Amadeus Structure Industry
Soon four major systems have taken the leadership on the market, namely Amdeus, Sabre, Galileo, and Wordspan. The main reason is that all of them have great databases of informations of travel data (number of places available on a flight, hotel, etc. ). The new oligopolistic market was reinforced by the growing importance of the initial investment the new entrants need to obtain the basic information of travels. For instance,, Amadeus owns the second biggest database of the world after the NASA)
The replacement of central reservation systems by GDS has increased the efficiency of agencies, but also provided a distribution network of thousands of selling points with the possibility to customize their prices and offers, so that they can fit perfectly the demand. Today, the three major GDS combined would regroup 1. 4 million of the travel transactions per year. But after decades of leadership, GDS firms are facing a new danger that threats their margins and business. These changes are radically transforming the dynamics of airline distribution and the rules of the game.
Akin Oghuzan, Regis Mattia and Sandrine Kouao In general, the discontent of the airlines about the distribution prices and the oligopolistic situation could be conducive to an opening to new market entrants. Moreover, the technological advances lowers the entry barriers for new entrants, and makes it easier and cheaper to build and maintain distribution systems ? Substitutes Travel agencies used to be the interface between companies and customers. Companies could also develop their own system of reservation through their agencies or via internet.
But as we said before, customers requirements are higher nowadays. A performant system has to be built in order to create a powerful and comprehensive interface between the customers and the company. It implies a big investement ( of time and money) and knowledge. Most of the companies don’t choose this option because this is expensive and hard to create such a performant system. We can say there is not so much substitues which could influence the market. ? Bargaining power of customers GDSs firms were initially created for airline companies by themselves or subcontractors.
For example Sabre was created by IBM for American Airlines and Amadeus was created by Air France, Iberia, Lufthansa and SAS. Such major GDSs companies act as the intermediate between travel providers and the travel agencies but also provide IT solutions to the travel providers. The principal customers of the GDSs industry are therefore the travel providers and the travel distributors, mainly the travel agencies. Figure 1 : GDSs firms twofold source of buyers In order to asses the power of the aforementioned buyers, one must take a closer look at the GDS industry.
The latter counts 11 different firms worldwide but since we are focusing on the American market, in the USA it can be considered more as an oligopoly consisting of the 3 leading companies Sabre, Amadeus and Travelport#. In the American market, these 3 companies have practically the totality of the market share. Akin Oghuzan, Regis Mattia and Sandrine Kouao Figure 2 : USA market share of GDSs firms (2009) With only these information, customers power could seem fairly low and it would be if GDSs where the only available proposition.
However, when we will take a closer look to the travel industry as a whole during the external analysis, we will see that technological advances are changing the customers power. ? Bargaining power of suppliers Concerning the GDS firms, they mainly need hardware and software suppliers. However some firms such as Amadeus are thinking to switch to externally provided software such as Linux to reduce their maintenance costs. Even if this software is free, the cost of such a system is very expensive. With the emergence of internet, they need to adapt their offer to companies.
They developed systems more and more useful for companies and also for customers. Ohters companies are present in the market, but the investement and the high level of technical part to develop those perfomants systems, could be an important barrier for new companies. Indeed Amadeus mainframe centre is in Erding, Germany, they have the second biggest database after NASA. This, requires a big investment. Suppliers as database and computers providers could be very expensive but most of the time, they have a long term partnership with the company.
For exemple, IBM create Sabre since 1960, and HP is the informatic support for Amadeus. This is an important aspect, because to be competitive, the system have to be very performant. Even if, many others informatic support can be available, their long term partnership, increase the power of supliers. In another hand, their expertise in GDS enable them to have new partnership with others companies. Because of their expertise in the domain, they understand the needs and can create more and more performant hardware and software for GGDS companies.
For example IBM create the TPF : Transaction Processing Facility This is a software wich is a high-performance operating system specifically designed to provide high availability for demanding high volume, real-time transaction processing for mission critical e-business applications. This system work only with IBM Hardware. They sell it directly to aerial companies such as delta airlines and Panamac. As one can see, even if many suplliers are available for GDS companies, the expertise, the long term partnership with some of them and the high cost of investment needed, enable them to keep a solid relation with the companies.
So it‘s increase the power of suplliers. Akin Oghuzan, Regis Mattia and Sandrine Kouao ? Concurrent As we said before, it used to have four companies wich dominate this industry : Amadeus, Sabre and travelport. They offer the same kind of services : Advanced technology to find the best rates a comprehensive travel content, system to Consolidated data and IT Solutions . Even if they offer the same services, each of them dominate in certain aera : Even if , Amadeus retains the number one position, in 2008 with a market share of 35. percent, Sabre is still the leader in united states. Depending on the country, habits of customers changed. For example, direct share of online air ticket sales in the US reached 61% of the online market versus 39% for Online Travel Agencies (OTAs) (PhoCusWright,2008). According to the same source, it is going to increase through time. This a very dynamic industry so the airlines corporate web sites have to be more and more attractive to costumers. These implies an evolution of the GDS services compared to the traditional GDS model, based purely on travel agency distribution.
Thus, cost of distribution have to be the most attractive: it is said that airlines have achieved discounts of up to 40% in their booking fees (Quinby, 2006). To do so, companies start to negociate with their suppliers to reduce the cost of their investment, in order to be able to sell cheaper tickets and also to facilitate their interface with the customers. Even with all those improvements, the more important for companies is o have a GDS wich is performant, comprehensible and not so expensive. In this way, Sabre is suposed to be cheaper than Amadeus.
Indeed, the findings of the study conducted by the firm Topaz in 2006 show that Sabre finds lowest fares four times as often as Amadeus or Travelport, resulting in actual savings of 20% on average per ticket for EMEA *, or approximately € 112. Area par billet Asie-Pacifique Europe / Moyen-Orient Amerique latine Amerique du Nord (USA/Canada) Montant economise en moyenne par billet % d’economies realisees en moyenne $132 €112 $114 $50 18% 20% 17% 12% They decrease the price ticket in asia, europ, and south america, at least two times less than in united states where they are leader.
This could be explained by a volontee to reach others markets. To do so they decrease the price of tickets and they also do patenerships with local companies. For exemple, fefew years ago, Galileo ( from travelport) controlled almost 75% of Middle east and Africa market . To face this advantageous position of Galileo and to gain some market, Amadeus have signed a ten year deal with 13 Arabian and north African airlines and Sabre has signed a 10 year deal with Emirates. This increase their market share and decrease the one of Galileo.
Amadeus cannot penetrate the US market, certainly because of the better price of Sabre, and also because Sabre is an american company wich have a long term relationship with American companies. Also, the investment is so important in such a system because of its required performance that the competition is very hard and this increase the entry barrier. Some low cost companies try to enter the market, but their resources and their proposed service was not sufficient enough to face these three big companies. This is an oligopolistic market. Akin Oghuzan, Regis Mattia and Sandrine Kouao Industry evolution – External analysis
Nowadays, customers habits have changed. Their needs are different, and people travel more than years ago. Indeed, the emergence of internet implies an important change in travel industry. Many ways to attempt a destination are possible, at different prices. The interfaces developed by the suppliers are very performant and the travellers can define precisely their needs and compare prices in real time. Travelling is now winthin everyone’s reach. However, travel providers and distributors are constantly trying to reduce their operating costs and, thanks to the internet mainly, there are starting o find alternative solutions at the expenses of GDSs. Figure 3 : GDS usage among ASTA (American Society Travel Agencies) from 1999 to 2009 The trend would suggest that customers are slowly quitting the GDSs industry for other cheaper alternatives which challenges GDSs firms to provide continuously better technology and solutions in order to preserve their customers. The loss of 20% in 10 years in GDS usage among ASTA should however be taken with respect to the evolution of the travel industry as a whole. In fact, the travel industry is constantly growing and, in the recent years, an important amount of low cost carriers (LCC) companies ave sprawn. Figure 4 : Low Cost Carriers (LCC) vs Full Service Carriers (FSC) market share in 2001 and 2011 Akin Oghuzan, Regis Mattia and Sandrine Kouao In order to be competitive and offer cheaper flights, LCC companies had to bypass GDSs fees. The internet mainly, combined with the creation of online travel agencies, provided a cheaper solution allowing LCCs to develop therefore explaining the previous results. The travel distribution industry saw in past 10 years the arrival of GDS New Entrants (GNEs) such as G2 SwitchWorks or ITA.
Such GNEs promised superior technology and cheaper fees on bookings, the two crucial airline concenrs in travel distribution and therfore could have broken the oligopolistic market held by the 3 leading GDSs. However, as today, very few airlines companies and travel agencies have switched to these GNEs. GDSs are still the most popular platform used because of its superior technology even thow the GNEs promised otherwise. GDSs are especially still very popular in the business trips market were the vast database offered allows for booking and quick modification of complex itineraries on the national or international basis.
The arrival of GNEs did however modify the relationship between GDSs firmsand the travel providers and distributors indirectly. In fact, the GNEs where mostly used as leverage during the re-negociation of contracts forcing the GDSs firms to discount their prices by 30 to 40%. This event stresses out that, even though GDSs are dominating the travel distribution industry they are constatly menaced of loosing their customers to a better technology. However, after the failure of GNEs, the trend nowadays is actually seeing the LCC firms tring to participate into one of the 3 leading GDSs.
We can see that the industry becomes very competitive. The suppliers developed more and more performants system which improve and facilitate the communication between the customers and the companies. They can better understand customers needs and respond to them. Also, Companies try to be more and more attractive, with different kind of packages at lower prices to respond to the low cost companies entry. Conclusion There is an oligoloe in this industry. Three big companies control the market. They are dominant in different areas, and they try to gain some market shares in areas where they don’t dominate.
The entry barrier is high because of the high specificity of this industry, meaning important knowledge, important technical aspect and a big investment. The substitue product are not so performant, compare to the GDS and they require a big investment. To be competitice nowadays, they have to use this kind of software because the need of customers change throug time. Indeed, with the emergence of the internet, customers habits change, and low cost companies emerge also. This lower a bit the barrier of entry, and it forces companies to improve their system and readapt their prices to the market.