Sabre Holdings - The Quest for New Business Models

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Case Details:

Case Code : BSTR175
Case Length : 15 Pages
Period : 1995-2005
Organization : Sabre Holdings
Pub Date : 2005
Teaching Note :Not Available
Countries : India
Themes: Business Models | Growth factors and Challenges
Industry : Travel and Tourism

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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The Global Distribution System

The Sabre system was developed to address two major data processing problems in the AA reservation process - 1) keeping track of the number of seats sold on the numerous flights operated by the airline and 2) informing travel agents of the ticket availability.

The evolution of Sabre from a simple reservation system into a distribution channel for travel products & services occurred mainly because of the new opportunities in the US aviation industry after deregulation in 1978. Civil aviation in the US had been under the regulation of the Civil Aeronautics Board (CAB) between 1938 and 1978. The CAB regulated market entry, decided airline routes and set airfares for these routes. This system of regulation kept airfares high, and thus demand was not stimulated. Airlines were still profitable as the CAB restricted competition. However, the economic recession in the early 1970s led to heavy losses for the airlines. There was now increasing demand for affordable air travel and this, together with declining airline profitability, forced the US government to deregulate the airline industry in 1978...

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Impact of the Internet

The popularity of the Sabre system and the subsequent jump in the number of travel agents led to a situation where commissions began to account for a major chunk of airline distribution costs. The IATA estimated in 1996 that commissions paid to agents formed 7.5 % of the total airline operating costs and 42.8% of total distribution costs.

Commenting on the agent commissions, Richard Anderson, CEO of Northwest Airlines said, "CRS fees have the wrong sort of incentives. The agency (travel agency) pushes a button and never sees the bill. We get the bill and that really doesn't work."Airlines began to realize the need to put a cap on the expenditure incurred on commissions.

They understood that cutting out intermediaries would go a long way in reducing distribution costs. The Internet revolution in the 1990s presented airlines with an opportunity to cut out intermediaries and get to the customer directly. Low-cost airlines started offering flight information and reservations through their websites...

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