GDS deregulation Potential Scenarios and Their Impact

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GDS deregulation - Potential Scenarios and Their
Impact ACTE PowerTalk, by Alex Cruz

Melia White House Hotel at Regents Park 30
November 2004
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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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What you think about it . . .
YES
NO
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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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What they think about it . . .
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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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What the EU is thinking about it . .

• Background ------------------------gt 60s, 70s
• First EC Legislation -------------gt 80s
• The After-Effects -----------------gt 90s
• Industry Developments ------gt 00s
• 2nd round of EC Legislation
• Starts ------------------------------------gt Dec
  2002
• Brattle Report ----------------------gt Oct 2003

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What the EU is thinking about it . . .
Background

• CRS came from airlines, in the 60s
• Six systems were available in the 70s
• Biasing displays
• Giving better data about parent airlines
• Imposing higher booking fees on rival carriers
• ? Parent carriers began using own market power to
  restrict competition

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What the EU is thinking about it . . . First EC
legislation

• 1989, CRS Code of Conduct (modeled after US 1984
  code), in order to
• Initially, stop airline owners restricting
  competition
• Eventually, dissipate GDS market power
• Introduced some subsequent amendments

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What the EU is thinking about it . . . First EC
legislation (cont.)

• Ruled
• All GDSs to provide at least one unbiased display
• Give all carriers access to their system on
  non-discriminatory terms
• Refrain from imposing restrictive terms on T/As
• Make MIDT data available on non-discriminatory
  basis
• All parent airlines to give all CRSs the same
  info/booking opportunities

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What the EU is thinking about it . . . The
after-effects

• Eliminated some GDS market power
• Mandatory participation limited airlines
  leverage to negotiate better fees
• Non-discrimination requirements stifled
  competition

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What the EU is thinking about it . . . Industry
developments

• GDS ownership by airlines begins to decrease
  Sabre, Galileo, Worldspan
• Only one left Amadeus
• Internet

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What the EU is thinking about it . . . 2nd Round
of EC Legislation Starts

• Asked for comments on three proposed amendments,
  in 2002
• Eliminate mandatory participation on parent
  airlines
• Remove the prohibition on GDS fee and service
  discrimination
• Revise rules allowing GSDs to share MIDT tapes
• Eventually commissioned the Brattle Report

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What the EU is thinking about it . . . Brattle
Report

• Asked to assess the foreseeable impact of its
  proposed amendments from economic and legal
  angles
• Used principles of competition analysis
• Examined the distribution supply chain
• Define potential anti-competitive behaviours
• Analysed three policy options

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What the EU is thinking about it . . . Brattle
Report (cont.)
Option 1 Eliminate the CRS Code of Conduct

• No requirements for a neutral display
• No requirements that parent carriers participate
  equally
• No prohibition on discriminatory booking fees
• No restrictions on CRS contract provisions with
  T/As
• No restrictions on T/As
• No requirement that participating carriers
  provide equal data to every GDS

• PROs
• Allow market forces to operated in the GDS
  market, promoting greater price and service
  competition

• CONs
• Amadeus and its parent carriers would have a
  strong incentive to engage in competitive abuse
  in their home markets

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What the EU is thinking about it . . . Brattle
Report (cont.)
Option 2 Adopt Dec 2002 Proposal

• Eliminate the requirement that parent carriers
  participate equally in all GDS
• Eliminate the prohibition of discriminatory
  booking fees
• Eliminate regulation of passive bookings
• Eliminate need for carriers to share all MIDT
  data equally
• Keep restrictions on GDS contract provisions with
  T/As
• Keep restriction display bias

• PROs
• Enhance market incentives, allowing airlines to
  use their natural bargaining leverage and forcing
  GDSs to compete more aggressively on the basis of
  price and service quality

• CONs
• Same potential abuse as in option 1

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What the EU is thinking about it . . . Brattle
Report (cont.)
Option 3 Retain Mandatory Participation and
Non-Discrimination Obligations in Parent
Carriers Home Markets

• Require parent carriers (including mktg airlines)
  to abide by the mandatory participation
  requirement in their home makrets
• Require airline-owned GDS to provide improvements
  to all carriers in the owners home markets

• PROs
• This options the major flaw in option 2 the
  potential abuse problem of owner carriers in
  their home markets
• Gives owner carriers incentives to sell

• CONs
• If enforcement is not effective, some abuse could
  take place by parent carriers in their home
  markets

This was the favoured and proposed option
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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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How it may affect us . . . Potential impact on
airlines

• GDS can negotiate freely with airlines to get
  access to the best content
• GDS can offer exclusive, personalised services to
  airlines to get development
• GDS can market/promote airline products through
  special rates for special display

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How it may affect us . . . Potential impact on
travel agencies

• Travel agents and corporate customers keep access
  to web fares negotiated with airlines by GDS
• No limit to GDS contract length
• GDSs can continue pay incentives and invest in
  the agency channel

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How it may affect us . . . Potential impact on
corporates

• Mandatory participation / discriminatory pricing
• Content may fragment
• Might drive costs higher to get access to all
  required content
• May receive less services from certain GDSs
• MIDT data monitored but not regulated
• No privacy protection
• Display biasing
• Will you believe the search results?
• Might have to launch counter-biasing technology
  investment
• Content parity who has what?

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How it may affect us . . . What are others
saying?

• All of our airline contracts are coming due at
  the end of the year and we want to build
  strategies into the RFP process that take into
  account GDS deregulation Lockheed Martin
• If it costs a little more to get at the right
  content, then its worth doing that. The fees
  are relatively small in the whole equation. -
  AMEX
• Seeking exclusivity of airline content is
  extremely foolish, and screws up your agent
  customers because they want content. Amadeus
• Deregulation will mean that agencies will
  probably need to be promiscuous and connect to
  multiple GDSs to cover product range . . .
  therefore reducing access to incentives. . .
  Opodo
• Airlines will be able to ask what is the ROI for
  distribution through a particular GDS in a
  particular market industry consultant

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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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How events are likely to unfold . . .Some likely
trends . . .

• No immediate, fundamental changes once
  regulations in effect
• More value pricing (. . . coming anyway?) as
  DCA/Preferred Fares/Total Rates expire
• Some screen biasing ultimately, agents can do
  that through business rules
• Unlikely to see a Northwest event in Europe,
  but more to come in the US over next 1-2 years
• 75 chances of airline divestment of stakes in
  Amadeus

HOT
HOT
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How events are likely to unfold . . .Yes, but
when ?

• Regulations with current Amadeus shareholder
  structure are more complicated
• Amadeus sale completed earliest summer 05
• New EC TREN management settled by then
• EU likely to formalise final study and draft of
  resolutions right before that
• It will likely require one year to get through

Accepting the speed that it is going at right
now, we dont expect deregulation to happen in
the UE before 2006. Deregulation being a factor
in the US, we think that laws have to be the same
this side of the Atlantic. Amadeus, Sept 04
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Agenda GDS Deregulation

• What you think about it . . .
• What they think about it . . .
• What the EU is thinking about it . . .
• How it may affect us . . .
• How events are likely to unfold . . .
• What should we do ?

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What should we do ?

• Stay up-to-date with developments
• Be pro-active and ask questions often from GDS
  with regards to their plans
• Talk with airlines/hotels regarding any screen
  biasing practices
• Continue pushing online traffic more flexibility
  with no impact on traveler
• Keep senior management informed

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• Thank you !
• And . . .

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Moving on . . .
 
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• QA
• See you at the ACTE Global Conference
• Vancouver, Canada May 1- 3, 2005