In my article from 25 November 2018, I already outlined the European Commission’s recent investigation on Computerised Reservation System providers ‘Amadeus‘ and ‘Sabre‘. Now, in this article I want to talk more about the business model behind Computerised Reservation Systems, how the aviation distribution market works and which implications these elements have on Competition (Law) issues in the aviation industry.
Oligopoly market
With three companies (Amadeus, Sabre, Travelport) controlling over 90% of global CRS/GDS air bookings, the market for Computerised Reservation Systems is highly concentrated.
Global shares of CRS/GDS air bookings
Double-edged sword: High ROIC
Remember? In my article from 25 November 2018, I have already mentioned the high return on invested capital (ROIC) Computer Reservation System services have in the air transport supply chain (ROIC of 20%). In contrast, the airline sector with an ROIC of 4% earns the lowest return on capital.
As can be seen, returns are unevenly and inefficiently distributed across the air transport supply chain. The risk for investors is also distributed very unequally. Apparently, according to IATA some of the sectors with the highest returns (Computer Reservation System services, aviation services) face the lowest volatility of returns. As a rule, you would think that – in competitive markets – investors would expect to earn a higher return on investment if they face a higher risk or volatility or returns. But not when in comes to Computer Reservation System services!
Why is the ROIC of Computer Reservation System services so high, especially compared to the average aviation sector ROIC?
ROIC = indicator for anti-competitive effects?
One reason for the above mentioned observation could be that market forces are not working to allocate risk efficiently. Furthermore, a lack of competitive pressures can cause market inefficiencies. While the ROIC is not expressis verbis an indicator for anti-competitive effects in Competition Law, we can not deny that the extraordinarily high ROIC of Computer Reservation System services (vis-à-vis the average aviation sector ROIC) is quite unusual. The high ROIC might simply be caused by distinctive market conditions, nonetheless we should still keep our eyes open for potential anti-competitive effects.
How the market works in detail
Travel agents usually pay a subscription fee to rent Computerised Reservation System tools to which they subscribe. As travel agents typically subscribe to only one Computerised Reservation System, the Computerised Reservation System providers compete to attract the travel agents to their system by paying them incentives per segment booked on their system. For smaller agents, the incentive payments can often compensate the subscription fee. For larger travel agents, which can generate substantial booking fee revenue, the Computerised Reservation Systems effectively pay the travel agents to subscribe.
Source: Commission, Impact assessment {COM(2007) 709SEC(2007) 1497}; Graphic: Aviation and Competition Law Research
When a travel agent books a ticket using a Computerised Reservation System, the airline pays the Computerised Reservation System a booking fee. The booking fee is a flat charge per passenger per flight segment. In order to include all travel agents, airlines typically need to participate in all Computerised Reservation Systems. This gives the Computerised Reservation System providers significant bargaining position vis-à-vis the airlines.
Two-sided market structure
The diagram shows that the market for Computerised Reservation Systems is a two-sided market, namely between airlines and travel agents. Because of this particular two-sided market structure, the Computerised Reservation System providers tend to have more market power vis-à-vis the airlines than vis-à-vis the travel agents.
The distinct economics of this two-sided market, and the lack of competition in the upstream market (airlines – Computerised Reservation Systems), motivate Computerised Reservation Systems and travel agents to increase the incentive payments. At the end of the distribution chain, the consumer pays a fare– which includes the increasing booking fees – and sometimes a service fee to the travel agent.
