“DALLAS, TX, MARCH 7, 1996. The world’s leading hotel chains today launched TravelWeb, the first Internet Web site from which hotel rooms can be selected and reserved directly from a personal computer.”
Four years and an Internet lifetime ago, John Davis III issued a now-quaint press release to stake his claim to a footnote in online history: the first real-time hotel booking in cyberspace. And not a minute too soon, since a mere five days later Fort Worth’s Travelocity would go live with full capability to book not only hotels but also airlines and rental cars, backed by the firepower of American Airlines’ Sabre reservation system.
Undeterred, Davis patiently built TravelWeb and its parent company, Pegasus Systems, into a powerful, nearly invisible backbone of the world’s network of electronic hotel re-servations. By embracing the glamour-free dirty work of transactions processing, building user interfaces, and collecting and paying reservations-agent commissions, he has maneuvered himself into the enviable position of collecting fees of up to 5 percent on the majority of all online hotel bookings—a situation that’s likely to improve, thanks to Pegasus’ recent acquisition of REZsolutions. The hotel-services company had been among the world’s most powerful reservations facilitators; in a single stroke, Davis increased his workforce from 150 to 2,100 and his number of offices from 2 to 50, and he quadrupled his annual revenues. He also gained the tools necessary for global expansion: access to international hotel markets, contracts with major non-chain hotels, and a network of reservations offices around the world. The hidden gem of the deal is REZsolutions’ NetRes technology, which makes possible Web-based communications between hotels and their customers and vendors.
The acquisition comes at a good time. The online travel industry is booming for the simple reason that the travel marketplace is ideally suited for the Internet. The product sells itself and easily translates to audio and video. There’s nothing to ship or warehouse. And even an online novice can click and buy in a matter of minutes. A leading online travel researcher, PhoCusWright, which is based in Sherman, Connecticut, estimates that e-hotel sales alone generated $1.1 billion in revenues in 1999, with $4 billion projected for 2001. Factoring in airline bookings, rental car reservations, and the like, the e-travel category was worth $7 billion in 1999, with $20.2 billion expected for 2001.
Much of that activity has a Texas tie. Travelocity is the world’s largest online travel service; after buying out the number three e-travel provider, Preview Travel, earlier this year, its projected annual revenues ($1 billion) and number of registered users (17 million) should far surpass those of number two, Microsoft’s Expedia.com. Travelocity is also the number four e-commerce site in the U.S., trailing only Amazon.com, eBay, and barnesandnoble.com. This dominance is at least partly the result of the company’s alliances with high-traffic Web sites like Yahoo!
Of the state’s other online travel sites, the most successful is aa.com, the Web site of Fort Worth-based American Airlines, which posted $575 million in bookings in 1999. Southwest.com, the site for Dallas’ Southwest Airlines, is easier to navigate; it’s almost certainly a significant revenue generator, though the company won’t release specific figures. On the discount-travel side, there’s hoteldiscount.com, the e-home of Dallas’ Hotel Reservations Network, which estimates $150 million in sales in 1999. Arlington’s subscription-only bestfares.com, primarily a place to make off-peak and last-minute travel reservations, pulled in nearly $104 million in 1999.
Each of those sites is better known to the public than Davis’, but few are as indispensable to the operation of the overall online industry. It’s the hotel-booking engine behind many of the biggest e-travel sites and nearly every major hotel site. Pegasus has reservations relationships with more than 32,000 hotels and 115 of the biggest hotel chains in the world, and Pegasus Electronic Distribution is a hotel-booking mechanism for 300,000 travel agent computers.
But two of Davis’ more recent innovations confirm his ability to wring the last cent of profit out of a transaction. Pegasus Commission Processing, developed in 1992, extracts fees from more than 80,000 travel agents (including rivals such as Travelocity) for collecting commissions and from hotels for processing the commission payment. Two-year-old Pegasus Business Intelligence, meanwhile, compiles booking data and sells it back to the hotels to analyze sales strategies. Inelegantly put, Pegasus is like the hog farmer who can boast that he uses every part of the pig but the oink.
How did the company carve out such a position for itself? It all began in 1988, when Davis was hired to be the president of the Hotel Switching Company, or THISCO, a consortium of fifteen major hotel chains. Even though he wasn’t especially well suited to create a program that would make it possible to book hotel rooms electronically—“I owned a computer and I had stayed in hotels; that was the extent of it,” he says today—he was given the task of developing a computer “switch” to link directly the chains’ diverse reservations systems with the eight major airline computer Global Distribution Systems (only four major GDS exist today).
Their faith was justified. A graduate of Texas Christian University with a degree in business administration, he had tried his hand at politics in his twenties with mixed success. At the age of 25, he served as the campaign director for U.S. senator John Tower’s successful 1978 reelection bid. Davis subsequently ran for state representative and lost in a close race—“Probably saving me,” he says, “from living in a mobile home for the rest of my life.” After politics came business. He was the president of Mid-South Drilling Company and founded a Dallas telemarketing company, ATC, which had grown from 12 employees to 1,200 by the time he sold it two years later. Perhaps his most notable accomplishment was co-founding 1-800-FLOWERS, the teleflorist that has since added a dot-com to the end of its name. The company was foundering financially when Davis was bought out by his partner, Jim McCann, but the centralized marketing concept he had developed—consolidating access to a neighborhood commodity and making it available nationwide at no cost to the consumer—presaged the one he would later exploit at TravelWeb and Pegasus.
Davis indeed developed the switch, and when it went live in 1989, he began pitching it to other hotel chains not in the consortium. Before long he figured out that universal access capabilities could make it possible for online services and even the Internet to plug into the hotel reservations systems. In 1994 THISCO launched TravelWeb as an online hotel and travel catalog. It was all looking and no touching—you still had to book your reservation offline—but it was groundbreaking at a time when most people thought “www” stood for “Wild Wild West.”
“Did I believe that in ten years everybody in the world would be on the Internet?” Davis asks. “No, gimme a break! And if I’d known how much money we were going to lose on the Internet, I’d have probably stayed away for a while.” Nevertheless, TravelWeb’s hotel booking capabilities went live in December 1995, and by the following August, the company had added the ability to purchase airline tickets via a third-party airline reservations engine.
The once-popular myth of the Internet as an inexpensive retail pipeline didn’t last long around Davis’ office. “I did not know how expensive it was going to be,” he says. “It is fighting for eyeballs and day-to-day name identification.” Wisely declining to squander all its resources in the costly battle for the consumer market, he instead thoroughly infiltrated the less sexy but still highly profitable electronic hotel reservations process—a decision that has since earned him numerous industry awards, including the honor of being named Person of the Year in Interactive Travel by The Interactive Travel Report. “Part of John’s excellence is his ability to lead early,” says Philip Wolf, the CEO of PhoCusWright.
Sitting in his office on Turtle Creek, gazing out the window at a stunning view of Highland Park, Davis marvels at the wonders a few short years have wrought. “The Internet has changed the entire world,” he says. “It’s incredible to me the opportunities that have been created.” There are certainly more to come—and he and his competitors will be there as they look for ways to make a buck off of teaching the old travel dog new high-tech tricks.
Fare Thee Well?
How much do you want to pay for an airline ticket? As little as possible. But how successful is the e-travel crowd at finding the lowest fare? Here’s how four Texas-based Web sites—travelocity.com, travelweb.com, aa.com, and southwest.com—and a real world, not-com travel agency, Christopher Travels, in the Austin suburb of Lago Vista, stacked up against each other. The goal: Find the cheapest round-trip fare between two cities based on specific travel dates regardless of travel times or itinerary. M.S.
2. Business trip to the New York City area from Austin, leaving on Monday and returning on Wednesday. Six-day advance purchase.
Best: $528 (Christopher Travels, which found a cheap fare that required a change of airlines in Dallas)
Worst: $1,488+ (everybody else)