Are you wondering what a GDS is or do you need a refresher? This quick guide will take you through the past, present and future of global distribution systems.
1. What is a Global Distribution System (GDS)?
A global distribution system (GDS) is software that travel agencies use to sell airline tickets or book hotel rooms. It's one of the most important channels for airlines to sell their tickets.
It's also controversial, as it siphons off revenue from airlines and keeps airlines dependent on outdated technology. GDS providers used to control a higher share of the distribution market, but airlines have invested in their own direct sales channels to bypass this. Nevertheless, it's still - and will likely continue to be - important for distribution.
2. A History of GDS
Before the creation of computerized reservation systems, a traveler who wanted to book a flight would go to an airline or a travel agent, who would find a file with the flight’s availability and physically check off a seat on a card. As airline operations ramped up, it was nearly impossible to scale this system. It consisted of 8 people seated around a rotating table of cards and took several hours from the passenger query to having a confirmed reservation.
In the 1950s, airlines were at the forefront of technological innovation and created a computerized reservation system. American Airlines was the first to develop this. Together with IBM they created SABRE using technology originally designed for the US Air Force to coordinate flight operations. Other airlines followed with United Airlines creating Apollo (which was eventually purchased by Galileo/Travelport) and Air France, Iberia, Lufthansa and SAS creating Amadeus.
These computer systems were sold to travel agents, making money not just from the systems but also by pushing their tickets to the top of the list. In the late 1970s the airline industry became deregulated in the United States and airlines were able to set their own prices. It created a complex market and made these computer reservation systems (CRS) even more valuable.
This resulted in the GDS, which is basically unchanged as of today. Airlines file their schedules with seat availability in a separate system and file their fares with the Airline Tariff Publishing Company (ATPCO). A travel agent uses the GDS to query all of these systems and create an offer.
3. An Overview of the Current GDS Market
As the role of traditional travel agencies is being replaced by online travel agencies (OTAs), GDSs still continue to dominate. OTAs are simply replacing the human travel agent with a website, but they are still using the same GDS system to book the actual ticket.
GDS providers have developed other software and typically produce a whole suite of services for the airlines, ranging from passenger service systems (PSSs) to revenue management systems (RMSs). Their main source of revenue however still comes from distribution - for Amadeus, approximately 65% of their revenue comes from distribution fees. This revenue is often greater than the total revenue of many airlines that they serve.
When it comes to return on capital, airlines are the least profitable segment of the industry. Travel agents and providers of IT products like GDS are the most profitable segments.
4. The Major Players in GDS
Currently the largest GDS providers are Amadeus, Sabre, Travelport and Travelsky. In 2016 Amadeus was the largest provider in terms of market share and revenue and controlled nearly 44% of the entire GDS market, with most of its bookings in Europe.
Sabre is the second-largest GDS provider and the largest in the Americas. It has its own GDS and also the Abacus GDS, which is entirely for the APAC region. In the 1990s airlines were strapped for cash and they spun off their respective GDS as separate companies (although some such as Amadeus are still partially owned by the airlines). These systems still dominate the market, although the direct distribution channel is becoming more important.
Travelport controls the Galileo and Worldspan GDS systems but contains a much smaller overall market share. Travelsky is the state-run GDS for the Chinese market only.
The main differences between the GDS providers are the markets in which they primarily serve, as well as the language used to build passenger name records (PNRs) and create queries. Some smaller airlines may also sell their inventory on one GDS but not another, so they may differ in inventory offered.
5. Current Issues with GDS
The main issues airlines currently have with GDSs are the fees produced when querying for a ticket or when booking a segment. Currently the average fee per segment booked through the GDS is approximately 4 euros. While this doesn't seem like much, it makes it difficult for trips with connections to compete with direct flights or flights booked without GDS (16-euro price difference on a round-trip ticket).
Another common gripe about GDS providers is that they have been weak in innovation. The interface most GDS providers use is basically unchanged since their inception and allows little in the way for displaying content beyond price and schedule.
As airlines introduce new products and services, it’s important that they can show passengers what they’re actually buying, as well as increase upsell and cross-sell. This is especially important for low-cost carriers and ultra low-cost carriers, where a significant percentage of passenger revenue comes from ancillaries.
Airlines have also complained about full content agreements. These are usually included in the participating carrier contracts they sign with the GDS. In theory, these are provisions where the airline agrees to give the GDS the same information on availability/prices that they have for their own direct distribution. In return, the airlines receive a discount on the distribution fees charged by the GDS.
Routings that have two or more connections are often omitted from results, which leads to a large revenue loss for that carrier and limits options for the consumer. The airlines argue that GDSs don't follow their end of the bargain and are biased against airline offers that have complex routings. This is illegal in the EU but not in the United States.
While distribution through GDS often makes it difficult to provide the lowest prices, it does have some important benefits. This is partially why some low-cost carriers, which used to avoid GDS, have signed distribution agreements within the past few years.
Airlines who want to sell to business travelers from larger companies that use travel management companies (TMCs) often find it necessary to distribute through GDS. These tickets are important as they are usually higher priced and can increase yields for the airline. Jetblue, which pulled its distribution agreement with Sabre after several years, agreed again to a distribution contract as their yields through direct distribution were lower.
Another point is that the distribution agreements are often part of broader technology contracts. Alessandro Ciancimino, VP of airline solutions at Sabre admitted that "there are economies of scale that exist when negotiating with a vendor across multiple products", implying that GDS providers are using their distribution contracts as leverage when signing contracts for other software services.
6. The Future of GDS
It's not immediately clear what the future distribution landscape will look like. However, it's likely that airlines will try to create direct connections with travel agencies and TMCs to bypass GDS providers. Airlines will also work to grow their traditional direct distribution channels.
Companies like Farelogix are creating NDC (New Distribution Capability) connections with travel agencies for this very purpose. American Airlines is going to start paying travel agents $2 for every booking through NDC - reviving an old practice - while airlines like IAG and Lufthansa are forcing the GDS providers to create NDC connections by charging for their "standard" GDS bookings.
GDS providers are slowly stepping up their game by working on ways to sell ancillaries and further improve their interfaces. For example, Sabre has introduced a graphical user interface (GUI) for their GDS platform. Additionally, they are trying to become NDC "aggregators". Travelport has reached NDC Level 3 Aggregator status. This is the highest certification level, which means they're capable of managing offers and orders.
It's likely that some gap will remain in the distribution landscape. Airlines are working out what they're able to do with their direct distribution, while and NDC that the GDS providers will try to fill (for example with business travelers and niche airlines who lack advertising resources). However, the distribution landscape is beginning to move away from times where GDSs are the only gatekeepers of distribution.