Amadeus, Sabre, and Air Transport

An early precedent of a digital platform can be identified in the aviation industry in the form of two global distribution systems: Amadeus and Sabre. In the 1980s, both started using digital technologies to match supply and demand in the aviation industry, facilitating interactions between airlines and travel agents for the booking of flights. They later expanded to rail tickets, hotels, and so on at the supply side, as well as online travel agencies in the demand side. Amadeus, the global market leader, is currently one of the largest digital platforms in Europe.

As these platforms have been active for more than 30 years, they provide a good example of the kind of conflicts that exist around digital platforms. Intermediaries, particularly if they grow to participate in a large share of transactions in a market, are prone to raise suspicion among the intermediated parties, calling for maximum transparency as well as for fair relationships with the ecosystem around them.

Amadeus and Sabre are also particularly interesting because, even in the 1980s, they were subject to the first digital platform regulation we have identified, both in the US and in Europe. The regulation, after review in 2009, remains in place in Europe and it advanced many of the regulatory solutions under debate today for the larger digital platforms: fairness in platform to business relations, non-discrimination, search neutrality, multi-homing, and liability.

Global Distribution Systems

We have been told for years that the internet is disintermediating human transactions. However, if a young and ambitious engineer based in Minsk (Belarus) wants to fly tomorrow to San Francisco to launch a start-up, it is probable he will use more intermediaries than he is aware of.

If our engineer tries to find the best deal on the web or on an app of the Belarus national airline, he will be disappointed to find out that Belavia, the country’s national airline, does not fly either to San Francisco or to US. If he tries American Airlines, and then Delta and finally Continental Airlines, he will find out that the US companies have no direct flight from Belarus to the US. They do not even provide the option of connecting two of their flights to complete the trip. He should not be surprised. Aviation is a highly fragmented industry. Even the largest airline in the world, American Airlines, does not carry more than 5 percent of the total annual passengers in the world.

Our internet-savvy engineer will probably use an online travel agency such as Expedia, or being European, eDreams, to identify that the best traveling option is provided by Turkish Airlines, with a stopover in Istanbul. If he decides to buy the ticket, he will be already using an intermediary, but will also, inadvertently, be using a second one, probably Amadeus. Online travel agencies use Amadeus to gain access to travel data, to compare fares, and to book tickets. Two intermediaries, not bad for a disintermediated digital world! If the engineer decided to buy his ticket in a traditional travel agency, the agent would probably also use Amadeus to identify the best travel option and book the ticket.

Amadeus, based in Spain, is the global leader (with a 40 percent market share) among a small group of digital platforms called global distribution systems (GDS) that intermediate in multi-sided markets. On the supply side, airlines provide full details about their flights and the available fares and allow them to be booked through the platform. On the demand side are both online travel agents and traditional agents, as well as corporations that directly manage their travel needs. Individual users usually do not interact directly with Amadeus, which is why our Belarusian engineer has probably never heard of Amadeus, even though he relies on the services provided by the platform in most of his traveling.

Had our engineer acquired his ticket through a traditional travel agent, the travel agent would have had a contract with Amadeus, having paid a set-up fee and a monthly fee to use the platform. He would introduce in his terminal the request for information to Amadeus about a flight from Mink to San Francisco. The screen would display the most attractive options for the trip. Agents typically do not go beyond the first screen, just as in most Google searches, so Amadeus ranking is key in the final decision as to which airline to contract. The agent and the airline both pay Amadeus a commission for every ticket sold. If our friend buys his ticket at an online travel agent, the process is basically the same: as the user introduces a request at the travel agent’s, it is redirected to Amadeus, which provides the relevant information to be displayed by the online agent in his site. As the transaction is completed, Amadeus receives a commission from the online agent and the airline. The difference is that the process is automated and the agent’s costs are lower than with a physical agent, so the price to be paid by the user is usually lower.

Amadeus was created in 1987 as a joint venture among four European airlines - Air France, Iberia, Lufthansa, and SAS - to create a European alternative to US-based Sabre. Amadeus and Sabre are the largest GDSs in the world. In a typical European arrangement, Amadeus’ headquarters are in Spain, the product development department in France, and the main data center is in Germany.

Amadeus was one of the first platforms in the transport industry. Amadeus displays direct network effects: the more travel agents used it, the more it became the standard, so agents would not need to learn to use other platforms. It displays more relevant indirect network effects: the more airlines use it to feed the supply, the more interesting it is for travel agents, and the more agents use it, the more useful it is for airlines. Over time Amadeus has created also significant algorithmic network effects. The more searches are made in the platform, the more the platform learns about customers’ profiles, travel patterns, and so on, and the better the information options that can be provided to users.

What is specifically interesting about Amadeus is how it overcame the “chicken-and-egg” challenge faced by all platforms during their initial stage. When Amadeus was created, US-based Sabre was already well established in the market. Sabre had started operating in 1964 as the first computerized booking system in the world, developed for American Airlines by IBM. SABRE evolved to include not only American Airlines flights, but flights of all the major US carriers and beyond. Amadeus was created by the leading airlines in Europe as a strategy to have more control over the distribution of their own products. They did not want to rely on an intermediary. Collaboration between competitors controlling a large share of supply ensured a critical mass on the supply side. Such a critical mass was more than enough for travel agents, the demand side, to join the platform. This is a strategy that can be exported to other industries where traditional players are afraid of being “platformed.”1 However, vertical integration of suppliers into platforms poses challenges of its own.

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