Industry Update
Press Release 8 April 1996

Airline Reservations Systems Face Internet Threat

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Apr. 8--They're identified by galactic names like Apollo, Galileo, Worldspan, Sabre, Amadeus and System One and they soon will be fighting for survival in cyberspace.

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They are not stars of some video game featuring outer space battle scenes, but the largest airline computer reservations systems used by travel agents to book flights.

With the rapid development of airline booking sites on the World Wide Web, however, it's just a matter of time, say some airline industry analysts, before a significant number of consumers begin bypassing travel agents and the computer reservations systems altogether to book flights directly

with airlines via their own personal computers.

That means trouble up and down the travel food chain – for travel agents, for the computer reservations systems and for the airlines that own the reservations systems and depend on the millions of dollars in revenue they generate annually, especially in lean times.

Ironically, it is the airlines themselves that are threatening the existence of their own computer reservation systems by establishing web sites on which consumers will be able to directly book their own flights.

Most consumers are unaware of just how dominant these computerized systems are in flight reservations – around 90 percent of all U.S. flights are booked through them.

Sabre is the computer reservations system of AMR Corp., the parent of American Airlines. Apollo and Galileo are owned by a group of airlines led by UAL Corp., the parent of United Airlines. Amadeus is based in Madrid, Spain, and is owned jointly by several European carriers. Worldspan is owned by Delta Air Lines, Northwest Airlines and Trans World airlines; and System One is owned by Continental Airlines.

(Sabre, Apollo, System One and Worldspan operate primarily in the U.S. Galileo and Amadeus operate, for the most part, abroad.)

For the airlines that own them, these systems, historically, have been cash cows, and in some years have been the only bright spot in an otherwise disastrous financial situation.

AMR's Sabre system, for example, made profits of $226 million, $83 million, and $184 million in 1991, 1992 and 1993, respectively, three years during which AMR's American Airlines lost millions. In 1994, when American and other carriers began slowly emerging from their downturn, Sabre

posted profits of $342 million.

Sabre, the largest system in the U.S. with 44 percent of travel agent bookings, is also the oldest, having been established in the 1950s. Between 1991 and 1995 alone, it generated revenues for AMR Corp. in excess of $5 billion.

Those who run the computer reservations systems insist they aren't about to surrender. They claim the prospect of consumers going on-line to directly book flights doesn't scare them. In fact, they see it as a way to expand their customer base and, in the long run, generate even more revenue.

"We're not concerned about the Internet. On the contrary, we're looking forward to increased use of the Internet in the travel business," said Paul Blackney, president and chief executive of Apollo Travel Services, the glenview-based marketing arm of the Apollo system, 77 percent of which is

owned by UAL Corp.

Blackney added that Apollo sees "challenges but (also) a lot of opportunities to expand our services."

Blackney also pointed out that most of the revenues for Apollo and other systems don't come from travel agencies, but rather from competing airlines, hotels and rent-a-car agencies and other travel-related suppliers that list their products on the systems.

Blackney and others in the computer reservations industry estimate that currently less than 1 percent of travelers are using the Internet to book flights without the help of a travel agent. Over the next 20 years, he admitted, "there's no question that will increase significantly."

Indeed, computer reservations systems firms already are investing millions of dollars to develop programs designed to ensure that they will be the provider of choice for those who book flights, hotels and rental cars on-line.

For example, Sabre is revamping its decade-old on-line system that lists flight schedules and allows travelers to directly book flights. Sabre also plans to begin selling tickets over the Internet sometime this year.

Apollo – the second largest system in the U.S. and, coupled with Galileo, the largest in the world – also is planning to establish a Web site. Initially, the site will serve the travel agent community, but eventually it will be open to everyone. Other computer reservations systems have similar plans.

Indeed, the competition among reservations systems for dominance on the Internet could become fierce, leading to a consolidation in what is a relatively small industry. Published reports in recent weeks speculated about the possible merger of Apollo/Galileo with Worldspan.

The challenge facing the computer reservations systems is two-fold. Firstit must come up with a user-friendly way for home computer users to easily access thousands of flight and fare schedules; then, book and pay for the flights they want with just a few key strokes.

Then it must figure out how to charge consumers directly for these services.

One reason so few people currently use the Internet to do their own booking is because the process is daunting. It requires the skills of an expert Net surfer and a travel agent who can decipher the arcane codes the airlines use to list their flights and fare schedules.

At present, consumers who book flights through travel agents don't pay anything. The airline pays the agent a fee for booking the consumer on one of its flights. If the consumer suddenly has to pay out of his or her own pocket for booking a flight, direct Internet bookings could quickly fade into

oblivion.

Analysts say that the computer reservations systems have a window of opportunity to develop effective Internet delivery systems to ensure their survival, but it won't last forever.

So far, the only airlines that allow consumers to bypass travel agents and reservation systems and book flights directly on the web are Alaska Airlines and British Midland Airlines.

But before long, they will all be up there.

USAir, for example, already has a site that displays information about flight schedules and fares as well as text about the history of the airline, recent press releases issued by the carrier and maps of the major airports it serves. It plans to offer on-line booking soon.

Other carriers close to transforming what are now just informational Web sites into channels for booking flights include Continental Airlines, Trans World Airlines, Southwest Airlines and Australia's Qantas Airlines. Several hotel chains and rent-a-car agencies also are close to allowing consumers to book reservations directly via the Internet.

Contact
Stanley Ziemba
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