American Airlines and six other U.S. carriers are backing a new, low-cost airline booking system that threatens to sharply undercut Southlake-based Sabre Holdings and other big travel reservations systems.
G2 SwitchWorks, formed last year and headed by a former Orbitz executive, said Wednesday that five of the airlines have also agreed to pay it more than $20 million in advance fees in exchange for discounts and a shot at an ownership stake in G2. American, America West, Continental, Delta and Northwest are among the carriers putting up the advance money, while United Airlines and US Airways just agreed to use G2.
Besides the airlines, G2 is also backed by the deep pockets at Texas Pacific Group, a Fort Worth company whose past investments have included Continental Airlines and Hotwire, the discount travel Web site. Texas Pacific Ventures, a unit of Texas Pacific Group, invested in G2 about six months ago and is "a very significant shareholder," said Bill McGlashan, a partner in the company's San Francisco office.
Henry Harteveldt, a travel technology analyst with Forrester Research, said Chicago-based G2's announcement is a significant challenge to Sabre and other global reservations systems, also called GDSs. G2 will charge the airlines about $3 per ticket, versus about $12 for Sabre and its peers, he said, and that will increase the pressure to lower prices.
Billy Sanez, a spokesman for American Airlines, said G2 and other new reservations technologies, compared with the GDSs, "offer a similar product for a much better price. American Airlines is very satisfied with the products that Sabre and the GDSs provide. It's the economics."
Airlines have been hemorrhaging cash and looking for ways to slash expenses, including the costs of selling and distributing tickets. U.S. airlines pay more than $1 billion in fees a year to the GDSs, Harteveldt said. American alone pays about $350 million.
Sanez said G2 should be operating by summer. He said American participated in the advance payments to G2 "to ensure there's a viable alternative" to Sabre and other GDSs.
Sabre spokesman Mike Berman said the G2 announcement and comments like Sanez's, which have been repeated by other American executives, sound like jockeying for bargaining leverage as the airlines begin to negotiate new contracts with Sabre. Those contracts start expiring late this year, continuing through summer 2006.
"There's clearly some posturing going on," Berman said. He said G2 isn't currently booking flights, the effectiveness of the company's technology remains to be seen, and being limited to just seven U.S. carriers restricts G2 to a small slice of the world travel market.
"No one matches the breadth or scope or yield of Sabre," he said. "We're confident in our ability to compete."
In a prepared release, G2 said it "is focused on taking costs out of the distribution process for airlines as well as providing cost savings and automation to travel sellers." It said the airlines agreed to make their flights available through G2 in return for fees as much as 81 percent below fees charged by the GDSs.
McGlashan said G2's success will depend on how useful it is to travel agents even more than how much money it saves airlines. He said G2 has signed up Carlson-Wagonlit Travel and World Travel Partners, two large business travel agencies, and will add more agencies soon because it offers scores of automation and processing solutions for agents.
"The agency is our customer at the end of the day," he said. "We're a benefit to the airlines as well."
How G2 attracts travel agents could be crucial to its success.
Today, Sabre and other GDSs pay travel agents to use their services. The GDS first charges the airline a fee, which G2 says averages about $12.50 a flight, and then passes on $3 to $5 of that fee to the travel agent as an incentive to use the GDS, Harteveldt said.
Tom Parsons, who runs the popular Best Fares Web site and travel service, said agents "aren't going to turn off Sabre just to help the airlines. If you use G2, you have to make a deal with the travel agent."
Harteveldt said that if the airlines can pay only $3 per ticket with G2 instead of $12.50 with a GDS, "they have the opportunity to look at their budgets and pay the travel agents, say, $5 to encourage them to use G2." The carrier would still save money, he said.
Harteveldt expects that the airlines would later try to phase out those payments as the new reservations system gains strength. Amid heavy financial losses and crushing fuel prices, he said, the airlines will try to keep whatever savings they can create rather than pass them along to agents or fliers.
"Travel agents are going to see less money coming in from the GDS and from the airline," he said.
Sabre Holdings (ticker: TSG) closed at $19.98, down 9 cents Wednesday.