Sabre Makes the Wrong Choice By Removing American Airlines

When Sabre announced that it would no longer offer American Airlines (AMR) flights for booking in its reservation system, some thought the move was extreme. In reality, however, this is one of only two options Sabre had. Instead of choosing to change with the times, Sabre has opted to use its heft to try to prevent the times from changing. In the long run, this will not work.

To really understand this saga, it's important to look at Sabre's history. Prior to 1960, airlines took reservations manually and eventually, mechanically. The process was cumbersome and most importantly, it didn't allow for an airline to grow significantly. An airline would keep its reservations in one place and anyone who wanted to book someone on a flight had to go to that one place (in person or on the phone) to see if it was available. That made achieving any sort of scale virtually impossible.

American was at the forefront in recognizing that it needed something new, so it partnered with IBM (IBM) to create Sabre, the first electronic reservation system. When it was installed in 1960, people throughout the airline could instantly see if there was availability or not. This piece of technology was incredibly important for the airline in terms of handling growth, but the true revolution didn't happen for 16 more years.

How Sabre grew
In the 1970s, a very significant amount of air travel was booked via travel agents. In 1976, Sabre put its first system into an agency which allowed agents to have direct, instant access to flights. This wouldn't be useful if it simply had American's flights, so it was opened up to let all airlines participate. This was tremendous for agents. Other airlines like United (UAL) immediately created competitors, and a race to outfit agencies with these systems ensued.

Why did they care so much? Well, American soon realized that it could bias the results in the display. So if an agent looked up flights from LA to New York, American could make it so Sabre showed all American flights first and then others after. The higher the ranking in the results, the more likely agents were to book. American made gobs of money with this strategy and the other airlines wanted a piece as well.

When this happened, it became a contest to see who could get the most systems in agencies. That meant offering all kinds of incentives. Since so many people booked using travel agents, the airlines were willing to pay to get their systems in an agency because they knew they'd make more money on the back-end.

Business on the back end
Even after the rules disallowing bias were put into place, the airline still saw these as cash cows. Every time a flight was booked, a fee was charged to the airline that received the booking. This meant that when an agent used Sabre to book a flight on rival United, American still made some money on the sale.

Over the next few decades, the airlines started to spin off their reservation systems into independent entities, so airlines like American stopped seeing direct income from segment fees. But the basic relationship continued until the 1990s when the Internet arrived. That was the big game-changer. Airlines realized that for simple travel arrangements, they could now reach customers directly, so they started to phase out commissions for travel agents. The standard 10 percent commission was slowly decreased until it disappeared completely. (There are still back-end incentives to push certain flights at certain agencies, but that's not the same.)

At the same time, the airlines started participating more and more in these Internet-selling channels. They had their own sites but there were also the online travel agents like Travelocity and Expedia that sprung up. These sites were built so that they booked using reservation systems like Sabre. (In fact, Sabre built Travelocity itself). They just put an easy-to-use consumer-facing front-end up to make it happen without the assistance of an agent.

Eliminating the middlemen, one by one
With this, the airlines had eliminated one middle man, the travel agent, for a lot of travel purchasing behavior. But the reservation systems still sat there as middle men to connect the dots. In 2000, the airlines got together to create their own system that would allow people to still book online but it would use direct connections with the airlines. This system was called Orbitz.

The idea didn't work out exactly as planned, and the airlines cashed out. Now that Orbitz is owned by the same company that owns Travelport and its two reservation systems, Orbitz has become just like the Travelocitys and Expedias of the world.

But we're now here 10 years later and technology has grown leaps and bounds in that time. The airlines have created more robust direct connections that will ultimately allow online travel agents and offline travel agents alike to use systems that handle bookings directly with the airlines. For a simple booking, the technology is there and ready to use. It just needs someone to use it.

But it's not feasible for every agency to create a direct connection with every airline. And what about booking flights across multiple airlines? There isn't a direct replacement for everything the reservation systems can do yet, but it's heading in that direction. It's just a matter of time before someone creates a viable alternative that will cost a lot less.

Blowing up the model
Data transfer costs almost nothing today, so the old model of segment fees and incentive payments has too much cost sitting in the middle. The airlines were able to get some of that out earlier this decade, but the model really just needs to be blown up. And that's what the airlines are trying to do eventually.

Seeing where this is going, Sabre has two options. It can try to create this hub of direct connections that would eventually be able to replace the existing reservation system with much lower cost to the airlines or it can fight to cling to its existing business model. Its decision to pull American out of its system in August (oh, the irony) shows that Sabre is going to cling to its business model and try to use its current heft to prevent airlines from being able to use other options.

This is not smart. If Sabre won't evolve, then others will jump in to fill the vacuum. Companies like Farelogix are working on things that will eventually make Sabre irrelevant when it comes to booking air travel. Sabre can try to fight that as long as it wants, but if it doesn't evolve, it's going to be out of this part of the business. It's just a matter of when.

Related:

• As Sabre Enters War Over Flight Bookings, American Has to Find New Strategies
• Expedia Drops American Airlines -- Right After Orbitz Battle
• American vs. Orbitz: How the Fight Could Change Travel Sales