It's notable that we had a much easier time finding experts who supported Sabre's proposed merger of Farelogix than opponents. But this court case will be decided on legal nuances, and its outcome is impossible to predict. We pity the judge who has to endure this crash course in airline technology and distribution.
In courtroom 6B of Delaware District Court, Judge Leonard Stark has begun to hear a complicated case.
Justice Department attorneys allege Sabre is attempting to take out a rival. Sabre denies that. It counters that Farelogix belongs to a sector of tech providers of airline merchandising services and direct connections that is dynamic, with many recent entrants. Sabre also argues that it has the resources to enhance Farelogix, which would, in turn, rev up the pace of broader industry innovation.
Testimony over the next nine days promises to shed light on how Farelogix fits into the broader airline distribution landscape. It will also show whether the Justice Department has evidence that Sabre’s executives had ill intent in purchasing the company. The court may suss out if airlines have only half-hearted interest in technological innovation, compared with a full passion for strong-arming the tech middlemen over fees. Overall, the judge aims to determine whether this deal might ultimately harm consumers.
The case will likely turn on the nuances of antitrust law.
Rather than handicap the legal issues, Skift asked industry experts for their preferred outcomes from the perspective of business strategy. The responses crossed the spectrum, but we found it easier to get supporters of the deal talking on the record than opponents and easier to find supporters than opponents in general.
Some Arguments for the Merger
Several experts preferred for Sabre to get Farelogix.
Many experts we interviewed said Sabre and Farelogix were not competitors in the same, relevant product market.
“I don’t see Sabre and Farelogix as competitors and, even if they were, there would be no damage to anyone from the merger that a free market wouldn’t undo in a relatively short time,” said Jeff Klee, CEO of Amtrav, which provides technology and agents to help manage business travel, and CEO of online travel agency CheapAir.
For some, the issue was resources. Sabre has the resources to make Farelogix an even better service to help airlines sell their tickets more creatively, known by terms like “merchandising” and “order-and-offer management.”
Several experts said they thought that the managers and leaders at Farelogix, founded in 1998, feel tired and under-capitalized.
“If the merger doesn’t happen, I can’t see another buyer investing as much in Farelogix,” said Ann Cederhall, a Europe-based senior consultant in aviation tech.
“Farelogix has blazed an important trail, which I give them a ton of credit for,” Klee said. “But as a partner of theirs, I get the sense that they’re in over their heads. That’s a big deal because a lot of people are relying on them to bring new distribution capabilities to life. Sabre has a lot more experience running and scaling large-scale systems, and Farelogix would be well-served if they could tap into that expertise.”
Some experts pointed to the deal’s potential impact on the global market for passenger service systems [PSSes], which help airlines take bookings on their websites, help gate agents board passengers, and handle other operational tasks.
Farelogix doesn’t sell a passenger service system. But Sabre does. The services Farelogix provides could help Sabre have a stronger offering in its passenger service system, Cederhall argued.
“I actually see this acquisition as an opportunity for Sabre to position itself as a provider of a modern PSS, with a focus on airline IT and direct connect solutions, rather than protecting the traditional distribution business,” Cederhall said.
In the passenger service system market, Amadeus has 43 percent global market share, compared to Sabre, which has 17 percent market share, as measured by passengers boarded, estimated airline technology consultancy T2RL.
“So Sabre is far behind Amadeus in airline IT, and Farelogix could give Sabre some additional capabilities,” said Richard Clarke, CEO of T2RL.
“Farelogix is a small company that Sabre could scale and provide a succession plan for management,” said Clarke. “Airlines need a marketplace that delivers industrial-scale solutions, and our data indicate that Sabre and Farelogix would compete more effectively as a combined entity. As for distribution and the DOJ’s [Department of Justice’s] interpretation of the market, we just don’t agree with it.”
What Is Farelogix?
One trouble the judge will face in this antitrust case is deciding what Farelogix is.
Farelogix has morphed since its founding in 1998. It began with marketing talk of creating an alternative to Sabre and its peer distribution technology companies Amadeus, Travelport, and Travelsky.
In filings, the Justice Department has focused on one of Farelogix’s product offerings, a direct connection between airlines and travel agencies that acts as a partial bypass of Sabre’s distribution services.
American Airlines and Lufthansa are among the customers of this so-called direct connect service.
Yet several industry experts we spoke to said that Farelogix’s direct connection service was a very modest product with a limited number of customers and a lot of competitors. Some argued that the vast majority of Farelogix’s revenues came from providing ancillary service technology instead.
Farelogix has also given up former aspirations to compete against the Sabres of the world on distribution tech, experts said.
This has led to confusion. Not long after 2015, when Lufthansa introduced a surcharge for bookings booked via so-called global distribution systems Sabre, Amadeus, and Travelport, Lufthansa and Sabre entered into litigation in a Texas court about whether the surcharge violated contract terms. In testimony, Sabre argued that Lufthansa should also charge a fee for tickets processed through Farelogix because Farelogix was acting as a global distribution system in this instance. That case has gone quiet but remains open.
In today’s Farelogix case, Sabre argues something different, namely, that Farelogix isn’t a global distribution system, which is the service that Sabre makes a majority of its revenue from. Farelogix itself years ago abandoned talk of aspirations to becoming a lightweight competitor to global distribution systems.
One of the upstarts in distribution technology is Duffel, a creator of a travel booking system that rivals some aspects of what distribution companies provide. It has raised $56 million in venture capital funding.
“From the perspective of Duffel I’m not overly worried if it’s approved,” said Steve Domin, co-founder and CEO of Duffel. “I don’t think Sabre would do anything drastic that would prevent us, or any other airline distribution player, to build our businesses.”
“Airlines might pull out of Farelogix, but there are a few other IT providers in the marketplace,” Domin said. “It’s true that there’s a healthy level of activity in the airline distribution space at the moment, however we shouldn’t forget that this still represents a very marginal share of the overall market and that the historic players still completely dominate the space. If the deal fails, it will definitely put Amadeus in a much better position overall, but that probably isn’t going to be a concern for the DOJ in this trial.”
Some Arguments Against the Merger
No one Skift interviewed would make on-the-record comments against the merger. Far fewer experts we spoke with sided with the Justice Department’s view, but there were a few.
A few industry observers claimed that Sabre has no interest at all in what Farelogix is doing. Sabre is merely interested in removing the “threat” before the next round of contract negotiations with a couple of key airline groups, these skeptics alleged.
These cynics pointed to history. In the early 2000s, a company called G2 SwitchWorks began winning airline customers for a preliminary version of direct connection technology. In 2008, one of the global distribution systems, Travelport, acquired the company and then buried it, experts said.
That said, Sabre has promised to extend Farelogix’s existing airline contracts with Farelogix for three years and committed to maintaining existing services.
A red flag for some other skeptics of the deal is its $360 million price. Some experts argued that the price, which was more than nine times Farelogix’s 2018 full-year revenue of $40 million, was too high.
If, as Sabre argues, Farelogix has lots of competitors with many startups entering, why didn’t it buy another of the startups to get a comparable set of merchandising and ancillary tools, they asked. Maybe it was because Farelogix provides services to Sabre’s main protagonists in the booking fee and direct connect spats: American Airlines and Lufthansa Group.
Sabre might counter in court that Farelogix’s merchandising is marginally better than other competitors and vastly better to Sabre’s internal offering. The companies had already been working together in some aspects and this would be the easiest next step.
The biggest wildcard may be potential surprise evidence. Federal attorneys hinted that they had obtained text messages and other communication where Sabre executives acknowledged that acquiring Farelogix would neuter a competitive threat and further entrench Sabre in booking services.
Some cynics argued that airlines as a broad group and the four major global distribution systems as a broad group have both displayed bullying, oligopolistic tendencies on various fronts that sometimes show a disregard about the end consumer.
Both sides are always trying to find leverage in their never-ending feud that is ultimately over booking fees, cynics said.
Sabre CEO Sean Menke has heard both sides of these cynical arguments. Earlier in his career, Menke was executive vice president and chief commercial officer at Air Canada and participated in a lawsuit against Sabre over its distribution practices.
“I’m probably one of the few individuals who has sued their future-to-be-employer,” joked Sean Menke during an interview at Skift Tech Forum 2018.
Here’s what some cynics said, speaking anonymously due to the controversial nature of their comments: If airlines truly cared about Farelogix, they would have made a counter bid to buy it or a comparable rival or else they would have invested heavily to build in-house systems to make it easy for travel agencies to bypass the global distribution systems.
Airlines, through their lax approach to investing in or building tech alternatives, open themselves to a cynical interpretation of their interest in Farelogix, cynics said. Carriers might only care about Farelogix’s fate because they want to have a bypass option as a form of leverage in their next round of negotiations over contract terms with the distribution giants.
Consider the comments just-retired Travelport CEO Gordon Wilson made during Skift Tech Forum 2018 when asked about American’s revived 2017 bid for a direct connection to agencies, which Farelogix has serviced.
“Is it having any traction?” Wilson said. “I can’t figure where. What does [the direct connect] do, what is it that the airlines are doing that they can’t do through the technology that we’ve invested in and deployed. It’s purely a commercial model.”
Follow the Money
Airline distribution is confusing, as Skift’s 2017 deep dive on the sector, Channel Shock, noted. One true north to keep an eye on while navigating the subject’s complexities is this question: “Who pays whom for what?”
Airlines resent the global distribution systems, despite spending about $7 billion on their services last year worldwide. Airlines dislike the business model where airlines pay fees to the tech middlemen, and the tech middlemen pay incentive fees to online and offline travel agencies. The middlemen also provide most of the agent reservations technology and back-office technology agencies use.
Some of the carriers argue that today’s commercial model allegedly gives the tech companies heavy influence over agencies and creates a lot of headwinds for the sector when it comes to introducing new technologies and processes.
Some airlines gripe that technology costs for distribution have not come down as fast — and innovations haven’t happened as fast — as in other sectors. Still, they typically only provide anecdotal evidence for that.
The global distribution systems counter than the average booking fees for distributing tickets have been declining for airlines for years while the companies have invested in new technologies, such as cloud-based systems, and in sales teams to help airlines and agencies with their needs.
Airlines also resent the profit margins of those tech companies. Publicly-held Amadeus and Sabre enjoy roughly double the margins of the largest airline groups.
From their perspective, travel tech intermediaries sometimes point out that the market capitalizations of some of the most vocal airline groups significantly exceed their own. Who’s bullying whom, they argue.
The Sabre-Farelogix case won’t resolve the long-running debate. Its outcome also won’t stop market forces from changing industry dynamics, experts said.
“A central aspect of this case is the fact that the travel ecosystem is in the midst of a transformation from historic basic travel product to more sophisticated digital commerce travel offers,” said Kevin Haskins, a senior travel industry consultant with IBM Global Business Services.
“This introduces an element of uncertainty into where travel distribution is headed and subsequently what are the positive or negative implications of Sabre’s acquisition of Farelogix,” Haskins said.
“Sabre will undoubtedly make a case that the Farelogix acquisition will accelerate innovation and transformation for its extensive customer base, thus bringing advantages of more advanced digital commerce capabilities to airlines, travel agencies, and ultimately a better traveler experience,” Haskins said.
“There’s some merit to this argument,” he said while noting he has a neutral perspective on how the judge should decide the case.
“One challenge for Sabre is that the crux of the issue lies in the digital transformation of travel distribution, and digital transformation tends to be most effectively driven by smaller disruptive players,” Haskins said. “While there are legions of travel startups looking to shake up travel, few if any have the visibility and street cred of Farelogix.”
A Jump Ball
Sabre had sparked the suit last August after it became frustrated at the Justice Department’s delayed review of its proposed Farelogix deal, which it had announced nine months earlier. In an uncommon move, Sabre dared the Justice Department to sue it or otherwise it would close the acquisition. The Justice Department sued.
A wild card is a broader U.S. backlash against so-called Big Tech. U.S. Attorney General William Barr last July said the Justice Department would review if it needs to address antitrust issues related to U.S. technology companies.
The government may be using its case against Sabre as a test for possible future cases against larger technology companies. For example, some of the Justice Department’s court filings suggest it aimed to treat Sabre’s action as an effort to quash “a nascent” competitor, rather than a current competitor. The Justice Department has rarely taken that approach in court in antitrust cases — adding an element of uncertainty about the outcome.
Prior to the trial, attorneys for the two sides clashed over whether past lawsuits that U.S. Airways and American Airlines filed against Sabre had any relevance to a technology merger today. The Justice Department won the point with Judge Leonard Stark, and its attorneys intended to bring testimony from figures familiar with how Sabre negotiated contracts with airlines around 2006. For example, Cory Garner, American Airlines vice president of sales and distribution strategy who has testified in other cases against Sabre’s past practices, is set to take the stand within the trial’s first days.
Judge Leonard Stark has said he hopes to wrap up arguments and testimony in the antitrust case by the end of next week.
Photo credit: An image of a speaker's dais at the U.S. Department of Justice. On Monday, a Delaware court began hearing arguments in the U.S. Department of Justice's antitrust lawsuit against Sabre over an acquisition. Brendan Smialowski / Bloomberg