1930s, most major airlines operated a Request and Aid the Reservation Process
Reply system1. The control of the inventory
was still maintained at the flight’s point of Figure 1: A Typical Airline Reservation Office Before Automation
departure, requiring the airline agent in

communication with the consumer to contact
the agent in charge of inventory for the
specific flight. The consumer would then wait
for the reply phone call. Once the sale was
confirmed, the agent would take the
appropriate information from the passenger
and record it on a Passenger Name Record
(PNR) card. The data were then transmitted
1
Duncan Copeland and Others. "Sabre: The development of Information-Based Competence and Execution of Information-Based Competition, " IEEE Annals of
the History of Computing 17, (1995): 30.
11
to inventory control, either by telephone or teletype.
The Request and Reply system was time consuming and therefore expensive for the airline, and
those costs were ultimately borne by the consumers. In 1939, this system was replaced at American
Airlines. Personnel at the airline’s Boston office realized that agents could sell seats freely until
the flight was almost sold out, cutting the number of phone calls in half, reducing the time and cost
necessary to process a consumer’s request, consequently increasing the productivity of the airlines’
reservation agents. The PNR cards were continuously reconciled with inventory control and when
the number of confirmed passengers reached a predetermined level, a “stop sale” message was
broadcast to all agents. This new system, dubbed Sell and Report, although a marked
improvement, still had several innate inefficiencies. For example, a number of seats needed to
be withheld from the general distribution channels as a buffer to guard against overselling the
flight. The system was also incomplete in that once the “stop sale” message was transmitted the
agents would be forced to revert to the Request and Reply system.
After World War II, commercial air travel blossomed in the United States and maintaining an accurate
count of inventory became increasingly important to the airlines. Airlines began maintaining large
centralized reservations offices where reservation agents could check on the availability of flights
by looking at large availability boards. However, as route networks grew, size constraints of the
physical plant made this method impossible to continue.
During the late 1940s, American Airlines president, C.R. Smith, began investigating the potential
of electromechanical devices to aid the reservation process. An internal study undertaken at
American to determine the requirements of such a system found that any system adopted needed
to meet six basic requirements. The system had to enable the agents to immediately determine
what flights were available for sale, record the sale or cancellation of the sale, and should take up
less physical space than was already being used. In addition, the input-output device used by the
agent should retain a record of the previous transaction until manually cleared by the agent and it
should automatically advise other stations as to the status of flights. Lastly, the electromagnetic
system should be able to undertake all of the above actions economically and with less error than
the then-current manual system. At the time, no manufacturer of business equipment could promise
all of the basic requirements American needed. However, there were numerous partial solutions
that simplified the process.
The first electromagnetic system designed for inventory control was named the Boston Reservisor,
after the American Airlines agent office where system testing took place. The Reservisor was
12
designed to handle the first portion of the reservations process, determining seat availability.
Initially installed in February of 1946, this system relied upon a relay between the agent office and
the main control room. After the agent specified the flight or flights by punching a series of buttons
on his or her terminal, a signal was sent to the main control room. If all of the desired flights had
available seats, the signal would pass unobstructed across numerous connections, one
representing each flight, sending it back to the agent, where a light on the terminal set illuminated.
Once the flight became sold out, personnel in the main control room would insert a plug, breaking
the signal connection and disabling the light on the terminal set. This system had potential; after
the first year of trials, the agents at the Boston office were able to handle more inquiries with fewer
reservation agents than any of American’s other offices. However, this new process was not
without problems. Because of the time delay between the reconciliation of the PNR card and the
available inventory, a cushion of several seats was still needed to protect against overselling the
flight until all messages in transit could be processed.
To handle the second stage of the reservation process, modifying inventory, automation was
introduced in 1952 with the advent of the Magnetronic Reservisor. The Reservisor was little more
than a giant aluminum wheel, coated with an oxide that could “record” millions of small electric
charges. Once a sale was made or cancelled, an airline agent could automatically adjust the
inventory recorded in the magnetic drum by pulling a lever. The original Magnetronic Reservisor
could handle inventories for 1,000 flights for ten days, with response time averaging approximately
one second. The functionality of the Magnetronic Reservisor was expanded in 1956; the new
system could handle more than double the information of the original, in approximately half the
time. However, there was still no way to attach the PNR information to a specific seat, so reconciling
inventory with reservations remained a tedious process.
I.1.2: The Introduction of Punch Card Systems
With the first two steps of the reservation process partially automated, i.e., determining availability
and modifying the inventory, all that was left was automating the recording of the passenger record.
A solution to this problem came through a partnership with IBM. The result was a machine-readable
card system, named the Data Organizing Translator, or “Resewriter” for short. A reservation agent
would manually punch holes representing the appropriate passenger data into a PNR card, and
insert the modified card into the machine. The machine read the cards, recorded the information,
and determined if any passenger information needed to be sent further down the system to other
stations. The combination of these three systems produced an error rate of approximately eight
13
percent, a vast improvement over a completely manual Figure 2: An Early IBM Punch Card System
process2. However, the systems became increasingly
unwieldy as they were expanded to accommodate more
passengers and more flights. By the end of the 1950s,
processing a simple, round trip flight often required the efforts
of as many as 12 employees, 15 steps, and three hours. As a
result, productivity per employee began declining noticeably,
from 5,100 annual enplaned passengers per reservation
employee in 1950 to 3,100 in 19583. The situation worsened Photo from Computer Museum website
in the late 1950s and 1960s as jet service became commonplace. As air travel became less
expensive, the number of passengers increased dramatically and travelers, especially business
passengers, began flying on little or no notice. Keeping up-to-date records of available seats
became increasingly important. Clearly, something more was needed and that something came
in the form of Sabre.
I.1.3: The IBM and American Airlines Partnership
Sabre’s beginnings date back to 1953 when C.R. Smith, then CEO of American Airlines, and
Blair Smith, an IBM salesman, met by chance on a flight from Los Angeles to New York. The
discussion between the two quickly focused on American’s reservation system which, at the time,
was inefficient and very costly. C.R. Smith invited the IBM executive to visit the airline’s facilities
at LaGuardia Airport, where the Magnetronic Reservisor was maintained. After Blair Smith viewed
American’s facilities, he recommended to his superiors that American and IBM conduct a joint
study on the feasibility of replacing the airline’s system.
After several years of research and no real results, the turning point finally came in 1959, when
SAGE (Semi-Automated Ground Environment) was declassified and became available for
commercial use. SAGE was an air defense system, developed partially by IBM, that demonstrated
the feasibility of interactive, real-time computing. This ability was precisely what American needed
to fully realize its goals of introducing an economical, reliable and productive computer reservation
system.
The following year, the Sabre system began taking shape as computer and data storage of sufficient
power and capacity were introduced. Two IBM 7090 computers, which could perform approximately
229,000 calculations per second, were hooked up in tandem to assure adequate system reliability4.
2
Leslie Goff, 1960: Sabre Takes Off, 1999, CNN, <http:www7.cnn.com/TECH/computing/9906/29/1960.idg> Accessed November 14, 2000.
3
Duncan Copeland and Others. "Sabre: The Development of Information-Based Competence and Execution of Information-Based Competition," IEEE Annals of
4
IBM Corporate History, <http:www.ibm.com/ibm/history/story/era2.html> Accessed December 16, 2000.
14
One computer performed the essential data processing functions while the other, which also served
as a backup, carried out lower priority operations. Each of these computers could handle inquiries
initiated by as many as 1,000 terminals5. Random access disc storage replaced the magnetronic
storage of the Reservisor systems. The new disc system resulted in improved speed in accessing
passenger records. Seat inventories were
maintained on six IBM drum files, each capable of Figure 3: Sabre Capabilities Circa 1962
T he Sabre system could pro cess th e follo win g daily:
maintaining over 7 million characters of data, and
8 5 ,0 0 0 P h on e calls
16 disc files with a capacity ten times that size. In
3 0 ,0 0 0 R equ ests for fare in form ation
total, the new system yielded a processing capacity 4 0 ,0 0 0 C onfirm ed p ass en ger res er vation s
3 0 ,0 0 0 Q u eries to oth er airlin es
of approximately 85,000 phone calls daily (Figure
2 0 ,0 0 0 S ales
3)6.
Source: Eagle: The Story of American Airlines, page 348
After several technical problems were resolved, the

system finally became fully operational in December of Tim eline Of M ajor Events
1964. At the time, Sabre was the largest commercial real-
1 99 6 – Th e Trav e l Indu stry
time processing system in operation. American’s E nte rs The Inte rne t E ra
reservation error rate dropped to less than one percent and 1 99 2 – Th e CRS R ule s Are R ev is e d
the time necessary to completely process a reservation had

been cut to a few seconds. Additionally, Sabre enabled 1 98 4 – Th e Orig ina l CR S Ru les
American to save approximately 30% in staff training and

1 97 8 – Th e Airline De re gu lat io n Ac t
related expense7. However, the added productivity and
1 97 6 – Airlin e CR S s Are O ffe re d
reliability did not come without significant costs. It was to Tra v e l Age nc ies
estimated at the time that Sabre cost over $100 million to

develop8, $2.1 million to install, and it would cost more than 1 96 4 - S a bre Be c om e s Fully
O pe ra tion a l
$37 million for additional computer related expenses P re -1 96 0 – E lec trom a gne tic De v ice s
9
between 1961 and 1968 . Much of this cost was borne by Aid the R es e rv a tio n P ro ce ss
IBM.
By 1967, Sabre was being used for several strategic planning tasks, such as evaluating historic
traffic patterns using real data, calculating the load factors of American’s flights, evaluating catering
requirements and monitoring sales in great detail. Sabre had also been equipped with a feature
that could forecast passenger demand and compare it with service requirements for as much as
5
Chicke Fitzgerald, Global Distribution Systems: Outlook for the 21st Century, (Rockville, MD: Garrett Communications) 228.
6
Sabre corporate webpage, <http:www.sabre.com> Accessed November 14, 2000.
7
Sabre corporate webpage, <http:www.sabre.com> Accessed November 14, 2000.
8
Leslie Goff, 1960: Sabre Takes Off, 1999, CNN, <http:www7.cnn.com/TECH/computing/9906/29/1960.idg> Accessed November 14, 2000.
9
15
ten years into the future.

Figure 4: The Sabre Mainframe Computers
By 1971, Sabre was no longer the standard bearer of
the computer reservation system industry; it had been
eclipsed by the Programmed Airline Reservation
System (PARS) developed in the mid to late 1960s by
IBM and enhanced for Eastern Airlines. In order to
restore the Sabre system to its former glory, it underwent
three major upgrades in the early 1970s. The first
upgrade was undertaken after the decision was made
to switch the software to a PARS-based system, which
had become the industry norm. The second upgraded
the outdated IBM 7090 processors to the latest Photo from IBM website
computer. The third occurred in 1973, when the IBM
Seletric terminals used by reservations agents were Figure 5: IBM Seletric Terminal Sets
replaced with cathode ray tubes (CRTs). The Seletric

typewriters had an average response time (time
between the receipt of the data and the beginning of
typing) of three seconds, which was creating a
significant drain on system resources. The new CRT
terminals could display over 900 characters in nearly Photo from IBM website
the same amount of time, increasing system and agent
productivity10.
I.1.4: Other Airlines Join the Fray
Other airlines quickly took notice of American’s and IBM’s success with Sabre and began
contracting IBM and other hardware providers to construct similar systems. IBM saw the success
of Sabre and the introduction of its new System/360 computers, which represented a major
technological upgrade from the 7090 system used by Sabre, as a sign that it should create a
standard industry system11. The PARS system had two major benefits for IBM. First, it would
promote the acquisition of IBM hardware by the airlines. Second, it would enable IBM, which was
at the time under contractual obligation to build customized systems for Delta and Pan Am, to
10
11
16
extricate itself from the risky business of developing disparate computer reservation systems for
airlines12. The PARS system was specifically designed for medium sized carriers in order to
appeal to the widest possible customer base; as such, several features of PARS were scaled
down from the Sabre model. IBM began taking orders for this system in 1965, and by 1968, its
PARS customers included Aer Lingus, Braniff, Continental, Delta, Northeast, and Western.
Eastern, while intrigued by PARS, required a larger, full-scale system on par with American’s
Sabre. As other hardware vendors began providing similar services, and snatching up key
customers, such as TWA (Burroughs) and United (Univac), IBM abandoned its former strategy
and entered into an agreement with Eastern to develop a new system suitable for a large, trunk
carrier. The product was fully developed and installed at Eastern’s new Miami data center by
1968.
In the late 1960s, both United and TWA began experiencing difficulties with their chosen CRS
development partners; the complexity and comprehensiveness of the systems these airlines
requested caused the majority of problems. TWA had spent more than $75 million on its 2,000
terminal system, which was badly behind schedule; it was finally killed in 1970 when Robert Crandall,
then Manager of Credit and Collections, took control of the CRS system13.
In 1970, United was having it’s own problems with Sperry Rand’s Univac division. It had sunk
more than $56 million into Univac’s 3,000 terminal computer reservation system14. Most of the
problems Univac and Burroughs experienced fell into two categories: simple data processing
errors that resulted from a lack of experience, and equipment capability, which had not yet reached
a level necessary for successful implementation of all planned features15.
American and IBM had managed to solve similar errors by gradually scaling down their list of
desired features. However, as the other major carriers were already late in developing these
systems, United and TWA opted to scratch their initial plans and purchase the fully-developed
Eastern-based PARS software. By 1972, of the ten major airlines operating in the U.S., only
Northwest did not operate the Eastern-based PARS system; American made the switch in 1971.
United’s version of the PARS system, dubbed Apollo, quickly exceeded both the Eastern-based
system and Sabre in terms of capabilities.
12
13
14
Thomas Petzinger, Jr., Hard Landing: The Epic Contest for Power and Profits that Plunged the Airlines into Chaos (New York: Times Business, 1996) 69.
15
Thomas Petzinger, Jr., Hard Landing: The Epic Contest for Power and Profits that Plunged the Airlines into Chaos (New York: Times Business, 1996) 69.
17
I.1.5: Joint Industry Computer Reservation Systems
Airlines and travel agencies, acknowledging the need for increased productivity and capability for
handling information, began calling for the development of a neutral industry-wide CRS. Joint
efforts to build this system continued throughout the late 1960s and early 1970s; however, all of
these efforts failed.
The Donnelly Official Airline Reservation System (1967), also known as DOARS, was the earliest
joint system. Based upon a Univac platform, DOARS failed primarily due to lack of a financing
agreement between the 21 airline participants16. Another attempt, the PARS-based Automatic
Travel Agency Reservation Systems (ATARS), collapsed under the
weight of a CAB investigation. A joint American Society of Travel Agents
(ASTA) and Control Data Corporation effort failed as well. Airline
managers, uneasy at the prospect of having a third party involved in
the distribution channel, managed to stop this effort by announcing their
intent to develop the Joint Industry Computerized Reservations
Systems (JICRS)17.
Before the construction of the JICRS system was undertaken, the major airlines agreed to participate
in a study that would determine its functional requirements. American Airlines took the lead, with
Robert Crandall (Senior VP-Marketing) and Max Hopper playing large roles. The study was in
three tiers: the first detailed the design of the JICRS system, the second laid out the technical
requirements and the third summarized the important conclusions from the first two. As a result of
its leadership role, much of the work on the first two tiers was completed internally by American
and was therefore considered proprietary knowledge; the other participants only had access to
the final report.
In July of 1975, the JICRS report was released. The technical team concluded that the system
was both technologically feasible and economically sound; savings for the airline participants
from 1976 to 1982 were estimated at approximately $3 billion18. United, displeased with the
proposed financing of this system (investment was tied to passenger volumes and, as United was
the largest domestic carrier, it would become the largest investor), announced its intent to install
its proprietary reservation system, Apollo, directly in travel agencies. American, TWA and other
airlines soon adopted similar plans.
16
17
Richard J. Fahy, Jr. "The Cutting Edge of Technology and Regulation," Handbook of Airline Economics, ed. Darryl Jenkins. (Aviation Week Group,1995) 499-506.
18
Note: The ASTA design is a registered mark of the American Society of Travel Agents and is used solely for informational purposes.
18
ASTA made one last effort to create a joint system, known as Multi-Access Agent Reservation
System (MAARS). The CAB approved this system, but did not give it anti-trust immunity due to
fears of disadvantaging other computer reservation systems which might be offered to travel agents.
During the 1960s and 1970s, only one system was proposed that did not have airline or travel
agency owners. MARS PLUS began in 1977 when ITT took control of the failed JICRS system. It
offered direct links to the in-house systems of all participating carriers but failed primarily due to
the inability of the investors to recover subscriber’s fees from the travel agents.
American recognized United’s increasing displeasure with the proposed JICRS system through
its role in the development study. As a result, the development teams began investing a great
deal of money and manpower into Sabre to prepare it for use by the travel agency community.
When United gave notice that it was planning to offer Apollo to travel agents, the company gave a
time frame of roughly nine months; American used the time to finish upgrading the Sabre system.
I.1.6: Sabre Emerges as the Leader
The Sabre product released to agencies in 1976 retained many

of the attributes of the internal system, but it also incorporated Tim eline Of M ajor Events
several features the travel agent community expressed interest 1996 – The Trav el Industry
Enters The Internet Era
in during the JICRS study. One of the unique features of Sabre
1992 – The CRS Rule s Are Rev ised
was the display algorithm, which was heavily biased in favor
of American19. Instead of ranking flights based on the OAG
1984 – The Orig ina l CR S Ru les
format of nonstops first, followed by direct flights, online
1978 – The Airline Deregu lat ion Ac t
connections and then interline connections, Sabre ranked
1976 – Airline CRSs Are O ffered
flights based on additional factors the airline believed to Trav el Age ncies
consumers preferred. The elapsed time of the flight, the

displacement from the requested time, and carrier preference 1964 - Sa bre Becom es Fully
Ope rationa l
were some of the most important variables. Each of the flights Pre -1960 – Electrom agnetic Dev ice s
Aid the Re serv ation Process
would receive a time penalty based on the rankings for each
variable and the flight with the lowest penalty would receive
the first position. The carrier preference penalty and resulting bias all but guaranteed American
the first position. Additionally, the original Sabre system, limited by processing power, used a
connection logic that only included five hubs per city-pair market. The agent, however, could
specify a desired hub for Sabre to use in this process.
A few technical problems had to be addressed before the Sabre system was distributed to travel
19
Civil Aeronautics Board, Report to Congress on Airline Computer Reservation Systems, (Washington, DC: 1983) 50.
19
agencies. As an internal passenger reservation system, Sabre was designed to handle inquiries
from airport locations and city ticket offices. As a computer reservations system released to
agencies, Sabre had to prepare for thousands of agency locations, causing numerous problems,
especially in assuring adequate system reliability20.
The customized product, the good will created by American during the study, and the marketing
plan developed for Sabre, produced a distinct advantage for American in signing up travel agencies.
The marketing of this system was left to a team of highly specialized field personnel, whose sole
responsibility was signing up subscribers and preparing them for the new service. In general,
these marketing specialists focused on large agencies in strategic markets. By the end of 1976,
130 of these agencies had subscribed to Sabre, and these agencies contributed incremental
revenues to Sabre in the amount of $20.1 million in the first full year of agency installations; the
initial expectation was slightly over $3 million21.
United Airlines’ computer reservation system, Apollo, was brought to the travel agent marketplace
shortly after Sabre. Unlike its counterparts at American, United’s management initially did not
see a need to transform Apollo from an internal system into a specialized agency CRS22. However,
United quickly realized that many agencies preferred American’s Sabre because it included several
JICRS features. As a result, in terms of product development, the initial Apollo system was about
a year behind Sabre23.
TWA announced its PARS system to travel agents shortly after United and American. Much like
Sabre, PARS did not explicitly differentiate between direct and connecting flights; it evaluated
flights based on departure times, elapsed times, and other factors. TWA also offered a less
sophisticated system, PARS II, which quickly found a niche with smaller agencies because it was
less expensive.
The MARS PLUS system connected the agency subscribers directly to the in-house systems of
the participating carriers. Despite claims by the owners that MARS PLUS was the only truly
unbiased system, these claims were likely more fiction than fact. As MARS PLUS offered direct
access to the airlines, agents using this system were getting the airlines internal, heavily biased
systems24. Unlike other systems offered to travel agents, MARS PLUS stored the reservation on
20
tthe History of Computing 17, (1995): 47.
21
22
Richard J. Fahy, Jr. "The Cutting Edge of Technology and Regulation," Handbook of Airline Economics, ed. Darryl Jenkins. (Aviation Week Group,1995)
499-506.
23
24
20
the in-house system of the transporting carrier rather than in the CRS. In order to facilitate changes
that were invariably made, MARS PLUS offered an index feature that would automatically guide
the agent to the appropriate system.
In addition to the biased screen displays, MARS PLUS had several other disadvantages25. Each
of these in-house systems used a different language and, while MARS PLUS translated the agent’s
inputs, it did not translate the displays and outputs. Therefore, the agents had to learn how to read
the carriers various codes. Also, the system suffered from the lack of participation by the major
carriers. For various reasons, the system had difficulty recovering operational costs from the
agent subscribers.
Most of the CRSs developed similar pricing strategies for their agency subscribers in the late
1970s and early 1980s. In return for the hardware, installation, software and training, the agency
agreed to pay the vendor a monthly subscription fee. This fee often depended on the level of
usage. The more bookings the agency made on the system, the lower the monthly fee. Agencies
offset this expense by increases in total commissions paid by the airlines resulting from the increase
in travel agent productivity. At the time, domestic commissions were approximately 10% and
international commissions were slightly higher26. With an average productivity increase of 40%27,
the travel agencies were quickly becoming more profitable.
This expansion of business at travel agencies quickly changed the distribution channel mix. Travel
agents began accounting for an increasingly large portion of ticket sales and airline city ticket
offices, always regarded by the airlines as a costly expense, began disappearing. Another
transformation was also occurring. Before automation, the travel agents were regarded as agents
of the consumers. With the introduction of compensation schemes that included features such as
override commissions to encourage bookings on specific airlines, this relationship was seriously
challenged.
I.2: DEREGULATION TRANSFORMS THE INDUSTRY
The Airline Deregulation Act of 1978 introduced true competition into the airline industry. For the
first time, airlines were allowed to change their route and fare structures in response to consumer
demand and competitive pressures. With the absence of price regulation, carriers increased the
number of fares made available to the public and the frequency with which they changed these
fares. Under regulation, fare changes were allowed infrequently. Deregulation introduced the
25
26
Chicke Fitzgerald, Global Distribution Systems: Outlook for the 21st Century, (Rockville, MD: Garrett Commuications) 62.
27
21
American flying public to the concept of the “fare war” during which it was not uncommon to see
prices altered daily. The Official Airline Guide (OAG)
schedules and corresponding fare data publications
were unable to keep up with this proliferation of
information. In addition, the characteristics of consumer Enters The Internet Era
inquiries changed, from simple seat availability to price 1992 – The CRS Rules Are Revised
shopping, thus lengthening consumer interactions with
independent travel and airline reservation agents28. 1984 – The Original CRS Rules
I.2.1: Securing Competitive Advantage

1978 – The Airline Deregulation Act
As a result, the computer reservation systems, which 1976 – Airline CRSs Are Offered
to Travel Agencies
previously had been limited to a handful of the largest
travel agencies, became widespread. In 1976, Sabre
and Apollo had automated only a few hundred agencies. Operational
These were typically located in areas of the country Pre-1960 – Electromagnetic Devices
Aid the Reservation Process
where their airline owners were dominant29. By June of
1978, several thousand agencies were automated and
competition between the major CRS companies for additional agency subscribers was fierce.
In order to differentiate their product and add features to increase agent productivity even further,
United sought to add several accounting features to the Apollo system. In 1978, United bought a
license to use software from Agency Data Systems (ADS was a company that developed
minicomputer systems for travel agency use). American became aware of the United software
acquisition and proceeded to buy the company30. United was able to continue marketing the
software as Apollo Business Systems; however, American now owned the software and
programmers. Eventually, all CRS proprietors developed “back office” accounting features for
use by their agency clients. Included in these were programs that automatically tabulated
commissions for the entire agency, denoted sales figures by agent and automatically recorded
the sale.
The increased reliance on and widening use of computer reservation systems enabled airlines to
transform the systems from an internal tool predominantly used for gaining incremental revenue
28
29
30
22
from the all-important interline passenger in a regulated environment into an external tool used to
gain a competitive advantage31.
One of the most successful methods of gaining this advantage, especially in regions of the country
where the airline owners had no substantial presence, was through the development of co-host
agreements. These agreements, the first of which was signed between Sabre and Western in
1978, allowed the vendor airlines and their computer reservation systems to expand their
geographic reach32. Since agencies typically signed lengthy contracts, effectively locking them
into one system, there was a large incentive to be the first mover. The deal between Western and
American, for example enabled Western to market the system to travel agencies in the western
United States, preventing United’s Apollo from dominating the region33. The CRS owners, who
had not yet recouped the sunk costs of developing their systems, received monthly cash payments
for this service. At the end of the first year of the program, five airlines had entered into agreements
with Sabre. Sabre began to enjoy significant economies of scope as a result; estimated
incremental revenues garnered by American in 1980 amounted to $78.5 million34.
By 1982, the five major systems all had similar co-host programs in place. The participants in
these agreements are shown in Figure 6. The contracts also typically stipulated that the vendor
Figure 6: Airlines With Co-host Agreements As of 1982
AA – Sabre UA - Apollo EA - SODA TW - PARS MARS PLUS

Air Cal Alaska Air American American Eastern
Air Florida Air Florida Continental Continental Northwest
Continental Continental NY Air Delta Pan Am
Delta Delta Ozark Eastern TWA
Eastern Frontier Pan Am Mississippi Valley
Frontier Mississippi Valley Piedmont Pan Am
Golden West Ozark Republic United
Northwest Pan Am TWA USAir
Ozark Republic USAir Western
Pacific Southwest TWA Western
Pan Am USAir
Piedmont
Republic
TWA
USAir
Western
Source: CAB Report To Congress, page 122.
31
32
Department of Transportation. Airline Marketing Practices (Washington, DC: 1990) 55.
33
Richard J. Fahy, Jr. "The Cutting Edge of Technology and Regulation, Handbook of Airline Economics, ed. Darryl Jenkins. (Aviation Week Group,1995) 499-506.
34
the History of Computing 17, (1995) 50.
23
could also charge the co-host a booking fee for each reservation. These co-hosts could charge
other airlines a fee for bookings made on terminals they had sponsored35. By June 1980,
approximately four thousand agencies were CRS subscribers, many as a direct result of these
co-host agreements. Three years later, as the co-host agreements expanded to several other
CRSs, more than 68% of all domestic travel agencies were automated, accounting for roughly
80% of domestic air travel sales36.
I.2.2: Display and Architectural Bias
Another method often used by airline owners of CRS systems to gain an advantage was display
bias. The CRS vendors knew that the majority of bookings would come from the first screen,
possibly even from the first line. Numerous studies undertaken by both airlines and concerned
government agencies quantified this advantage. According to one study, 70%-90% of all bookings
were made from the first screen of the CRS display, and roughly 50% of the bookings were made
on the flight occupying the first line37. As a result, the incremental revenues attributed to the first
position were enormous and the vendors each developed a method to ensure its flights occupied
the first line. Other airlines could pay for a better position on the screen; typically this was offered
as part of the co-host agreements.
The algorithm used by Sabre operated by levying a time penalty that represented carrier preference.
American, as the host, received no penalty. Co-hosts typically received a penalty of thirty to forty-
five minutes. Other airlines received a sixty to seventy-five minute penalty. As a result, American
occupied the strategically advantageous first position more often than it “deserved”. In fact, a
Department of Transportation study undertaken in 1988 found that 11% of American Airlines
bookings made through Sabre were the direct result of display bias.
The Apollo system biased displays using a different system. Rankings in Apollo followed the
OAG format, nonstop flights were listed first, followed by directs and connections. Departure
times decided the order and, where departure times were the same, Apollo gave the first position
to United. For connections, all United-to-United connections were listed first, followed by United
to co-host, and so on. Figure 7 shows the displays of three major systems resulting from a specific
query.
A less overt method of biasing the display was through system design, also known as “architectural
bias.” Architectural bias was not the result of programming algorithm; it resulted primarily from the
lack of processing power, which forced abbreviated searches. One example of this type of bias
35
Richard J. Fahy, Jr. "The Cutting Edge of Technology and Regulation," Handbook of Airline Economics, ed. Darryl Jenkins.(Aviation Week Group,1995) 499-506.
36
37
Civil Aeronatuics Board, Report to Congress on Airline Computer Reservation Systems, (Washington, DC: 1983) 42.
24
Figu re 7: Co m p ariso n of F lig h t Ranking s By CRS System
Wh e n q u e rie d fo r flig h ts b e tw e e n L o s An g e le s a n d C le v e la n d o n J u ly 1 5 ,1 9 8 2
le a v in g a t 7 :0 0 AM , th e firs t s c re e n s o f th e d is p la y s a re a s fo llo w s :
Sabre Apollo
D ep art Arrive D ep art Arrive
Airline Flight # C ity P air Tim e Tim e Airline Flight # C ity P air Tim e Tim e
1 AA 166 LAX OR D 0700 1238 1 UA 70 LAX C L E 1150 1900
2 AA 108 C LE 1317 1524 2 UA 66 LAX C L E 1100 1805
3 AA 446 LAX D F W 0720 1208 3 DL 486 LAX C L E 1130 1937
4 AA 254 C LE 1303 1628 4 CO 314 LAX D E N 0700 1005
5 TW 136 LAX S TL 0730 1254 5 UA 642 C LE 1115 1555
6 TW 482 C LE 1343 1608 6 UA 694 LAX D E N 0715 1025
7 UA 642 C LE 1115 1555
PARS
D ep art Arrive
Airline Flight # C ity P air Tim e Tim e
1 TW 136 LAX S TL 0730 1254
2 TW 482 C LE 1343 1608
3 AA 166 LAX OR D 700 1238
4 AA 108 C LE 1317 1524
5 UA 70 LAX C L E 1150 1900
6 CO 202 BURDEN 0700 1015
7 UA 642 C LE 1115 1555
S o urce : CA B . Re po rt to Co ng res s o n A irline C om p ute r Re se rvatio n S ys tem s ,

1 982 , p age 122 .
occurred when the CRSs specified hubs over which connections were to be made. Before the
CRS rules were enacted in 1984, the number of hubs per market pair varied rather significantly.
Sabre used only five hubs; Apollo provided the most complete search as it used nine hubs38. The
vendor airlines could direct passengers over their own hubs, at the expense of competitors, by not
including specific hubs in the list. Additionally, agencies were more likely to book services on the
CRS owner carrier rather than other airlines for a variety of reasons. First, agents felt they had
more reliable information on availability on the owner carrier. In Apollo, only United displayed real-
time availability for less than nine seats. Also, agencies that used one airline repeatedly found
that they received preferential treatment in solving their customers’ problems39. Additionally, many
agencies claimed booking on the owner carrier was less time consuming than booking on others
participating in the system. And after the deregulation of agent commissions in 1980, for many
agents, the more you booked on the host airline the more you earned. Incremental airline revenues
resulting from these types of bookings were part of the “halo effect” of CRS ownership.
38
39
25
I.2.3: Booking Fees and Other Methods To Disadvantage Competitors
Another method of gaining an advantage was through the variation of booking fees. It was not
unusual for the vendor airlines to charge booking fees reflecting the level of competition perceived
between the two airlines. Airlines that signed early co-host agreements, such as Western with
American, usually faced a nominal fee of
Figure 8: Percent of Domestic Tickets Sold By
approximately 25 cents per segment. Travel Agencies
Airlines that competed head to head 60%
60%
against the vendor airlines and new low 50%
Percentage of Tickets
53%
40%
fare entrants were forced to pay fees in 38%
30%
the neighborhood of $2 to $3 per
20%
segment40. The fee made it impossible
10%
for some small airlines to participate in the
0%
CRS, effectively cutting them off from the 1977 1979 1982
increasingly important travel agent Source: US DOT, Office of Transportation. Airline Marketing Practices:
Travel Agencies, Frequent Flyer Programs, and Computer Reservation
distribution channel (Figure 8). Systems, 1990, page 12.
The data CRS vendors developed from the booking information also became a valuable tool.
With data, CRS vendors could approximate the true market size of a city-pair, view the success of
its competitors fares in maximizing their revenues and use the data to pressure travel agents that
were using alternative airlines more than the vendor would like.
Numerous other abuses of market power existed in the CRS industry. In effect, airlines and travel
agencies were at the mercy of the CRS. Since each CRS developed a group of 100% contractually-
bound travel agents through the exclusivity clauses included in the agent contracts,41 to be
competitive, airlines were forced to participate in every CRS. The CRSs controlled travel agents,
for the most part, through punitive contract clauses.
After realizing the substantial financial and competitive gains that came from CRS ownership,
additional systems appeared on the market. The financial gains came from several sources: the
booking fees charged other airlines, the subscriber fees, the value of the reservation service
performed for themselves and incremental revenues received as a direct result of the “halo effect”42.
In 1979, Delta entered into a marketing agreement with Apollo. Through this agreement, Delta
marketed the Apollo system under the name DATAS throughout the southeastern United States.
40
41
42
26
By 1982, Delta developed its own product, DATAS II, which it began promoting instead of Apollo.
DATAS II used the standard OAG format, with elapsed time the deciding factor between flights
that depart at the same time. The system used five connect points, but allowed agents to specify
alternative hubs.
Eastern entered the market in 1981 with its system, SODA (System One Direct Access). System
One, as it became known later, gave Eastern no preference on direct flights, which were listed on
the display in OAG order. However, preference for Eastern did exist in the connection algorithm.
System One initially used only five hubs for connections and its Atlanta hub was favored heavily in
comparison with other hubs. To complete bookings, agents automated with the System One CRS
switched from the Eastern primary display to the in-house systems of ten other airlines, giving
them the most accurate availability information possible. This was the first Direct Access technology
in the industry following MARS Plus multi-access.
During this same time, Sabre, Apollo and the other initial entrants began developing additional
products to be used by their agency clients. One of the first features Sabre created for its larger
agency clients was Stars, Sabre Traveler Automation Records. Stars was designed to eliminate
the Rolodex files of agencies, which often had numerous duplicated entries. This product enabled
agencies to develop and maintain better relations with their clients.
The slow start by many airlines in bringing their CRS products to the marketplace and the evolving
dominance of fortress hubs resulted in regional concentration. By 1983, Sabre had developed an
88% market share in Dallas and Apollo had a 75% share in Denver43. Additionally, the nature of
the agency contracts assured an oligopolistic market structure. Without the ability to freely switch
CRS services, agencies were locked into lengthy contracts. The first few entrants were able to
grab a large portion of the agencies willing to automate, leaving only smaller agencies for later
companies. The incredible economies of scale in this industry (extremely high product development
costs and low marginal transaction costs) enabled the first movers to outbid new entrants in agency
incentive offer packages. Also, if necessary, the first movers had the ability to reduce CRS fees to
a very low level, undercutting the competition as it tried to develop a dedicated airline following.
43
27
I.3: THE CRS REGULATIONS ARE INTRODUCED
I.3.1: Anti-Competitive Behavior
At the beginning of deregulation, many observers expected fierce competition between the
entrenched major airlines and the assorted low-cost and low-fare new entrants that sprang up
across the country. Some predicted the downfall of at least some of the major airlines. In actuality,
the death of some major airlines came not at the hands of the new entrants, but at the hands of
other major airlines, which for the first time were allowed to compete head-to-head for passengers.
While there are numerous reasons why some major airlines succeeded where others failed, the
efficiencies brought about by computer reservation systems and the gains derived from their anti-
competitive tendencies were no doubt a factor.
As an example, both Braniff and American operated in Dallas, Texas. Consequently, the airlines
were bound to compete directly against one another under deregulation. Braniff made many
strategic errors, post-deregulation, and in addition, it began to lose market share in Dallas shortly
after the 1976 introduction of Sabre to travel agencies. The slow drop-off in passengers became
more noticeable after deregulation. The management of Braniff struggled to discover why the
airline was losing valuable business passengers and its position as Dallas’ preferred airline. The
answer they found was Sabre. Many would argue that the Sabre CRS enabled American to divert
passengers who otherwise would have traveled on Braniff to American, slowly siphoning off
customers and revenue. The situation in Dallas quickly became acrimonious; Braniff publicly
accused Sabre of canceling Braniff reservations, a charge that was never proven.
Some complaints leveled against the computer reservation systems took on more definite and
provable forms. United, through the Apollo system, flexed its muscles against five new entrants,
demanding a $3 booking fee per segment to keep the start-ups schedules in the system44. Also,
Continental Airlines complained that its discounted fares never made it into the display feature in
Sabre. Later, a former senior member of the American staff stated under oath that a feature was
programmed into the system that allowed these fares to be suppressed long enough for the
management of American to investigate the viability of matching these fares45. Travel agents soon
joined in the complaints. They were frustrated at the comparatively laborious and time-consuming
process of booking a reservation on an airline other than the system owner and angry at the
contract clauses the CRS companies demanded.
44
45
Thomas Petzinger, Jr. Hard Landing: The Epic Contest for Power and Profits that Plunged the Airlines into Chaos (New York Times Business, 1996) 168.
28
I.3.2: Enter The Regulator
In response to these complaints, Congress instructed the Civil

Tim eline Of M ajor Events
Aeronautics Board (CAB) to develop a report investigating the
1996 – Th e Trav el Ind ustry
charges of anti-competitive behavior. The report was made E nters The Internet E ra
public on June 1, 1983. The CAB outlined four major areas 1992 – Th e CRS Rules Are R ev ised
where anti-competitive behavior was evident; displays, booking

fees, booking data and agency contract terms. Additionally, 1984 – Th e O rig ina l CR S Ru les
the CAB expressed concern about the market shares the

1978 – Th e Airlin e Dereg u lat ion Act
largest two systems enjoyed and the high barriers to entry to 1976 – Airlin e CRS s Are O ffered
to Trav el Agen cies
the CRS industry. After the publication of this study, the CAB
began rulemaking proceedings in September 1983. A year
1964 - S abre Becom es F ully
later, the CAB adopted regulations that resulted from this O peratio na l
proceeding. (The European Union adopted a similar set of Pre-1960 – Electrom agnet ic Dev ices
Aid the Reserv atio n Pro cess
regulations in 1989.)
Part 255.4 of the Code of Federal Regulations (CFR) prohibits

the computer reservation systems from using carrier specific variables in ranking flights in the
primary display. Secondary displays, which were often designed by CRS companies to enable
travel agencies to display only the airline owner’s flights, however, could still remain biased as
long as the primary displays were at least as useful and easy to use. This regulation also mandated
that all participant fare and schedule data be loaded into the systems with the same standards as
used for the owner carriers. Additionally, Part 255.4 ordered the vendors to disclose their display
criteria upon request46. Other forms of bias, however, were allowed. The architectural bias that
comes from limiting searches to a selection of hubs was expressly allowed.
Part 255.5 deals with non-discriminatory access. If the CRS offers a service enhancement to the
owner, then the CRS must offer it to all airlines participating at the same level of access. Similarly,
fees for bookings had to be non-discriminatory. The CAB rejected calls by the airlines that the
booking fees be “reasonable,” as such regulation would create its own set of inefficiencies.
Additionally, the rules state that airline owners of CRS companies cannot discriminate against
other CRS companies by lack of participation or provision of information (CFR 255.8). These
companies also must provide, for a fee, the marketing data they accumulate.
Travel agent concerns were addressed, at least in part, in Part 255.6. The new rules mandated a
46
29
maximum contract length of five years, enabling agencies to take advantage of existing tax benefits.
Restrictions on the use of multiple CRSs by travel agencies were eased and the practice of tying
commissions to the use of specific CRSs was prohibited.
The CAB also expressed concern over the significant barriers to entry that all but guaranteed the
failure of a new entrant to the CRS industry. Computers were still prohibitively expensive. Product
development was often a time consuming and costly proposition. Additionally, economies of
scale enabled established vendors to achieve extremely low marginal transaction costs.
These regulations were intended to protect consumers and increase competition in the CRS
industry. However, the extent to which the rules succeeded in increasing competition is debatable.
In fact, the CRS rules have seemingly institutionalized the oligopoly market structure.
By mandating the participation of all airlines with an ownership stake in a CRS in all other systems,
the government ensured the airlines would have no power against the CRS. As a result, the
booking fee system is distorted. Instead of responding to competitive pressures and decreasing
as the marginal cost of bookings fell, fees have risen by as much as 1400% for some airlines. The
established CRSs enjoy monopolistic rents as a result, which make the ability of a new entrant to
survive a competitive response unlikely.
The CRS rules took effect on November 11, 1984, but did little to quell the controversy surrounding
anti-competitive behavior. The two groups that were the most outspoken were travel agents and
non-CRS-owning airlines. The travel agents focused their continued criticism at minimum use
clauses, liquidated damages clauses, the five-year contract length, and the practice of rolling-
over contracts before the five-year time frame has expired. The airlines took aim at the cost of
marketing data and booking fee increases.
Apollo and Sabre, the two main CRSs, adopted minimum use clauses after the CRS rules became
effective. The clauses state that agency subscribers to the CRSs must continue using those
systems at a rate ensuring that the majority of bookings from the agency are made on the incumbent
system. For Apollo, the percentage was kept at 50%; Sabre mandated 75%. While this certainly
did not violate the letter of the law, the clauses came close to violating the spirit of the regulations.
A second provision used by both major CRSs was liquidated damages clauses. If the agency
terminated the 5-year contract, the agency would have to pay the CRS damages in the amount of
forecasted booking and subscription fees that would have been used over the remaining life of
the contract. These resulting liabilities were sufficiently high to make the early termination of a
contract economically infeasible.
30
Another shortcoming of the CRS rules was the lack of prohibition against “shingling,” a practice
whereby the CRS binds agents to its service by building overlapping contracts for additional pieces
of equipment. Even with the five-year contract length, this practice effectively locks in agencies,
particularly smaller ones that rely on the CRS companies for their equipment.
One major airline complaint that developed after the CRS rule took effect surrounded the cost of
the Marketing Information Data Tapes (MIDT). At roughly $10,000 per month47, many new entrants
were priced out of this valuable information. These fees have increased dramatically. Today,
several GDSs charge over $50,000 per month. In addition, despite the elimination of preferential
display bias, the market shares for CRS owners continued to increase.
I.3.3: Congress and General Accounting Office (GAO) Enter the Picture
Legal proceedings began almost immediately. Three weeks after the CRS
rules became effective, nearly a dozen airlines sued American and United,
claiming they were using Sabre and Apollo for unfair advantage. The lawsuits
were based in the “essential facility” tenets of anti-trust law. In general,
there are three types of facilities regarded by the courts as essential: natural
monopolies or joint ventures that exhibit excessive economies of scale,
assets developed as part of a regulatory regime, or government assets.
The airlines claimed the CRSs fell under the first category.
In March 1985, American and United testified before a congressional subcommittee on aviation
to respond to charges that their CRSs were allowing them to abuse their market power and gain
excessive profits from their original investment. Other airlines, many of which had ongoing lawsuits
with the two large CRS-owners, countered American and United’s defense, claiming that both
were underestimating the profits being generated from CRS ownership and overstating initial
development costs. At the request of the subcommittee, the GAO undertook a study of returns on
investment to the CRS industry. The final report was released in 1986. In it, the GAO concluded
that there was insufficient data to draw a conclusion on the profit margin of American and United’s
computer reservation systems. However, the GAO did conclude that the major vendors possessed
significant market power, making further entry into the industry unlikely. A similar study, conducted
in 1988 by the Department of Transportation, found Sabre’s contributions to American’s cash flow
to be extremely high, in the neighborhood of $200 million to $1 billion, as shown in Figure 9.
Another legal issue that found its way to the courts revolved around the length of travel agent
contracts, which the 1984 rules had set at a maximum of five years. Late entrants to the CRS
47
31
Figure 9: Sabre Profitability: 1976 - 1986 (Source: U.S. Department of Transportation)

Cumulative
($000,000s except for percent ages) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 Total
Cash Revenues
Participant Fees 0.0 0.0 0.0 0.0 15.4 23.5 21.7 46.7 86.6 199.1 230.9 623.9
Subscriber Fees From Travel Agents 0.3 2.4 5.9 13.9 16.6 30.2 59.7 71.6 83.5 93.4 105.7 483.2
Total Cash Revenues 0.3 2.4 5.9 13.9 32.0 53.7 81.4 118.3 170.1 292.5 336.6 1107.1
Cash Expenditures
Operating Expenses 11.0 3.4 6.3 10.8 14.1 22.9 32.8 41.5 45.2 65.5 87.2 340.7
Equipment Investments 2.9 8.6 22.4 24.6 28.4 19.5 22.9 18.6 21.0 64.4 55.7 289.0
Development Expenses 0.9 1.6 1.9 3.5 4.5 4.2 6.6 8.0 11.3 16.7 17.1 76.3
Subscriber Network 1.7 4.7 8.2 15.2 21.3 25.8 33.8 44.7 53.6 78.7 92.6 380.3
Total Cash Expenditures 6.6 18.3 38.8 54.1 68.3 72.4 96.1 112.8 131.1 225.3 252.6 1076.4
Net Cash Flow -6.3 -15.9 -32.9 -40.2 -36.3 -18.7 -14.7 5.5 39.0 67.2 84.0 30.7
Increme ntal Passenger Revenues 0.0
Domestic Airline Passenger Revenue 1548.4 1756.0 2035.3 2383.4 2741.0 3138.0 3156.2 3603.0 4034.6 4584.8 4488.4 33469.1
% Sold Through Sabre 0.0 3.6 7.3 12.2 18.4 29.8 35.0 41.0 41.8 40.0 39.2
Revenue Sold Through Sabre 0.0 63.2 148.6 290.8 504.3 935.1 1104.7 1477.2 1686.4 1833.9 1759.5 9803.7
% Attributable to Bias and Halo 0.0 23.7 23.7 23.7 23.7 23.7 23.7 23.7 21.0 15.0 15.0
CRS Contribution to Owner Airline
@ 80% of Bias and Halo Revenue 0.0 12.0 28.2 55.1 95.6 177.3 209.4 280.1 283.3 220.1 211.0 1572.1
@ 40% of Bias and Halo Revenue 0.0 6.0 14.1 27.6 47.8 88.6 104.7 140.0 141.7 110.0 105.6 786.1
@ 5.6% of Bias and Halo Revenue 0.0 0.8 2.0 3.9 6.7 12.4 14.7 19.6 19.8 15.4 14.8 110.1
Imputed Value of CRS Services to Host Airline 0.0 0.0 0.0 0.0 1.9 1.8 1.7 4.3 8.2 31.0 35.2 84.1
Total Cash Contribution
incl. 80% of Bias and Halo Revenue -6.3 -3.9 -4.7 14.9 61.2 160.4 196.4 289.9 330.5 318.5 330.3 1687.2
incl. 40% of Bias and Halo Revenue -6.3 -9.9 -18.8 -12.6 13.4 71.7 91.7 149.8 188.9 208.2 224.8 900.9
incl. 5.6% of Bias and Halo Revenue -6.3 -15.1 -30.9 -36.3 -27.7 -4.5 1.7 29.4 67.0 113.6 134.0 224.9
Source: Copeland, Duncan G. and others. "Sabre: The Development of Information-Based Competence and Execution of Information-Based Competition."
IEE Annals of theHistory of Computing, Vol. 17, No. 3, 1995.
industry, especially Continental’s System One, actively recruited agencies with existing contracts
and paid them to switch. These System One sales personnel, known as “Lorenzo’s raiders,”
(after then-CEO Frank Lorenzo) spent
Figure 10: 1988 Regional Market Shares Based on Bookings
more than $250 million financing
City Sabre Apollo System One Pars Datas II
switches48. American and United Atlanta 21.7 16.7 26.1 0.1 35.4
Chicago 40.3 46.8 4.2 5.4 3.3
sued hundreds of agencies, claiming Dallas 87.3 3.7 1.4 0.6 7.0
Denver 21.2 56.9 17.2 2.7 1.9
breach of contract, asking the courts Detroit 47.7 35.9 5.3 4.9 6.2
El Paso 89.1 1.5 2.5 0.8 6.1
to enforce the liquidated damages Houston 42.0 10.6 41.6 2.3 3.5
Kansas City 14.4 13.9 30.6 39.6 1.5
clauses. System One counterclaimed Los Angeles 42.2 38.0 3.9 13.7 2.2
on behalf of its agencies, arguing that Miami 12.0 1.6 79.7 1.2 5.5
New York City 54.6 13 19.7 10.7 2.0
the two main CRS companies, Sabre Pittsburgh 17.7 40.1 15.5 24.0 2.7
Salt Lake City 23.2 37.4 4.0 3.9 31.5
and Apollo, operated as monopolies San Francisco 37.8 44.9 2.5 10.3 4.5
St. Louis 25.3 3.2 4.2 66.1 1.2
in specific regions where their parent
Source: US DOT, Office of Transportation. Airline Marketing Practices:
companies were concentrated Travel Agencies, Frequent Flyer Programs, and Computer Reservation
Systems, 1990, page 99.
(Figure 10), a fact supported by
48
Thomas Petzinger, Jr., Hard Landing: The Epic Contest for Power and Profits that Plunged the Airlines into Chaos (New York : Times Business, 1996), 365.
32
American’s own internal records. However, this counterclaim was rejected in 1988, and two years
later, the legal battles finally dissipated.
The regulatory storm brewed up again in 1986 and 1987. The original rules, although they stopped
the most egregious CRS abuses, did little to mitigate the market power of the CRSs, particularly
the two largest. The non-CRS owning carriers found Congress a willing partner in the investigation
of perceived continued abuses. The second round of regulatory scrutiny focused on three main
issues, “architectural bias,” participation and travel agent contracts.
A second group of regulations was enacted in 1992. For travel agents, the
minimum use and rollover clauses were banned. The CRS companies were
also now mandated to offer three and five year contracts. In practice, however,
the three-year contracts were offered on such poor terms that most travel
agencies continue to agree to the five-year option. To combat the “halo effect,”
the revisions permitted agencies to purchase their own equipment and use
their terminals to access more than one company’s system.
In issuing this second round of regulations, the Department of
Transportation refused to institute some of the rules that both Enters The Internet Era
airlines and travel agents had urged. Booking fees were not 1992 – The CRS Rules Are Revised
addresses, although the Department of Transportation agreed

they were set excessively high49. The DOT also refused to order 1984 – The Original CRS Rules
CRSs to separate from their airline parents after American 1978 – The Airline Deregulation Act
Airlines argued that such a move would cost it over $250 million50. 1976 – Airline CRSs Are Offered
to Travel Agencies
The liquidated damages clauses were also not prohibited,
although the Department did suggest these clauses might be
illegal under local laws. Operational
Aid the Reservation Process
I.4: DEVELOPMENTS SINCE THE FIRST CRS RULES
The CRS industry has been transformed dramatically since the introduction of the 1984 rules.
However, the Global Distribution Systems (GDSs) and government rules have often not kept pace
with the times. Technological advances since the mid 1990s have made the legacy systems used
by the GDSs obsolete, allowing the substantial barriers to entry to be overcome. This is threatening
the established business models. Additionally, the usefulness of the rules is threatened, as there
are questions surrounding which GDSs and related companies are subject to regulation.
49
50
33
I.4.1: Airlines Divest CRSs
One of the most striking developments since the introduction of the CRS rules in 1984 has been
the change in ownership of the major CRS and GDS companies. While many of the systems
were developed by airlines in conjunction with computer companies, the majority are now public
companies with either no or a vastly reduced airline ownership role. In general, there have been
two shifts in thinking surrounding this divestiture trend. First, with numerous U.S. domestic and
international airlines selling their shares in GDSs, it is possible that government regulations evolved
to the point where the strategic advantage in GDS ownership has been lost. The airlines that
continue to hold on to their shares are generally seen as doing so for investment purposes rather
than for strategic or competitive reasons. The second shift in thinking revolves around the ties
between airlines and the GDSs. As the GDSs have transformed into more than just airline
reservation systems, the close, nearly parental relationship between the two is no longer necessary.
Amadeus is the youngest of the major GDS companies; it was founded in 1987 by Air France,
SAS, Lufthansa, and Iberia. Although these founders are European, the CRS roots of Amadeus
lie in the United States. The booking engine behind the Amadeus product
is System One, originally the CRS of Eastern Airlines. In 1986, Eastern,
under financial strain, sold System One to the Texas Air Corporation, parent
company of Continental Airlines. The deal linking System One and
Amadeus was made in the following year. SAS divested its interest in
1991. In 1999, Amadeus completed its initial public offering; the three
remaining airline owners each have 25% of the Class A stock and the
public owns the remainder.
The beginnings of Galileo International are rooted with two companies; the Galileo Company
formed by British Airways, KLM, and Swissair, and the second company, Covia. Covia was
created in 1986 when United decided to spin-off its Apollo computer
reservation system. In 1992, when these two systems merged, the first true
global distribution system was created. Currently, the public owns
approximately 75% of Galileo, with ownership of the remainder split between
several airlines51.
The ownership of Sabre, the oldest computer reservation system, remained

unchanged until 1997when it became partially public. In 1999, Sabre was spun-off from AMR and
51
Chicke Fitzgerald, Global Distribution Systems: Outlook for the 21st Century, (Rockville, MD: Garett Communications) 171.
Note: The Amadeus design is a registered mark of Amadeus Global Travel Distribution and is used solely for informational purposes.
Note: The Galileo design is a mark of Galileo International and is used solely for informational purposes.
34
became wholly publicly owned.
Worldspan’s roots lie in the IBM-based PARS systems created at the end
of the 1960s and the beginning of the 1970s. In 1986, Northwest Airlines
purchased a 50% stake in TWA PARS. The airlines split this
company into two separate organizations; PARS Travel
Information System (PTIS) and PARS Service Partnership (PSP).
In 1990, Delta folded its CRS, DATAS II, into PTIS; the resulting
company was renamed Worldspan. The three airlines still own the entire company. Delta owns
40%, Northwest owns slightly less than 34%, and the remainder belongs to TWA.
As the airlines began to divest themselves of their CRS ownership, questions arose as to which
GDSs are still subject to the CRS rules. The set of regulations enacted in 1984 and re-adopted in
1992 stated that any airline owning a share of a CRS company “shall ensure that the system’s
operations comply with the requirements52.” The Department of Transportation has indicated that
it intends to continue to enforce the CRS rules on all CRSs, whether airline owned or not.
I.4.2: Globally Competitive GDSs Emerge
Another trend that emerged during the last fifteen years was the globalization of the CRSs, resulting
in a new type of travel distribution company, the Global Distribution Systems (GDS). There are
several reasons for this overseas expansion. First, to serve the new business travel marketplace
more efficiently. Second, the airlines largest clients are shifting their focus towards international
expansion. Global airline alliances now offer seamless travel across combined networks. The
distribution companies had to expand as well in order to continue playing a supporting role.
Financial reasons also play a role. The risk associated with an economic downturn in one region
of the world is mitigated. And, the CRS and GDS companies exhibit sizeable economies of scale
and scope so expansion results in significantly increased profits.
Initially, Sabre was predominantly based in the United States. During the late 1980s, Sabre and
Amadeus entered into merger negotiations, which eventually failed. However, Sabre established
a European Division and began to look for other possible international opportunities. The first
agreement was with Qantas, which began marketing the Sabre system in Australia as Fantasia.
After its success in Australia, the company searched for opportunities in Latin America. At that
time, American did not have a significant presence in Latin America or a strong partner to assist
in the marketing of its CRS. Consequently, Sabre was not able to secure a foothold in this market.
52
Code of Federal Regulations, Part 255.2.
Note: The Sabre design is a mark of Sabre, Inc. and is used solely for informational purposes.
Note: The Worldspan design is a mark of Woldspan, L.P. and is used solely for informational purposes.
35
But in 1990, when American Airlines Figure 11: Sabre Geographical Mix of Bookings
purchased Latin American routes from 80%
70% 74.8% 74.3%

Eastern Airlines, this changed. Sabre 72.4%
Geographical Mix
60%
began operations in Asia in 1998 after
50%
developing a long-term agreement with
40%
Abacus, Asia’s primary regional CRS. 30%
27.6%
Currently, Sabre is marketed in 112 20% 25.5% 25.7%
countries. However, the vast majority of its 10%
1998 bookings came from the United 0%

1996 1997 1998
States, as reflected in Figure 1153. United States Worldwide
Source: Fitzgerald, Chicke. Global Distribution Systems, page 261.
Galileo was also looking to expand in the
1980s. It found an opportunity when it entered a marketing agreement with Ansett and Australian.
The Galileo system was marketed in the Pacific region under the name Southern Cross. Expansion
into Latin America occurred thanks to United, which acquired Pan Am’s routes in 1991. The
Galileo system is now marketed in over 100 countries worldwide and approximately 56% of its
1998 bookings came from the outside United States54.
System One developed a significant market presence in Latin America through Eastern Airlines.
Even after Eastern was forced to pull out of the region, System One held strong against the Sabre
and Galileo encroachment. System One’s leadership in Latin America was solidified.
Amadeus also successfully expanded into other regions of the world, thanks in large part to its
national marketing company business
Figure 12: Amadeus Geographical Business Mix
structure. Amadeus is the most 90%
international system; it has a presence 80%
80.7%
78.9%
70% 75.6%
Geographical Mix
in over 130 countries and 81% of its

60%
bookings come from outside the United
50%
States (Figure 12). 40%
30%
For Worldspan, expansion came 20% 24.4%
21.1% 19.3%
primarily as a result of TWA’s extensive 10%
European network. Asian expansion 0%

1996 1997 1998
came through an agreement with United States Rest of World
Abacus, which ended in 1998. Source: Fitzgerald, Chicke. Global Distribution Systems, page 158.
53
54
36
Expansion in other areas has not been as successful and, as a result, Worldspan has a presence
in only 60 countries.
I.4.3: Alliance Partnerships
The international airline alliances present several new challenges for the GDSs. In dealing with
passengers, the main challenge is tracking the continually changing composition of the alliances.
At a minimum, this requires the GDS systems to synchronize frequent flyer programs, issue single
tickets and, in general, maintain the illusion of seamless travel the alliances attempt to offer. The
second challenge is developing products and services needed by alliances, a line of business
estimated to bring in $100 million per alliance55. This line of business entails the integration of the
alliance members internal systems. Galileo was the first to offer alliance functionality. In July
1999, it introduced the Preferred Availability product, which combines schedule and availability
for alliances and frequent flyer groups. Sabre followed quickly with its Alliance Manager product.
By September 1999, the big four GDS companies were offering similar products.
I.4.4: The Internet Threatens the Status Quo
The last two decades have seen significant technological

advancements that threaten the grasp GDSs have on Timeline Of Major Events
airlines, travel agents and, ultimately, consumers. In 1996 – The Travel Industry
Enters The Internet Era
combination with laws prohibiting CRS/GDS limitations on
1992 – The CRS Rules Are Revised
third party suppliers of hardware, personal computers offered
a chance for even the smallest of agencies to break away
1984 – The Original CRS Rules
from the legacy technology of the CRS/GDS companies. This
equipment decreased training expenses, as did the graphical 1978 – The Airline Deregulation Act
user interfaces (GUI), such as Windows. The next step in 1976 – Airline CRSs Are Offered
to Travel Agencies
this logical progression will be the introduction of speech-
recognition software. The 2000 Travel Weekly survey found
that 36% of agencies owned their own equipment in 1999, Operational
up from 26% in 1997 (Figure 13); 28% also use third party Aid the Reservation Process
software as a front end to the reservation systems.
The combination of personal computing and the development of the Internet has opened up an
entire new line of business to the global distribution companies. Sabre was the first GDS to
realize the potential of the Internet. Its Travelocity product became operational in the beginning of
55
TravelAsia. "GDSs Vie for Alliance Business," September 3, 1999.
37
1996. Travelocity was the first Figure 13: Percent of Travel Agencies That
Own Their Own Equipment
comprehensive travel reservation
system on the Internet, fully functional 40%
even before the airlines own websites. 35% 36%

30%
As a travel agency, Travelocity receives
25% 26%
commissions from airlines, typical 20%
commissions for online agencies 15%
(approximately 5% with a cap of $10) 10%
are slightly lower than for traditional 5% 2%

0%
agencies. In addition to commissions, 1995 1997 1999
Source: Travel Weekly 2000 Travel Agency Survey.
Travelocity’s revenue stream includes
advertising fees from airlines, car rental companies, and other non-airline suppliers. According to
Forrester Research’s 2000 Travel Online Study, Sabre’s Travelocity product is the top ranked
travel web site56. Sabre introduced a complementary product in 1999. Virtually There Online Trip
Review enables travelers to access up-to-date information on flights, weather at destinations and
maps, on the day they travel.
Amadeus launched its Internet product, www.amadeus.net, in 1997, making it a relatively late
entrant. Galileo’s online site was launched in 2000 after it purchased Trip.com. Worldspan has
strategically elected to not launch a branded online travel agency of its own. However, it has
developed a significant Internet presence by operating as the booking engine for several sites
including Expedia, the second largest online agency, and Priceline.com.
In general, there are four different types of services offered on the Internet.
The first is the web-enabled travel agency. Each GDS offers travel agents Internet access and the
software necessary to build and maintain its own website, as well as the ability to use the GDS on
that website. 78% of agencies reported in the 2000 Travel Agency survey that they had Internet
access in 1999, up from 56% in 1997 (Figure 14). Initially, the largest agencies (American Express,
Carson Wagonlit, etc,) were the ones using this type of service, but today the Internet has allowed
smaller, regional agencies to compete on a more equal footing due to this capability.
The second type of online service is the direct sale of inventory by suppliers. One of the key
drivers for this is securing cost efficiencies57. Airline sites typically only offer booking capabilities
on the host airline and as such, they tend to have lower market shares than Travelocity and other
56
Travelocity.com press release, September 7, 2000. <http:www.Travelocity.com> Accessed November 20,2000.
57
Chicke Fitgerald, Global Distribution Systems: Outlook for the 21st Century, (Rockville, MD: Garrett Communications) 107.
38
online agencies. The cost makes it

Figure 14: Percent of Travel Agencies That
prohibitive for all but the largest airlines Have Internet Access
to really have market-dominating
80%
websites. A competitive site might cost 78%
70%
as much as $20 million to develop and
60%
an additional $4 million annually to 56%
50%
maintain58. However, it is estimated 40%
that the Internet can reduce distribution 30%

27%
20%
costs by roughly 75%. These supplier
10%
driven websites are the “first
0%
generation” of Internet development. 1995 1997 1999
Source: Travel Weekly 2000 Travel Agency Survey.
A third category is the online travel
agency, exemplified by Travelocity and Expedia which aggregate
air, hotel, car, and cruise options into a “travel supermarket.” This
type of agency is differentiated from the traditional agency in that it
is not a “brick and mortar” storefront. All of these agencies use a
GDS for their booking capabilities and a fulfillment agency for
ticketing, customer service and accounting related functions. These
online agencies represent the “second generation” of Internet travel
sites, those that facilitate consumer choice but are limited by their legacy architecture.
Recently, there have been other travel sites introduced online that use new business models, such
as auctions, to allocate airline inventory, but many of these are struggling or joining the dot.com
graveyard due to a lack of capital. Sites of this type are generally considered to be the “third
generation” of Internet development in that they are consumer driven. Priceline.com was an early
trailblazer of the auction business model. Other business models likely to be introduced to the
Internet are futures markets.
The last type of site is the portal. The revenue stream is predominantly from advertising. Most
portals have already entered exclusive agreements with online agencies or GDS companies.
58
Chicke Fitgerald, Global Distribution Systems: Outlook for the 21st Century, (Rockville, MD: Garrett Communications) 109.
Note: The Travelocity design is a mark of Travelocity.com, L.P. and is used solely for informational purposes.
Note: The Expedia design is a mark of Expedia, Inc. and is used solely for informational purposes.
39
1.4.5 Consolidation
Another trend in the GDS industry is the consolidation of online travel agencies. As mentioned
above, the only two GDS companies that have a significant Internet presence are Sabre, initially
through its Travelocity product, and Worldspan, through its partnership with Microsoft’s Expedia.
However, by purchasing other agencies and developing exclusive agreements with the major
Internet portals, such as Netscape, AOL and Yahoo!, these companies have ensured that a new
entrant to the online travel agency industry will have an extremely difficult time developing into a
successful company.
Travelocity is the top ranked Internet travel agency, in terms of reach, according to Forrester
Research. It is also the largest, with a 32% market share59 and estimated 2000 revenues of
$201.3 million60. In October 1999, Sabre
announced that Travelocity was going to Figure 15: Market Share of Online Travel Agencies
merge with Preview Travel, which had 1999 Gross Bookings
Other Travelocity
1998 revenues of $200 million61. This 24% 32%
combined company has more than twice
the revenues of Expedia, the second ITN.net
7%
largest online travel agency. Travelocity
also concluded exclusive deals with Priceline Cheap Expedia
10% Tickets 23%
several of the largest Internet portals, such
4%
as AOL, Yahoo, Lycos, and Excite, and
Note: This precedes the consolidation of online travel agencies. Post-consolidation,
acquired the website, GetThere.com. the largest two online agencies have an approximate 75% market share.
Source: PhoCusWright
Expedia has developed several similar

relationships. Through it’s relationship with Microsoft, Expedia has an exclusive relationship with
the MSN portal.
1.4.6 Market Structure and Inefficiencies
Despite the technology improvements that have been incorporated into the GDS companies’
products, the current structure of the GDS industry has encouraged the development of numerous
inefficiencies. Two types of price and cost inefficiencies have arisen. The first type is the price
inefficiencies that arise from the oligopolistic market structure. The CRS rules that mandated
equal participation forced nearly every major airline to participate fully in every system. The systems
did not compete against each other for participants and had no incentive to compete against
59
PhocusWright Research.
60
Travelocity.com <www.travelocity.com> Accessed February 20,2001.
61
Travel Weekly Crossroads, "1999 Top 50 Travel Agencies." June 24, 1999.
40
each other in terms of the booking fees. As a result, the booking fees charged by the GDS
companies have trended upwards over time. One large GDS company has raised its fees from
$2.10 per segment in the early 1990s to approximately $3.5462. Sabre recently announced its
plans to increase booking fees in 2001 by 7%63. Figure 16 depicts the disparity between the
GDS booking fees and the major airlines’ reservations and sales expense. This constant upward
pressure on one segment of the airlines’ costs has forced drastic reductions in the levels of
commissions offered to traditional travel agencies.
Figure 16: Reservation and Sales Expense Per Dollar Passenger Revenue Is Falling
Despite the Increase in GDS Booking Fees
12 0 $4 .5 0
Ave rage GD S B ook ing Fe es P er S egm ent

Inde x of Re servations & S ales E x pense P er D ollar
$4 .0 0
10 0
$3 .5 0
80 $3 .0 0
P as seng er R eve nue
1990 M ajors = 1 00
$2 .5 0
60
$2 .0 0
40 $1 .5 0
$1 .0 0
20
$0 .5 0
0 $0 .0 0
199 0 199 1 199 2 199 3 199 4 199 5 199 6 199 7 199 8 199 9 20 00E 20 01E
Majors GDS Booking Fees per Segment
Note: CRS Booking Fees are Estimated On a Li near Trend From 1990 to 1995
Sources: Airline Proprietary Data, US DOT Form 41
The second inefficiency arises from the cost of each booking. Over the last two decades, the cost
of processing and equipment has dropped dramatically64, implying that the internal marginal cost
each GDS faces for booking reservations has been declining as well. If the GDS companies truly
competed against each other, the booking fees charged should approach the variable cost each
GDS incurs plus a reasonable return on invested capital. This is clearly not the case.
62
Statement of the Honorable Kenneth Mead, Inspector General, DOT, before the Committe on Commerce Science and Transportation. "Internet Sales of Airline
Tickets."
63
Aviation Daily, August 9, 2000.
64
The Dismal Scientist <www.dismal.com> and <www.Free Lunch.com> Accessed Decmeber 28, 2000.
41
I.4.7: Enter Orbitz
Recently, a consortium of some of the largest domestic airlines created

a joint venture to reduce distribution costs arising from GDS booking
fees. Orbitz, as this independent company is known, is a new entrant to
the highly concentrated industry of online travel agencies. While any joint venture started by horizontal
competitors should receive anti-trust scrutiny, Orbitz is designed to solve many of the problems
associated with the GDS industry, not create new ones.
Orbitz is offering airlines substantial savings from the typical booking fees. In return, and among
other things, the airlines must agree to offer Orbitz any publicly advertised fares, including deeply
discounted e-fares. This is not intended to reduce competition; any GDS or travel agency can
offer a similar financial arrangement on booking fees and gain access to these types of fares65. In
fact, one of the basic principles of economics holds that, in order for competition to exist, information
must be available to the widest possible audience. The introduction of Orbitz will also help combat
the concentrated market shares held by the entrenched incumbents.
Orbitz will also introduce new technology to the GDS industry. The company will use modern
serial processors instead of mainframe technology, resulting in “1,000 times the computing power
of Sabre, at a fraction of the cost66.” As the Department of Transportation noted in its 1988 report,
developing the technology necessary to compete in this industry has been expensive enough in
the past to create a significant barrier to entry. This new technology will enable Orbitz to search
every fare and schedule possibility in responding to a consumer’s request, a function not previously
possible with legacy GDS technology.
Detractors of Orbitz claim that the founding airlines are either intending to collude on setting fares
or to create a heavily biased system that will reduce the welfare of consumers. Orbitz will receive
its fares from the same source as other online travel agencies. Therefore, there will be no opportunity
for the airlines to collude. Moreover, as stated by Kenneth M. Mead, DOT Inspector General, in
his post hearing questions submitted by Senator McCain :
“We do not see anything unique to the structure of Orbitz that would encourage or facilitate collusion
on pricing. The airlines will have no greater access to each others’ fares than they currently have
through browsing their competitors’ websites and purchasing CRS data. In the current state of
technology, airlines can become instantaneously aware and respond immediately to changes in their
competitors’ fares and services - although Orbitz will gather this information more easily in one place,
it will not offer a substantially greater platform upon which the airlines can communicate about pric-
ing.”
As for the second criticism, Orbitz is the only agency contractually bound to airlines to create a
65
Gary Doernhoefer, "Orbitz to Be Alternative to High CRS Fees," Aviation Daily, Novembr 16, 2000.
66
Testimony of Jeffrey Katz before the Committee on Commerce, Science and Transportation. July 20, 2000.
Note: The Orbitz design is a mark of Orbitz, L.L.C. and is used solely for informational purposes.
42
neutral display. In order to do this, Orbitz has purchased rights to use the only system developed
independently of the airlines, ITA software. Additionally, the founders and charter members
are such vastly disparate companies it would be impossible for Orbitz to bias the displays in
order to favor everyone. Included in the airlines that have agreed to work with Orbitz are some
of the largest U.S. flag carriers as well as low fare airlines that compete directly against them.
1.4.8 Best Practices of Joint Ventures
A group of five of the largest automakers has created an Internet site with a similar purpose in mind.
Covisint, announced in February 2000 and operational in October of the same year, is intended to
develop into a multi-functional e-marketplace. The founders (General Motors, Ford, DaimlerChrysler,
Nissan, and Renault), with a combined purchasing power of over $300 billion67 fully intend to develop
Covisint into the largest B2B marketplace, handling an estimated $750 billion in purchasing per
year68.
The primary goal of Covisint is to reduce manufacturer time and costs by making the procurement
process more competitive and efficient. Currently, when a manufacturer needs a part to be made, it
translates the specifications into the language used by the internal systems of the suppliers. Covisint
will enable the automakers to make a single posting of information to which all suppliers will have
equal access. The auction-type process Covisint utilizes for most of the contract awards will create
further savings. Other services, such as the creation of an online catalog and demand forecasting/
capacity planning services will be included at a later date.
It is estimated that by reducing the costs associated with these transactions, auto part makers will
save approximately 10 to 25 percent of total costs per annum69.
One of the most promising features of this marketplace for the auto manufacturers is its ability to
reach a wider range of suppliers than a manual process would economically allow. For the suppliers,
especially the smaller regional companies, Covisint will enable them to achieve the focused visibility
they require to compete effectively. In addition, the e-marketplace will allow all suppliers to
geographically broaden their customer base.
Before Covisint began operations, a full regulatory review was done both by U.S. and foreign
governments to ensure Covisint would not reduce competition between the auto manufacturers.
Anticipating this review, Covisint adopted several guidelines for collaborative purchasing by the auto
manufacturers. First, the aggregation of purchases by multiple Original Equipment Manufacturers
67
Reuters News Service. "ArvinMeritor Says Sees Savings in Covisint Exchange," November 1, 2000.
68
Keisel, Ralph. AutomotiveNews.com. "FTC Gives Nod to Covisint," September 11, 2000.
69
Keisel, Ralph. AutomotiveNews.com. "FTC Gives Nod to Covisint," June 26, 2000.
Note: The Covisint design is a mark of Covisint and is used solely for informational purposes.
43
(OEMs) is explicitly forbidden. Second, collaborative purchases by the automakers will not be
allowed for automotive-specific parts. Lastly, purchases of commodities that are not automotive
specific, such as office supplies, will be allowed as long as they meet current laws of competition70.
The Federal Trade Commission (FTC), after an initial investigation, gave its approval in early
September. The FTC approved the joint venture while reserving right to investigate further once
the site was functioning. Approval from the German government followed at the end of the month.
On October 3, 2000, ArvinMeritor, a supplier of exhaust systems, became the first company to
complete a transaction on the website. It held an auction to find a potential manufacturer of a
plastic molded part. The company held similar auctions later in the month.
AirNewco is another joint venture, like Orbitz, developed by horizontal competitors with the objective
of creating savings by streamlining and integrating their supply chains. This B2B e-marketplace
was founded by nine international airlines: American Airlines, Air France, British Airways,
Continental Airlines, Delta Air Lines, Iberian, SAirGroup, United Airlines, and United Parcel Service.
AirNewco has been set up as a company independent from its founders.
AirNewco will operate as a marketplace between the airlines and suppliers of fuel, catering, parts
and services associated with these commodities. Eventually, the e-marketplace intends to develop
a catalog of services and commodities, a support structure for inventory management, and
transaction support functions71. As a result, the airlines participating in the marketplace will achieve
significant savings through lower prices, transaction,
inventory, and processing costs.
MyAircraft.com has been created by Honeywell, United

Technologies, and i2 technologies, to reduce costs
associated with maintaining large inventories. These
inventories tie up over $50 billion. MyAircraft.com estimates that participants will experience
one-time inventory related cost savings of 25% and recurring savings of 5% annually72.
Airlines will benefit by reducing equipment downtime by 3-5%73 through better planning. To this
end, MyAircraft will provide spare parts forecasting, inventory planning, and maintenance scheduling.
MyAircraft will also create a spot market for inventories, reducing inventory costs for airlines by
roughly 25 percent74. For OEMs, MyAircraft will provide forecasting and inventory
70
Covisint website general facts. <http:www.covisint.com/info/faq_gen.shtml> Accessed November 30, 2000.
71
AirNewCo corporate website. <http;www.AirNewCo.com> Accessed Decemebr 28,2000.
72
MyAircraft.com White Pages. <http;www.MyAircraft.com> Accessed December 28, 2000.
73
74
Note: The AirNewCo design is a mark of AirNewCo and is used solely for informational purposes.
44
planning to ensure the companies have the right parts on hand when airlines conduct routine
maintenance. Spot markets will enable manufacturers to dispose of excess inventory. Additionally,
regional manufacturers will have access to a larger base of customers than was previous
economical.
Efficiencies will also result from the single marketplace’s ability to facilitate communications
between firms. With over 18,000 buyers and sellers worldwide75, the aerospace industry is highly
fragmented and in need of such capabilities.
In October 2000, MyAircraft and AirNewco announced a merger.
These joint ventures have several features in common. The so-called “best practices” include:
developing bylaws and corporate practices affirming a pro-competitive stance in anticipation of
regulatory scrutiny, development of a corporate foundation independent from the equity investors,
and, perhaps most importantly, “critical mass.”
Each of these firms has developed corporate by-laws stating their approach to competition. Covisint
specifically details transactions that it will not allow. Other firms have been more general in their
approach. Regulators have consistently allowed each of these sites to begin operations before
judging what, if any, anti-competitive effect they may have. So far, regulators have not found any
harm.
Another best practice has been the foundation of a corporate entity separate from the initial owners.
CEOs and other personnel have been brought in from the outside the joint venture participant
companies to ensure that loyalties are to the joint ventures. Additionally, all intend to offer the
majority, if not all, of the ownership to the public once the marketplaces have developed sufficiently.
Perhaps the most significant is the recognition of the importance of creating “critical mass.” The
initial investment by and participation of several major companies, in each case, is likely to
guarantee a degree of success.
75
MyAircraft.com White Pages. <http;www.MyAircraft.com> December 28, 2000.
45
Section II: Deficiencies of Global Distributions Systems in the New Economy
II.1: BACKGROUND
The GDS systems currently used in the travel industry are largely unchanged from the original
systems created in the late 1960s and early 1970s. For much of this time, the pace of techno-
logical advancement served to protect the incumbents from new competition. The cost of pur-
chasing the necessary hardware alone ran into the tens of millions of dollars. Subsidizing agency
CRS/GDS switches in order to create the instant market share necessary to survive a competi-
tive response easily meant spending millions more. Thoroughly protected from competition, the
GDSs have raised booking fees by nearly 7% per annum since 1990 even though the marginal
cost of these transactions has been falling.
Fortunately, this anti-competitive and anti-consumer behavior is nearing an end. Technological

advancement has accelerated to the point where the creation of a competitor to the entrenched
incumbents is now economically feasible. Additionally, technology has progressed to a point
where these “dinosaurs of the mainframe” are in need of modernization in order to compete
effectively in the “new economy.” However, instead of investing in the necessary new equipment,
these established companies are attempting to prohibit new entrants. In this section, the defi-
ciencies of the present distribution systems, in terms of technology and industry economics, are
examined in greater detail.
II.2: THE INTERNET REVOLUTION
The Internet is at the core of the so-called “new economy.” In the travel industry, the Internet booking
sites are enabling consumers to access flight and fare information and electronically book their
own travel. Although the four GDS companies still rely on bookings made by traditional travel
agencies for the bulk of their revenue, each is trying to re-invent itself in order to diversify revenue
streams and reduce dependency on a shrinking distribution channel.
Support of Internet travel distribution has developed into a main focus of the four GDS companies.
Each provides Internet booking tools for their travel agency customers and serves as the booking
engine behind several travel-related websites. A broad range of companies own these Internet
sites, from brick and mortar agencies, to cyber agencies, travel suppliers, and even the GDS
companies themselves.
46
Figure 17 displays the relationships between some of the most prominent travel sites and their
owners and GDS system affiliations. A more detailed chart is included in the appendix.
Figure 17: Ow nership and GDS Affiliations of Major Online Travel Agencies
PRIMARY CUSTOMER
Public Majority
Site Corporate Consumer Pow ered By
Company Ow ner
Expedia X Y Microsoft Worldspan
Travelocity X Y Sabre Sabre
Priceline.com X Y Priceline Worldspan
Trip.com X N Galileo Galileo
Various (choice of
ETravel X N Oracle
corporation)
Biz Travel X N Rosenbluth Worldspan
SAP Travel X N SAP Amadeus
AmericanExpress.-
X X N American Express Sabre
co m
Continental
Continental.com X N Worldspan
Airlines
Use of self-booking tools, such as the websites listed above, is occurring at a double and triple-
digit pace; however, even with this dramatic growth, over 75% of all travel transactions are still
booked through travel agencies, using one (or more) of the GDSs. With all of the channels of
distribution growing, the GDSs are reaching the limits in terms of their ability to efficiently extract
information from their legacy mainframe environments, impacting all channels, especially the
technology-heavy Internet channels.
II.3: MAINFRAME BASED SYSTEM LIMITATIONS
Most GDS companies evolved from IBM-based systems, using powerful IBM 3090 mainframes in
a clustered processing environment. However, Amadeus still utilizes a hybrid of IBM and Unisys
platforms. The IBM computers run the operating system software while the Unisys computers
handle the fare and pricing systems.
IBM’s Transaction Processing Facility (TPF) is the operating system of choice for the GDS
community today. Also used in the online banking business, TPF provides speed, reliability and
47
recoverability. All of these features are essential for mission critical software systems and have
served the GDS community well for over two decades.
In order to provide an idea of the scope of the hardware investment required by a GDS for the
creation of a competitive system, the following is an overview of the Amadeus computer
architecture76.
On any given day, the GDS industry collectively processes more than 3 million bookings, interfaces
Figure 18: Legacy System Architecture
AMADEUS SYSTEM
Amadeus began its data center in the late 1980s w ith IBM systems for the travel distribution system and
Unisys systems for the fare quote system. It deployed ten IBM 3090s w ith a total of 16 processors and three
Unisys 2200 units, containing six processors. At the time, all its relevant data w as laid dow n in about 550 disk
drives.
Today the system is made up of six IBM computers w ith a total of 32 processors running the TPF systems.
One of the six computers handles all front-end communications softw are. Four additional IBM computers,
w ith a total of 22 processors, are used to facilitate off-line processing and backup, as w ell as development
and testing. The data systems are now measured in terabyes. The Fare Quote System still resides on a
separate back-end distributed system operating on a Unisys Series 2200 computer w ith about 49 processors.
Amadeus' netw ork has 16 nodes distributed throughout Europe, the US and Asia and it supports a user
population of 205,658 terminals. Each node is capable of supporting up to 2.8 gigabytes of data per second.
Amadeus supports 52,559 travel agency locations and 8,219 airline sales office locations w orldw ide.
with well over 100,000 travel agency locations and more than 1,000 travel suppliers worldwide.
For those systems that handle hosting services for airlines (i.e., serve as the engines behind
internal reservation systems), collectively over 1 million passengers are processed each day.
The core systems process upward of 5,000 messages per second, on average, which is precisely
what TPF was designed to do.
The primary shortcoming of the TPF system architecture is its record-based file system and its
lack of relational databases or data warehouses. Because most of the important data (schedules,
availability, fares and pricing) and transaction information (client profiles, reservation details) still
reside in fragmented, non-relational files, the system does not have the same search and retrieve
capabilities as popular database architectures, such as Oracle and Teradata.
Additionally, the GDSs rely on older programming methodologies, such as base level languages
(e.g., Assembler and Cobol) and less sophisticated testing tools to extract data from the archaic
file systems. As a result, intense and complex computing applications, such as constructing fares
according to rules and availability, have to be done with a set of very detailed parameters in order
to limit the processing time. From a practical perspective (taking into consideration both time
76
Chicke Fitzgerald, Global Distribution Systems: Outlook for the 21st Century. (Rockville, MD: Garret Communications) pages 147-148.
48
and cost of processing), this limits the output of the query. Furthermore, to develop new applications,
modify old ones and do the testing required for these complex systems is extremely time consuming
and costly. Even what seems to be the smallest modification to a GDS system (such as expanding
a field size for city codes or flight numbers) can take 6-9 months elapsed time, with the cost
reportedly running into the millions of dollars.
II.4: GDS LIMITATIONS
II.4.1: Design Limits and Processing Capabilities
The GDS systems were designed to be used by professional travel counselors to handle large
volumes of transactions. Everything within the system was accomplished with the sole purpose of
consummating a booking transaction.
Prior to the introduction of PC systems that could simplify the user interface, training on the native
GDS system environment took six weeks initially, with a two-week refresher course scheduled
some one to two months after the individual began using the system. Now with more intuitive
front-end programs, training has been cut to one week or less, producing a tremendous saving of
time and money for the agency community.
Today’s GDS systems search the records in their databases serially, across a number of fare
records that are tied to specific flight itineraries, supporting, as an example, a specific query for
the price for flights from Dallas to Chicago on 11NOV. Without another specific query they would
not tell you that the price on Tuesday the 10th was significantly lower than Wednesday or that since
seats are not available at the lowest fare on Thursday the 12th or that an even lower fare might be
available if one is willing to stay over a Saturday night. It is expected that a travel agent or an
airline reservations agent will add this level of experience and value to the information displayed.
Since relational database capabilities are not inherent in these systems, TPF simply cannot support
complex “dream shopping” requests common to the leisure traveler. If a consumer looking for an
inexpensive weekend trip queried “give me every flight that operates out of Dallas, Texas for
under $300,” the existing GDS-based systems would be incapable of responding. Since these
systems support the preponderance of Internet travel sites, technological innovation is required to
bring the current systems to the point where they can support these types of queries in a reasonable
amount of time, at a reasonable cost.
49
This kind of query would not have been required in a travel agency system, as a travel agent would
be familiar with a handful of destinations that would have met this criteria. While TPF still sits at
the core of all GDS systems, most GDS companies have begun to modify their operating
environments to include a wide variety of client/server technologies and powerful distributed
computer systems to off-load some of the intense computing required for complex functions. Fares,
pricing and “dream shopping” are prime targets for updated applications environments utilizing
newer technology, but most GDS companies have not overhauled their basic capabilities to take
advantage of the newer system capabilities. And the GDSs and airlines have turned to companies
like Datalex, Equant and Sabre’s GetThere.com to customize their Internet booking engines to
make their own legacy systems accessible and easier for consumers to use (Figure 19).
Figure 19: The Need For Internet Booking Engines
Delta's Reservation System
Delta's internal reservation system, Deltamatic, has a peculiar limitation on international flight availability
listings that inserts an 8 hour w indow of time on the entry as it checks availability. If you called their
reservations number to request a flight from New York's JFK airport to Dublin at 8am, their internal system w ill
respond that there is no service, even though there is a nonstop flight that leaves at 730pm.
This error requires an airline reservations agent first to know that they service the New York/Dublin market
and then to know that they can either construct a connection to Dublin through Atlanta or Cincinnati if there
is a compelling reason that the individual truly w ants to leave in the morning. Or they could force a
connection on another carrier, perhaps through Brussels or London (although neither of those options w ould
likely get the passenger to Dublin any earlier than the non-stop w ould have). Or they can change the
departure time in their system entry to 12noon, at w hich time the system w ill display their non-stop to Dublin
at 730pm.
The booking engine used by Delta for its Delta.com w eb site has been programmed in such a w ay as to
alleviate that interim step on International flights, as it ignores the 8 hour w indow in its search for non-stop
service in a given market. It has business rules built into the system that understands the w ay that the host
system operates and the limitations of Delta's display w indow of time for flight availability. Unfortunately, the
same logic has not been applied for domestic flights (w here there is a 4 hour w indow on availability displays).
If you request a flight from Tampa to JFK at 3am, the system w ill reply that there is no service, w hen in reality
there is a non-stop flight at 715am. Changing the departure time to 4am w ill yield the non-stop flight in the
display.
This brief example illustrates the complexity of the challenge of taking information from a mainframe,
legacy system environment designed for the professional user and moving it to a system that can
be used by a novice consumer who is not knowledgeable about either an airline’s route structure
or the peculiarities of its system environment. It also highlights the complexity that would ensue if
the government attempted to regulate the Internet travel sites. If DOT were to initiate a rule governing
the display algorithms for availability entries in the GDS system for travel agents (e.g., making
sure that the four hour rule is not applied to availability entries for domestic flights within the U.S.),
50
programming changes must be accomplished by the Information Technology (IT) departments of

four companies at significant expense due to the legacy system architecture. If this same rule
were applied to all Internet booking sites, those IT changes would have to be made by scores of
companies, and someone would have to monitor that they had, in fact, been made. This would be
an enormous administrative burden and an unnecessary cost burden to many companies that are
already struggling to redefine the economics of the industry, introduce technological innovations
and at the same time, become profitable.
II.4.2: Limited Fare Availability for Consumers
The GDS systems provide search technology for reviewing fare information submitted by the
individual airlines to the Airline Tariff Publishing Company (ATPCO), the central source for the
collection, organization and dissemination of fare information for virtually every domestic airline.
There often are thousands of possible fares available in a given city pair market. Although a low
fare may be published for a given city pair, availability of that fare on a particular flight is tightly
controlled by allocating a certain number of seats for sale at that price. There are often complex
rules that surround the utilization of any given fare on a specific flight and date combination.
Given the way GDS systems have been designed, only limited routing options can be examined
with each availability and fare request. Variables such as alternate airports and flexible travel
dates are not supported by the legacy GDS environments and it is not unusual to display integrated
availability and pricing on the same screen.
II.5: WHAT IS NEXT?
To support a more personalized marketing approach, data mining, customer relationship

management systems and mobile access are the next major investments that will be required by
GDS companies to effectively unlock the value and power of transaction data. Consumers continue
to demand information that is increasingly targeted to their preferences and their corporate policies.
Until GDS companies update their legacy systems to refine displays to meet this need for
customization and personalization, there will continue to be a market for middleware software
solutions created by specialized firms.
Over the past few years, the bulk of GDS company efforts have been spent adopting a much more
open architecture, migrating from proprietary communications protocols to industry standard
protocols, including X.25, ATM and TCP/IP. This has been required to facilitate opening up the
systems to travel suppliers and even to agency organizations wanting to extract information from
51
the systems rather than interacting with the GDS in the traditional Global
manner.Aviation Associates, Ltd.
After demonstrating initial resistance to the open standards concept proposed by the Open Travel
Alliance (OTA), the GDS companies have begun to integrate the use of tools such as XML
(extensible markup language) to broaden their ability to communicate with other systems. Over
time, this may obviate the need for middleware products to sit between the consumer web sites
and the GDS companies.
II.6: THE DISTRIBUTION COST DEBATE
II.6.1: The Travel Supplier Perspective
Booking fees charged by the GDSs continue to escalate. The cost per million instructions per
second (MIPS), a standard measure of computer processing efficiency, fell from $480 in 1978 to
$4 in 199577. Similarly, the cost to transmit data “declined by three orders of magnitude between
the mid-70s and the beginning of the 90s, allowing more data to be transmitted over longer distances
at lower prices”78.
The rising cost of distribution through the GDS systems is a major contributor to travel suppliers’
decisions to find less expensive means of distribution – i.e., distribute their products directly to the
consumer. Prior to the introduction of the CRS Rules in 1984, booking fees averaged less than
$1 and were as low as $0.25 per segment in some cases. The Civil Aeronautics Board (CAB)
predicted that once the CRS Rules entered into effect, the average booking fee for a full availability
display on the GDS would range from 54 cents to $1.0079; Sabre set its full availability booking fee
at $1.75, more than 300% of the CAB’s base estimate80. Booking fees today are typically $3.54
per segment and average $10-$15 per roundtrip flight. These fees have risen 70 percent since
1990 and for some carriers have risen over 1400% since 1983. Sabre has recently raised its
rates for 2001 in the range of 7%; other CRSs have enacted similar increases. Figure 20 displays
the recent trend of booking fees. It is evident that this latest booking fee increase is hardly an
anomaly. The level of booking fees are most punitive to the smallest low fare carriers. They
simply do not have the resources to absorb the fee levels or increases, particularly since their
average fare is significantly lower than that of the major carriers. Travel suppliers are prudent to
seek less costly distribution channels, but must weigh their actions carefully against the market
power still in the hands of the GDS companies, namely their control over the agency community
which accounts for over 75% of airline bookings.
77
Progressive Policy Institute, Computing Costs are Plummeting, June 29, 2000.
78
Progressive Policy Institute, Data Transmission Costs are Plummeting, June 29, 2000
79
Federal Regulation 49 at 11672
80
Department of Transportation, Study of Airline Computer Reservation Systems, May 1998.
52
Figure 20: GD S R ate Increases 1998 - 2001
1998 1999 2000 2001E
Amadeus 3.3% 5.2% 4.5% 6.9%
Galileo 4.0% - 7.4% 3.4% 5.4% 6.0%
Sabre 7.0% 2.9% 3.5% 7.0% - 10.0%
Worldspan 2.2% - 7.2% 3.5% 5.9% 4.0%
C onsumer Price Index 1.5% 2.2% 3.4% 2.8%
Sources: 1) TD R 12/3/98, 1/14/99, 2/11/99

2) TW C rossroads 12/1/00, 12/13/00
3) C omputerworld 12/4/00
4) Gl obal D i stri buti on System s: Outl ook fo the 21st C entury
5) MTech Strategi es research
6) Ai rli ne survey data
7) Bureau of Labor Stati sti cs
8) C ongressi onal Budget Offi ce
II.6.2: The GDS Perspective
One of the defenses of the GDSs is that the types of transactions flowing through the system are
getting more and more complex, and the average number of transactions per booking has been
increasing, driving up processing costs.
Historically, professional travel agents have been quite efficient in their use of GDSs. In the late
1980s when PCs were introduced into the travel market place, the amount of information moving
back and forth between the mainframe server and the PC clients increased dramatically. Also,
clever technology companies and savvy agents created robotic systems that would “bang” on the
GDS host systems with requests for specific seats and lower prices. These systems were referred
to as seat busters and price busters, automating repetitive, labor-intensive processes. New quality
control applications were also introduced and these systems also increased the number of average
hits on the GDS per booking.
At about the same time, the GDSs began charging agencies and travel technology companies
that employed these software add-ons. With the advent of the Internet and the use of these booking
systems by consumers instead of professionals, the number of transactions per booking on the
GDSs have gone up exponentially as there are, without exception, more “lookers” than “bookers”
on every single Internet travel site. Many consumers use the online systems now for browsing and
53
then do their shopping either on the phone with the supplier or with a travel agent directly.
Consequently, the GDS systems are burdened with the new consumer transactions on top of what
they had originally experienced with the travel agency.
As fare structures and the number of fares continue to increase, use of the old legacy architecture
for fares and pricing continues to be enormously expensive. The GDSs store many millions of
fares in enormous databases measured in terabytes (a terabyte equals one trillion bytes). Today,
it is not unusual to have over one million fare changes daily within any one GDS, an average of
2,000 for every carrier represented. These pricing transactions are the single most expensive
type processed by the GDSs. However, each year, rather than overhauling their pricing system
infrastructure with modern serial processors, the GDS companies throw more and more MIPS
and more Direct Access Storage Devices (DASD) at the problem, increasing the cost per
transaction. The GDSs offset these hardware costs with increases in booking fees charged to
the travel suppliers. Thus, the growing inefficiencies of the GDS legacy technology are passed
first to the suppliers, then ultimately to the consumers.
II.7: WHAT’S DRIVING CONSUMER DIRECT DISTRIBUTION?
There is a growing need to eliminate the trade-off between quality of information that a business
can offer and the number of people to which
that information can be conveyed. Brick Figure 21: Distribution Channels
and mortar agencies, by their very nature,

Suppliers
are limited in their reach by the number of
people that can be served effectively by Global Distribution Systems
their existing staff. They do not have infinite
elasticity to grow and take on hundreds or Supplier
Bricks & Mortar
Reservation Supplier Internet Travel
Consolidators Travel
Centers & Ticket Websites Agencies
thousands, let alone millions of new clients. Offices
Agencies
They have comprehensive information

available via the GDS and can now
augment that information with Internet data Consumers
sources. But agencies have always filtered Note: Suppliers include airlines, hotels, car rental agencies, cruise lines, etc.
the information for their clients and have

applied their professional backgrounds to help consumers make choices.
54
II.7.1: Customer Perspective
Key customer drivers include:
· Price
· Ease of use
· Dealing with known brands
· Comprehensive/Unbiased Information
· Customer Service
The Internet has the capability of providing more consumers with higher quality information than
was ever before possible, which thereby reduces the historic trade-off between comprehensiveness
and the reach of the information. Consumers also desire a level of comfort that they are being
offered the lowest fare. While some get this assurance from their agency/agent, others will only
be sure after checking numerous sites personally.
A recent USA Today article notes that 45 percent of consumers who purchase travel online visit
four or more sites before making a purchasing decision and more than 60 percent visit at least
two sites81. Today there is at least the perception that the Internet is a source of unbiased and
quickly accessible information82.
Ease of use and a painless user experience is also important, but the Internet is still lacking in this
respect. Consumer Reports Travel Letter published a report titled Travel Web Sites: Look Around
Before You Book. This report states that there are four deficiencies in the major travel sites:
· Lack of sensible itineraries
· Reordering of flight information
· Navigation difficulties
· Unavailability of flights [which correspond to low fares offered]
Overwhelmingly, price is driving purchasers to the Internet. Yet the perception of the Internet – and
a key reason for its adoption in travel searches – is that it offers perfect (or near-perfect) information,
hence perfect choice. This is a powerful driver because the economy seeks a perfect state and
this possibility, via the Internet, will guarantee its continued growth as a prime sales environment
for travel.
81
"The Keys to Unlock Online Booking," Laura Bly, USA today, October 5, 2000.
82
PhoCusWright research Travel E-Commerce Survey, November 2000.
55
The industry still has challenges in order to resolve these issues for consumers. The greatest
hope lies with technological innovation that can create a more complete product display as well
as provide relevant ancillary information, resulting in a more satisfactory user experience.
II.7.2: Supplier Perspective
One reason behind the movement of the supplier to the Internet and other consumer direct
distribution methods is the need to reduce the cost of distribution. Lowering overall agency
commissions was a substantial step, but it did not solve the GDS booking fee issue. Moving
bookings to online agencies also did not solve the problem. Suppliers were able to pay lower
commissions to online agencies than traditional brick and mortar agencies, but the bookings
were still coming through a GDS which charged the full booking fee. The only way around this was
for the supplier to establish its own site, connected to its own CRS. This eliminated both the
agency commission expense and the GDS booking fee.
A second opportunity presented by the Internet in particular is the ability to dispose of inventory at
a very low cost of sale. Recently, the Department of Transportation mandated that airlines advise
their call center customers that lower fares may be available on their web sites. This directive
paved the way for airlines to reduce the scope of another high cost of doing business, their own
call centers.
The last key issue is that of customer loyalty. Air travel has, by and large, become a commodity.
Frequent flyer programs were implemented in order to drive customers to book on a preferred
carrier the majority of the time. With the proliferation of frequent traveler programs with redemption
possible on more than just the hosting supplier, the original goal of these programs has been
somewhat diluted.
Suppliers are hoping that they can reinvigorate brand loyalty by giving their frequent flyers a hassle-
free vehicle for booking their products online, rewarding them with the availability of lower fares
and granting additional mileage.
II.7.3: The Challenge
PhoCusWright Vice President of Information Services, Lorraine Sileo, says that, ‘the challenge is
keeping online buyers as loyal customers.” PhoCusWright’s recent survey of Internet users that
have also traveled finds:
· 21 million Americans bought travel online in 2000, and 7 million now buy travel exclusively
online.
56
· There are 48 million online travelers (people who use the Internet and have traveled on a
commercial air carrier in the last year), of which 13 million, or 27%, “usually” buy their
personal travel online. This reflects a three-fold increase in two years.
· Online travel buyers take more trips on average than off-line buyers — 5.9 vs. 3.6. They
take more business trips (3.6 compared to 2.0) and more personal trips (2.3 vs. 1.6).
· Online travel sites have moved into first place as the research tool of choice for leisure
travelers. Further, 44% of those surveyed
use one or more travel-specific Web sites
Figure 22: The Major R easons for C hoosing a
when researching personal travel, up Site Include83:
sharply from 28% in 1999. Good Prices 91%
E ase o f U se 80%
· Nearly all (91%) online travel buyers say they
K now n N ame 58%
picked the online travel service previously
Appeared comprehensive and unbiased 50%
used because “it seems to have good
Operated by a preferred supplier 49%
prices.” Ease of use ranked second at 80%.
Good customer service 48%
Additional results are included in Figure 22.
The overwhelming perception that the lowest fares are on the Internet should drive more agents to
establish their own web presence, rather than trying to convince airlines not to have one83.
PhoCusWright has found that travelers using online services are still, ‘lookers, not bookers.’
· 84% visited travel sites
· 76% looked online but didn’t book and
· 23% looked and booked online
This is similar to the traditional travel agent/customer relationship where customers often perform
significant research before travel but primarily rely on the travel professional to complete the sale.
As the industry is able to break down the barriers to purchasing travel online (e.g., security, credit
card fraud, etc.)84, both online agencies and suppliers will begin to enjoy economies of scale that
will make this channel truly a profitable one.
83
PhoCusWright research Travel E-Commerce Survey, November 2000.
84
The eTravel Report TM, July 2000.
57
II.8: CRS/GDS AGENCY RELATIONSHIP
II.8.1: Retention/Conversion Incentives
The early 1980s marked the first appearance of “the bag man”, an airline sales representative
from a major U.S. carrier who provided cash incentives for switching reservation systems, the first
of which occurred in Montana85. This practice is still common today and key accounts in highly
competitive markets can earn more from “switching” than from profits generated by operations. A
Sabre executive noted that cash payments of $10,000 to $15,000 for a four- to five- terminal
agency are routine on retention deals and payments of $50,000 for conversions are not unusual.
Increasingly, the GDS companies are trying to switch from the cash incentive method of
compensation to a “credit line” based structure whereby any overage is credited to the agency’s
account to cover future shortfalls.
Despite these recent attempts to switch from cash incentives to a line of credit, the pressure has
remained on the GDS companies to continue paying cash bonuses, both for new customers and
for existing subscribers that renew contracts. The incentive payments to the agency community
help the GDS companies maintain and expand their market positions. These payments, for the
most part, are no longer linked to the airline relationships since many of the original GDS owners
have divested themselves of their equity in the GDS companies. The risk involved in not paying
up-front cash is the potential loss of the account and, more important, the loss of the annuity revenue
stream from its associated booking activity.
The booking fee revenue that GDS companies receive from travel suppliers now make up the
bulk of their annual revenue and to lose any significant booking activity can have a negative impact
on profitability (Figure 23).
Figure 23: B ooking Fee R evenue to the GD S from a Mid-Siz e Agency

Average Average Average Annual GD S
Total Total
Annual Sales Ticket Segments B ooking R evenues from
Tickets Segments
Price * per Ticket** F ee B ooking Fees
$5,000,000 $384.14 13,016 2.9 37,747 $3.54 $133,623
* ATA Annual R eport

** U .S. D OT OD 1A D atabase
With booking fee revenue at this level, it is easy to understand why intense competition exists
between the GDS companies to retain accounts such as American Express (AX) and Carlson
Wagonlit, each of which produce over $11 billion in sales annually86. Using the relationships noted
58
above, the booking fees at stake for an account the size of AX or Carlson would amount to
approximately $294.0 million annually. Even Travelocity or Expedia, with annual revenues of $285
and $250 million, respectively, are worth $7.6 and $6.7 million in booking fee revenues to the
GDS which powers the site87.
II.8.2: Onerous Contract Terms
Over time, the GDS companies realized the inherent value of a customer contract, as well as the
cost of losing an existing client and the cost of obtaining new ones. They introduced new contract
terms to address the issues of early contract termination, which was happening more and more
as competitors tried to convince clients to switch systems. Eventually, the contract terms became
increasingly restrictive, effectively denying most agencies any possibility of switching to another
CRS or using an additional CRS.
II.8.3: Productivity-Based Pricing
Productivity pricing (or sharing some of the booking fee revenue with the travel agency in exchange
for a pre-agreed threshold of bookings per terminal per month) was originally introduced to agencies
as a way to offset their monthly equipment cost. This economic incentive was a way for agencies
to reduce operating expenses, and, in some cases, it became a revenue source.
Where this mechanism failed was in the abusive booking practices of unscrupulous agents. These
agents created “dummy” segments simply to receive credit from the GDS. The end result was to
increase costs to the airlines, as they had to pay for both real and dummy airline segments generated
via the GDS. Ostensibly, the focus on volume could also prove to be a distraction from the core
business of consultative selling and this could be detrimental to the consumer.
II.8.4: Agency Override Agreements with Suppliers Impact Travel Choices
Agency override agreements between agencies and suppliers have become commonplace.
“Commission overrides are incentive payments made by some airlines to some travel agencies in return
for the agencies meeting specified sales quotas on particular routes of overall sales levels. The payments
are in addition to the base commissions that are usually established as set percentages of ticket prices.
Overrides influence consumers’ travel options and decisions. Unless the consumer specifically requests
his or her carrier of choice, the travel agent’s carrier selection may be based on financial incentives from
the airlines rather than schedule and service considerations, and even, potentially, price. The infrequent
traveler may not realize the complexities of fare and schedule structures and fail to insist on receiving all
information pertinent to the travel decision. The use of overrides, intended to increase air carriers’ market
shares, may also influence airline competition by contributing to increased market concentration by major
carriers, higher fares, fewer choices in routes and scheduling, and other potential anti-competitive effects.”
87
This assumes that the web travel agency is utilizing the GDS for bookings and that the GDS is charging airlines the normal booking fees for all bookings
originating on the web.
59
Source: U.S. Dept. of Transportation, Lawrence H. Weintrob, March ’99, Report on Travel Agent Commission Overrides
In many agencies, standard commissions and service fees alone do not permit the agency to be
economically viable. Because of this, override commissions are not just prevalent, they are often
perceived as necessary. Thus, override commissions can become a key influencing factor in how
an agency does business. This economic incentive is not necessarily evident to the purchaser of
travel and has the potential to color and limit the options being offered.
The impact on the customers is that they may not be getting the best product or suite of products
for their budgets or needs. At the very least, they are unlikely to be getting an unbiased offering.
Because of the continuing escalation of booking fees, which are ultimately forcing the airlines to
reduce other distribution costs, such as commissions, the travel agencies and consumers are
both penalized. Figure 24 displays a historic trend of commissions per dollar passenger revenue.
In the long run, it will be to the benefit of the travel agency community to see more Internet-based
serial processor driven platforms evolve.
Figure 24: Commissions Expense Per Dollar Passenger Revenue Is Falling Despite the
Increase in GDS Booking Fees
120 $4.50
Average GD S B ooking Fees Per S egm ent

$4.00
Index of C om missions expense P er D ollar
100
P assenger R evenue - 1990 = 100
$3.50
80 $3.00
$2.50
60
$2.00
40 $1.50
$1.00
20
$0.50
0 $0.00
1 9 90 1 9 91 1 9 92 1 9 93 1 9 94 1 9 95 1 9 96 1 9 97 1 9 98 1 9 99 2 0 00 E 2 0 01 E
M ajors G DS B ooking Fees P er S egm ent
Note: CRS Booking Fees are Estimated On a Linear Trend From 1990 to 1995
Sources: Airline Proprietary Data, US DOT Form 41
60
II.9: DISPLAY BIAS
When the original CRS Rules were enacted in 1984, bias was proscribed (Part 255.4 of the rules).
Although the GDS companies all claim that display bias has been eliminated, this is only true within
the limited purview of the DOT proscription.
Bias abounds outside of this narrow view and, despite the best intentions of the regulatory design,
the reality is:
· Subtle bias continues to exist despite DOT regulation of CRS systems.
· Display algorithms can benefit one airline and disadvantage another.
· GDS products can be offered to agencies and corporations that allow them to use the
software options to reintroduce bias to support preferred relationships with suppliers.
· The GDS systems still have technology that limits their ability to search the universe of
possible flights and fares from origin to destination.
GDS systems, while powerful, are not very dynamic in terms of search capability. Accordingly, they
are designed to pre-screen a majority of flight options before beginning to evaluate them based on
price and time. Figure 25 describes some examples of architectural bias within the GDS systems.
When airlines owned the GDS systems, it was perceived – largely by non-owner airlines – that owning
a GDS provided a significant competitive advantage because the owning carrier generally appeared
on the first display page (which was also where the bulk of bookings occurred). This was known as
the “halo effect” of being a system owner. This type of bias was not eliminated when the CRS rules
were promulgated in 1984, as the DOT itself documented in its 1988 study.
The DOT rules have been renewed regularly in subsequent years. Interestingly, there has been little
industry opposition to these creeping extensions. This is thought to be for several reasons, including:
· The rules are easily circumvented.
· The airlines no longer are the primary owners of the GDS systems.
· The rules may do as much to entrench the existing GDS oligopoly as they do to limit its abuses.
II.9.1: Bias in Agency and Corporate Use of the GDS
Travel agencies can alter the availability entry that is made in the GDS to overtly produce specific
biased displays (Figure 26).
61
Figure 25: GD S D isplay B ias Examples

C onnection Tables - GD Ss are allow ed to pre-select the hubs
that are used to construct flight connections, using only a small
subset of the number of possible connection routings. The
Limited Search tables built by the GD Ss can and do advantage larger airlines
C apabilities w hich operate from major hubs, and disadvantage smaller
carriers or those that operate point to point or from smaller
hubs. Worldspan is the only carrier that supports dynamic
connection building as it relates to constructing a fare.
Last Seat Availability - The GD S companies offer high levels of

connectivity to carriers. These products (such as Worldspan's
Airline Source, Galileo Interactive Sell, Sabre D irect C onnect
Availability and Amadeus Access) allow the GD S to reach into
Prohibitive Participation the airline's computer in real time to obtain last seat availability.
F ees While these products are all available to all participating carriers
in the system, from a practical perspective only the largest
carriers can afford to take advantage of this option due to the
programming w ork w hich must be done on their ow n systems.
Additionally, the booking fees on these products are higher,
w hich places undue burden on low er cost carriers.
D isplay Algorithms - Part 255 requires that w hatever algorithm a

system selects, it must be used consistently and w ithout
discrimination. Follow ing are some factors w hich are allow ed.
These can be used in an infinite number of combinations,
w eighting one more than another in a given algorithm.·
N on -C arrier Specific D isplacement time - the amount of time separating the requested
D isplay Factors departure time from the actual departure time·
Elapsed time - the total time from departure to arrival·
Alternative airports - the use of another airport w ithin a specified mileage

radius of the original airport requested
Participating C arrier - Eliminating a carrier that has signed a

participation agreement w ith a GD S. This form of bias is strictly
prohibited by Part 255 and is the most common form of display
bias mentioned in conjunction w ith the C R S R ules.
N on-Participating C arrier - Participation in a GD S is not required

Elimination of a C arrier by the D OT, unless the airline ow ns an interest in a GD S. For
from the displays those carriers that are not ow ners, such as Southw est, they can
and do elect not to participate. This can be done selectively,
such as in the case of Southw est. They have alw ays
participated in Sabre (w ho provides them w ith hosting services)
and have recently elected to join Galileo, but they do not
participate in Worldspan or Amadeus. From a competitive
perspective it is a market requirement to participate in all GD S
systems, but it is not mandatory.
Middleware (e.g., software that allows an agency to alter how GDS information is displayed on its
system) and corporate policy are additional tools for producing legal biases. For example,
Worldspan uses a randomizing algorithm for Internet banner advertising. This means that what
‘banner’ is offered will come in random order. A corporate client, however, does not have to
‘randomize’ its offerings. Any corporation is perfectly within its rights offering the products of
preferred suppliers.
62
Figure 26: Methods of Introducing Bias

Typically customers want to leave at a certain time (usually on the hour or the half hour).
By departure time
The agency can specify time, or alternatively accept the GDS default time. Most online
agencies also support this feature.
Agencies can choose the shortest elapsed time from departure to arrival, especially
By elapsed time
useful when the client is traveling internationally. Some online agencies also support this
feature.
Customers may want to be at a destination by a certain time (e.g. to attend a meeting).

By arrival time
Agencies can request this as a display parameter. Some online agency sites also
support this feature.
By flight type (e.g. non- Agencies can choose non-stops or one or more stops. Some online agencies also
stop) support this.
Many carriers have code share and marketing agreements with wholly or partially owned
regional feed carriers, or with non-equity partners. A core basis of the alliances, such as
By codeshare or alliance the Star Alliance, is to market participant services. The GDSs all have products which
allow you to construct Alliance Displays which are totally biased towards flights of a given
agreement
alliance. The online agencies generally do not support this feature. Travel agents see
both the listed carrier and the carrier that actually operates the flight in the initial display.
Some online systems also do this for codeshare flights, but it is not mandatory outside
the agency marketplace.
Corporations often have negotiated fare agreements with specified carriers. To ensure that
corporate travel costs are optimized, it is important to ensure that these fares are used. The use
of middleware (such as Sabre’s GetThere, Worldspan’s Trip Manager, XOL PowerTrip and Oracle
eTravel), as well as offering travel access via a company Intranet, are excellent ways to manage
the use of negotiated fares.
II.9.2: Airline Manipulation of Bias Rules
As soon as government regulations had been put in place, GDSs found ways to circumvent them.
For example, changing flight times and schedules has been deemed completely legal. This is
why flights at airport hubs are scheduled for key departure times, even though it may be technically
impossible for those flights to be on time, even within the industry accepted standard of fifteen
minutes.
To counteract this move, the DOT subsequently required the GDS companies to add a feature to
the primary display that shows the “on-time” performance factor for each flight, as reported by the
Federal Aviation Administration (FAA). Travel agencies are not required to disclose this information
to clients, nor are online agency sites required to display the on-time indicator. Many sites, however,
voluntarily display the single digit on-time indicator and the related description (the corresponding
percentage) on their availability displays.
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II.9.3: Bias in Online Agency Websites
Today’s online agency websites (such as Travelocity, Expedia, Cheap Tickets, LowestFare, etc.),
which are powered by GDS systems, have new opportunities to reintroduce bias into availability
displays. The DOT rules apply to the GDSs on which these websites are based, but not to the sites
themselves. The websites are technically not restricted in how they modify the GDS-provided
information they display to Internet users.
Figure 27 displays the key features characterizing agency web sites, noting where they differ from
the travel agency GDS display.
Figure 27: Differences Betw een Bricks and Mortar Agency and Online Agency Displays
TRAVEL AGENCY DISPLAY ONLINE AGENCY WEBSITE DISPLAY
Seat Availability The GDS systems display flights, whether or not seats are The online web sites only display those flights that they
available. This allows a travel agent to waitlist a flight, or show as available, based on GDS information.
to call the airline's executive desk to clear a seat.
Fare Availability Travel agencies can display the full range of fares that are Again, the online systems only show seats at a particular
published and can expressly search for a class of service fare that are reflected as available by the GDS. Calendar
that would grant that fare, or they can call the airline if that based availability products often use cached booking
class of service is not shown as available. information (based on prior bookings that day) to populate
their fare calendars, rather than actually looking at
availability for a given date.
Order of Flights Travel agency displays are specifically governed by Part Technically, since they are used by consumers and not
255 of the DOT rules and must conform to rules for bias. travel agency professionals, online agency displays are not
governed by the CRS Rules. While most systems claim to
comply voluntarily, there is a question as to whether
marketing agreements and advertising sales carriers
include subtle (display order) and not so subtle (overt ads
which can limit the display to a single carrier) bias.
Display by Price Agencies can overtly request and produce an integrated Many agency web sites default to a display by price, from
display of flights and fares, sorted from low to high (or visa lowest to highest, thereby not offering the consumer a full
versa). choice of airlines in a given market (e.g. non-stop flights
may not display, but circuitous 1 and 2 stop connections
may be displayed instead).
The Consumer Reports Travel Letter recently published the results of its Internet travel research.
One of the key questions addressed was, ‘Is your web site biased?’. Consumer Reports’ hypothesis
was that a web site titled “United Airlines” would offer flight options and booking tools inherently
designed to favor United Airlines but that independent travel web sites would offer an objective
alternative. This is the equivalent in the retail world of individuals going to the Sony.com site, knowing
that it will display Sony electronics, as opposed to visiting BestBuy.com, where they expect to see a
broader range of electronics manufacturers. However, it is noteworthy that consumers generally do
not demand that every electronics manufacturer be displayed on a given site, nor do they contemplate
64
whether there is display bias when the displays are ordered. As long as consumers have the
capability of finding products by manufacturer, by price or by product characteristic, they are generally
satisfied.
Consumer Reports’ testing of these sites did not yield conclusive findings, but rather suggested
that travel sites may not be totally objective.
· On Travelocity, advertised airlines dominated flight listings.
· On Lowestfare88, many TWA flights with inconvenient itineraries (obtained through a contract
fare arrangement) were repeatedly listed first.
· On all sites tested, certain airlines with viable itineraries for routes tested were not listed
at all.
II.9.4: Featured Airlines
Travelocity often presents “featured airlines,” which receive full-color advertisements linked to
specific cities or airports. When you request a list of fares, Travelocity asks if you would like flights
offered by the featured airline or choices from other airlines as well. Typically, these types of ads
exert a subtle, yet measurable, influence on consumer choice.
Consumer Reports tested the relationship between the featured airline ads and screen position. It
found that the featured airline on Travelocity was listed first 48 percent of the time. In nine separate
tests, each recording the top nine flight choices, the featured airline flew at least one leg of every
trip Travelocity posted. Many of these trips involved convoluted interline itineraries. Travelocity has
subsequently contracted with Ernst & Young to produce a report disproving these allegations89.
Consumer Reports indicated that Lowestfare’s contract agreement with TWA seems to have
influenced its flight listings. In their tests, that airline was listed as the first choice 50 percent of the
time (in 27 of 54 tests), when no other site listed TWA first more than 23 percent of the time. The
TWA routings sometimes involved connecting flights when other web sites offered non-stops.
II.9.5: Missing Airlines
Consumer Reports also found that cross-referencing its test results revealed that certain airlines
listed in their Galileo benchmark as offering the lowest fare and a viable itinerary were not listed at
all on some web sites. This is because not all airlines are required to participate in the Internet
agency displays. Some airlines can and do elect to withdraw. For example, Midway deliberately
88
Carl Icahn, the former Chairman and CEO of TWA is the founder of Lowestfare.com
89
A copy of this report is being promoted on the main page of the Travelocity site.
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chose not to have any of its flights in Expedia or any agency online system, and the same was true
for RyanAir in the U.K. Southwest has allowed only Sabre to sell its flights in Travelocity and only
according to strict rules (e.g., no mixed carrier displays).
In further tests, Consumer Reports found that Spirit Airlines was missing from Expedia; Vanguard
was absent from Expedia and Lowestfare; and Southwest can be booked only through Travelocity,
even though Cheap Tickets and Lowestfare receive data from Sabre, which includes Southwest.
One key airline executive says web site marketing initiatives include preferential listing of flights.
Without identifying specific sites, Al Lenza, Vice President of Distribution Planning for Northwest,
is blunt: “The effect is, you will get some low fares, but not all low fares.... They want to charge us
overrides [bonus commissions]. They claim they can give us more business. That means some of
it is biased.”
He adds, “[Airlines] are getting more than just banner ads for their money. When there’s a tie [in
airfares], they show up first. And [airlines] get ‘preferred carrier’ status. Advertising is OK, but it
shouldn’t influence the flight selections.... We’re just not going to have our inventory be used to
mislead the customer.”
The conclusion of the study by Consumer Reports suggests that Internet bias schemes do exist.
The implication is that Internet agencies feel it if the consumer asks for a price and the price is the
same for multiple flights, then they have the right to alter the display to allow their preferred airlines’
fare to bubble to the top.
II.10: MARKETING PRACTICES
II.10.1: Use of Multiple GDS Systems
One of the provisions of the original CRS rules prohibited practices that would limit an agency’s
ability to subscribe to multiple GDS systems. Agencies generally needed this freedom to serve
their corporate clients more completely (Figure 28).
The first marketing practice addressed by the CRS rules was that of tying an agency to the use of
a single GDS through minimum use clauses. A second practice was that of not allowing access to
multiple GDSs from a GDS-supplied PC. Both of these practices were dealt with in the CRS rules,
but at least the first regulation was subverted by a new practice known as productivity pricing. As
opposed to minimum use provisions, the GDSs took the “reverse psychology” approach of rewarding
volume with a declining monthly fee for the GDS. Effectively, productivity pricing has the same
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Figure 28: The Need for Multiple GDS System Access
Agency A w ins a new corporate account that uses Sabre to book their travel. All of the
profiles and existing bookings for this new client are in Sabre. Agency A uses the
Worldspan GDS. Due to liquidated damages clauses in the corporate account's
contract w ith Sabre and their productivity pricing agreement, economically they are not
free to terminate the contract w ith Sabre. So therefore, Agency A must install at least
one Sabre terminal, or utiliz e a technology platform, such as Lanyon or Datalex, that
allow s access to more than one GDS over a single PC.
effect as minimum use provisions, as the monthly fees for access can be cost prohibitive for a
narrow margin business such as a travel agency.
II.10.2: Tying of Corporate Account Discounts to Use of GDS
Bulk discounts to corporations (the sale of a number of seats for a set price based on routes used
and the number of seats purchased), according to one airline executive, are the ‘backbone’ of
airline sales.
There are allegations that carriers with an interest in a GDS tie corporate discounts to the use of
that GDS. The premise is that a carrier that has an equity interest in a GDS would be better off
directing corporation bookings to their GDS than to allow the bookings to go to a competing
GDS. With its ownership in Worldspan, it is assumed that Delta would share in 40% of the net
profits derived from revenues — of which the bulk come from booking fees. And since Delta is
one of the top three customers of Worldspan (based on bookings), this would be hard to challenge.
Today, Worldspan is the only GDS wholly-owned by airlines (Delta, Northwest and TWA) and it
has been a target of most of the complaints of corporate tying. The other three GDSs are public
companies although two still have some airline ownership. United, Olympic, Air Canada, Alitalia,
Aer Lingus, Austrian and Swissair still own a small portion of Galileo. Air France, Lufthansa and
Iberia still own a portion of Amadeus. Sabre is the only GDS that has no airline owners.
Tying corporate discounts to GDS use is expressly prohibited by the CRS Rules. Yet this provision
has failed in its implementation. The fundamental problem is DOT’s inability to come to grips with
specific instances of abuse. In research for this study, nothing but anecdotal evidence was found
to support this as well; however, examination of the GDS use by top corporations in hubs dominated
by Delta (Atlanta), American (Dallas), Northwest (Minneapolis and Detroit) and United (Denver
67
and Chicago) will most certainly reflect the GDS strongholds that existed prior to the implementation
of the CRS Rules.
In July 1999, Amadeus filed a petition with the U.S. Department of Transportation urging it to
prohibit GDSs and their airline owners from linking the availability of discounted corporate airfares
to the use of a specific GDS. Both Worldspan and Delta separately filed comments, asking DOT
to deny the Amadeus complaint and requested that the issue of “tying” arrangements be specifically
addressed in the CRS rule revision then being considered.
Following is an article detailing this complaint:

“Amadeus has filed another protest with the U.S. Department of Transportation seeking a ban on the
practice of tying access to corporate fares to the use of a GDS affiliated with the airline. For example,
Delta may tell an agency or corporate customer that it cannot access its corporate fares and discounts
unless the fares are booked through Worldspan, in which Delta holds a stake. Amadeus called this
practice “widespread” and “anti-competitive”. The practice “undermines the core purpose of the GDS
rules – to prohibit bias in favor of those airlines that own or market systems,” it said. Amadeus’
comments were filed in the DOT rulemaking proceeding on revising of the over-all assessment of the
rules. Amadeus has raised the issue in two other cases before DOT, dating back to 1997, to no
avail.”
(Source: TDR, April 20, 2000)
II.10.3: Availability and Pricing of GDS Marketing Information
One of the regulatory requirements covering CRS systems is that they must make marketing
information available to participating carriers on a non-discriminatory basis. Previously, the owners
had an advantage in being able to access the booking information that was unavailable to other
carriers.
The rule governing marketing information created a new revenue source for GDSs. The product
is known as MIDT (Marketing Information Data Tapes) and BIDT (Billing Information Data Tapes).
These products include sales data generated by the travel agents. This information is now sold to
the airlines.
Regulations regarding the sale of this data were, in theory, an attempt to level the playing field of
marketing information access for those airlines that did not own CRSs. The reality is that the cost
of obtaining this data was – and is today – prohibitive to all except the largest airlines.
It is reported that MIDT data tapes on Sabre can run as much as $60,000 per month with an
additional $10,000 to $20,000 per month for processing. This figure is reported to be $17,000
per month for Worldspan, the smallest of the systems.
When the DOT determined that fees in general had to be ‘reasonable,’ it did not perceive how
68
much leverage the GDS oligopoly could exert. In the past year, in response to claims that the sale
of this data is still unfair, the GDS companies have modified their pricing and product somewhat
to allow segmented purchases of MIDT and BIDT data as opposed to offering just the full product.
II.10.4: Dynamic Pricing
With the proliferation of fares and thousands of options for key markets, literally all pricing in the
airline arena is dynamic. However, in practice, fares are loaded into the GDS systems on set
schedules, depending on the airline’s agreements with the data provider (ATPCO) and the individual
carriers that have the ability to upload pricing changes dynamically. There are several issues
surrounding the pricing capabilities of the GDS, as shown in Figure 29.
Figure 29: Pricing Capabilities of the GDSs

The concern over the fairness of pricing availability policies as it
applies to travel agents is heavily debated. The airline position, and
this is becoming greater with increasing use of the Internet, is to only
Full availability of all fares have 'web fares' or its lowest fares available for in-house closeout
from the supplier sales. Agencies believe that they should have access to all fares,
regardless of the nature of the fare. Obviously, consumers would also
desire access to all available fares through whatever venue they
choose to use to purchase the ticket.
The GDS systems currently do not display every fare available in a

Ability of the GDS to given market due to system limitations in their ability to consider all
display all fares connection and carrier combinations.
Of the GDS systems, only Worldspan has a fare program which is

dynamic in its ability to compare/interrogate the available fares based
Ability to construct
on dynamic construction of connections. The others utilize the
dynamic connections
connection table methodology in their fare construction routines.
Depending on an airline's participation level in the GDS and their

technical capability to do so, it is possible in some of the GDS
environments to update a price for a specific flight "on the fly" or
dynamically. This capability is theoretically available to all airlines, but
Ability of a carrier to
as a practical matter, only the largest airlines can take advantage of this
dynamically update prices
feature. Other airlines must wait to make new fares available in the
GDS based on the normal fare filing and loading schedules of ATPCO,
the primary fare source for the GDSs.
Travel agents understandably want access to the lowest fares as they feel this is key to their value-
added relationship with their clients. Ironically, one industry analyst feels that most clients are
even more willing to pay a premium to a travel agent after they have used the Internet to chase
lowest fares. Dynamic pricing is the base reality of a commodity as perishable as an airline seat.
Most distribution chain relationships allow the manufacturer the last minute right to liquidate its
stock before it spoils.
69
In practice, if a travel agency wants to provide its clients with a guarantee that they will offer the
lowest fare, the agency can book the seat for the client at the web fare on the airline’s site directly,
then include that segment on the client’s agency-issued itinerary. Unfortunately, the mechanism that
an agency must use to insert the segment into the GDS in order to print the itinerary for an e-ticket
would incur a booking fee charge to the airline. This practice is abhorrent to the airlines, as they are
paying a fee, but receive no incremental value from the GDS.
Several of the GDSs are working on products known as the “super PNR” which will allow incorporation
of Internet booking activity into the GDS Passenger Name Record (PNR). Unfortunately, these
products are generally targeted at leisure content, such as tours and ground transport.
II.10.5: New Fare Technology
There are several different technologies emerging to enrich the pricing capabilities for both
professional travel agents and consumers. One is the use of parallel processors to drive the fare
and availability search more effectively. One such system is ITA Software, a new search tool that
was independently developed over 8 years ago by a group of graduate students at MIT’s Artificial
Intelligence Lab.
Another new fare technology is auction and dynamic pricing mechanisms to deliver additional options
to consumers. One company pursuing this is CapXNow. The technology platform can conceivably
be incorporated into the GDS solutions (although to date they have not been), or they can be built
into consumer web sites.
In retail terms, this is the same model deployed by Filene’s Basement. In this case, a product (such
as an Armani jacket) would have a full retail price when purchased on the 6th floor of Filene’s, but in
the Basement store, the jacket would be marked down. Then, for every week that it does not sell,
the price goes down a predetermined amount. The buyer can choose to return the following week,
but is taking the chance that the product will not be available.
Encouraging this kind of innovation in the industry is critical at this juncture, since to date GDSs
have dominated price offerings with their outmoded capabilities.
II.11: LACK OF COMPETITION
II.11.1: Lack of New GDS Competition
The GDS industry is an oligopoly, with four players dominating the worldwide market for travel
agency distribution technology. Due to significant barriers to entry, not to mention market saturation,
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there have been no new entrants in the past decade. The U.S. Travel Agency Registry (USTAR)
has been trying, without success, to launch an agency-sponsored system, Genesis (Figure30).
Figure 30: BARRIERS TO ENTRY
Case Study: GENESIS
Genesis w as founded by the United States Travel Agents Registry (USTAR). Genesis intended to completely
sever the legacy relationship that applies to the current distribution process. Its plan included developing an
agent-ow ned, agent-implemented and agent-managed system, w ith its ow n ticket stock, financial settlement
and accreditation. Industry experts speculate that the efforts w ill die a natural death due to the suppliers'
unw illingness and the travel agencies' inability to fund the development that w ould be required for Genesis to
displace one of the big four in an agency setting.
As shown in Figure 31, there are three major barriers to entry into the GDS market:
Figure 31: Major Barriers to Entry

BARRIER KEY ISSUES PRIMARY LIMITATIONS
1. Aggregation of Sellers Communications Capital cost
Applications Closed architecture
Content (fares, schedules, availability) C o st
Contracts Staff/time/geography
2. Aggregation of Buyers GDS lock-in of agency desktop Existing contracts w ith severe
penalties for termination
Establishing a consumer brand Cost/time
3. Underlying technology Building and processing complex

Capital cost/time to market/technical talent
to support distribution communications infrastructure to
infrastructure connect buyers and sellers
The Internet provides a framework to facilitate new entrants into the GDS marketplace, but it by no
means eliminates all of the barriers to entry.
Although aggregating sellers into a single site is still a daunting challenge, the introduction of XML
as a standard for communicating between buyers and sellers via the Internet has at least bridged
the closed architecture and communications costs issues. The issues surrounding content
acquisition and obtaining and managing contracts with multiple suppliers still poses a challenge
for any new entrant.
Tapping into buyers is also a significant challenge. The travel agency distribution system provides
ready access to pre-qualified buyers, but it is tightly controlled by the existing GDS owners. These
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companies have existing agency contracts that typically last five years but are often structured in
such a way as to be nearly perpetual. Penalties for early termination can be substantial and the
pain of switching can be a significant barrier to change for an agency owner.
Most significant of all of the barriers is the sheer processing power, data storage, technical skills
and industry knowledge required to build a travel distribution system. Even the existing travel
agency distribution systems were based on pre-existing architecture90. The estimated price tag
for building a system from scratch today would run into the tens of millions of dollars, with some
estimates as high as $100 million.
II.11.2: First-Mover-Advantage
GDS concentration dates from airline ownership and the hub-and-spoke system. For the original
airline owners, this provided an infrastructure of first mover advantage in all of the key business
markets. For example, United owned Apollo (which later became a part of Galileo) and had
natural dominance in the Chicago and Denver areas because of both their hub presence and the
fact that Apollo’s mainframe, and by extension a significant technical staff, were in Denver. In
addition, they tended to have schedule dominance in other areas that were not necessarily hubs,
such as in Los Angeles and San Francisco. Where this occurred, they tended to place the most
CRSs. Travel agents and corporations in a region dominated by a carrier were certainly most
likely to automate using that carrier’s GDS system.
The result is that concentration drives a requirement for every airline (whether they themselves
own a GDS or not) to participate in every GDS in order to achieve complete distribution through
the agency channel.
II.11.3: Agency Perspective
The American Society of Travel Agents (ASTA) asserts that they provide the only independent
analysis for travelers, especially in terms of best fares available in a given market. While this was
once true, consumer direct distribution and the Internet’s ability to reach a broad audience with
near-perfect information leads to the conclusion that travel agents are no longer the best source of
information. However, according to ASTA:
“Armed with motive and opportunity, the airlines have now embarked on a campaign to reshape the
market in their own image. Their deliberate course of conduct, described below, has substantially
reduced competition in the market for travel services and injured consumer welfare. If successfully
consummated, this strategy will make it much harder for the public to learn about all of the fare and
service options available to them and thus increase the likelihood that they will, on the whole, spend
90
Sabre was built using American airlines internal reservations system. Galileo was based on Apollo, which was originally United airlines internal system.
Worldspan was built using TWA's PARS system. Amadeus was built using System One's technology (although significantly re-architechted).
72
more for air travel than they otherwise would. By restricting access to unbiased and comprehensive
information from independent sources, the airlines expect, rightfully, that they will be able to increase
the average price consumers pay for air travel.
Travel agents quote schedules and fares, and provide ticketing services, to consumers on major U.S.
airlines, small U.S. airlines, large and small international airlines, and start-up airlines. Travel agents
are the only efficient, independent and comprehensive neutral sources of information for airline travel
options. Travel agency sales of air travel alone exceeds $80 billion annually.
If the airlines can divert any meaningful amount of this business to themselves, the potential gain to
them is enormous, not merely in commissions avoided, but in the higher overall prices that consum-
ers will pay for air travel. Deprived of easy access to independent sources of comparative price and
service information, consumers inevitably will end up paying more, on average, even if the airlines
never raised another fare.
Source: ASTA web site
At the core of the ASTA position is its assertion that agents have provided every air carrier, in
every market, an instant professional distribution system able to inform the public of service and
price options and sell the entire inventory available at any moment, with no additional investment
required by the airlines.
ASTA further believes that travel agents promote the use of air transportation services by serving
as the only one-stop neutral source of comprehensive information and counseling about an incredibly
complex array of fares and services.
An analysis of the existing travel distribution infrastructure leads to the conclusion that agencies
cannot guarantee that they are independent, complete and unbiased in their recommendations.
This is because they depend too heavily on preferential relationships through both the GDS and
various travel suppliers. And with the advent of the Internet and the proliferation of travel sites, they
no longer hold the franchise on travel information they once did. ASTA’s position also fails to
acknowledge a supplier’s right to distribute its product over a number of channels, or to develop
new technology or a new paradigm for distribution. Most importantly, travel agents find their new
service burdened with a growing cost, the GDS booking fee, which they neither receive nor benefit
from, but which increasingly makes it uneconomical to sell the lowest fares through travel agents.
II.11.4: Understanding the Relationship Between GDS Companies and Internet Sites
The Internet has a plethora of travel sites. As previously stated, each of the Internet travel sites
(also known as online agencies) currently relies on one of the GDS systems to power the booking.
This section will provide background on the existing relationships between the GDS and each of
the primary sites.
A listing of the top web sites is set forth in Figure 32. In most cases, the relationships and governing
73
agreements are multi-year exclusive

Figure 32: The Affiliation of Top Travel Sites
arrangements in which the travel web site is
SITES AFFILIATION
paying for placement (e.g., the equivalent of
AOL Websites Travelocity
Ore-Ida paying for prime shelf space in the
Yahoo Travelocity
freezer case). By locking in these long-term
MSN & Microsoft Expedia
deals, the travel site guarantees a great deal
of exposure for their products and increases Lycos Netw ork Travelocity
the barriers to entry for any new entrant. Excite@Home Travelocity
Go Netw ork Travelocity
II.12: BOOKING FEES

About.com Travelocity
According to Computerworld.com, all GDSs Time-Warner (*)

91
raised their fees for 2001 . Amadeus will Alta Vista Trip.com
increase its per-ticket reservation charge to * Time-Warner is in transition as it relates to travel, since Leisure Planet
w ent out of business in late 1999.
airlines by 6.9%. Galileo International
announced an increase in its average booking
fees by 6%, its largest boost since 1992 (Figure 20, Section I) Both companies stated that the
increase is being used to build next generation Internet-based booking systems. Worldspan informed
its participating suppliers of a 4% increase, but the precise terms are yet to be announced. Sabre
said it will not make a public statement about booking fee increases, but will inform its customers.
In response to the recent increases, Orbitz92 Communications Vice President Carol Jouzaitis said,
“These fees are passed on to consumers in the form of higher ticket prices. It’s just that much more
important for the travel industry to have competitive distribution channels like Orbitz that are trying to
lower the cost of distribution.”
II.13 INDUSTRY ECONOMICS
II.13.1: Market Penetration and GDS Profit Margins (publicly traded)
Amadeus is the largest GDS in terms of worldwide location share, with 48,126 locations as of
December 31, 1999, yet they are ranked #3 in revenue share, net earnings and profit margin.
Amadeus processes approximately 269 million segments93 per year. Although Galileo ranks second
in terms of revenue, it operates at the highest gross operating and net profit margins. It is second in
worldwide location share, with 40,192 locations as of December 31, 1999. The Galileo GDS
91
Computerworld December 4, 2000; TW Crossroads 12/1/2000
92
The airline-owned website that plans an internet alternative to the CRS Channels.
93
This figure only includes segments generated by travel agencies. Airline offices also use Amadeus for booking unlike other companies.
74
processes over 325 million segments per year.
From a revenue perspective, Sabre is the largest GDS with revenues 85% greater than Amadeus
and 60% greater than Galileo. Sabre’s revenue equates roughly to those of America West, one of
the smaller major U.S. carriers. However, Sabre’s profits are more than three times those of America
West. Sabre processes over 353 million segments per year.
The average net profit margin for the publicly traded GDS companies is 13.6%, which is more than
twice the average margin of the U.S. major airlines and more than three times that of the bricks and
clicks agencies evaluated.
Figure 33: Operating Statistics of Selected GDSs

Operating N et
Total Operating Other L ess N et
Period Income/ Operating Earnings/
Company R even u es E xp en ses Income Taxes Margin
Ending L o ss Margin L o ss
(millions) (millions) (millions) (millions)
(millions) (millions)
13.6%
Sabre 12/31/99 $2,434.6 $2,062.1 $372.5 15.3% $155.4 ($196.00) $331.90
14.3%
Galileo Intl 12/31/99 $1,526.1 $1,213.2 $312.9 20.5% $361.2 ($143.00) $218.20
12.9%
Amadeus 12/31/99 $1,316.2 $1,093.4 $222.8 16.9% $25.2 ($77.50) $170.40
II.13.2: Sample Profit Margins for Agencies (publicly traded)
Of the five publicly traded agencies listed in Figure 34, only Navigant is primarily a brick and mortar
travel agency. Cheap Tickets operates both as a traditional brick and mortar agency with a large
call center, and operates as a major online agency. Travelocity, Expedia and Priceline all fit into the
“online agency” mold, with large sales and marketing expenses to establish their brand name in the
eyes of the consumer.
Net margins for the agencies that operate both offline and online (known as “bricks and clicks”),
resemble those of the airlines. The top three online agencies all operate at a significant loss, with
Travelocity being closest of the three to profitability.
II.14: CONCLUSIONS
Computer reservations systems, which evolved into today’s Global Distribution Systems (GDSs),
were among the first paradigms founded on the premise that technology itself has great value.
Airlines created the original GDS systems as an efficient vehicle for distributing their products and
services to the professional travel agency community. Today, that technology serves as the back-
75
Figure 34: Operating Statistics of Selected Travel Agencies

Operating N et
Total Operating Other L ess N et
Period Income/ Gross Earnings/
Company R even u es E xp en ses Income Taxes Margin
Ending L o ss Margin L o ss
(millions) (millions) (millions) (millions)
(millions) (millions)
Bricks and clicks agencies
Navigant 5.7%
12/31/99 $229.2 206.0 23.2 10.1% 0.2 10.2 13.2
(NSDQ: FLYR)
Cheap Tickets 2.2%

12/31/99 $339.6 330.8 8.8 2.6% 4.1 5.272 7.6
(NSDQ: CTIX)
Pure Online Agencies
Travelocity -32.1%
12/31/99 $64.2 84.8 -20.6 -32.1% 0.0 0 -20.6
(NSDQ: TVLY)
Expedia -87.9%
6/30/00 $134.8 255.5 -120.7 -89.6% 2.3 0 -118.4
(NSDQ: EXPE)
Priceline -218.7%
12/31/99 $482.4 1544.6 -1062.2 -220.2% 7.1 0 -1055.1
(NSDQ: PCLN)
bone for the increasingly powerful and profitable Global Distribution System companies.
Upon becoming commercial successes in the travel agency marketplace in the late 1970s, the
GDSs provided a vision of a technology-based company that could drive an industry into the future
by dealing with the totality of the industry served. For the first time in airline history, the products of
the entire industry could be centralized in a single source and integrated with other travel products.
For the past two and a half decades, the GDSs have truly been electronic travel supermarkets,
empowering professional travel agents to more efficiently serve the public. As computerized middle-
men, the GDSs deliver the latest information on the suppliers of travel and related services to travel
agent retailers and corporate travel departments and now, with the advent of the Internet, directly to
consumers.
These Internet booking sites, backed by Global Distribution Systems, are creating a vehicle en-
abling consumers to access flight and fares information and electronically book their own travel.
They have the same power to choose the airline that they want and the price they are willing to pay
as they have had in a traditional retail environment for many years.
But, as far as global distribution systems have come, there is great potential for further develop-
ment. Because GDS companies have not adapted to these recent technological advances, costly
inefficiencies have developed. Other companies are seizing the opportunity to develop and market
new systems and business models that can alleviate some of these problems.
In the not too distant future, the technology that drives the reservations activity will recede into the
76
background. Eventually, information systems will be thought of more like electricity or the tele-
phone network than as a decisive source of organizational advantage.
94
Copyright © 2000 Garrett Communications Inc., MTech Strategies Inc.
77
Appendices
A.1: DEFINITIONS94
AACO Arab Air Carriers Organization
AADT Decision Technologies (predates Sabre Inc.
AAGR Annual Average Growth Rate
ABS Apollo Business Systems
ACP Airline Control Program
ADS Agency Data Systems
AIM Amadeus Instant Marketing
AMR Parent company of American Airlines
AMRIS AMR Information Services (predates Sabre Inc.)
API Applications programming interface
APPN Advanced Peer-to-Peer Networking
ARC Airline Reporting Corporation
ARTA Association of Retail Travel Agencies
ASTA American Society of Travel Agents
ATA Air Transport Association (U.S.)
ATARS Automatic Travel Agency Reservations System
ATC Air Traffic Conference
ATM Telecommunications protocol
ATO Airline Ticket Office
ATPCO Airline Tariff Publishing Company
ATS Apollo Travel Services
AXI American Express Interactive
BA British Airways
BIDT Billing Information Data Tapes
BSP Bank Settlement Plan
BTS Sabre Business Travel Solutions (corporate travel management system)
CAB Civil Aeronautics Board
CASMA Computerized Airline Sales and Marketing Association
CEO Chief Executive Officer
CPU Central Processing Unit
CRM Customer Relationship Management
CRS Computerized Reservations System

94
Copyright © 2000 Garrett Communications Inc., MTech Strategies Inc.
78
CRT Cathode Ray Tube
CTI Computer Telephony Interface
CTIP Coalition for Travel Industry Parity
CTO City Ticket Office
DASD Direct Access Storage Devices
Datas II Delta’s original travel agency system
DIR Data Interface Record
DOA Department of Aviation (Thailand)
DOARS Donnelly Official Airline Reservations System
DOJ US Department of Justice
DOT US Department of Transportation
DV-IV EC’s Directorate General for Competition
EC European Community
ECAC European Civil Aviation Conference
EDP Electronic Data Processing
ERP Enterprise Resource Planning
ERSP Electronic Reservation Service Provider
ETD Sabre Electronic Travel Distribution
ETDN Electronic Ticket Delivery Network
EU European Union
GDS Global Distribution System
GETS Gabriel Extended Travel System (SITA Product for agencies)
GLC Galileo’s stock identifier on the New York Stock Exchange
GLV Global Logistics Vendor
GmbH Corporate designator (international)
GUI Graphical User Interface
HEDNA Hotel Electronic Distribution Network Association
HP Hewlett Packard
HR Human Resources
HTML Hypertext markup language
HTTP Hypertext transfer protocol
IAR Interactive Agent Reporting System
IATA International Air Transport Association
IBE Internet Booking Engine
IDC International Data Corporation
IETF Internet Engineering Task Force
79
IPO Initial Public Offering
IT Information Technology
ITR Interactive Travel Report
JAL Japan Air Lines
JICRS Joint Industry Computer Reservations System
LAN Local Area Network
LCH Lufthansa Commercial Holding GmbH
MAARS Multi-Access Agent Reservations System
MATIP Mapping Airline Traffic over IP
MIDT Marketing Information Data Tapes
MIPS Millions of Instructions per Second
MIX Motorola’s Mobile Internet Exchange
MVS Multiple Virtual Storage
NBTA National Business Travel Association
NDC National Distribution Company
NIBS Neutral Industry Booking System
NMC National Marketing Company
OA Other Airline
OAG Official Airline Guide
OLTP Online Transaction Processing
OMS Office Management System
OTA Open Travel Alliance
PARS TWA’s original reservations system
PC Personal Computer
PDA Personal Digital Assistant
PNR Passenger Name Record
POP Point of Presence
POS Point of Sale
PSP Pars Service Partnership
PTIS Pars Travel Information Systems
PTVL Preview Travel Nasdaq stock ticker
PVC Permanent Virtual Circuit
RDS Regional Distribution System
SA Corporate designator (international)
SABREPAC Sabre Political Action Committee
SAFIR Schuler Airline Flight and Information Reservations
80
SARL Corporate designator (international)
SCS Sabre Computer Services (old name for Sabre Technical organization)
SEC Securities and Exchange Commission (U.S.)
SITA Telecommunications company serving the travel industry
SMI Worldspan’s Structure Message Interface
SODA System One Direct Access
STIN Sabre Travel Information Network
STP Satellite Ticket Printer
TCP/IP Telecommunications protocol (Internet)
TDR Travel Distri bution Report
TIAS Travel Industries Automated Systems (Australia/New Zealand)
TPC Australian Trade Practices Commission
TPF Transaction Processing Facility
TRIPS Early American Express project with Tymeshare
TSG Sabre’s stock identifier on the New York Stock Exchange
TTG Travel Trade Gazette
TVLY Travelocity Inc. Nasdaq stock ticker
UPS Uninterruptible Power Systems
USTAR United States Travel Agents Registry
VM Virtual Machine
WAP Wireless Application Protocol
WWW World Wide Web
X.25 Telecommunications protocol (packet switching)
XML Extensible markup language
81
A.2: GDS BASED INTERNET TRAVEL SITE MATRIX (TOP 100)
The Internet has a current proliferation of travel sites.

Top 10 Internet sites – (based on Neilson/Net Ratings’ estimation of the number of unique visitors in July 2000)
Sites Affiliation
AOL Websites Travelocity
Yahoo Travelocity
MSN & Microsoft Expedia
Lycos Network Travelocity
Excite@Home Travelocity
Go Network Travelocity
About.com Travelocity
Time-Warner Leisureplante.com
Alta Vista Trip.com
Website GDS Type Notes

1 www.1travel.com Amadeus Site
2 www.4airlines.com Apollo/Galileo Site ITN
3 www.4lowfare.com Sabre Site
4 www.a2btravel.com Sabre Site Travelocity
5 www.aaa.com Sabre Site Getthere.com
6 www.accesstravel.com Sabre Site travelnow.com
7 www.airconsolidators.com ? Site Engine by http://209.125.234.6/
8 www.airline4cheap.com Sabre Site travelnow.com
9 www.airlineticketsdirect.com Apollo/Galileo Site software by softvoyage.com
10 www.air-res.com Patheo Site
11 www.air-reservations.net Sabre Site
12 www.airsaver.com ? Site
13 www.airtravel.net Patheo Site
14 www.americanexpress.com Apollo/Galileo Site ITN
15 www.aol.com Sabre Site
16 www.asiatravel.com Amadeus Site www.fare.com.hk
17 www.bargaintravel.com Amadeus Site onetravel.com
18 www.bestfares.com ? Site must be magazine subscriber to use
site
19 www.biztravel.com ? Site Rosenbluth
20 www.buyingbrain.com ? Site Referral site
82
21 www.cheap-online-tickets.com Sabre Site lonelyplanet.com

22 www.cheaptickets.com Sabre Site
23 www.citynet.com Amadeus Site
24 www.concierge.com Worldspan Site Expedia
25 www.counciltravel.com ? Site Airquest GmbH
26 www.ebookers.com ? Site flightbookers plc
27 www.ego.net Sabre Site
28 www.etn.nl ? Site discountairfares.com
29 www.expedia.com Worldspan Site
30 www.fareagent.com Sabre Site
31 www.faredata.com Worldspan Site LA Times owned
32 www.flightdiscount.com Sabre Site skytours.de
33 www.fodors.com Worldspan Site Expedia
34 www.frommers.com Sabre Site Appears to be Travelocity
35 www.geocities.com Sabre Site Yahoo.com
36 www.go.com Sabre Site Disney company
37 www.gorp.com ? Site sells trips and uses agents
38 www.hotelsandflights.com Sabre Site travelnow.com
39 www.hotelstravel.com Sabre Site travelnow.com
40 www.hotwire.com Sabre Site
41 www.informedtravel.com Amadeus Site
42 www.innovativetravel.com Sabre Site
43 www.itn.com Apollo/Galileo Site American Express
44 www.kasbah.com ? Site Referral site
45 www.lastminute.com ? Site
46 www.lowairfare.com Sabre Site
47 www.lowestfare.com Amadeus Site VM Technology, Inc.
48 www.onetravel.com Amadeus Site
49 www.onlineres.com ? Site SITA owned site
50 www.only-travel.com Sabre Site travelnow.com
51 www.pathfinder.com ? Site Referral site
52 www.priceline.com ? Site
53 www.savvio.com Custom Site limited inventory
54 www.site59.com ? Site Referral site
55 www.smarterliving.com None Site Referral site
56 www.smarttraveler.com Sabre Site powered by lowairfare.com
57 www.thetravelzone.com Amadeus Site
58 www.ticketplantet.com Sabre Site lonelyplanet.com
83
59 www.tiss.com Sabre Site Travelocity

60 www.travel.com Various Site Referral site
61 www.travelairline.com Sabre Site travelnow.com
62 www.travelbyus.com Amadeus Site ITA Software
63 www.travelchannel.com Amadeus Site Discovery Channel
64 www.traveldirt.com Various Site Referral site
65 www.travelersadvantage.com ? Site Cendant
66 www.travelersnet.com Worldspan Site Datalex
67 www.travel-for-less.com Sabre Site powered by lowairfare.com
68 www.travelnow.com Sabre Site
69 www.travelocity.com Sabre Site
70 www.travelpage.com ? Site Referral site
71 www.travel-reservation.com Sabre Site
72 www.travelreservations.com Worldspan Site
73 www.travelscape.com Worldspan Site Expedia
74 www.travelselect.com Worldspan Site
75 www.travelsource.com Apollo/Galileo Site ITN
76 www.traveltime.com Apollo/Galileo Site travelpoint.com
77 www.travelweb.com Worldspan Site Expedia
78 www.travelzoo.com ? Site lowestfare.com
79 www.trip.com Apollo/Galileo Site owned by Galileo
80 www.tripspot.com Various Site Referral site
81 www.uniglobe.com Apollo/Galileo Site ITN
82 www.vacations.com Sabre Site Travelocity
83 www.vacationspot.com Worldspan Site Expedia
84 www.vacationweb.com Amadeus Site onetravel.com
85 www.weekends.com Patheo Site
86 www.worldfares.com Sabre Site skytours.de
A.3: SEARCH ENGINE MATRIX (TOP 25)
Website GDS Type Notes

1 www.zensearch.com ? Engine Referral site
2 www.yahoo.com Sabre Engine Travelocity
3 www.webcrawler.com Sabre Engine Excite.com
4 www.onvia.com ? Engine Referral site
84
5 www.northernlight.com ? Engine Referral site

6 www.netscape.com Worldspan Engine travelscape current partner site
7 www.msn.com Worldspan Engine Expedia
8 www.lycos.com Sabre Engine Travelocity
9 www.infind.com ? Engine Referral site
10 www.hotbot.com Sabre Engine Lycos
11 www.goto.com Various Engine Referral site
12 www.excite.com Sabre Engine Travelocity
13 www.dogpile.com Various Engine Referral site
14 www.directhit.com ? Engine ask Jeeves - referral site
15 www.cnet.com ? Engine Referral site
16 www.altavista.com Apollo/Galileo Engine trip.com
85

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The History and Outlook

Prepared by: Prepared for:

Special Note for the Reader

SECTION I: HISTORY AND EVOLUTION. .............................................................................. 11

SECTION II: DEFICIENCIES OF GLOBAL DISTRIBUTIONS SYSTEMS IN THE NEW

II.7: WHAT’S DRIVING CONSUMER DIRECT DISTRIBUTION? ..................................................................... 54

SECTION I: HISTORY AND EVOLUTION

SECTION II: DEFICIENCIES

GDS dominated channels have

these booking fees cost airlines

average ticket price. All GDSs

Internet, a new and user-friendly

ES.2: OBJECTIVES OF THE STUDY

The study has been designed with the following objectives:

1. Describe the history and evolution of the airline distribution system.

Compounding the pressure to advance technologically, there is considerable pressure on the

Figure ES-2: 1999 Net Profit Margin Comparison

*Source: ATA 2000 Annual Report; company reports

Figure ES-3: Airline Costs Compared to GDS Booking Fees

all U.S. carriers.

3. The Internet is transforming the purchasing of travel from a supplier-controlled to a

shop for travel, among other things.

Section I: History and Evolution

I.1: THE DEVELOPMENT OF COMPUTER RESERVATION SYSTEMS BEFORE DEREGULATION

I.1.1: History of Early Manual Reservation Systems

the introduction of multi-passenger cabins. The reservation

departure, requiring the airline agent in

to inventory control, either by telephone or teletype.

I.1.2: The Introduction of Punch Card Systems

I.1.3: The IBM and American Airlines Partnership

After several technical problems were resolved, the

the time necessary to completely process a reservation had

American to save approximately 30% in staff training and

estimated at the time that Sabre cost over $100 million to

ten years into the future.

replaced with cathode ray tubes (CRTs). The Seletric

I.1.4: Other Airlines Join the Fray

I.1.5: Joint Industry Computer Reservation Systems

I.1.6: Sabre Emerges as the Leader

The Sabre product released to agencies in 1976 retained many

consumers preferred. The elapsed time of the flight, the

I.2: DEREGULATION TRANSFORMS THE INDUSTRY

I.2.1: Securing Competitive Advantage

Figure 6: Airlines With Co-host Agreements As of 1982

AA – Sabre UA - Apollo EA - SODA TW - PARS MARS PLUS

Source: CAB Report To Congress, page 122.

I.2.2: Display and Architectural Bias

Figu re 7: Co m p ariso n of F lig h t Ranking s By CRS System

S o urce : CA B . Re po rt to Co ng res s o n A irline C om p ute r Re se rvatio n S ys tem s ,

I.2.3: Booking Fees and Other Methods To Disadvantage Competitors

I.3: THE CRS REGULATIONS ARE INTRODUCED

I.3.1: Anti-Competitive Behavior

I.3.2: Enter The Regulator

In response to these complaints, Congress instructed the Civil

where anti-competitive behavior was evident; displays, booking

the CAB expressed concern about the market shares the

Part 255.4 of the Code of Federal Regulations (CFR) prohibits

Figure 9: Sabre Profitability: 1976 - 1986 (Source: U.S. Department of Transportation)

addresses, although the Department of Transportation agreed

I.4.1: Airlines Divest CRSs

The ownership of Sabre, the oldest computer reservation system, remained

became wholly publicly owned.