Technology Takes Flight

American Airlines' Sabre Reservation System gave e-commerce wings and helped revolutionize air travel.

It's 1960. Gas costs about 30 cents a gallon. Only big business, government and academia own computers. The first phones to use buttons instead of a rotary dial are still three years away. And American Airlines Inc. and IBM are working on a revolutionary idea.

Their plan was to use computers to automate the process of reserving airline seats. Their brainchild was called Semi-Automatic Business Research Environment, or Sabre, and it pioneered e-commerce 30 years before the Web and helped make air travel accessible to the average person by tracking ever-growing numbers of flights and fares.

Before Sabre, American used a system based on computer cards and teletypes to handle reservations. According to the Institute of Electrical and Electronics Engineers, processing a round-trip reservation between New York and Buffalo required the efforts of 12 people, at least 15 procedural steps and up to three hours.

By 1998, Sabre had evolved into a global distribution system (GDS) for travel information, reservations and transactions, connecting more than 30,000 travel agents and 3 million online customers with 400 airlines, 50 car-rental companies, 35,000 hotels and dozens of railways, tour companies, ferries and cruise lines. In 1964, the year Sabre was launched, there were 79 million airplane boardings in the U.S. Spurred in part by the ability of computers to track an explosion in fares, routes and flights, that number had risen to 560 million in 1998.

"[Online reservations] enabled airlines to grow rapidly to serve the expanding demand of the expanding business world," says Richard Eastman, president of The Eastman Group Inc., a Newport Beach, Calif.-based developer of travel industry software. It allowed the airlines to manage their inventory of seats faster and more accurately, with lower bookkeeping costs, he says. And through electronic settlement of ticket purchases, the reservation systems allowed airlines to get paid for tickets more quickly.

Now Web-based systems allow any customer with a PC to conduct sophisticated fare comparisons and, in some cases, link directly with travel providers without relying on a GDS. As a result, Sabre and its competitors, faced with dwindling demand for their expensive services, are selling off the GDS parts of their businesses and scrambling to update their technology.

At the start, American's Sabre, United Air Lines Inc.'s Apollo, TWA's WorldSpan and Amadeus (originally a partnership of European airlines) were internal "inventory" systems, owned by the airlines, installed only at airports and airline ticket offices and used to track each airline's seats, flights and other operational information.

The first version of Sabre was based on two IBM 7090 mainframes, which were among the first fully transistorized mainframes. They could handle 26,000 passenger reservation transactions per day and were linked by phone lines to American terminals in more than 50 cities.

Sabre was so new that it spurred the development of IBM's Transaction Processing Facility, an operating system that works with software to conduct a high volume of transactions in real time and that is still at the heart of many online systems.

By the late 1960s, Sabre and its competitors had become operational necessities, not luxuries. They cut costs by automating the seat reservation fare calculation process and could perform complex "yield management," juggling the price and availability of empty seats to maximize revenue for air carriers and enable frequent-flier programs. By the mid-1970s, airlines began marketing the systems to travel agents as a way to funnel more business to their flights, and by 1980, American reported that placing Sabre at travel agencies had generated $79 million in incremental revenue.

In the rough-and-tumble deregulated environment of the late 1970s and early 1980s, American began offering to "co-host" other airlines on Sabre, giving their flights preferential display on Sabre in return for a fee. In areas where American itself had no competing routes, this helped carriers such as Delta Air Lines Inc. and Western Airlines compete against flights pushed by United's Apollo system while making Sabre more attractive than Apollo for travel agents. Driven by demand for one-stop travel shopping, the systems placed in travel agencies worldwide evolved into GDSs, dwarfing the airline-specific "inventory" systems from which they sprang.

Eventually, the GDSs grew into mammoth businesses providing outsourcing, software development and a host of other services to airlines and travel agencies, and many airlines spun off all or part of their GDS businesses. But their primary role was still as a toll road that every customer had to take to see fares and book travel.

Web Threat

The Web bypassed that GDS toll road, allowing a direct link between the customer and the airline for the first time. This new business environment, with its new processing needs and business models, also made it cost-effective for newer PC- and Web-based technologies to challenge the 40-year-old technology on which most GDSs still operate.

"The strategic uses of these systems is past," says Eastman, adding that the process of updating 1960s-era mainframe systems spells "the demise of the GDS as we have known them." It's no wonder the airlines are divesting themselves of their GDSs as rapidly as they can, he says.

Airlines still need computerized reservation and operational systems, although many are run by the GDS companies spun off by the airlines or by outsourcers such as Electronic Data Systems Corp. The GDSs themselves are busily updating their technology and business models to compete with companies trying to undercut their prices with newer, less-expensive Web-based technologies. The airlines, meanwhile, are busy fighting challenges such as the slump in demand following the Sept. 11 terrorist attacks and expensive union contracts - none of which was caused, or can be cured, by IT.

The success of GDSs makes it easy to forget that the major ones are basically inventory systems, built for a simpler time when the government authorized which cities an airline could serve and allowed only a few simple fare levels. Each new function - such as the ability to rapidly change routes and fares - meant expensive reprogramming in a low-level language requiring "four to 16 separate DOS-like commands simply to compare and price" multiple fares on a single route, says Eastman. Even so, the GDSs were reliable and robust enough that they weren't worth replacing - until the rise of the Web cut much of their pricing power.

Partly as a result of the need to keep patching older technology, the prices GDSs charged the airlines rose from about 50 cents per segment, or individual flight leg, to as much as $4.25 per segment now, says Eastman. The airlines, which paid the GDS to host their flight schedules, insisted that the GDSs adapt their basic, mainframe-based applications to work with newer generations of technology, such as minicomputers and PCs, rather than replace them outright, says Eastman. By the time the airlines realized "there were newer, faster [computing] tools out there," he says, it had become prohibitively expensive to re-create in newer technology 30 years of airline processes.

"They never had to get out of that system, as long as the supplier controlled the distribution process," says Eastman. As soon as customers could use the Web to shop for fares and seats themselves, he says, "their system broke down."

"A hotelier can load Sabre or Galileo with rates and instantly distribute them to participating travel agencies," says Philip Wolf, president and CEO of PhoCusWright Inc., a Sherman, Conn.-based travel industry consultancy. "But the hotelier can also distribute [room] inventory and pricing to Hotels.com or Expedia.com and, lo and behold, the same inventory is instantly available" to PCs all over the world. "For the first time, the [major] GDSs have viable competition," he says. Even Craig Murphy, Sabre's chief technology officer, acknowledges that "the Sabre global network isn't as important as it once was."

What's Next

The GDSs are so big, so well established and so critical that they won't disappear overnight. But they won't be owned by airlines or serve their original role as captive systems to distribute the airlines' "product" (seats on airplanes). They will instead be independent entities, serving multiple travel providers and multiple customers over the Web. Murphy argues that there's still a role for the Sabre GDS, using updated technology to provide a Web-based "intermediary" linking travel providers to travel users. He argues that attempts to "direct connect" customers to airlines, including Sabre's own GetThere business unit, will still link to the airlines through the GDSs.

After making the Sabre GDS and its associated businesses a separate unit in 1976, American's parent company sold its final stake in Sabre in 2000 so that Sabre could focus on providing technology services for the travel industry. But within a year, Sabre sold its IT outsourcing business and technology assets to EDS, shifting its focus to travel marketing, ticket distribution and reservation hosting.

Galileo International Inc. in Rosemont, Ill., which sprang from United's internal Apollo reservations system and later merged with several European distribution systems, was purchased last year by Cendant Corp., the owner of motel chains such as Ramada and Days Inn and car-rental company Avis Group Holdings Inc.

Madrid-based Amadeus Global Travel Distribution SA, owned by a combination of European airlines and public shareholders, operates e-Travel Inc., which provides travel services to corporate customers and travel suppliers. It also operates Vacation.com, an online network of travel agents.

The fourth major GDS, Atlanta-based WorldSpan, is still airline-owned but is up for sale, says Eastman.

Rival Investments

Most of the GDSs, or the companies that own them, are hedging their bets by investing in competitors. "Sabre owns GetThere, which enables corporations to connect directly with an airline system and bypass the Sabre GDS," says Wolf. Similarly, he says, Amadeus is one of the investors in ITA Software Inc., whose pricing software is now used by the airline-owned Orbitz LLC travel site, which competes with the pricing systems run by the GDSs.

Eastman predicts that the GDSs will be supplanted in part by travel firms doing "online, real-time packaging" of airline seats along with hotel rooms and ground transportation, getting a higher markup than the individual airline or hotel could.

Even those that try to adapt face a rough road. WorldSpan, says Eastman, caught on early to the opportunity to be a "switch," routing traffic from travel Web sites to airlines' core reservation systems. But if Orbitz can "use cheaper, lower-cost Internet type technology . . . to offer direct purchase when you go directly into the airline inventory system, the value of the 'switch' goes away," says Eastman.

"WorldSpan's strategic initiative was great, but they failed to update their architecture" to reflect the needs of a demand-driven, Web-enabled industry, he says. "As a result, they are being bypassed."

The same is true for many of the GDSs, according to Eastman. "Technology, as demanded and expected by the new generation of knowledge-era humans, simply overwhelmed this ingenious solution of the late '50s and early '60s," he says.

Scheier is a freelance writer in Boylston, Mass. Contact him at rscheier@charter.net.

Copyright © 2002 IDG Communications, Inc.

  
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