The Travel Industry


The Growth of Online Distribution

International tourism is a multi-trillion dollar industry forecasted to rise at 7% per annum through the decade. Travel suppliers' revenues are projected to grow at a similar pace, reaching close to $650 billion by 2007. To secure this business, $152 billion a year is spent on travel distribution - mostly to agents, consolidators and the GDS. (Forrester Research)

Travel distribution is moving fast from off-line to on-line in the U.S. The penetration of on- line distribution is expected to grow from 15% in 2002 to 39% by 2007. On-line distribution is expected to grow at 27.7% CAGR from 2002 to 2007 when it is expected to approach $100 billion a year. The supplier direct share of online travel distribution is expected to remain steady at 50% over this period. Online supplier direct distribution is expected to grow five fold from $10 billion in 2002 to $45 billion by 2007. (Phocus Wright historicals, CSFB estimates)

Global Travel Exchange harnesses new technologies and the Internet to bring cost reduction, brand control and revenue enhancement to this fastest growing segment of travel distribution.

Travel Distribution in the Past

The worldwide travel industry today sells the majority of its products either over the telephone or electronically via the four GDS that were first established over 25 years ago. Sales over the Internet began about five years ago and represent the fastest growing channel, but still accounts for only a small minority of travel sales. Global Travel Exchange will be able to offer the same product line to all buyers without any differentiation in service or availability.

GDS were originally developed by the major airlines in the mid-1970's (before PC and Internet) as a means of selling airline travel through travel agencies. They provided significant efficiencies for both airlines and travel agencies and achieved nearly 100% penetration of the travel agency community, as travel agencies grew to represent approximately 80% of airline ticket sales on a worldwide basis. The GDS offered the travel agency a comprehensive system to shop for airline seats, compare fares and routings, book reservations and print tickets and other travel documentation for their customers.

The GDS subsequently began to enhance their services to offer electronic booking of hotel rooms, car rentals, cruise reservations and a variety of other travel related products. While achieving significant growth, these other travel lines have never secured the penetration that was achieved in the airline sector. There are enormous sectors of the travel industry such as tour operators, consolidators, ferries, cruise, rail, and other ground transportation that have little or no penetration by the GDS.

The GDS have capitalized on their market success to become highly successful businesses, enjoying many years of substantial revenue growth and strong profit margins. GDS fees now average about $4.00 per transaction. Since the average airline reservation involves three to four segments, an airline can find itself paying excess fees per ticket issued. Because of practically no significant travel supplier with the exception of Southwest Airlines and some new airlines have had an effective alternative to participating in the GDS services, the suppliers have been tied to the pricing and marketing schemes of the GDS. This has generated a great deal of concern amongst travel supplies as GDS fees now represent a significant expense line item for them. GDS travel distribution annual fees are estimated at about $6 Billion.

Travel Distribution in the Future

The Travel & Tourism Industry is under immense customer pressure to deliver more with less. Travelers are demanding that offerings be more segmented, be of highest quality with the fastest execution times and the lowest possible price. Consumer sophistication, new technologies and security regulations will force major transformation of the Industry into new collaborations among suppliers to reach customers with numerous new channels, developing new efficiencies while driving down their cost.



One of the most significant and fastest growing overhead costs is in "Distribution" - marketing, reservation and sale of travel products - which is based on cumbersome and expensive transaction processing. The "legacy Global Distribution Systems" (GDS) and the systems and networks of Travel Agents and Tour Operators have become unduly complex and labor intensive. Travel suppliers and sellers spend more than $12 billion a year alone on electronic distribution technology. Analysts and industry decision makers are agreed that the most substantial cost reduction and service improvement in Distribution will come from the use of Internet and new technologies to reduce labor expenses. Forrester Research estimates that integrated direct links would increase the profitability of a typical supplier by 10% as it diverts a third of its sales away from GDS's and directly to buyers. Over the next three years percentage of sales via direct connects is projected to increase 15-20% industry wide.

Many forces are coalescing throughout the travel supply and demand chain to lead to new Internet based solutions. At the supplier level, distribution costs are amongst the highest expenditure items for airlines, hotels, cruises and car rental companies. To reduce costs and maintain control of their own commercial destiny, suppliers are trying to bypass the GDS to sell direct to institutional buyers and selected agencies. They are looking for low cost web based solutions. They are increasingly using web-based systems for their non-distribution activities and are looking at them intensively for consumer remote connectivity. Similarly intermediaries are also increasingly seeking web based systems and applications to secure their independence, increase functionality and reduce cost.

Digital functionality, cheap computing power, standards based messaging, and universal access are converging to create major realignments in the Travel Industry as market fragmentation and profit erosion are countered with collaborative marketing alliances and reduction in distribution cost. Streamlining processes from start to fulfillment of booking and vertical integration of support processes across the travel value chain will bring new economy and agility to the distribution infrastructure. Support processes like fulfillment, settlement, inventory distribution, call center operations, profile management, back office accounting and volume agreement analysis can be aggregated and handled with the economics of high volume and expertise through specialization-- like the way payroll processing is done today.

There is a natural symbiosis between suppliers, intermediaries and end users in seeking web based distribution and a similar interest in web access and remote connectivity for the myriad of non-distribution applications. Global Travel Exchange is ideally poised to step into this space as a shared system and network solution with open architecture, standards based, promiscuous interface, reduced transaction charges, ease of connectivity and continuous availability.