Reshaping the Travel Industry's Global Distribution System

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Typically all systems are complex and GDS is no different. Depending on a professional's station in the system, the system will look and act differently. I attempted a high-level view in a systems-of-systems architectural perspective based on the articles I read and the experience I have had. In the past, I used several systems. In the US Navy, SATO and NALCOMIS were the two primary systems. NALCOMIS was modeled after Caterpillar's global distribution and maintenance repair system. While working in aerospace, I used a system called ABACUS to track and change modes of shipment for aircraft components en route.

Supply Chain Management, SCM, involves the downstream flow of material effects and/or services to an end-user and a reverse upstream flow of money and/or warranty components. SCM, as applied to the services industry, has a slightly modified model, Figure 1. The dominant actor in the supply chain is the Service Provider.  The service supplier model may become more complex than the illustrated model as tiered service distributors and infomediaries who support the supply chain processes. The major difference from the manufacturing model is the introduction of a Commodity Wholesaler in lieu of the material wholesaler. The commodity wholesaler operates on price and availability solely at the demand point. Whereas a material wholesaler operates on contracted demand fulfillment usually fixing price for a term.  I prefer to use wholesalers upstream from the provider and distributors downstream from the provider. APICS does not distinguish between them considering the two terms synonymous.  The service provider may utilize a commodity wholesaler or go direct to the supplier. A key to the supply chain success is end-to-end transparency in order to be responsive to end-user demand and avoid forecasting errors. 

Figure 1: Supply Chain Service Model 

The Travel Industry's Global Distribution System

The principle management system in the travel industry is the Global Distribution System, GDS, which has undergone an evolution across the expanse of time; Figure 2. Four main systems have emerged; Amadeus, Galileo International, WorldSpan, and base system SABRE. There were also other smaller systems that emerged then blended back into the mix again. The wholesale of capacity is found through the four systems to which the suppliers subscribe. Each of the main systems tends to be regionally oriented.

Figure 2:  GDS Evolution

The travel industry has an interesting adaptation of supply chain management as the chain has been intensely process and logistical in the past. More recently the chain is moving towards a supply orientation. This industry provides logistical services to move humans downstream then service management activities and cash upstream. The supply aspect centers on cost-effective capacity and value-added products and services.  Most supply chains focus on only two tiers from the dominant actor in the chain.  In the case of the travel industry, the dominant actor is the travel service provider such as American Express Travel, HRG, or BCD Travel. The commodity wholesalers are in the Global Distribution System, GDS, as SABRE, Worldspan, Amadeus, and Galileo.  The chain does become a little complex with infomediaries such as Concur and Appirio to the GDS systems. The service suppliers to the GDS systems are companies that move humans via bus, car, aircraft, train, or ship as well as provide hospitality services such as hotels.   Service suppliers provide mobility services and are constrained by capacity.

The supply management methodology varies by supplier. In general, aircraft, buses, and trains have mobile capacity and demand is always in flux. These suppliers establish demand-based load capacity based on stable routes over intermediate time periods.  They can react to minor fluctuations in route demand by adding additional capacity based on short term forecasts they make and also by charters.  Most travel industry rail systems are solely passengers and remain fixed routes with variable capacity.  Cruise ships have fixed capacity, fixed routes, and rarely are used as a mode of transportation as passengers embark and disembark at the same port.  Instead, cruise ships are modes of leisure and treated as mobile hotels. Occasionally, cruise ships will terminate at a different destination.  Auto rentals are generally treated as cruise ships as auto rentals are returned to the same point of origin.  However, auto rentals may be one way as well. The methodologies used for managing capacity against demand in most cases involve multi-dimensional simplex optimization of capacity and minimization of cost.  

Figure 3: Global Distribution Systems

Note: POTS = Plain Old Telephone System.  TELCO = Telephone Company

Airline capacity planning is interesting and may be external to GDS as well as internal to GDS. SABRE offers a solution called Airspace Flow Manager which is internal to the SABRE GDS segment. Other solutions are external to the GDS system such as Quintiq, OpenPro, and GroundStar.  Airline capacity is also constrained by airport and route capacity which the application GroundStar addresses. Airlines may run capacity plans multiple times each day independent of GDS and adjust pricing in GDS based on loading demand then input the new load plan into GDS.  The reason capacity planning is often external to the online sales transaction processing of GDS is that the planning algorithm often takes a long time to execute. Current data from GDS usually feed the front end of the capacity planning then the result is loaded into GDS to adjust for the market conditions. These runs are scheduled usually during lulls of activity and are posted prior to the upswing in efforts to smooth the demand for capacity. 

Travel industry service providers then look to GDS for the available capacity but the four systems tend to service-specific regions. Services like Appirio and Concur attempt to blend the four systems into a single view yielding a global view in a cloud base virtualized environment. Once a travel itinerary is established and sold then the service providers often offer value-added services to the traveler. For example, when a travel hazard event occurs then actions are taken to optimize travel and mitigate travel hazard events through cost-effective rerouting and other changes to the itinerary.

Travel Industry Outlook

The travel industry management was built out of the airline industry which has, for the most part, divested its holding in GDS. However, the travel industry outlook can be a gauge, largely in part, by the airline industry outlook. The Atmosphere Research Group conducted a December 2012 study that was commissioned by the IATA looking ahead to 2017. The study is dated for the volatile travel industry which can turn quickly in a different direction. However, systems are stable and take time to adapt. Therefore, there is some lag in the change being effected.  The general outlook of this study stated that the airlines are frustrated by third-party sales due to the higher costs and demand lower GDS cost. The airlines have been successful at transitioning to direct sales as low-cost carriers generate more than half their own bookings. Airline executives claim that GDS sales are 20 times more costly.  The airline industry has evolving strategies that impact distribution to deal with the situation. Alliances and business models are forming in innovative ways. Of the three major airline alliances the Atmosphere Group touts that three elements influence the newer strategies:

1. Anti-trust immunity and joint ventures
2. Strategic polarization of distribution, sales, and marketing by country
3. Alliances replace individual airlines as corporate account gateways

The gist of these elements indicates a movement towards the regionalization of capacity and services as well as efficient inter-regional connectivity solution. The study goes on to indicate a movement away from a distribution focus and an increased focus on commerce or supply chain styled thinking as airline executives are more focused on results than process. This is resulting in a product-centric effort and executives are more concerned with the traveling experience. Big-data will underpin the airlines' commerce efforts making them practical and possible. The airline executives want changes to commerce systems that do better at retailing their products and services.  Services are beginning to emerge that bypass GDS such as TravelFusion and Farelogix.  Services like Concur and others are working more directly with the airlines integrating user data into comprehensive data warehouses.  The industry also appears to be organizing around value creation hubs using more contemporary software and better commerce features that are more flexible than GDS. 

Based on this study the industry is moving away from the GDS distribution process towards a modernized and responsive supply chain model that is transparent from end-to-end. This transparency, typical of a well-designed supply chain, will have the effect of eliminating forecasting errors that results in unfilled capacity.  As an outcome, the newer model will be more responsive to sales demand.  That said, GDS is making changes to become more responsive and offer additional products and services while reducing costs. The other significant cost factor is credit card fees.

The current trend appears to be that the airlines are diverting capacity to more direct web-based EDI systems before loading GDS with capacity for third party sales. In many cases after the direct sales are made, the airlines load GDS with the administrative and operational data to execute in legacy systems. With the diversion of sales away from the current distribution system towards other supply chain systems, the channel service provider will have to adjust to another business model soon. In some cases, non-GDS sales have peaked at 53% of the sales.  The change does not appear to be limited to retail although that is where the inroads are being made. Corporate travel and business-to-business sales will be impacted as well.  The challenge will be for service providers to find their place in the emerging supply chain whether that remains in GDS as the system adapts or emerges as another system entirely. At some instant, there will be a match point causing the industry to either shift or adapt to the current systems. Whatever the event, the status quo appears to be changing.

Please feel free to comment and provide insight. Please email me at James.Bogden@gmail.com

References:

APICS (2011). APICS Certified supply chain professional: learning system. Association for operations management: IL.

Lee, E. & Chacko, N. & Cruz, A. (2006) Reducing distribution costs: an Accenture webcast series. Retrieved from:  http://www.accenture.com/us-en/Pages/insight-airline-webcast-series-overview.aspx

Harteveldt, H. (2012). The future of airline distribution: a look ahead to 2017. Atmosphere Research Group. Resourced from:
 http://www.iata.org/whatwedo/stb/Documents/future-airline-distribution-report.pdf

Wikipedia (2014).  Global distribution system. Resourced from:
 http://en.wikipedia.org/wiki/Global_Distribution_System.

Original Post on 11Aug2014, updated 20Mar2015