Travel activities at your destination gets twice the money of car rental business

Tour activitiesWhat do you do when you get to your destination? Well, apparently you spend $27 billion. A recent report from travel industry research firm PhoCusWright says that’s how much was dropped on the travel activities, events, attractions and tour space in 2009. Yep, $27 billion sounds like a big number, and doubtless, it is. But, did you know that it’s almost twice the size of the car rental market in the United States?

Several factors are responsible for the growth of this sector of the travel business, including “a growing aggregator network and advancements in technology and commercial models will power significant growth in advance bookings and online distribution,” says PhoCusWright.

And, it’s going to keep going.

Look for double-digit growth for travel activity bookings via online channels through 2012.

“The challenges of connecting to myriad small providers with limited technical capability and a low average transaction value have inhibited online distribution of travel-related activities,” notes Douglas Quinby, senior director, research at PhoCusWright. He adds that “while the market remains highly fragmented, key activity aggregators and a flood of innovation related to local search, social media and mobile devices are creating unprecedented opportunities.”

[photo by Richard Hsu via Flickr]

Sabre tells clients of American Airlines drop, booking war is scorching

Sabre and American AirlinesOkay, we all saw this coming. The battle that was expected between airlines and online travel agencies as a result of improving market conditions has reached a high level of intensity, centered on American Airlines (with Delta playing a supporting role).

The situation is running deep, as both American and Delta have stepped back from online travel agencies (though for slightly different reasons). American Airlines is eager to push its Direct Connect system, which is what led it to pull out of Orbitz. Expedia, seeing the early stages of a trend, dropped American Airlines, likely as a defensive move to prevent a surprise later. Delta pulled out of three smaller online travel agencies – CheapOair, OneTravel and BookIt – to consolidate its distribution channel and focus on a core group of partners.

This has led to incredible amounts of uncertainty and angst in the airline and travel sectors, as the escalation has been swift and unconstrained. We’re past the early stages of the conflict between the two sectors. A month ago, Douglas Quinby, Sr. Director, Research at PhoCusWright, told me that things were just starting to percolate. Now, he explains, “[W]e saw the tip of the iceberg back in November, when American said it intended to pull its fares and schedules from Orbitz. We are now starting to see more and more of the iceberg,and it is a big one.”

Specifically, global distribution system Sabre has announced that it is terminating its relationship with American Airlines. This is ironic, of course, as the idea for Sabre was hatched on an American Airlines flight in 1953 by American’s president, C.R. Smith and IBM senior sales representative R. Blair Smith. Six years later, they made it a reality (Sabre spun off from American Airlines parent company AMR completely in 2000 following a 1996 IPO).

Quinby continues, “[W]ith Sabre’s escalation, the pressure clearly has to be building on American. What’s next is a near-term compromise that will result in an uneasy truce (with the potential for further escalation before we get there).”
But, that might take a while to reach, as you can see from Sabre’s recent message to its clients, revealed to Gadling yesterday. The company says:

Sabre has taken a set of actions to protect what you have told us is important to you – full air fare transparency and the ability to efficiently operate your business. As part of these actions, we have changed some of our availability and shopping displays to support airlines who value the transparency and efficiency of the proven system our customers use to serve travelers.

Sabre adds:

We have also initiated termination of our global distribution agreement with AA. We have provided AA notice that accelerates the termination date of our current agreement to the extent possible, culminating in early August. We are seeking a new agreement with AA that provides our customers long-term assurances of efficient comparison shopping.

AA’s stated plans regarding its “Direct Connect strategy,” backed up by its recent actions, are an attempt to impose a costly, unproven and unnecessary system that would make it harder and more costly for you to operate your business and for your customers to comparison shop based on full and transparent fare information. Based on AA’s actions, in addition to the steps noted above, we have also given notice that we are eliminating the substantial price discounts AA has enjoyed consistent with its prior long-term commitments to provide full content and support efficient comparison shopping for our agency and corporate customers.

It’s clear that the escalation is continuing, and Sabre isn’t the only player using heated language. In a statement on its website, American Airlines countered that Sabre has “taken a set of punitive actions against the airline and its customers, despite the fact that American has met all its obligations and continues to work in good faith with Sabre.” And, it has lobbed at Sabre the same “anti-competitive” accusation that the online travel agencies leveled at American. For good measure, American adds:

Sabre’s actions are discriminatory and patently inconsistent with both its contractual obligations and its professed goal of ensuring full transparency for the benefit of consumers and travel agents. In contrast, the actions only serve to protect Sabre’s market position and attempt to force airlines and travel agencies to rely exclusively on its legacy systems that only lead to higher fares and fewer choices for consumers.

In a message to members of its frequent flier program, AAdavantage, American said:

While there is much misinformation circulating on these matters, rest assured that tickets for travel on American Airlines and American Eagle – including all international and domestic classes of service – are widely available through a number of outlets, including American’s own website, AA.com, which features our Lowest Fare Guarantee. Tickets, fares and schedules are also available through American’s reservations agents, thousands of travel agencies in locations worldwide, other online travel agencies such as Priceline.com, and travel search engines such as Kayak.com. For more information, please visit AA.com.

There are rumors circulating that Priceline has signed on for American’s Direct Connect program, but nothing has been confirmed – a smart move given how volatile the disputes are getting between American and the other online travel agencies.

Of course, the actions by Sabre have led many to wonder if Amadeus, another global distribution system, is going to jump into the fray. This seems likely, Quinby told me by email: “Amadeus has a pretty small presence in the U.S. so they may sit this one out (with a good bowl of popcorn!)”.

Here’s the Sabre message in full and unedited:

Dear Sabre Customer,
This is to notify you that Sabre has taken a set of actions to protect what you have told us is important to you – full air fare transparency and the ability to efficiently operate your business. As part of these actions, we have changed some of our availability and shopping displays to support airlines who value the transparency and efficiency of the proven system our customers use to serve travelers. Specifically, we have made changes in the Sabre . system that alter the order in which some of American Airlines’ flights appear in availability and shopping displays. The display changes do not apply for points of sale in the EU or Canada due to specific regulations in those markets.
We have also initiated termination of our global distribution agreement with AA. We have provided AA notice that accelerates the termination date of our current agreement to the extent possible, culminating in early August. We are seeking a new agreement with AA that provides our customers long-term assurances of efficient comparison shopping.
AA’s stated plans regarding its “Direct Connect strategy,” backed up by its recent actions, are an attempt to impose a costly, unproven and unnecessary system that would make it harder and more costly for you to operate your business and for your customers to comparison shop based on full and transparent fare information. Based on AA’s actions, in addition to the steps noted above, we have also given notice that we are eliminating the substantial price discounts AA has enjoyed consistent with its prior long-term commitments to provide full content and support efficient comparison shopping for our agency and corporate customers.
We understand that some customers may have concerns regarding the potential impact of these actions on their operations. I want to assure you we decided to take these actions only after very careful consideration of the negative impacts AA’s plans would have on your business and ours. We have a track record of acting in the best business interests of our customers and doing what is necessary to grow the value of the proven and successful system that enables travel agents, corporate travelers and consumers to efficiently and cost-effectively comparison shop.
Sabre is taking these actions as part of our efforts to obtain a new agreement with AA that provides long-term assurances to our customers who prefer to continue using a proven system that provides significant value to both suppliers and buyers of travel. We are committed to delivering this value to our customers for the long term, and we will take the necessary steps to accomplish that objective.
Sincerely,
Chris Kroeger
Senior Vice President, Marketing
Sabre Travel Network

And here’s the message to AAdvantage members, in full and unedited:

Dear Thomas Johansmeyer,

As a valued AAdvantage member, we want to clarify what you may be reading in the press. As a result of a commercial dispute, over the past several weeks there have been changes to how we sell our tickets. American Airlines last month removed its fares and schedules from Orbitz.com, and effective January 1 Expedia.com stopped offering American Airlines fares on its website. Additionally Sabre, a company that distributes airline fares and schedules, made it more difficult for travel agents to find and select American’s flights by moving our fares lower in the display order than they normally would be listed.

While there is much misinformation circulating on these matters, rest assured that tickets for travel on American Airlines and American Eagle – including all international and domestic classes of service – are widely available through a number of outlets, including American’s own website, AA.com, which features our Lowest Fare Guarantee. Tickets, fares and schedules are also available through American’s reservations agents, thousands of travel agencies in locations worldwide, other online travel agencies such as Priceline.com, and travel search engines such as Kayak.com. For more information, please visit AA.com.

We are committed to working with all distribution channels, including traditional travel agencies, online travel agencies and global distribution systems. We will keep you informed of important updates on these developments.

Thank you for giving us the opportunity to address this matter. We appreciate your business very much and look forward to welcoming you aboard soon.

Sincerely,

Maya Leibman
President
AAdvantage® Loyalty Program

Can travel booking sites endure the airline onslaught?

airline and travel booking sitesAmerican Airlines wanted out of Orbitz … and then it was bounced by Expedia (preemptively, it seems). Delta wanted out of CheapOair … and OneTravel … and BookIt. Nobody knows what’s next, but it appears that something is on the horizon, given the magnitude of change in the airline/online travel agency landscape over the past few weeks. I wrote a month ago that a “brand war” was brewing, a sentiment that has since been echoed by other media and research organizations.

So, as the battle intensifies, it’s natural to ask one simple question: should online travel agencies actually exist?

Specifically, a comment by Delta’s Glen Hauenstein on Tnooz caught my attention:

“We look at it very much like an Apple store versus Best Buy. You can buy components or Apple products at both. Your experience in an Apple store is obviously quite different than it is at a Best Buy store. That model is what we think about when we think about Delta.com.”

This remark, delivered by Hauenstein at a Delta investor event, is seductive for its simplicity. Ithas everything the airline needs to look cool and in control. It aligns itself with the most innovative retailer on the planet, contrasts itself with a passé business model and makes the strategy look viable. In pulling out of CheapOair, OneTravel and BookIt, Delta creates the appearance of exclusivity and style (at least acceding to Hauenstein).

This would not bode well for the online travel agency sector, as the Delta play would indicate that owning the customer itself is far superior to sharing the customer with an intermediary. And doubtless, this is true: having the customer create a relationship with your brand is always best. The problem, unfortunately, is that this approach isn’t viable. There will always be bargain-hunters, comparison shoppers and lovers of alternatives who are natural online travel agency customers.Now, let’s return to Hauenstein’s retailer analogy. It actually fits, though not as he intended, particularly because Delta is not a premium alternative in the manner of Apple relative to Best Buy. Its product is a commodity, just like the products offered by the vast majority of airlines. Rather, we’re looking at a single-brand retailer (e.g., The Gap) relative to a major discounter (e.g., Wal-Mart).

Let’s dig into this a little bit. There’s something about the online travel agency model we can learn from the retail sector.

With the National Retail Federation’s “Big Show” in New York right around the corner, Deloitte’s Global Powers of Retailing report is bound to hit the world soon, and it will show, I suspect, that Wal-Mart is once again the largest retailer in the world. Doubtless, Target, Tesco and Carrefour will be in the top 10 as well. You won’t find Apple, The Gap or J.Crew, though. And, this is a situation that hasn’t changed much in more than a decade.

The vast majority of customers in the retail space want choice. That’s why they go to Macy’s and malls and big-box retailers. Of course, the travel consumer’s behavior is quite different. Most still prefer to book on the airlines’ websites – 62 percent, according to travel industry research firm PhoCusWright. Nonetheless, that leaves a considerable chunk of the market available to online travel agencies, and it indicate that roughly a third of the travel-buying community wants easier access to choice than the airline websites afford.

Also, the market share number can be deceiving, as Motley Fool explains:

Last year industry researchers at PhoCusWright said the global distribution system used by Orbitz, Expedia, and Priceline accounted for two-thirds of all airline passenger revenue, or $81 billion, in 2008. Losing a good portion of that money to the airlines will crimp the OTAs business, which they see as a threat to their future, but in the escalating rhetoric and use of force by both sides, it may be that all parties end up pouring more resources into a conflict that neither one really wants to fight.

The airlines do have a considerable negotiating position. The industry just recorded record profits, and with all the additional fees introduced, there are new revenue streams which seem to carry disproportionate large profit margins. A recovering market reduces price sensitivity among travel buyers, which leads to less bargain-hunting, also an advantage for the airlines.

Yet, what the airlines need to understand is that these factors are not absolute. Bargain-hunting behavior will continue. Consumer demand for choice – and the ability to evaluate options – will not recede in favor of unconstrained brand loyalty. The airlines may be in control, but the grip is not one of iron.

It’s pretty clear that the situation will get uglier over the next few weeks. I’m reminded of an email I received from Douglas Quinby, Sr. Director, Research at PhoCusWright, “American may have jumped the gun a bit with Orbitz, but believe me – we ain’t see nothin’ yet!” But, I don’t think a heightened level of intensity will necessarily lead to the decimation of an industry. The online travel agencies are here to stay: they aren’t going anywhere. The dynamic between these sites and the airlines, though, appears to be changing, and we’re just witness to growing pains.

Expedia demotes American Airlines, airline booking war gets HOT

Expedia and American Airlines intensify airline booking war

Could the battle between airlines and online travel agencies have gotten any more intense? This week, American Airlines got the green light in court to yank its fares from Orbitz, and Delta announced that it was pulling out of several smaller sites – CheapOair, OneTravel and BookIt. Travel industry experts are saying it’s about time, but that doesn’t lessen the shock to the business, especially with the rapid succession. Well, if you didn’t think it couldn’t get any crazier, brace yourself: the online travel agency community is fighting back.

Expedia is changing the way it shows American Airlines flights on its site, making it “extremely difficult” for users to find them, according to ABC News. Is it a show of solidarity, as Scott Mayerowitz of ABC puts it, or could it be an early form of risk management? By reducing its reliance on the American Airlines relationship, Expedia can mitigate the impact of an American withdrawal from its own site.

And let’s not underestimate the financial damage involved: the move by American with Orbitz could cause a nine-figure loss. For the first three quarters of 2010, the sale of American flights was worth approximately $800 million to the latter.

Mayerowitz confirms what I wrote several weeks ago, that a “full out war,” as he puts it, is at hand.At the beginning of December, I noticed that the increasing fares, an outcome of many economic developments, was indicative of a positive development for the airlines. Not only does it mean they can charge more, but it suggests that traveler price sensitivity is waning. Since airline web sites still own the bulk of online sales, the stronger brands of airlines will lead to continued growth in 2011, some of it likely to come at the expense of online travel agencies such as Expedia, Orbitz and CheapOair.

That forecast has become a reality.

This latest development, by Expedia, does not remove American from its site completely. The airlines flights still show up in search results, but the fare is not listed. Instead, users have to click a link to see the details.

Given the competitive landscape, it does seem evident that this is a defensive move on Expedia’s part. Expedia’s statement to ABC News is full of business risk management language:

“This has been done in light of both American Airlines’ recent decision to prevent Orbitz from selling its inventory and a possible disruption in Expedia’s ability to sell American Airlines tickets when our contract with American Airlines expires,” Expedia said in a statement to ABC News. “American Airlines has shown it only intends to do business with travel agencies through a new model that is anti-consumer and anti-choice.”

Basically, Expedia is saying it doesn’t want to get caught with its pants down – as Orbitz was. By taking early action to reduce its reliance on American, it can facilitate a smooth transition at the end of its contract (if necessary) or at least maintain a solid negotiating position.

ABC News reports that passengers looking for bargains will have to work a little harder as a result of this trend toward fragmentation, but the implications may not be as severe as it seems. Bargain-hunting has always involved a measure of this sort of behavior, as would-be buyers would hit airline sites as well as several online travel agencies. This is reinforced by the fact, according to data from travel industry research firm PhoCusWright, that 28 percent of visitors to online travel agencies ultimately make their purchases directly from airline websites.

The airlines have the brand advantage here, as that’s where the bulk of the experience occurs, not to mention that a visit to an online travel agency likely indicates that price, rather than brand recognition or loyalty is the motivator. And, like the online travel agencies, they also sell hotels and other ancillary services, meaning that they can compete head-to-head.

So, why are there any online travel agencies at all?

The booking sites actually play an important role in the travel business, which is why they exist and will continue to do so. In any market where there is both a wide variety of choices and price sensitivity, consumers can benefit from a bit of help in making the decision. This includes being able to compare prices and routes and put together packages across multiple sectors (airlines, hotels, rental cars and so on) that maximize value through comparison. As intermediaries, they make the process of navigating alternatives easier.

Since the online travel agencies are able to amass a market this way, they gain the power to negotiate with travel suppliers (such as airlines and hotels) to offer some discounts, which makes the sites more attractive to buyers. Over time, this has created a robust channel for the booking sites, which do billions of dollars a year in business. They remain an important part of the strategy of any travel supplier, even if it means sacrificing some revenue in order to win the customer. Online travel agencies remain a great way to reach the price-sensitive customer.

But, as I mentioned, the changes in the economic climate are making price less of an issue, and the airlines are aware of this. They see an opportunity to claim more of the revenue for themselves, not to mention long-term ownership of the customer relationship. And what has followed has been the brewing war between online travel agencies and their suppliers.

The decisions by the likes of American and Delta aren’t surprising, given these market conditions, but what about Expedia? Doesn’t it seem like they’re sacrificing some revenue to make a point?

Well, it may not be that simple.

It makes sense to cut its risk a bit, given American’s decision to pull its inventory from Orbitz. Also, it appears to be betting on the fact that a visitor to Expedia doesn’t care about getting an American Airlines flight. Rather, the visitor wants a flight: there’s a difference between New York to San Francisco and New York to San Francisco on American. The customer who wants the former won’t be affected by the absence of a particular airline’s fares on a booking site. A customer who wants the latter would more likely go to the airline’s site directly. The only concern for Expedia is whether the flights by American were priced favorably relative to other airlines, and the loss of any negotiated fare deals it had.

What comes next? Well, that’s hard to say. Douglas Quinby, Sr. Director, Research, at PhoCusWright, told me earlier this week that “American may have jumped the gun a bit with Orbitz, but believe me – we ain’t see nothin’ yet!” There will be more changes in the near future it seems, but this appears to be tempered by the belief by some travel industry experts that the airlines and online travel agencies will find ways to mend their relationships. American and Orbitz, for example, are expected to find a way to work together again, and Bill Miller, Sr. Vice President of strategic partnerships at CheapOair, told Tnooz, “”We’ve had a 10-plus-year partnership with Delta and we fully expect to renew our contract with Delta in 2011. This is our only comment at this time.”

Airlines will need to find a way to work with the online travel agencies, and the online travel agencies will need to demonstrate their value to the airlines … a typical obligation for a market intermediary. My guess is that the dust will eventually settle, and the market will return to a happy medium.

But, it all comes down to the consumer.

If the airlines can make substantial gains, the booking sites will become less relevant. If the online travel agencies can solidify their brands and become more present and important to consumers, they’ll regain some of their recession-period negotiating power.

For now, the two sides are amping up the intensity, and we can sit back and watch the fireworks.

[photo by rjones0856 via Flickr]

Update: This story has been modified to reflect that the $800 million is from American Airlines flights only and does not include ancillary fees.

When airlines pull out of travel websites, who loses?

Airlines: CheapOair, Delta, American Airlines, OrbitzIt’s been a busy week. The action with airlines and online travel agencies has been brisk, and in the end, it affects you as much as it affects them. Sure, there’s plenty of money involved for the travel sites and the airlines, but in the end, it all comes down to what you experience during the buying process. These changes – with American Airlines and Orbitz and Delta and CheapOair – will have an effect on you and on which airline you fly next.

Doubtless, the numbers are big. Orbitz generated $800 million in revenue by selling flights on American in the first nine months of 2010, though some of it came from ancillary services. While CheapOair’s revenues from Delta aren’t available, let’s not lose sight of the fact that it’s the largest airline in the United States, so the impact can’t be trivial.

Are the airlines eyeing all that business and trying to claim it for themselves? There’s a flaw in that thinking, according to the Business Travel Coalition. In a statement released last night, it noted that American Airlines may lose some of the revenue it books through Orbitz, and you’re the reason why.

The dynamic is pretty straightforward. According to data from travel industry research firm PhoCusWright, the BTC says, 87 percent of travelers turn to the internet when they start shopping for tickets. Also, around 28 percent of the would-be travelers who visit online travel agencies wind up buying their tickets on the airlines’ websites instead.In practical terms, let’s say you’re looking for a flight, and you go to Orbitz. On Orbitz, you notice options from American Airlines. There’s a one-in-four chance, roughly, you’ll just go to American’s site to buy your ticket.

Now, what happens if you don’t see American on Orbitz (or Delta on CheapOair)? Well, you may see a flight on United, and go to that airline’s website to make your purchase. That’s a lost opportunity for the airline that pulled out of the online travel agency.

As Kevin Mitchell, BTC chairman, puts it: “American acts as if it’s the country’s biggest airline when it’s really number four and falling. Consumers may not even know American’s flights are missing. The ones who will gain the most here are American’s competitors who will enjoy feasting this Christmas on turkey served up by American. Delta, United, Southwest and others should be grateful for this early Christmas present.”

He adds: “American’s decision to immediately pull its flight information from Orbitz shows that it has near-zero interest in preserving an open and transparent marketplace. It is an outrageous act that will negatively impact consumers nationwide who are in the midst of comparison-shopping for their holiday travel. Moreover, American is tacitly acknowledging that if a consumer booked an American flight on Orbitz, and now needs to change it, she will need to work through American Airlines. That’s a recipe for huge consumer confusion and frustration right in the heart of the holiday season.”

The same, of course, could be said about Delta in regards to CheapOair, though on a much smaller scale, given that CheapOair forecasts 2010 total revenue of $1.2 billion (compared to $800 million in revenue related to American Airlines alone for Orbitz).

So, it all comes back to you. The airlines want you. The online travel agencies want you. This is why the battle for the consumer is intensifying. And, with fares on the rise and economic conditions stabilizing, the stakes are getting higher. For the airlines, direct ownership of the consumer certainly has its perks, but it also comes with a handful of risks. They may be serving business up to the competition, as Mitchell said.

Airlines and online travel agencies are king some pretty big bets on how you will book your tickets. Ultimately, however, the decision is entirely yours.

[photo by cliff1066 via Flickr]