SABRE - How American Airlines Reconfigured the Airline Industry Ecosystem - Taylor Cornwall, Daniel Kane, David Rader, Tomas Garcia, Lacey Farrell ...
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The Tuck School at Dartmouth SABRE – How American Airlines Reconfigured the Airline Industry Ecosystem Taylor Cornwall, Daniel Kane, David Rader, Tomas Garcia, Lacey Farrell and Pablo Navarro
In 1952, American Airlines installed the state of the art Magnetronic Reservisor to ease the burden of
the growing number of flight reservations on the airline. This new, larger reservisor could handle more
information than its predecessor, which had been the first airline reservation system to incorporate
electronics into the time-consuming, and labor intensive process of booking seats on an airplane flight.
However, even as the upgraded system was being rolled out, American Airlines knew that as both the
number of flights and reservations continued to grow, the reservisor would be plagued by mismatched
seat inventories and customer reservations, errors due to the manual transfer of passenger information,
and poor customer service. As a result, in 1954 American Airlines and IBM entered into an agreement to
create the first real time reservation system, known as SABRE. 1
Pre- SABRE Reservation Process
Before SABRE existed, reservation process involved three steps: determining the availability of space,
adjusting the inventory, and recording passenger names.
Determining Adjusting Recording
Availability Inventory Passenger Names
When an airline agent sold a seat, the agent noted passenger- specific information on a passenger-name
record (PNR) card that was transmitted, by telephone or teletype, for inventory control to reservation
offices. Available seats were displayed on boards installed in reservation offices where sales agents
determined seat availability. As the seats were sold, seat inventory decreased up to a certain level
where a “stop sale” message would be broadcasted to all agents.
Seat inventory was reconciled with the card file of PNRs. Data entered in this way tended to be
inconsistent which caused flights to be under or overbooked, deteriorating both customer service levels
and utilization of aircraft capacity.
As the demand for air travel began to exceed the available supply after World War II, airlines’ ability to
process passenger reservations efficiently became more important since reservations offices became
larger and more congested. Airlines needed a new approach to reservation management to provide
additional flights without increasing reservation costs.2
SABRE’s Proposed Value
The benefits of the proposed system were numerous. First, SABRE’s real time data would allow for
more efficient flights as no shows, cancellations, and waiting lists could be simultaneously rectified on
any given flight. Second, sales representatives would no longer have to under-book a flight in order to
1
Plugge, W.R. & M.N. Perry. “American Airlines’ “SABRE” Electronic Reservations System.” Computer History
Museum. Vol. 14.2 p. 593-594.
2
Copeland, Duncan and James McKenney. “Airline Reservations Systems: Lessons from History.” MIS Quarterly.
September 1988. P. 354.
1maintain a cushion for sales in the pipeline. Previously, booking a flight took hours so a number of seats
were kept open on planes so that flights did not get overbooked while a sale was being processed. Next,
customers would have their tickets booked in a much more timely and accurate manner. Lastly, SABRE
would offer the ability to retain and access passenger name records (PNRs). More than just the name
and birthdate of a passenger, PNRs were huge data files that included information such as previous
flights and customer preferences. This data could be accessed and used to improve customer service at
American Airlines.3
Execution Risk
The American Airlines team was tasked with creating the application software that would meet the
requirements of the proposed system. SABRE would be required to:
Maintain 40,000 passenger reservations in real time
Support 83,000 daily phone calls
Retrieve information within three seconds 90 percent of the time
Be installed at more than 100 locations
Record and access passenger name records (PNRs)
Eventually, initiate and receive teletype messages to and from other airlines4
The requirements posed an enormous problem because no application software had been created to
handle this much data in real time, which forced American to hire a programming manager and augment
its programming staff with additional outside hires.5 As American Airlines worked out the software
challenges, its partners faced co-innovation challenges of their own.
Co-Innovation Risk
The computer-based reservation system needed a real-time connection between different sales agents
and reservation offices. That meant creating an online real-time teleprocessing platform that did not
have a comparable in the commercial world. The only similar scheme at the time was the air defense
system called Semi-Automatic Ground Environment (SAGE). This solution included a network of
computers and communications lines to provide real-time calculation of the paths of all aircraft flying in
North American airspace.6
Both SABRE and SAGE needed at least three major innovations to take place before being implemented:
1) Hardware and Memory, 2) Telecommunications, and 3) Monitor size and cost.
Hardware and Memory: Integrating seat inventory with passenger-name records required rapid access
to large databases. Until the early 1950s, the main data storage system was in the form of sequential
magnetic-tape storage, which was slow to access. The perishable nature of airline seats and the required
access from different locations necessitated faster and more direct access that a recent innovation such
3
Plugge, W.R. & M.N. Perry. “American Airlines’ “SABRE” Electronic Reservations System.” Computer History
Museum. Vol. 14.2 p. 595
4
Head, Robert V. “Getting SABRE Off the Ground.” IEEE Annals of the History of Computing. 2002 p. 32-33
5
Ibid.
6
Schulz, William. “The Emergence of the Real-Time Computer Reservation System as a Competitive Weapon in the
U.S. Airline Industry 1958 -1989.” Technovation Volume 12 No. 2. 1992. P. 65
2as the disk files provided. In addition, semi-conductors increased information processing speed and logic
processing methods such as the binary languages allowed random-access to disk storage. 7
Telecommunications: A fundamental piece of the system was based in the inter-connection of different
computers, and therefore a solid and established communications network was needed before the
computer reservation system could be a reality. In the 50s, telephone methods and devices were widely
spread allowing connection of different remote computers.
Monitors: Another indispensable innovation was the T.V. monitor, allowing reservation agents to get
access visually to availability and inventory information. This advancement was possible thanks to the
development of the cathode ray tube for television in the 1930s.8
Had American tried to bring together all of these diverse elements on their own, it would almost
certainly have failed. However, in IBM, it found a partner that had already started the consolidation.
Prior to the 1953 meeting, IBM had been actively involved in creating the SAGE system. While for a
completely different industry, this project had brought together the challenges of hardware,
telecommunications, and user interfaces. Through its success on this project, IBM entered the SABRE
development with a knowledge base that greatly improved the chances of success.
In addition, and perhaps most importantly, American was willing to compromise functionality in order to
increase the likelihood of success. In the initial designs for SABRE, American envisioned “a system that
could match passengers to seats, speed communications among airlines, contain seat availability on all
carriers’ schedules, print passenger itineraries, and issue boarding passes, with terminals located in the
offices of travel agents.”9 While this would be the eventual evolution of the system, each piece involved
significant uncertainty and risk. Many of American’s competitors tried to tackle all of these issues at
once and the delays increased dramatically, as each challenge compounded on the others. Instead,
American focused on three critical elements: 1) Passenger-name records, 2) Seat availability, and 3)
Inter-airline communication. By being willing to reduce functionality, American significantly reduced co-
innovation risk, a strategy that allowed it to launch four years ahead of any competitors. While the
program had its share of operational challenges, SABRE became fully operational by 1964.10
Adoption Chain Risk
SABRE was revolutionary in its ability to process data in real time. However, for all of the innovation
that occurred to create the system, there was not a huge amount of adoption chain risk.
First, the customer’s interaction with sales representatives would remain unchanged. SABRE provided
back office support to the sales people and did not interface with customers. As a result, customers
would only notice that booking their flights had become a much less time-consuming proposition.
7
Plugge, W.R. & M.N. Perry. “American Airlines’ “SABRE” Electronic Reservations System.” Computer History
Museum. Vol. 14.2 p. 595-596
8
Schulz, William. “The Emergence of the Real-Time Computer Reservation System as a Competitive Weapon in the
U.S. Airline Industry 1958 -1989.” Technovation Volume 12 No. 2. 1992. P. 67-68
9
Copeland, Duncan and James McKenney. “Airline Reservations Systems: Lessons from History.” MIS Quarterly.
September 1988. P. 355-356.
10
Ibid.
3Second, sales representatives would have to learn the new system but there were large incentive for
them to do so. Under the old reservation system, sales representatives would be tied up for hours
making a single flight reservation. However, SABRE allowed sales agents to make the sales in a much
shorter time than the old system, which allowed them to make additional sales. Furthermore, SABRE
allowed the sales representatives to access the PNR data. Armed with this client information, the agents
could provide a higher level of customer service than they were able to do prior to SABRE.
Third, management had incentives to implement SABRE because it provided management reporting
services.11 For the first time, managers received reports that showed flight efficiency and other valuable
data that was automatically sent to them. In essence, managers would now receive more information
without having to do anything to receive it. With all of the parties involved seeing significant benefits,
SABRE and other similar reservation systems quickly spread across the industry.
First Mover Advantage?
With the system’s launch in 1964, American stayed one step ahead of both Delta and Pan Am, which
launched their own real time reservation systems, called DELTAMATIC and PANAMAC respectively, in
1965, with full functionality limited for several years by technical difficulties.12 At this point, it is critical
to ask: Did American gain a first mover advantage by getting SABRE up and running first?
On one hand, SABRE was a significant competitive advantage. It helped to keep the cost of booking
flights down, to keep flight capacity utilization up, and to provide a higher level of customer service. In
the end, though, SABRE did not change the ecosystem of airline travel but merely improved the
efficiency of the ecosystem. For the first year with SABRE, customers would notice a time difference
between booking with American versus booking with a competitor. However, within a year, other
airlines had developed their own systems and closed that gap, thus rendering the first mover advantage
moot.
When we consider the core question of first mover advantage, “if my competition got there first, would
I still enter,” we find no real evidence of first mover advantage. Within only a few years, there were
numerous systems being developed and no standard platform that had emerged. Therefore, while this
was an innovative solution to a significant industry issue, the invention of SABRE merely provided an
operational advantage rather than the strategic positioning of first mover advantage. And, as we will
see, it created no significant restructuring in the ecosystem.
11
Plugge, W.R. & M.N. Perry. “American Airlines’ “SABRE” Electronic Reservations System.” Computer History
Museum. Vol. 14.2 p. 593-594.
12
Copeland, Duncan and James McKenney. “Airline Reservations Systems: Lessons from History.” MIS Quarterly.
September 1988. P. 356
4Reconfiguring the Industry: 1964 – 1997
As we have shown, creating the SABRE reservations system was an incredible achievement of
cooperation and innovation that dramatically improved how airline tickets were purchased. But, as we
will see, this revolutionary technology change remained very un-revolutionary for the industry for over a
decade. In the early 1970s, though, the technology began a process of reconfiguration that dramatically
changed the value blueprint of the industry, positioning SABRE to capture extraordinary value. At the
same time, we will explore how this reconfiguration, which initially created so much value for American
Airlines, eventually helped to lead it into bankruptcy. The analysis will use core tools to examine four
distinct periods:
1) 1964 – 1973: The Adoption Chain Quagmire
2) 1973 – 1984: The Initial Reconfiguration
3) 1984 – 1997: Reconfiguration Out of Your Control
4) 1997 – Present: Winning (and Losing) the Reconfiguration Game
1964 – 1973: The Adoption Chain Quagmire
With the creation of SABRE, American Airlines found itself with an extraordinary new innovation ahead
of any of its competitors. What is striking is how little they did with the system for the next 10 years.
While there is evidence that they envisioned the wider uses in travel agent expansion and passenger
relationship management13 (what would eventually be industry-changing initiatives), the system for the
most part remained a competence enhancer and cost-saving mechanism. Our analysis here will attempt
to understand why American would wait so long to roll out these reconfigurations and what needed to
change to make it happen.
At the core of our analysis is the concept of Adoption Change Risk, in which an invention, regardless of
how much potential it has, will only be adopted if each of the players in the system see relative benefit
from the change. This concept of relative benefit will also be critical as the most important criteria is the
Relative Benefit to the player minus the Absolute costs incurred. Throughout this period, we find
adoption chain risk as a barrier to implementation both externally in the industry and internally within
American airlines itself.
External Adoption Chain Risk
While there are many players in this system, it is helpful to simplify the value blueprint to four main
actors: the larger set of airlines, the GDS’s (including SABRE), the travel agents, and the customers. In
looking at the potential to rolling out to travel agents, all four of these groups would need to see
positive relative benefit from the change that exceeded the costs they are required to make.
In the late 1960s, any advances that made it easier to find and compare tickets would likely have been
appreciated by customers, provided the costs of the system weren’t just passed through (Green light).
Similarly, airlines would likely have been willing to list their prices as there was the potential for
additional sales, providing the listing cost wasn’t too high (Green light). The challenge, however, came
at the intersection of SABRE and the Travel Agents.
13
Copeland, Duncan. “Airline Reservations Systems: Lessons from History.” MIS Quarterly. September 1988. Pp
353 – 370.
5External Adoption Chain
Airlines SABRE Travel Agents Customers
Green Yellow Red Green
The relative positions of these two players can best be seen in American’s 1967 Donnelly Official Airlines
Reservations System (DOARS). Only three years after the initial launch, American was attempting to
expand operations to travel agents, by placing terminals with a small set of agents to test out the
feasibility of a larger roll out.14 At the time, however, the hardware was still in the early stages and was
very expensive. In addition, American Airlines and SABRE saw this roll-out primarily as a way to save
costs and did not consider the potential to expand sales in its benefit calculations (even when SABRE
was fully launched to travel agents nine years later, the company projected a mere 6% return on
investment). From a travel agents’ perspective, there was benefit to having instant access to flight
prices and schedules, but, provided the airlines all have GDS systems themselves, the relative benefit
was the time savings of not having to call each agent. As the agreements began to take shape, American
tried to push most of the investment cost onto the travel agents, in order to make its small projected
return. The travel agents, in turn, could not justify the significant additional cost by the smaller relative
benefit. As a result, the initiative failed and American would wait until 1973 to try again.
Internal Adoption Chain Risk
In addition to the external adoption chain risk, American Airlines also faced internal challenges to
expanding the SABRE system. Shortly following the DOARS initiative, in 1968, American Airlines
experienced a dramatic change in senior management. Death, departure for government posts, and
retirement left AA with few senior managers who were experienced with SABRE. In 1968, George
Spater took over as president of AA. Spater’s management style focused on decisions by committee and
was a sharp contrast the decisive decision making style of past leadership. Spater’s leadership provided
little direction and prioritization for AA; suddenly past strategic priorities, like SABRE, were now
competing for the resources of the firm and effectively left in a holding pattern. Particularly with the
view that a further roll-out of SABRE would result in low return on investment, it was often de-
prioritized.
SABRE, under Spater’s leadership, suffered from a resource allocation problem as well as a conflict of
interest between functional managers and the technical team working on SABRE. This internal unrest
and lack of centralized, strategic support for SABRE jeopardized AA’s position as the market leader in the
automation of booking and inventory management. In 1973, industry experts determined that AA’s
SABRE was the fourth best system in the market, behind the systems of United Airlines, TWA, and
Eastern Airlines. Fourth place was a long way to fall from AA’s earlier days of being the market leader,
especially in a marketplace with few strong competitors. At this point, the future of SABRE and certainly
its role as an innovation leader looked very much in jeopardy.
1973 – 1986: The Initial Reconfiguration
A Change in the Adoption Chain
In 1973, the ecosystem and its incentives began to change. Travel agents were steadily becoming a
dominant sales channel for airline tickets. The hardware was also seeing vast improvements in
14
Copeland, Duncan. “Airline Reservations Systems: Lessons from History.” MIS Quarterly. September 1988. Pp
353 – 370.
6performance and reductions in cost at the same time, with many airlines upgrading their systems in the
early 1970s. The government was beginning to talk about a potential deregulation of airlines in the
coming years, which would likely result in increased competition. Finally, the American Society of Travel
Agents (ASTA), fed up with waiting for a booking solution from the airlines, looked to partner with a
computer company to create an alternative. This set of changes dramatically altered the incentives of
each of the players and would provide the ecosystem in which American was able to fundamentally alter
the competitive landscape.
These changes were so impactful because they fundamentally altered the adoption chain setting that
we described above. First, the falling price of hardware reduced the Total Costs incurred through
implementation. Similarly, the increased performance added to the relative benefit for both the airlines
and the travel agents. The potential deregulation and increased competition enhanced the benefit of
any tools that would help airlines compete better. Finally, the fact that the ASTA was looking for an
outside solution, meant that doing nothing would add additional costs for the airlines, resulting in a
higher relative benefit for moving forward. Therefore, these changes alone shifted the adoption change
to green for SABRE and to yellow for travel agents. The important move, now, was how to shift travel
agents from yellow to green.
The Changing Ecosystem
Airlines SABRE Travel Agents Customers
Green Green Yellow Green
Establishing Leadership
While issues in the adoption chain were improving, as mentioned above, American began this period in
a position of weakness. SABRE, at the time, was one of the weakest systems out there and, having
squandered its initial advantage, American had no legitimate claim for why it should lead the system.
However, through three strategic moves in three short years, American would once again emerge as the
leader.
The first strategic move was a re-organization internally to focus on customer acquisition. One sign of
this renewed focus, and SABRE’s return to a high priority, was the appointment of the head of customer
service, George Warde, as the new president. AA also hired a key member of the United Airlines team
to help push along the development of SABRE.15 This experience and newfound focus enabled AA to
rejuvenate the SABRE project. Internal adoption chain was no longer an issue; AA knew that in order to
succeed they had to improve its customer service.
The second strategic move was to focus the airlines on an industry-wide solution. While American
recognized that there was potential first-mover advantage in this space, the weakness of its own system
led it to search for a more collaborative solution. All of the other airlines faced the same ASTA threat
and, by offering to share the development costs, there was a large potential benefit for airlines by
joining. American further enhanced the proposition by designing a system where the costs were split
15
Duncan G. Copeland, Richard O. Mason, and James L. McKenney, “Sabre: The Development of Information Based
Competence and Execution of Information-Based Competition,” IEEE Annals of the History of Computing, Vol. 17,
No. 3 (1995): 44.
7based on the relative size.16 While this meant a larger cost for American, it was willing to bear that
additional cost in order to make sure that adoption was attractive to all players, including the smaller
airlines.
With all of the other airlines on board, the group then turned to how to convince the travel agents to
agree to this solution. Here, they took their third strategic move, by offering to share some of the
surplus with the travel agents. At this point, the group of airlines, known as the Joint Industry
Computerized Reservations System (JICRS), offered the ASTA members an additional one percent
commission if they would delay the development of their alternative system. By sharing this value, the
ASTA members agreed and JICRS was well positioned for implementation.
Reconfiguring the system
By 1976, nearly twelve years after the launch of the first GDS system, and over twenty years since the
initial project kicked off, the ecosystem incentives were aligned for reconfiguration. At this point,
American also received a bit of luck from a different player in the ecosystem, who did not see the
relative benefits and total costs in the same way.
After a few years of development of a joint solution with other leading airlines, United Airlines, the
largest player in the group, became unhappy with the progress of the discussion and threatened to
leave the consortium. At the same time, United was also signaling to the travel agent community plans
to make their technology platform, Apollo, available to travel agents. Market research informed AA of
the benefit of first mover advantage. At this point in time, airline terminals were bulky and large, and
although they represented large capital expenditures (on the equipment and training costs) to the
airline, travel agents were reluctant to devote the shelf space and time to learning and utilizing more
than one system. Travel agents saw access to one terminal as adequate and thus AA knew that they had
to move ahead of United in order to prevent being “locked out” from accessing customers booking
travel at travel agencies.
As predicted, United Airlines withdrew from the joint airline effort in January of 1976 and launched an
independent effort to make the Apollo system available to travel agents. This move was the catalyst for
AA’s entry into the travel agent market. Although United announced its intentions, the airline was not
ready to deliver the Apollo system to travel agents for nine months. Since AA was prepared for a
scenario when United broke off from the group, this window was what AA needed to enter the market
first. AA had been the leader in the effort to find a collaborative solution that would leave the travel
agents with more surplus, and the ASTA recognized AA’s efforts and supported AA over United after the
collaborative effort disbanded. Additionally, AA was very focused on the evolution of SABRE to best fit
the needs of travel agents, a new constituent in the ecosystem, and devoted the time and resources to
working with the travel agents to figure out what was working and what was not working.
The result of these efforts was transformational for the industry. From a restructuring standpoint,
SABRE had moved from primarily a background efficiency tool to a major player in the value chain, an
addition in the terms of reconfiguration. AA had also been able to combine the rest of the airlines into
one category, while still maintaining its dominant position. While the system contained all of the fares
of other airlines, it would surface American fares first in the slots where most travel agents would
16
Copeland, Duncan. “Airline Reservations Systems: Lessons from History.” MIS Quarterly. September 1988. Pp
353 – 370.
8purchase from. This control over the system also allowed American to charge for “co-hosting,” where it
would provide similar benefits to other airlines for a fee.17
Initial structure Stage 1: Add and Combine
Airlines Customers Airlines Customers
S S T.A.
A A
B B T.A.
R R
E E T.A.
This system would prove very lucrative for American Airlines. While their initial surplus projections were
sufficient to induce American to enter this space, the actual surplus far exceeded these expectations. In
particular, American had never calculated the potential benefit from additional sales. The first set of 200
installations were estimated to generate an additional $20m in annual revenue, representing a return
on investment of 500 percent, far above the 6% initially planned for18. This trajectory would continue
and by 1985, it was making $143m in profit on $336m in revenue, a margin of 42.5%.
1984 – 1997: Reconfiguration Out of Your Control
When we discuss reconfiguration, we often look at it from the lens of how a company can strategically
reconfigure its own ecosystem, as AA did initially. However, there are times when an external force,
either a competitor, a new entrant, or the government changes the ecosystem. This section looks at
how external forces reconfigured the airline industry ecosystem.
By 1984, American’s SABRE system and United’s Apollo system had become the dominant GDS’s within
the US, providing significant profits to their owners at the expense of some of the smaller airlines that
did not own their own systems. This inequality led the Civil Aviation Authority to conduct an anti-trust
investigation and, in 1984, the U.S. government announced sweeping reforms.
These reforms essentially severed the preferential Stage 2: Separate
relationship between GDSs and the airlines that owned
Airlines Customers
them. In particular, the regulations required that all
GDSs give equal placement to all airlines’ fares as well S T.A.
as requiring airlines to post their fares on all GDSs in A
the US (the mandatory participation clause)19. This had B T.A.
a profound impact on the airlines, eliminating their
R
ability to give preferential treatment to their own
E T.A.
flights when travel agents ran a search. While
previously the systems had been used largely as a tool
17
Copeland, Duncan. “Airline Reservations Systems: Lessons from History.” MIS Quarterly. September 1988. Pp
353 – 370.
18
Ibid.
19
Edelman, Benjamin. “Distribution at American Airlines (A).” Harvard Business School. June 22, 2009.
9for promoting their own products, this regulation meant a clear shift in the industry toward a more level
playing field for all airlines and a stark separation of Airline and GDS.
While it was a massive disruption in the way airlines sold tickets, regulation was not altogether
unforeseeable – and smart airlines had already tried to find ways to maintain their advantages. One
such way was to encourage loyalty toward their brand by incorporating what became known as frequent
flyer miles. This loyalty program, extremely common today, originated in 1978 when American Airlines
began using the SABRE system to track how often individuals flew with American. The rewards that
customers received, the thinking went, would encourage them to search explicitly for American Airlines’
flights so that when the day eventually came that the field was evened, American would still be the
preferred choice.
American’s creation of a frequent flyer miles program was quickly followed by the other airlines and
today, nearly all major airlines have this sort of program. Its origins, though, were the first major sign of
trouble in the airline industry which would become less and less profitable over the next thirty years.
The loyalty program was a response to an outside action that started to commoditize the airlines’
product. Consumers, it appears, did not really differentiate between any of the airlines – they just
wanted fast, cheap and reliable transportation to wherever they were going. Since most airlines are
equal on the “fast” and “reliable” scales (in fact using the same aircraft for transportation), the only way
to compete was by being cheaper. With SABRE being required to show all prices, fighting to be the
cheapest airline soon became a transparent battle that reduced consumer prices and eventually
reduced airlines’ margins to nearly zero.
The reconfiguration that the government caused is interesting because it was an outside force that
made it happen, rather than the intention of one of the actors in the ecosystem. This reconfiguration
separated the airlines from the GDS providers, since the respective products no longer could derive any
incremental value from being part of the same company (i.e. the airlines couldn’t use SABRE to drive
their own sales). Unfortunately for the airlines, this separation gave GDS all the leverage in the industry
because they were essentially the market makers who linked travel agents – and by extension
consumers – to their choice of flights. Eventually shareholders would force the airlines to spin off their
GDS to unlock the profitability that GDS provided and airlines lacked (see EXHIBIT 1 for revenue details).
This raises the interesting question of how should a firm react when government regulation or
deregulation reconfigures an ecosystem. One easy solution is to lobby against the disruption. The airline
industry, like many other industries, has spent millions of dollars to keep lobbyists in Washington to try
to avoid regulations that limit their power. In this case they managed to delay the regulation for a long
time, but could not hold it off forever. In cases like this, we believe that lobbying is mostly a short-term
solution. When looking for long-term solutions to government intervention, strategists need to
understand the impact that their business has on society as a whole in order to understand how
government might insert itself. In the case of airlines, they operate in an industry that is critical to the
national economy. Transportation allows the movement of goods, ideas, people and capital – all vital
elements of a functioning capitalist society. It is clearly in the best interest of that society for the pricing
of this transportation to at least be transparent, and in some cases the government actually directly
competes (e.g. city subways and commuter rails) in order to keep pricing low. Recognizing the degree to
which government intervention is likely should be a key component of any firm’s “wide lens” toolbox.
Seeing the high likelihood of reconfiguration could have helped airlines to take on more action to ensure
brand loyalty. Frequent flyer miles were a great intervention, but they to some degree skipped a critical
10piece of the ecosystem – the travel agents. What if airlines had offered more incentive for travel agents
to choose their brands, giving bulk discounts for larger amounts of purchases from an airline? These
discounts could be passed on to consumers or just used to buy the loyalty of travel agents, since the
loyalty of the GDS was no longer going to be an option. Additionally, they could have focused more on
building brand differentiation so price wasn’t the sole criteria that consumers concentrated on. For
instance, Southwest eventually became the industry’s leader in profits by seeing that price was going to
be approximately the same and instead focusing on customer service. Nothing would have stopped the
major airlines from competing on customer service or comfort in the earlier days, and it would have
made consumers scroll through prices to find the airline they wanted to be on most.
The lesson for other firms that the airlines provided is that a firm needs to be aware of the likelihood
that the government will intervene and reconfigure their ecosystem. If it appears likely, that firm needs
to identify what is the most important goal of the intervention. When the intervention is going to cause
a leveling of one playing field (e.g. price), the firm must find another playing field as soon as possible and
develop a competitive advantage on that dimension (if an intervention is NOT going to level a playing
field but will simply increase its importance, it is obviously crucial that the firm do everything it can to
lead on that more important quality). Regulation reconfigured the airlines’ ecosystem to make it easier
for customers to compare airline ticket prices, but it took more than a decade before anyone really tried
to build a brand that got its strength from a different dimension. With a wider lens, they would have
thought to build this sort of a brand before the reconfiguration even happened.
1997 – 200620: Winning (and Losing) the Reconfiguration Game
At this point, the two stories start to diverge. While American owned SABRE until 2000, the connection
between the two was split by regulation and, as we will see, the fortunes of each largely drifted in
different directions. As we mentioned above, American Airlines was reverted back into a largely
commoditized category of airlines. Without a real way to differentiate themselves, and without a direct
link to the customer, they were left to compete on price, and would see profits swing wildly with
changing economic conditions.
SABRE, on the other hand, had positioned itself firmly as a central broker between the different parts of
the value diagram. However, at the time, it shared this broker space with the travel agents and the
years leading up to the mid-1990s would see an ongoing battle for the value capture in this space. By
1989, over 80% of tickets were booked through travel agents, putting SABRE and other GDS in a difficult
position. First, they had to get travel agents on board to support their own relevance. But, they also
needed to do it in a way that didn’t give away too much.
Much of the period from 1984 to 1997 was about finding the appropriate balance of incentives. SABRE,
along with the other GDS’s eliminated access fees for most agents and also added “incentive payments”
between $1 - $2 per ticket.21 These moves created incentives for scale and helped provide a barrier to
entry for any other systems. Over time, four main GDS came to dominate the space. But, the entry fee
was costly, and reduced the ability of SABRE to capture large amounts of value in the system.
20
In 2007, Sabre was acquired by a private equity firm and stopped publicizing results. Indications have been that
it has since struggled amongst stronger competition, but still remains in a better position than American Airlines
21
Edelman, Benjamin. “Distribution at American Airlines (A).” Harvard Business School. June 22, 2009.
11The industry structure remained this way until the 1990s when, with the invention of the internet,
SABRE saw the opportunity to reconfigure the ecosystem once again. For years, the travel agents had
been the connection to the customer and, as such, had received much of the broker benefit. However,
the internet provided an opportunity to go directly to the customer and subtract the travel agent from
the equation.
In 1997, SABRE launched Travelocity, a website
Stage 3: Subtract
that allows customers to search and compare
different fares instantly. In doing so, it offered Airlines Customers
all of the value of the travel agent without
having to leave one’s home. Also, since a major S
player was removed from the value blueprint, A
they were able to offer some of the saved value
to the customer to entice them to adopt the
B
new technology. From SABRE’s perspective, R
they had completed a restructure of the travel E
booking industry and place themselves at the
very center of the ecosystem.
The impact of the repositioning can be seen directly in the financial results of both SABRE and American
Airlines. American Airlines saw vast profit swings throughout the period, with negative results for most
of the early 2000’s. SABRE faces tough competition in the online booking space, but as a central broker,
it has been able to consistently capture value and mitigate downwards swings throughout the period. It
is fully enjoying the benefits of the system that it largely helped to create.
Net Profit - SABRE and American Airlines
2000
1000
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
-1000
-2000
-3000
-4000
American SABRE
22
Epilogue: Innovation at American Airlines
In hindsight, this is a devastating story for American Airlines. As we look at its struggles today, it’s easy
to associate at least a large part of the blame on its own innovate creation, SABRE. But, as we’ve walked
22
Data Source: WRDS Data for American Airlines and SABRE holdings company; information post 2006 is not
available for SABRE as it was acquired by Private Equity Firms
12through the history, we hope that we’ve shown how American consistently made decisions that were in
its best interest considering the ecosystem and the pressures it was facing. In particular, American’s
ability to anticipate the role of travel agents and move quickly to stake out a significant position in the
space helped AA to capture considerable value throughout most of the period discussed.
American’s challenges are not that it created a disastrous innovation, but rather that it didn’t keep
innovating when faced with a changing ecosystem. It is easy to blame the outside effects of airline
deregulation and government intervention on the GDS system, and these activities have indeed
contributed to a general decline in industry profitability. Nonetheless, American’s inability to anticipate
these changes and devise new innovations around differentiation has been the largest contributor to
the current situation. Turning things around will require a better understanding of the larger ecosystem
and the willingness to actively adapt to it, just as it did with SABRE fifty years ago.
13Exhibit 1: American Airlines and SABRE Selected Financial Results
American Airlines SABRE
Year Sales Net Income Sales Net Income
1995 $ 15,610 $ 208 $ 1,530 $ 226
1996 $ 15,136 $ 705 $ 1,622 $ 187
1997 $ 15,856 $ 780 $ 1,784 $ 200
1998 $ 16,299 $ 1,063 $ 2,298 $ 232
1999 $ 16,338 $ 627 $ 2,417 $ 332
2000 $ 18,117 $ 778 $ 2,597 $ 144
2001 $ 17,484 $ (1,562) $ 2,103 $ 31
2002 $ 15,871 $ (3,495) $ 2,043 $ 214
2003 $ 17,403 $ (1,318) $ 2,001 $ 83
2004 $ 18,608 $ (821) $ 2,126 $ 190
2005 $ 20,657 $ (892) $ 2,519 $ 172
2006 $ 22,490 $ 164 $ 2,808 $ 156
2007 $ 22,794 $ 356 NA NA
2008 $ 23,696 $ (2,531) NA NA
2009 $ 19,898 $ (1,474) NA NA
2010 $ 22,150 $ (469) NA NA
2011 $ 24,000 $ (1,965) NA NA
Notes
In 2007 SABRE Holdings was acquired by Silver Lake Partners and TPG Capital.
All sales and net income figures are reported in millions of U.S. dollars.
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