Airline sites take off fast
June 9, 1999
by Todd Woody
(IDG) -- In a corner office at American Airlines' headquarters near the Dallas-Fort Worth International Airport, John Samuel markets one of the leading airline Web sites, aa.com. A block away, Terry Jones runs Travelocity, a leading consumer travel site, out of airline reservation giant Sabre's sprawling offices, where a colorful Travelocity sign is affixed to one end of the building's beige facade.
That all three companies sprang from the same corporate parent – AMR (AMR) Corp. – is a sign to some observers that airlines are moving to dominate the online travel industry. Indeed, after a slow start, the carriers have quickly grabbed market share.
Last year, the airlines wrote 60 percent of all air tickets sold online, according to market research firm Jupiter Communications. Until recently, that market had been the province of pioneering Internet travel agencies like Preview Travel (PTVL). United Airlines followed American to the Web in 1998. The airline launched ual.com while making a minority investment in Internet Travel Network, a Palo Alto, Calif., company that operates corporate travel sites and its own consumer site. In its first year, ual.com sold $200 million in tickets – matching Preview's total bookings for all travel that year.
Samuel, American's managing director for interactive marketing, predicts aa.com will book a half billion dollars worth of airline tickets this year. (The airline declined to provide 1998 online sales figures.)
"Airlines are positioned to become the new 'online travel broker' for all types of travel bookings," Jupiter analysts wrote in a 1998 report. Last month in Chicago, Jupiter put it more bluntly. In a video that opened its annual travel conference, the company flashed the question, "Will you be disintermediated?" to the assembled travel agents.
But the airlines so far have been rather indifferent disintermediators. The rapid growth in their online sales has been a byproduct of universally recognized brand names and a loyal cadre of frequent fliers, rather than any grand plan to seize the Internet travel market.
Online sales, though growing fast, represent only about 4 percent of their revenue. But airlines fear alienating travel agents – online and offline – because they sell about two-thirds of their tickets.
"If a customer finds more value from going to Preview because they can get a whole set of services, we don't see that as a bad thing," Samuel said at the Jupiter conference. "The way to get market share is from the great mass of people who are not on the Internet."
A United Airlines official maintains that the company doesn't want to drive travel agents out of business. "We recognize the value agencies bring, and we don't want to offend. We have to be very careful," says Laurie Salvano, marketing manager for ual.com.
Online travel agents themselves profess to be unconcerned about the airlines' Web involvement. "This is like Monaco taking over Liechtenstein and declaring world victory," says Travelocity President Terry Jones about the airlines' early success.
Such collegial spirit aside, the entry of airlines, hotels and other suppliers into the Net travel market is rapidly altering the online landscape. The category looks even more chaotic when you add travel wholesalers like Travelscape.com, reverse-auction sites like Priceline.com and newly wired traditional travel agencies. "There's lots of different business models that are going to exist in this world," says Samuel.
How all this competition shakes out may well depend on whether the airlines – the proverbial 800-pound gorillas of the travel industry – remain content serving their most-profitable frequent fliers or begin to covet leisure travelers who are the bread and butter of online agencies.
Although the nation's biggest airlines – United and American – had long offered proprietary, dial-up booking services, they were fairly late entering the Web game.
"At the beginning, we had a lot of discussions with [former American chairman and CEO] Bob Crandall about strategy. Who should run [the Web site], who should do what," Samuel says. In 1996, AMR spun off Sabre as a separate company and took it public. AMR retained about 82 percent ownership of Sabre, which provides airline-reservation services.
Sabre, which already had been selling consumer travel online through its EasySabre service on America Online (AOL), Prodigy (PRGY) and CompuServe, decided to launch Travelocity on the Web. American Airlines, like other carriers, targeted its Web site at business travelers and other frequent fliers.
The airlines decline to disclose their exact revenue from business travelers. But the carriers acknowledge that these corporate road warriors generate about two-thirds of their income. Samuel says that American derives more than 80 percent of its revenue from business travelers.
It's easy to see why: If George and Martha in Seattle are flying to Dallas to visit their grandson, they might have paid $350 if they bought their tickets two weeks in advance and are staying over a Saturday night. The harried businesswoman crammed into the next seat probably forked over $1,400 for a last-minute ticket, but she still gets the same bag of stale pretzels as George and Martha.
The airlines lure frequent fliers to their Web sites with bonus miles for flights booked online and offer online-only discount fares. American established the first frequent-flier program in 1981. According to Samuel, 35 percent of American's gold, platinum and executive platinum members – those that fly at least 25,000 to 100,000 miles a year on the airline – have registered at aa.com.
Some analysts and industry insiders expect the airlines to capitalize on that gold-card mine to expand their services, mimicking the online travel agencies. Ual.com already offers hotel and car reservations and vacation packages. United frequent fliers can comparison shop for the best airfares. The site will highlight cheaper fares on other airlines, but only about 15 percent of ual.com's sales go to competitors, according to marketing manager Laurie Salvano.
United is something of an exception. Other airline sites offer some of these services, but they don't make them easy to use – no doubt loath to point their customers to competitors.
Even United, however, shies away from suggestions that it might one day evolve into a Preview Travel. Salvano says the hotel and car-rental portion of the site was developed as a "courtesy" to frequent fliers and that such offerings account for a minuscule percentage of ual.com's revenue.
"The all-inclusive package is something online agents can do better than United can," Salvano says in an interview at United's headquarters near Chicago's O'Hare International Airport. "When you're talking about car and hotel beyond air, they're probably the experts on that. As well as at the follow-up, the personal touch."
Even if the airlines wanted to give the online agencies a run for their money, they face several obstacles. The most immediate problem is finding enough bodies. The airlines, which have traditionally promoted from within, have been forced to compete with Net companies for employees. "We can't grow fast enough," says Salvano, a 15-year United veteran. "We can't get qualified people inside, or they're moving on to something bigger and better."
Then there's the task of trying to compete in an entrepreneurial marketplace from inside a large corporation. Ual.com, acknowledges Salvano, is "barely even a brand" as far as the corporation is concerned.
American, however, spun off aa.com as a separate group within the airline. "Certainly, in the early years, it made us particularly nimble. Now we're struggling with some of our own growth," says Samuel, whose polo shirt and chinos set him apart from the button-downed look of American's corporate culture.
Samuel says aa.com doesn't intend to take on the consumer travel sites. It doesn't have to – its sister company Travelocity is already one of the top travel agencies in the consumer market. Sabre, meanwhile, handles the technological operations for aa.com, as well as other airline sites, and builds Web sites for traditional travel agents.
Aa.com and Travelocity may share corporate genes but Travelocity President Terry Jones insists, "There's no relationship to American at all. If anything, they treat us at more arm's length than other airlines." He points out that Microsoft (MSFT)'s Expedia travel site recently ran a two-for-one offer from American Airlines that wasn't available to Travelocity customers.
Travelocity has also had to create an entrepreneurial culture inside a bureaucratic corporation. It's a challenge illustrated by Jones' business card: On one side, he's listed as Travelocity's president; on the other, he's president of Sabre Interactive.
Jones says he keeps in mind the fate of the previous occupants of his office, a division that produced slides for corporate presentations. "I asked the guy running it, 'Have you ever heard of PowerPoint?' He said, 'It will never be important.' That unit is out of business and he's selling insurance now."
As entrepreneurial as Travelocity aims to be, it still faces constraints imposed by the suits in the corporate suite. While independent companies like San Francisco-based Preview Travel can invest some $60 million in portal deals, Travelocity must answer to the bean counters. "Because we are part of a major corporation that has a bottom-line focus, we have to be very selective and enter into partnerships carefully – ones we can afford," remarked Travelocity marketing director Sheryl Gatto at a travel forum in Los Angeles recently.
A former travel agent himself, Jones discounts competition from the airlines. "I'm not concerned about their distribution strategy. I think it's very hard for any company to change what it is. You don't expect service at a large big-box retailer."
The airlines, says Preview Travel CEO Jim Hornthal, "have to define their business. If they want to be travel agents that own planes that's one thing. If they want to fly planes, that's another."
"American is more than entitled and expected to get the platinums and golds to their site. You've earned that loyalty forever," he says.
Hornthal and his fellow online agents have no choice but to be magnanimous. Last year, the major airlines began paying a flat $10 commission on tickets booked online. That means the business flier who paid $1,800 for that trip to Chicago is worth no more in commissions than the weekend warrior who bought a $109 seat on the San Francisco-Los Angeles shuttle.
The airlines began putting the squeeze on Net travel agencies (and to a lesser extent, traditional agents) before they even began selling online themselves. In September 1997, the airlines cut commissions paid to online agents from 8 percent to 5 percent. Preview, for instance, now earns an average commission of 4 percent on airline tickets.
"The business model is tough. It's a combination of volume and diversifying revenue," says Expedia Product Manager Suzi LeVine.
The online agencies' answer to the incursion by airlines and other travel suppliers has been to create full-service, one-stop shopping for leisure travelers by expanding into vacations and cruises. The agencies also are concentrating on customer service and creating expansive libraries about travel destinations.
In the end, that strategy may pay off in more ways than simply attracting extra customers. The airlines are more than happy to let online agencies invest tens of millions of dollars in portal deals that drive traffic to agency sites, thus selling more tickets for the airlines. And if more leisure travelers buy their American or United tickets at online agencies, so much the better.
"People in the airline industry don't want agencies out and they don't want them in," former American Airlines CEO Robert Crandall noted at the Jupiter conference. "They don't care. They want to distribute airline tickets in the most cost-effective way possible. If the agencies don't add value, they will do it themselves."
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