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

Source: Belobaba/Barnhart/Swelbar, Information Technology in Airline Operations, Distribution and Passenger Processing, MIDT Booking Data, January–December 2013.

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.

So, what are Computerised Reservation Systems in the first place?

According to Article 2 number 4 of the Regulation (EC) No 80/2009 of the European Parliament and of the Council of 14 January 2009 on a Code of Conduct for Computerised Reservation Systems

“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, %)

Source: IATA, Profitability and the air transport value chain, Economic Briefing No 10

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.

Computerised Reservation Systems and Competition Law