Over the years, the big global distribution systems have been a major barrier to innovation by airlines and travel startups, in particular. The European Commission now intends to take a serious look at this dynamic.
First the European Commission went after Google, and now it has two of the world’s largest providers of airline distribution services — Amadeus and Sabre — in its sights.
The European Union’s competition watchdog has launched a probe of Amadeus, based in Madrid, and Sabre, based in Southlake, Texas, to gauge whether their contracts with airlines and travel agencies have illegally inhibited competition — with the effect of inflating airfares and hurting consumers.
“The commission will investigate whether certain terms in Amadeus’ and Sabre’s agreements with airlines and travel agents may restrict the ability of airlines and travel agents to use alternative suppliers of ticket distribution services,” a European Commission statement said. “This may make it harder for suppliers of new ticket distribution services to enter the market, as well as increase distribution costs for airlines, which are ultimately passed on in the ticket prices paid by consumers.”
The commission has the authority to slap fines of up to 10 percent of a company’s global revenue for violating European Union regulations.
Amadeus and Sabre denied wrongdoing.
Investors seemed only modestly alarmed, given that they merely knocked less than 2 percent off the share price of Amadeus after the Friday announcement — and Sabre’s stock saw no impact.
The commission’s statement left it unclear why it chose to exclude from scrutiny UK-based Travelport, which has the third-largest market share of the so-called global distribution systems. Given the nature of Travelport’s business, it could reasonably be presumed to be a possible future target of the investigation. Travelport declined to comment.
Eyeing Contract Terms
The European Commission didn’t specify which practices or contact clauses it will be probing.
But the commission did allude to so-called “full content” clauses, which Amadeus and Sabre have typically added to their contracts with airlines. The provisions require a carrier to distribute its airfares via all of its channels and not save some of its offers for exclusive distribution outside of Amadeus and Sabre, such as through an airline’s own website or through a rival tech provider.
Sabre responded in a statement that it believed that full-content, or parity, clauses, “are in the best interest of consumers and serve to provide them with comparability and transparency, enabling consumers to easily and efficiently shop and book the best flights that meet their needs.”
“While the vast majority of the world’s carriers recognize the value of full content agreements for them and for their customers, and choose to participate in the Sabre GDS [global distribution system] at this level, airlines are able to participate in full content or less than full content agreements based upon their unique strategies and approaches to the marketplace,” Sabre said.
Since the mid-2000s in the U.S., airlines have sued the distribution middlemen a few times. The carriers accused the tech companies of penalizing airlines and travel agencies for allegedly breaching their contracts when they pursued alternative distribution initiatives, among other practices.
In December 2016, American Airlines won a U.S. trial against Sabre in which a jury deemed some of its business practices, including the full-content provisions, to have been anti-competitive. Sabre is pursuing an appeal of the decision. Some airlines have said in the past that Amadeus and Travelport have included such provisions in their contracts as well.
Amadeus said in a statement that it believes it is “providing non-discriminatory and neutral market access for airlines and choice for consumers and travel buyers. It is well documented that the neutral marketplace provided by the GDS is facilitating comparison and choice, thus providing European citizens with competition among airlines resulting in lower ticket prices. Amadeus will continue to make the case forcefully for the need for a strong and neutral marketplace for airline distribution.”
The announcement of the competition investigation occurs during a period when several major European airlines are giving incentives to travel agencies to book through airlines’ direct channels, bypassing the most lucrative services of the global distribution systems. Skift took a look at the dynamic in a deep dive, Channel Shock: The Future of Travel Distribution. Skift Research took a look, too, in a report for subscribers this month “The State of Airline Distribution 2018.”
Sabre Buys Farelogix
There is at least one ironic twist to the timing of the investigation: Earlier this month, Sabre announced an agreement to acquire Farelogix for $360 million. Over the years, under previous Sabre leadership, Sabre took several steps to try to stymie the startup.
Farelogix has numerous airline contracts, enabling it to sell ancillary services to travel management companies outside of the distribution services of Amadeus, Sabre, or Travelport.
In the mid-2000s, ITA Software and G2 SwitchWorks attempted to create alternative distribution systems, and the existing distribution systems took numerous actions to try to drive them out of business. ITA Software ultimately abandoned its effort, and Travelport acquired the assets of G2 SwitchWorks.
The European Commission said it will assess whether current global distribution system practices “could create barriers to innovation.”
They certainly have created such barriers in the past, and some critics have argued that they have benefited from a near-oligopoly on distribution.
Supporters of the middlemen note that, in the U.S., overall airline distribution costs have fallen, as a share of overall expenses, in recent years, as Skift noted earlier this month. Airline ticket prices overall have gone down on average in many countries, partly because of the rise of low-cost airlines, many of which have often opted not to use the technological middlemen for distribution services. Against that backdrop, it may be challenging for investigators to prove pricing harm to consumers.
But EU Competition Commissioner Margarethe Vestager is a force to be reckoned with, given that she has taken an aggressive stance with businesses in several sectors. Most notably, the European Commission has twice fined Google over the last few years over its anticompetitive practices.
Now the competition authority is looking closely at the global distribution systems. “The agreements under investigation may breach European Union competition rules which prohibit agreements between companies that prevent, restrict or distort competition within the European Union’s Single Market (Article 101 of the Treaty on the Functioning of the European Union),” the commission said. “The opening of a formal investigation does not prejudge its outcome.”
Sean O’Neill contributed to this story.
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Photo credit: Margrethe Vestager, the European Commissioner for Competition, announced the watchdog group would probe the global distribution systems for anticompetitive practices. Bloomberg