This article from NYTimes.com has been sent to you by psa188@juno.com. As Big Airlines Struggle, Computer Booking System Prospers February 10, 2003 By SAUL HANSELL As the airline industry heads closer to insolvency, it is no surprise that Sabre Holdings, the world's largest computer reservations system, is having a tough time. Not only is overall travel down, but the rapid adoption of Internet travel booking is causing an even more rapid decline in the number of bookings through travel agencies, Sabre's main users. Making matters worse, Travelocity, Sabre's own online travel agency, has stumbled, ceding the leading position to Expedia. But financially, Sabre is doing amazingly well. The company, which was separated from American Airlines in 2000, predicts that its revenue will fall by only a few percentage points this year. And its profit margins are still higher in this bleak year than airlines achieve even at their best. Indeed, Sabre has been able to raise the price it charges airlines to book each ticket by 3 percent, even as airfares fall. Sabre in reality may be doing too well for its own good. The airlines have set their sights on its highflying profits and are seeking to bring them down. "They charge exorbitant rates relative to the value they add," J. Scott Kirby, executive vice president for sales and marketing of America West Airlines, said of Sabre and its rivals. "It is a cost that we don't find justified." The airline industry is fighting a battle on several fronts with Sabre and other reservations systems. Five big airlines started Orbitz, an online travel agency that is developing technology to bypass the reservations systems. Northwest Airlines already has a Web site that agents can use to book tickets for their clients directly, and America West is building one. In all these cases, the airlines are pressing travel agents to cooperate by keeping their best fares off the common reservations systems, an action that undercuts the systems' big advantage - that they give agents one screen where they can book nearly any travel arrangement. At the same time, the airlines have used their considerable lobbying power, persuading the Department of Transportation to propose eliminating some of the rules that help Sabre and its three rivals - Galileo, Worldspan and Amadeus - keep their fees up. On the other end of this assault is William J. Hannigan, Sabre's chief executive. No stranger to tough conditions, Mr. Hannigan served as a Navy radioman on a fast-attack submarine. After a career with phone companies, he joined Sabre in December 1999, on the eve of its spinoff by AMR, American's parent. Things started to deteriorate, with business travel in recession and then the Sept. 11 attacks and their economic aftermath. Mr. Hannigan responded by selling much of Sabre's computer operations to Electronic Data Systems and eliminating one-third of Sabre's jobs. But he has continued to raise fees, rather than cut them as most airlines demand. His strategy is to exploit the reservations business, a cash cow, for as long as he can and use the money to build new lines of business, especially online travel. The jury is out on whether this is a wise use of Sabre's cash. A new high-margin hotel product has yet to prove that it can revive Travelocity. And a $757 million acquisition of GetThere, an Internet corporate travel site, is still losing money. Some investors would rather see Sabre pay a dividend than make more acquisitions. But there will be little cash for anything if the airlines make good on their pledges to revolt against the reservations fees. Sabre has introduced one discount program, but in general Mr. Hannigan asserts that Sabre's fees are worth every penny. Since Sabre mainly serves travel agencies that book business travelers, it sells much more profitable tickets than a site like Orbitz that draws bargain-hunting vacationers. "I make no apologies for our pricing structure," Mr. Hannigan said from his office in Southlake, Tex. He said airlines sold $80 billion worth of tickets on Sabre last year and its total revenue from those sales was $1.5 billion, or about 2 percent. But the airlines argue that since 1993, Sabre's fees have increased in some cases by about 20 percent while airfares have fallen 30 percent. Moreover, executives at most airlines say they need to be in all the reservations systems to be available to all the travel agents. "We sell over $5 billion a year through Sabre," said Craig Kreeger, vice president for sales at American. "If they increased their fee by 50 percent, I would probably have to pay it. I have absolutely no leverage." Mr. Hannigan replies that the industry practices the airlines object to were all developed when Sabre was owned by American and its rivals were owned by other airlines. Worldspan and Amadeus are still controlled by airline groups. Galileo was bought by Cendant in 2001, a few years after it was spun off from United. "It is a structure that was created by the airlines," he said, "and you always have to take it with a grain of salt when they complain about it." And indeed the airlines are partly responsible for the current state of affairs. American started installing Sabre systems in travel agencies in 1976. At first, Sabre blatantly favored American flights, listing them before more convenient flights from other carriers. In 1984, the government imposed regulations to ensure the reservations systems treated all airlines alike. Even after that, the airlines found a kind of "halo effect" - where agencies booked more flights on the airline that owned the reservations system they used. That is why the airlines, not the travel agencies, pay for the systems. Indeed, the airlines instructed their own systems to woo agencies with free computers and later, cash payments referred to as incentives for each ticket sold. The reservations systems paid for these incentives by raising the fees they charge airlines for each booking. And because of the way the government wrote its rules, the airlines decided they had little choice but to pay those higher fees. Sabre says it has responded to the airlines' criticism with a program in which it will cut its fees 10 percent for any airline willing to sign a three-year contract and give Sabre access to all its low fares, including those that had only been offered over the Internet. So far, only US Airways and a few small foreign carriers have accepted the deal. Galileo has introduced a variation on that program that offered a 20 percent cut in booking fees, but only at agencies that agreed to waive about half of the incentive payment. In addition to access to Web fares, the agency gets extra commission on some of Cendant's brands like Avis car rental. US Airways and United have signed up for that deal. Most of the other big airlines say that even that the 20 percent cut proposed by Galileo does not go far enough. "Sabre and Galileo have the most to lose," said Al Lenza, vice president for distribution and e-commerce of Northwest. "They are taking baby steps in order to protect 95 percent of their revenue." American has proposed its own program that would have agencies pay 50 percent of the booking fees in return for access to its Web fares. It says that 90 agencies have agreed. Analysts say it may fall to the government sort all this out. "I don't see the two sides coming to an agreement," said Scott Barry of Credit Suisse First Boston. "The airlines are from Venus and the reservation systems are from Mars." Before the airlines commit to long-term deals, they are waiting to see the final rules proposed by the Transportation Department, perhaps later this year. The draft regulations, released last fall, read like an airline wish list - allowing big carriers to use their bargaining power. They would end the rule that reservations systems charge all airlines the same fee. And they would ban the incentive payments. "The proposed new rules would significantly weaken the control of the reservation systems on the individual airlines," Mr. Lenza said. Sabre says that a complete deregulation would be fine, but the proposal, which eliminates some rules and imposes others, does not create the proverbial level playing field. "We say `Regulate us: that's fine. Or deregulate us; That's fine. But we don't want to be stuck in the middle,' " Mr. Hannigan said. Left unsaid is that those most likely to be disadvantaged are travelers. If the airlines go through with their threats to pull more of their best fares off Sabre and its rivals, it will be harder for the agents to find itineraries at the best prices. That is one result, Mr. Kirby conceded, of America West's plan to bypass the reservations systems. "Unfortunately, it will never be as convenient for travel agents as the current systems." http://www.nytimes.com/2003/02/10/technology/10SABR.html?ex=1045886595&ei=1&en=cad57a115202fcde HOW TO ADVERTISE --------------------------------- For information on advertising in e-mail newsletters or other creative advertising opportunities with The New York Times on the Web, please contact onlinesales@nytimes.com or visit our online media kit at http://www.nytimes.com/adinfo For general information about NYTimes.com, write to help@nytimes.com. Copyright 2002 The New York Times Company