Eastman’s
Off the Wall
Comments©
Geez … either I’m getting older faster … or faster is getting older quicker. It used
to be that one had time to “think” one month to the next But somehow “thinking”
has become a luxury … increasingly consumed by keeping pace with each new
shift in the market place … each new twist in business processes.
June 2004
From Trends E-Magazine©, June, 2004
Business people everywhere are increasingly realizing that innovation is the key to
continued success. Financial restructuring has run its course. Applying “me too”
information technology to conventional problems is a requirement merely to stay in
the game. Operational excellence, while always important, is now delivering everdiminishing returns as we address smaller and smaller opportunities(*). Today the big
wins come from:
- Companies … that create new business models
- Businesses … that redefine their business processes
- Companies with revolutionary highly differentiated products …
- Companies with extraordinary and hard-to-copy management systems ….
(*)Trend #5, “The Buzzword of the Decade is “Innovation”, page 22
Eastman's "Off-the-Wall Comment(s)"© ...
Perhaps the first point to recognize is that the dilemma defined in this snippet from
Trends E-Magazine is that pretty much universal to most contemporary businesses; not
specific to the travel or airline industry. The trend is driven, in large part, by shorter
manufacturing and service life cycles with accompanying rapid price erosion. And as
prices erode, product differentiation becomes price sensitive; and the product group
becomes a commodity.
And while the snippet discusses industry in general, travel distribution was an early
pioneer with the likes of PriceLine, Travelocity, Expedia, Orbitz …companies that
created new business models and/or differentiated products. And the airline business is
seeing its share of new business models and differentiated products in the rapid
adoption of the new low cost carrier product offerings. But even as we discuss this today
– those models themselves are beginning to erode under mutually competitive pressures
as well as competitive response by established vendors.
That said, the interesting aspect of the travel industry’s move toward innovation has
been what has NOT moved; or NOT even begun to transform itself. The Trends story
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comments, << The managerial shift from an obsession with operational effectiveness to
differentiation through innovation is a crucial part …>> of the innovation process. In that
statement lies the conundrum of the airlines and the travel industry in general!
In last month’s OTWC, I discussed Delta’s new management team. Their goals all fit
within the scope of “ … an obsession with operational effectiveness ….” US Air’s entire
recovery program focused on operational effectiveness. United Airlines’ comeback plan
is linked to operational effectiveness. TED and Song are both “me too” efforts tied to old
business processes (in lieu of newer solutions being proven by the low cost carriers)
implemented with greater operational effectiveness.
Ah … you think I pick on airlines!?! Consider from today’s Wall Street Journal1, << Last
American Express Corporate Travel Services is expected to unveil today extra
services for small to midsize businesses in hopes of competing more
aggressively with Internet agencies such as Orbitz Inc. and Travelocity. ….
November, longtime corporate travel agency Carlson Wagonlit lost a McDonald's
Corp. account to Orbitz. In April, Carlson launched a new offering with moreefficient, cheaper online booking options.
This month, Navigant, another
traditional agency, launched its own online booking tool for the corporate market
rather than relying on others for online services. Amex is taking a different
approach, in part by using the heft of its corporate card. It made the call after a
recent survey found that loyalty rewards were among clients' top three priorities,
along with low airfares and booking fees. >>
It appears that the established industry vendors remained locked into their 40 year-old
business paradigms – unable to reinvent themselves or substitute buyer-driven market
or product solutions for the structural hierarchies and processes that dominated the past.
As we’ve discussed in OTWC before, most of these processes are inherited and
inculcated by the technology systems that have served these vendors throughout the
past 4 decades; processes that limit the ability of management to innovate. But by
sticking with these legacy processes, managers must be dependent on costly but
incremental improvements on “… operational effectiveness …” and “me too” responses.
Still, the reality of the corporate cultures, investments in existing technology, established
business processes, and buyer loyalty preclude a virtual instant make-over into one of
the contemporary innovator-type or new-model companies. But equally clearly, the newmodel fast-response technology-based companies have acquired critical mass. Thus,
the established vendors must begin to find ways to transform within themselves – to
redirect their “… operational effectiveness …” focus on innovation of new products, new
solutions, new processes, and new markets to meet new buyer expectations.
The solution for these traditional vendors … whether airline, agency, or some other
travel vendor constituency … lies in building a synthesis between the virtues of the newmodel companies and the existing legacy structures. And that synthesis is initially
dependent on transforming the technology platforms upon which information is
managed; enabling legacy companies to derive and manage information in a
competitively timely manner.
1
“American Express Plans Corporate-Travel Pitch,” THE WALL STREET JOURNAL, June 30, 2004; Page D2
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This does not mean “me too” information technology solutions to “conventional”
problems. Rather, it suggests the need to link operations, finance, inventory, and
management systems interactively – not in a content access mode; but rather, in the
interactively business-rules driven contextual sense of business solutions delivery. And
those processes need to necessarily be contextually responsive to buyer demands and
needs when the buyer is buying!
In my view, the difference between “content” (buyer goes out to a site that stores content
for viewing the purchase) and “context” (product is delivered to the buyer in the context
of the buyer’s current medium of access and the buyer’s use of the product being
purchased) represents the next level of innovation within the travel industry. Vendors
with legacy systems or business processes unable to respond to buyer needs in the
context and medium of the buyer’s choice when the buyer decides to commit – will
simply wane away.
The rapidly evolving life-cycle of travel products suggests that the only way to ensure
profits will be through synthesis innovation; innovation that marries logistics, tactics, and
strategy with buyer’s contextual needs.
The root of such innovation within the travel industry is dependent on a changed
management perspective toward information management. The current embedded
processes and related cultures foster, at best, only operational effectiveness.
Accordingly, the “big win” is impossible; for those systems cannot support new business
models (a la JetBlue), redefining of one’s business processes (a la Expedia), highly
differentiated products (a la Priceline), or hard-to-copy management systems (a la
Orbitz/ITA pricing model).
Still, given today’s ongoing dependency on the core inventory source platforms – “big
wins” going forward will be increasingly dependent on information technology synthesis;
the melding of the information processes between the old and new business models.
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From Hotel News Resource©, June 30, 2004
Statistics show that online media will continue to reshape the travel industry
Consumers still seem resistant to buying cars, groceries or furniture online. But travel
and financial services are easy to buy digitally, and consumer attitudes and behavior in
2004 are being shaped very differently as a result…. "There is now near-perfect
information for the customer. Products, amenities and prices can be compared on a
vast 'super-market' of unprecedented choice," says Bala Subramanian, senior vice
president of brand integration at Hilton Hotels. Subramanian says, "While share of
shelf-space and customer facings is important, rising above the noise to increase
customer relevance and making an emotional connection without resorting to
discounting is a challenge."
Joel Chusid, [managing director of Americas sales and marketing for China Eastern
Airlines] agrees, "Airlines have become a commodity, and must strive to differentiate
their products. Product differentiation is important, and one can point to differentiation
in First Class long-haul services, but also in short-haul domestic routes, a la Jet Blue
and Song with state-of-the-art entertainment options. But these are not necessarily
drivers of choice, at least not as strong as price. However, building brand identity, a
reputation and an image is still important."
Eastman's "Off-the-Wall Comment(s)"© ...
Now the premise of this concept isn’t anything you have not read before in OTWCs. But
the statement that, << There is now near perfect information for the consumer. Products,
amenities and prices can be compared on a vast 'super-market' of unprecedented choice.”
>> really caught my eye – initially because I wanted to believe it; and upon reflection,
because it so grossly misstates both the reality and the truth.
What has become available in recent years is the vast market of choice and the ability to
compare prices. What is NOT available yet is the ability to integrate those products into
a buyer-desired offer. And also NOT available is the “whole” of available products. The
point that Subramanian and Chusid make is really ONLY that technology has driven like
product groups into pricing competition; and that such competition has turned those
products into commodities!
As was discussed in the first comment above, there is no way out of that price erosion
model in the current era -- except through new business models, processes,
differentiated products or hard-to-copy management systems. I suspect that finding one
of those four elements as a base against which to position his product is the “challenge”
to which Subramanian alludes.
Also, note that neither Subramanian nor Chusid offer alternatives. Their comments
reflect more of the same … the use of brand building and clever “shelf presentation” to
rise above the “noise” of other vendors in the eyes of the customer. Both classic
Industrial Age mass production tactics … made increasingly ineffective by the scope and
breadth of the hyperarchy of information available to the buyer. “
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And it is because of the commoditization of tour products that interactive and integrated
production and packaging will evolve. Only through interactive integration of commodity
product offerings … can vendors add value by creating the travel solutions that that
buyer’s now know are available. It appears to me that intermediary packagers are
beginning to evolve the new business models, processes, differentiated products and
hard-to-copy systems to enable these products.
That it would be middlemen or intermediaries that would evolve these solutions is logical
… in large part because the traditional vendors have not been able to shake either their
legacy technology processes or the mental pictures that those processes spawn. Such
were the comments of Subramanian and Chusid. And such are the comments and
thoughts that I continue to hear from within the “establishment” of the industry. These
are smart and intelligent managers who will become redundant because they continue to
reflect an extension of the existing processes.
Travel industry executives tend to deny that the business processes or structures are
going to change. They are surprised and unprepared when they do. The embedded
thinking precludes taking risk … even small strategic risks to test new ideas or concepts.
Accordingly, opportunities to respond to market demands are missed and the hierarchies
of existing processes become high-cost anchors when the need to respond competitively
arrives. The traditional travel suppliers still hold sacred the premise of optimization; but
executing out-of-date business processes remains non-competitive when competitors
are innovating new and different business models.
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From Information Week©, June 7, 2004
Since Sabre's birth in the 1960s as American Airlines' electronic flight-reservation system, it
has set the standard for how travel reservations are processed. …. Spun off from American in
2000, its Sabre Travel Network, a system for electronically distributing air- line tickets, hotel
rooms, and rental cars, provides pricing and availability information from 400 airlines, 60,000
hotel properties, and 41 car-rental companies. It processes 40% of travel reservations
worldwide, the largest share for any electronic distribution channel.
But Sabre's business model is being threatened by the Internet. Airlines and hotels are pushing
customers to buy direct online, avoiding Sabre's fees--$3 to $4 per flight segment and about $4
on hotel rooms--to process transactions. Travel agencies, facing their own pressures in
competing with Internet booking, also are trying to help suppliers avoid Sabre's transaction
fees. That's eroding Sabre's traditional role as a transaction platform that gives airlines and
hotels a conduit directly to travel-agency desktops. So Sabre is relying on a technologyenabled transition to make its core business less an aggregator of travel-reservations
information and more of an IT factory developing tools that travel agencies will use to design
their own content applications.
Doing this requires nothing less than reinventing the travel industry's decades-old distribution
ecosystem. In a transition years in the making, Sabre is moving from proven, reliable, yet
inflexible IBM mainframes running the Transaction Processing Facility operating system to a
service-oriented architecture. It expects to provide dramatically lower IT operating costs from
Linux-on-Intel servers and more-productive developers, and more flexibility using Web
services and the Internet to deliver new kinds of content to travel agents. Sabre is the market
leader, but its competitors--including Amadeus Global Travel Distribution, Cendant's Galileo
International, and Worldspan--are attempting similar changes. "These guys don't have an
option," Forrester Research analyst Henry Harteveldt says. "If they don't reinvent themselves,
they don't survive."
…. The technology change … will cost more than $100 million, though Craig Murphy [Sabre
Chief Technology Officer] describes it more as a new way of doing business than a single
project. A two-tier system will replace the mainframe--one for pricing and booking tickets and
rooms, and one for searching and shopping functions. The pricing system runs on HewlettPackard NonStop servers running Unix, and Murphy says it costs 80% less to operate than the
legacy system, based on the 20% of transaction volume Sabre has migrated to the new servers.
Shopping and search functions use the same business rules as the Sabre transaction system but
will run on an even cheaper platform of Intel servers, Red Hat Linux, and the open-source
MySQL database. In both cases, Sabre is using a service-oriented architecture in which
programmers break down the various functions into self-contained Web services so that an
airline or a travel agent can more easily pick the services needed rather than having to
subscribe to one monolithic offering(*).
(*)Good story on Sabre strategy -- URL: http://www.informationweek.com/story/showArticle.jhtml?articleID=21401658
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From InformationWeek.Com©, June 7, 2004
Rivals Ready: Amadeus, Galileo Have Their Own Big Ideas. Sabre Holdings
Corp. may be the largest platform for electronic distributors of plane tickets and
hotels. But its rivals believe they're being more innovative in addressing the reality
that direct sales on the Internet are eating away at that business. Galileo International,
Sabre's largest U.S. rival, is rolling out a service-oriented IT architecture similar to
Sabre's to build closer data-sharing ties with customers(*). It launched a test in March
to automate refunds and exchanges, and it's been using an XML-based interface for
more than a year to connect to reservation systems and process transactions. "What
we're proposing now is to take this a step further and let people start developing
against our framework," says Robert Wiseman, who oversees Galileo as chief
technology officer of Cendant Travel Distribution Services.
…. Amadeus, which operates Europe's largest distribution system, says it's a step
ahead of Sabre and Galileo in part because it thinks of itself as a travel technology
company. It still operates a global distribution system (and upgraded it to an open
architecture) and an online travel unit, which operates the e-Travel site, but it's
focusing its attention on its restructured IT services business, now called Altea. It's
offering software and services for reservations-system hosting and for managing
inventory among the growing number of distribution channels, and more are expected.
All of these services link to a central repository of passenger records that lets global
airline alliances--such as Oneworld, Star, and SkyTeam--interact with the customer
more like a single airline, with access to customer-loyalty data and personal
preferences.
(*)Complementary Story to Sabre piece URL: http://www.informationweek.com/story/showArticle.jhtml?articleID=21401663
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From TravelWeekly.Com©, June 7 2004
Worldspan Technologies' initial public offering will be 32.25 million shares of
common stock for between $19 and $21 per share, according to a Securities and
Exchange Commission (SEC) document filed June 7. The IPO could raise as much as
$677.25 million. Worldspan intends to use the net proceeds of the IPO to pay down
debt, prepay credits owed to Northwest and Delta, and redeem outstanding shares of
preferred stock.
From PSInform.Com©, June 3 2004
During a conference call with financial analysts, Worldspan chairman and chief
executive Rakesh Gangwal said that the company is changing its business focus of the
past several years and will again compete more aggressively for travel agency
business, in addition to the online business that have formed a key component of its
strategy for some time.
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Eastman's "Off-the-Wall Comment(s)"© ...
First … the first asterisk (above) points to the Information Week source article noted
above. The Sabre story should be of particular interest to those of you seeking to better
understand Sabre’s strategic focus.
Second … the featured Sabre story was complemented by a story (second asterisk
above) that sought to provide a competitive position for Amadeus and Galileo. I was
surprised at first to note that Worldspan’s competitive position was not discussed … but
now realize that Worldspan was on the very day of that story release, announcing its
expanded IPO – and is required by SEC law to maintain a “quiet period” with respect to
such information during its IPO period.
For regular readers of OTWCs, the strategic initiatives outlined in these stories are
consistent with what has been suggested over the past five years here. So, in and of
itself, this is not particularly new information – with the exception of the confirmation by
Worldspan just prior to its IPO announcement that Worldspan plans to deemphasize its
Internet gateway strategy and will attempt to revitalize its agency base.
There is some interesting “public posturing” taking place in these stories. For example,
this is the first time that I’ve seen the GDSs publicly recognize the impact of the Internet
on their core business model; or reflect on the fact that the suppliers can distribute
product less expensively through other digital mediums than the “$3.00 to $4.00”
segment or hotel booking fees (and as virtually every reader of OTWC knows, those
segment fees are understated fairly significantly in the Information Week story). And of
course, both Amadeus and Galileo were in a “me too” mode when interviewed for their
story piece; neither apparently able to provide clear definitive alternative strategies.
That interesting perspective is reflected in Sabre’s premise that their platform will reflect
a different way of doing business; while Galileo and Amadeus simply reflect on the new
demands of Internet (implicitly suggesting that the supplier controlled channel distribution
model will sustain itself even as the medium of distribution changes to Internet).
Worldspan simply suggests that it is reverting back to the traditional agency distribution
model; and by omission, implicitly suggests that it is also abandoning a short-lived effort
to compete in the airline hosting business.
Very clearly, Amadeus is focused on its hosting capabilities, or Altea as it has apparently
named that product line. And Galileo is increasingly expanding its franchise-equivalent
distribution package Cendant-based product; allowing others to build technology against
“… our framework.” I
As Henry Harteveldt says, “If they don’t reinvent themselves, they don’t survive.” But
“re-inventing” themselves is itself a subjective assessment, and of the four, it appears
that only Sabre is really moving down that path. Amadeus seems to be morphing
primarily into a host platform. Galileo is being absorbed within Cendant. And, I surmise,
Worldspan is setting itself up to be bought; for even with its new financing, Worldspan’s
financial base appears to be eroding rapidly.
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Plus, anybody addressing the “majors” in travel distribution must also consider the only
non-GDS platform -- IAC (InterActive Corporation) … with its Expedia base and
appended Internet channel outlets. IAC has little, if any, of the legacy systems
“baggage” that is increasingly an anchor on the legacy GDSs. IAC is already “modular”
in design and running on lower cost architectures. In some ways, IAC equates well with
the low cost carriers grabbing market share and dominance over the major legacy
carriers – faster, more nimble, customer demand-driven responsive with better
information management tools to support their business processes.
But the industry and the media still think in terms of the industry’s traditional business
silo’s; the way its been done in the past. Accordingly, competitive alternatives tend to be
omitted. Such an omission by Information Week simply reflects the tradition-bound selffocused way of looking at the industry. But it is critically important to recognize that the
industry is no longer what it was … nor will it ever return to that past.
The reason is reflected directly in Craig Murphy’s two comments … (a) << it costs 80%
less to operate than the legacy system, based on the 20% of transaction volume Sabre has
migrated to the new servers.>> and (b) << Sabre is using a service-oriented architecture
[incorporating] self-contained Web services so that [users] can more easily pick the services
needed …. >>. It is not just that Sabre is building such a platform – but rather, that
contemporary technology demands such an environment. It is not so much a coup that
Sabre has recognized the need … as it is a tragedy that the other GDSs do not seem to
be moving in comparable directions with any concerted effort.
++++++++++
If there is a theme that runs through out this month’s Off-the-Wall Comment – it is
that there is as much in what it doesn’t say as in what it does say. Given the
RFPs and other requests for services or tools that are flowing across my desk
these days, it is clear that the old model of travel distribution is on its last legs.
Agencies, suppliers and intermediaries are all striving to regain control of the
products they offer while concurrently, distributing those products with innovative
direct-link packaging through diverse and disparate channels.
Equally important, the intermediaries are demanding tools that integrate
disparate production controls and audit trails to the packages that their customers
buy … ensuring that customer relationship management is not just a function of
the product offering; but is an integrated piece of the product delivery and
subsequent follow-up. These are complex technological matrixes that must tap
divergent host suppliers … yet deliver ROI within the price expectation of the
buyer’s delivered product. Such tools cannot be build using legacy architectures
and platforms.
Respectfully,
\\ Richard
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