Regulators have moved to block a distribution merger. That’s a very 2019 view
Regulators are not sunning themselves on beaches this summer, it seems.
Competition authorities in both the US and UK have this week raised concerns over Sabre’s proposed acquisition of distribution technology company Farelogix.
In the US, the DOJ has filed a civil antitrust lawsuit seeking to block the US$360 million deal because it “would eliminate competition that has substantially benefitted airlines and consumers”.
Assistant Attorney General Makan Delrahim said, “Sabre’s proposed acquisition of Farelogix is a dominant firm’s attempt to take out a disruptive competitor that has been an important source of competition and innovation. If allowed to proceed, the acquisition would likely result in higher prices, reduced quality, and less innovation for airlines.”
Sabre has said it will challenge the DOJ ruling, claiming that it lacks “a basis in reality and reflects a fundamental misunderstanding of the industry”.
Responding to the ruling, Sean Menke, Sabre’s president and CEO, said, “Over the past two years, Sabre has embarked upon a strategy with an entirely new executive management team focused on evolving the underlying technology of the travel ecosystem we support. To meet travelers’ changing expectations while increasing profitability, airlines need a technology partner that is ready to deliver tomorrow’s technological solutions today. Together, Sabre and Farelogix will drive faster innovation in the dynamic, highly competitive airline technology space, helping airlines accelerate their growth and profitability while better serving travelers. We look forward to closing this transaction and to delivering the benefits it will enable for our airline and agency customers, corporations, and travelers.”
In the US, Sabre has a more than 50% share of airline bookings through travel agencies.
Despite Sabre not being the market leader in the UK, the Competition and Markets Authority (CMA) also said this week that it will not wave through the deal.
In its Phase 1 investigation it found that “Farelogix is much smaller at present but is an important competitive threat to Sabre and recognised as an important innovator with a disruptive business model”.
The CMA said that Farelogix’s “innovative technology…would have been expected to further develop and grow…in the future” and that Sabre would not face enough competition from other suppliers, “leading to higher prices or lower quality services, as well as reduced innovation in the industry generally, which could have adverse effects for airlines, travel agents and consumers across the UK”.
Farelogix was founded in 1998 and has its headquarters in Miami. It now has more than 250 employees and counts American Airlines, Emirates, Lufthansa, Qatar Airways and Virgin Atlantic among its customers. Farelogix provides NDC-certified connections for its airline partners, including for Lufthansa’s Direct Connect.
So what is likely to happen?
The world of distribution has been disrupted enormously in the decade since Farelogix was founded. Sabre’s decision to acquire Farelogix was driven by a recognition that its comfortable world was changing, driven largely by the airlines’ decision to move forward with NDC.
We are still in the early days of NDC. The number of live NDC-enabled transactions is tiny but growing. IATA has set a 2020 target for 21 airlines – including all of the Farelogix partners mentioned above – to make at least 20% of their sales via NDC.
Sabre may look dominant as a GDS right now to the regulators but come next year that dominance, in the US at least, may be starting to look a little shaky unless the Farelogix deal is agreed.
Our view is that the deal will eventually be given the green light but with stringent conditions on Farelogix’s pricing and operations post any merger.