On 23 November 2018 the European Commission (DG COMP) informed that it has opened a formal investigation to assess whether agreements between Computerised Reservation System providers ‘Amadeus‘ and ‘Sabre‘ on the one hand, and airlines and travel agents on the other hand, may restrict competition. Amadeus and Sabre are leading worldwide suppliers of so called Computerised Reservation Systems (CRS), that are known to be a Competition Law issue in the aivation industry.
So, what are Computerised Reservation Systems in the first place?
“a Computerised Reservation System or CRS means a computerised system containing information about, inter alia, schedules, availability and fares, of more than one air carrier, with or without facilities to make reservations or issue tickets, to the extent that some or all of these services are made available to subscribers.”
Therefore, Computerised Reservation Systems act as technical intermediaries between the airlines and the travel agents. The Computerised Reservation Systems typically provide their subscribers with instantaneous information about the availability of air transport services and the fares for such services. To sum up, Computerised Reservation Systems are used for hosting airline seat inventory and seat reservation transactions.
Importance of Computerised Reservation Systems
First of all, the investigation by the European Commission is kind of interesting because Computerised Reservation Systems are basically past their peak, as direct sales are a growing sales channel for airlines. Aviation IT-company SITA predicts that by 2020 only 29.3% of total airline sales will be made via partners/GDS/travel agents, whereas 70.7% of total airline sales will be made via airline direct web/phone/ticket offices & airline apps (Source: SITA 2017 Air Transport IT Trends Insights, page 21). What is also particularly interesting here is that mobile app sales (i.e. flight booking via a mobile app of an airline) will continue to grow faster than any other sales channel.
However, according to an IATA Economic Briefing (conducted by McKinsey & Company) the highest returns in the air transport supply chain are earned in the distribution sectors. Computerised Reservation System services earn an average return on invested capital (ROIC) of 20%, double their 10-11% cost of capital (WACC). In comparison, the airline sector with an ROIC of 4% earns the lowest return on capital, yet faces the second highest volatility of returns or risk.
Total airline sales made via sales channel
Return on capital varies throughout the value chain (ROIC excluding goodwill of sample, period 2004-2011, %)
History of Computerised Reservation Systems
The early development of Computerised Reservation Systems began in the 1950s, when American Airlines partnered with IBM, and the first Computerised Reservation System was implemented by American Airlines in 1962 (known as ‘Semi-Automated Business Research Environment’, or ‘SABRE’). Originally developed, owned and operated by airlines itself, the use of Computerised Reservation Systems had been extended to travel agents as an irreplaceable distribution tool.
Before the development of Computerised Reservation Systems, only airline carriers or travel agents sold airline tickets. The travel agent would question the traveler an then turn to the Official Airline Guide (a book containing carrier schedules and fare information). The travel agent would then determine the flights and carriers that could best fit the customer’s needs. As you can see, ticket distribution used to be quite complex before the introduction of Computerised Reservation Systems.
What is the difference between Computerised Reservation Systems and a Global Distribution Systems?
The European Commission states that “Computerised Reservation Systems are also known as ‘Global Distribution Systems“. This perception is not entirely correct. A Global Distribution System (GDS) is a computerised network system that enables transactions between travel industry service providers (i.e. airlines, hotels and travel agencies).
While Computerised Reservation Systems are solely responsible for the inventory management (available seats = inventory; so broadly speaking ‘inventory management’ means the selling of seats), Global Distribution Systems combine the inventory management systems of multiple Computerised Reservation Systems from major airlines. Thus, Global Distribution Systems operate the Computerised Reservation System and provide access to all reservation systems.
Although, Computerised Reservation Systems have evolved into Global Distribution Systems over the years that host inventory of multiple airlines and other modes of travel and travel related associated services, airline transportation is still the most important travel service sold through these systems.
Source: Aviation and Competition Law Research
Competition Law and Computerised Reservation Systems
In order to promote fair competition in the airline sector and to ensure that consumers benefit from more choice and lower ticket prices, it is necessary to have regulations on Computerised Reservation Systems. For this reason, the European Commission adopted a 1989 Regulation (No 2299/89), last amended in 2009 (No 80/2009), to ensure that air services by all airlines are displayed in a non-discriminatory way on the travel agencies computer screens.
Regulation 80/2009 maintaines safeguards that protect against potential competitive abuses by airlines owning or controlling a Computerised Reservation System (so called ‘parent carrier’). Ultimately, Regulation 80/2009 aims to establish a a level playing field between Computerised Reservation Systems and airlines, therefore complementing Competition Law rules under Article 101 and 102 TFEU.
