As I noted a month ago, quoting Warren Buffett, airlines are a horrible business. On the other hand, the business of selling airplanes to airlines is tremendous.
The same backwards logic applies to another business ancillary to airlines, the global distribution systems or GDSs. The world’s carriers pay $7 billion to the GDSs, while the collective profits of all global airlines are only $3 billion. On this blog where a topic of constant interest is the creation of electronic marketplaces, GDSs are an important case-study of a particularly successful example. The Economist has put together a nice history of GDSs. An excerpt:
At the dawn of the internet age, airlines assumed that the middlemen who came between them and their passengers were headed for extinction. Travellers would eventually buy tickets either from the airlines’ own websites or from price-comparison engines which hooked up directly to the airlines’ computers over the web. So why pay commissions to agents? And why continue to own reservation systems, especially since regulators had stopped them from fiddling with travel agents’ GDS screens to place their own flights at the top? So Lufthansa, Air France and Iberia sold most of their shares in Amadeus (the largest GDS); American Airlines sold Sabre; British Airways and KLM sold out of Galileo; and so on.
However, the loss of direct commission from airlines made travel agents more beholden to the GDSs, which not only slip them a share of fees but also provide their back-office computing. Many online travel agencies have come to resemble physical ones, signing up with a GDS which provides a reservations system and other computing power while handing them a commission (ultimately paid by the airlines) on every booking. Despite airlines’ efforts to make travellers bypass agents and come to their own websites, less than half of flights are booked this way.