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Airline-backed site set to enter Web travel fray

Industry Standard

(IDG) -- Airlines have stood by and fumed over the last few years as millions of dollars in ticket-sales commissions slipped through their fingers and into the pockets of online travel agencies Travelocity and Expedia. Now, after much fanfare -- and some delay -- the airlines are getting ready to launch their counterattack: Orbitz, a travel startup backed by the major carriers. With this venture, they hope to bring the bulk of ticket sales back under their wing.

It won't be easy, for several reasons. First, the competition from independent online agents is fierce. Travelocity has 25 million registered users, while Expedia has 12 million, according to research firm PhoCusWright. While there has always been a give and take between the airlines and travel agents, the balance of power online tilts away from the airlines. "The only thing worse than 30,000 travel agencies is two," says PhoCusWright CEO Philip Wolf. Second, the technological challenges are daunting. And last, airlines are enjoying success with their own sites, making a joint venture that much less appealing.

Still, the airlines insist they remain committed to the venture. The Chicago-based Orbitz, which was originally dubbed T2 -- "Travelocity Terminator" -- plans to offer a broader selection of tickets at better prices than the big two. Whether the airline-backed site can deliver on that promise remains a big question, but Orbitz CEO Jeffrey Katz is predicting that the venture will be profitable by the first quarter of 2003. INFOCENTER
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After technological glitches forced Orbitz to miss its initial launch date last summer, executives say they're on track to begin peddling tickets to the public in June. They quietly began testing a version of the site last month, making it available to 200 family members and friends. Twenty-nine carriers have committed to list all their fares on Orbitz -- including special discounts offered only on airline Web sites and not available on either Travelocity or Expedia. Building a system that will let thousands of consumers simultaneously access virtually all ticket quotes has been a big headache; as recently as December, the operation was plagued by glitches. The company refuses to let reporters view the current test site.

Of course, saying you have the technology and proving it works are two different things. An early test will come in the next few months, when the airlines will have to decide whether to pour more money in the venture. So far Orbitz has received a combined $50 million investment from the five major airlines -- American, Continental, Delta, Northwest and United. It will run through that money soon and is now seeking $100 million more. No one will pony up if the service doesn't work.

In the meantime, a number of airlines have been pursuing their own online sales efforts that could undermine their interest in Orbitz. While Orbitz boosters see the need for a broad site to counter Travelocity and Expedia, other industry analysts note that the airlines have been chipping away at the dominance of online travel agents. Airline Web sites -- more than a dozen are operating in the U.S. -- accounted for 58 percent of all online air travel bookings in 2000, a jump from 53 percent in 1999, according to PhoCusWright. Conversely, online travel agencies' share fell to 42 percent from 47 percent. Says Mike Boyd, president of the Boyd Group, an aviation consulting firm: "Airlines have their own reservation systems, their own Web sites. Why would they have another one?"

United, Delta and America West have created separate e-commerce divisions to manage their own ticket sites, and that approach leapfrogs any third party -- whether it be a travel agent, Travelocity or Orbitz. Southwest Airlines, which has decided against joining Orbitz, reported in December that 30 percent of its passenger revenues came from its Web site, and that cost the airline only $1 per ticket, compared with $10 to sell a ticket through a traditional travel agency.

But Al Lenza, VP of distribution and e-commerce for Northwest Airlines, dismisses the idea that airlines can depend solely on their own sites for sales. Many customers want a "full shopping experience" online, he says. "Our Web site alone would never succeed at capturing that market."

Orbitz holds a major incentive for the airlines: huge savings. They typically pay agents 5 percent commissions per ticket plus a booking fee ranging from $10 to $16 to reservation system companies like Sabre (which owns 70 percent of Travelocity).

Sabre and the other reservation system companies maintain and provide the databases that travel agents use to track schedules, prices and seat availability. Orbitz is receiving limited assistance from Sabre's rival, Worldspan, and is developing technology that will allow participating airlines to bypass Sabre, Worldspan and other operators of computer reservation systems and thus cut their fees by one-third.

Lenza also argues that the airlines can't afford to be at the mercy of the online travel agencies. There was an instance when Northwest proposed offering special fares with Expedia, but the deal never went through because Expedia refused to give the airline more prominent placement on the site than it was already giving one of its own "strategic partners," Lenza says.

What does it take to be a strategic partner to Expedia? "They want money, they want advertising and they want co-marketing," Lenza says. "It's obvious that they are trying to maximize revenue, and they're not necessarily interested in having as many airlines file as many low prices on their site."

Expedia spokeswoman Suzi LeVine says that such grumbling misses the point: That kind of competition is good for the consumer. "Everybody should have such problems having airlines compete to give our customers deals."

Furthermore, the idea that an Orbitz participant would denounce Expedia as anticompetitive strikes some people as hypocritical. Says Ed Perkins, a consumer advocate for the American Society of Travel Agents: "Whenever a bunch of companies who are supposed to be competitors get together, then I think consumers better watch their pockets." Michael Stacey, Travelocity's senior VP of consumer marketing, adds that if all of the competition is squashed and Orbitz is the biggest site standing, then "what motivation do they have to be an advocate for the consumer?" That's exactly what worries regulators. [See "A matter of trust," link below.]

It is unrealistic to imagine that Orbitz is going to wipe its online rivals off the field. And there's probably no harm in getting one more big marketplace for tickets. It'll be a crowded battlefield and, at least in the short term, the winner will be the consumer.

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A matter of trust
(The Industry Standard)
Orbitz still awaiting clearance for takeoff
Attorneys general voice antitrust concerns about Orbitz
Airline-backed online travel agency banks on new search engine
Orbitz CEO: Late entry forces airline-backed ticketing site to spend big
Orbitz launch delayed for a year
Travelocity, Expedia continue to slug it out
Orbitz, critics joust over airline Web site at hearing

Orbitz, LLC
Expedia, Inc.

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