Evolution the only solution

The dinosaurs died out because they failed to adapt to their changing environment. Amadeus, one of the world's largest travel technology companies, hopes to avoid a similar fate as it grapples with the profound technological, regulatory and commercial changes sweeping through its industry. “There is no doubt that the traditional travel distribution model is evolving,” says David Jones, executive vice-president for commercial operations at Amadeus.

The Madrid-based company was founded by four European airlines in 1987 and claims to be the leading operator of global distribution systems (GDS) - the booking terminals used by travel agents.

Undoubtedly, the biggest change to affect Amadeus and other GDS operators has been the rapid take-off of internet travel.

In Europe, Amadeus’ main market, online travel grew 51 per cent in 2004 to reach €19.2bn, according to PhoCusWright, a consultancy.

The rapid growth of online travel initially caught Amadeus off-guard. It looked on with horror as upstart travel websites drew bookings away from the GDS screens that Amadeus has in more than 67,000 travel agencies.

In addition, the inexorable growth of low-cost carriers, which rarely appear on GDS screens as they usually only sell direct, has shown travel suppliers that there is an alternative to agents.

Traditional airlines once depended on travel agents for 90 per cent of their bookings. But many “flag carriers” are now selling 25 per cent or more of their seats through direct channels, with big savings on GDS fees and agency commissions. “Direct distribution can still grow quite a long way,” admits Mr Jones.

Another factor for GDS was September 11. The global downturn in air travel after the terrorist attacks in the US caused cash-strapped airlines to complain about the fees GDS operators charge for flights booked through their systems.

In the case of Amadeus, airlines pay a fee of €3 to €5 for each flight segment booked through an agent. The GDS then rebates some of the fee to the agent.

The airlines have long complained of the spiralling cost of GDS fees but, before the internet, there was no alternative to a GDS if they wanted their tickets widely sold.

Consolidation has left four main GDS players - Amadeus, Sabre, Galileo and Worldspan - and an oligopoly that has frequently drawn complaints from anti-trust bodies.

In the US, the nettle was finally grasped last year when the GDS market was deregulated, allowing airlines to negotiate discounts on GDS fees.

Some form of deregulation is also likely in Europe, where Amadeus is strongest. “We would prefer deregulation to happen [in Europe] as currently we are in a uneven situation as all our competitors are US-based,” says Mr Jones.

None of Amadeus’s three main competitors are now owned by the airlines that created them. Three of Amadeus's founders, Iberia, Air France and Lufthansa, still hold a 49 per cent stake, but not for much longer. The three recently accepted a proposal from private equity firms to take Amadeus private and pocket €1.6bn in cash in return for reduced control

“With private equity, the airlines are able to grow and expand Amadeus faster than they could do themselves while realising a significant amount of capital,” says Richard Clarke, director of Travel Technology Research, a UK-based consultancy.

Amadeus needs fresh investment to fund new technology initiatives designed to compensate for the decline of its GDS business. One of Amadeus's most recent moves has been into information technology services for airlines.

“It is a natural extension for us to move into these areas and undoubtedly airline IT is growing faster than the overall GDS business,” says Mr Jones.

Although it is sometimes accused of being a “dinosaur” due to its mainframe-based technology, Mr Jones says Amadeus was one of the first businesses to create a dedicated internet unit back in 1996. It quickly realised that the internet, on balance, created more opportunities than threats.

That is because many travel websites use Amadeus, either to build the entire site or to provide the back-end booking engine. Internet bookings processed by Amadeus grew 47 per cent during the past 12 months.

That sounds spectacular but is from a low base and currently fails to compensate for the inexorable decline in Amadeus’s GDS business.

Pundits have been predicting the death of travel agents for many years, but they continue to survive. And so too does Amadeus.