Is American Airlines making a “reckless rodeo bet”?

by Tom Johansmeyer on

American Airlines’ decision to pull out of Orbitz has triggered a war in the travel industry, as airlines and online travel agencies vie for ownership of the customer. The latest step was Expedia’s decision to minimize the exposure of American Airline options in searches on its site, likely a play to reduce the risk of a move by American to pull out of Expedia, too.

According to a statement by the Business Travel Coalition, this could erode American Airlines‘ standing in the market further. In addition to losing visibility on a major booking site, the airline will lose the additional sales that come when a visitor to an online travel agency leaves the site to book directly with the airline.

Says Kevin Mitchell, chairman of the Business Travel Coalition, said, “American is making a reckless rodeo bet that it can rope its best customers like calves and then push and pull and kick them toward aa.com and Direct Connect.” He continued, “Online consumers may not even know American’s flights are missing. The ones who will gain the most here are American’s competitors United, Southwest and others. They should be thankful for this early Christmas present.”
Striking a somewhat alarmist tone, Mitchell noted that American Airlines Direct Connect “takes the consumer problem of hidden airline fees to a much darker and dangerous place for consumers.”

While this may be a bit extreme, there are clear implications of the shakeup, especially for bargain-shoppers and occasional leisure travelers.

The fact that Expedia appears to have come to the defense of its competitor, as Mitchell stated – “Expedia’s decision to support the consumer and its competitor Orbitz underscores the enormity of the economic damage American Airlines’ Direct Connect plans could have on consumers due to lessoned [sic] price transparency and impeded comparison shopping” – should be taken within the context of what could happen to Expedia’s business if it didn’t implement this defensive measure.

The real impact of this is pretty simple: customers loyal to the American Airlines brand will continue to buy from American Airlines. Those who are searching for the cheapest fares will balance their behavior between visiting online travel agencies and airline websites.

American Airlines may not have made a “reckless rodeo” bet, but is making a statement about the future of its business. The airline is betting on its own brand, and the online travel agency community is responding.

[photo by ReneS via Flickr]

Expedia demotes American Airlines, airline booking war gets HOT

by Tom Johansmeyer on

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.

Are you an impotent traveler?

by Tom Johansmeyer on

The endless people crowded at gate areas over the next week or so will probably feel what it means to be an impotent traveler. When you’re at the mercy of the airlines, there’s little you can do to affect change. Sure, they can’t control the weather, and legitimate problems do arise from time to time (no business is perfect). But, when you want information, have a legitimate grievance or would just benefit from some solid customer service, there’s a good chance you’ll be disappointed. Expectations for airlines are so low that there’s really little incentive to change.

Of course, it’s not just the airlines, according to the Daily Mail: “Along with airlines, this group includes train companies, mobile phone and computer suppliers, broadband providers and cable and satellite TV firms.” The article adds, “The normal rules of the marketplace do not apply in their case. They know they have become indispensable.”

There are times when we’re just not in the driver’s seat, and there is little we can do about it. If you need some ideas on how to overcome travel impotence, check out our tips on how to be effective in making your voice heard.

[photo by nesnet via Flickr]

Airline seat as buffet rebuffed, only take what you buy

by Tom Johansmeyer on

When you go to a buffet, you know what to expect: take as much as you want. You pay once, and then you can consume all that you like. It’s the nature of the environment. This stands in stark contrast to other restaurants, where you pay for an entrée and get nothing more. If you want an appetizer, you have to shell out a few extra bucks – likewise dessert. As a society, we have learned to live with this, even to expect it.

Yet, this changes as soon as we start boarding planes. We want more than we’re paying for, even if it comes at the expense of someone else.

I was cruising through the travel news this morning and saw a Q&A story on ABC News about fights over the armrest. One passenger wants it up, and the other wants to put it down. A fight ensues, unless one of the passengers is reseated.

The question was simple: is it unreasonable to insist that the armrest go down when the passenger next to you is spilling over into your seat? Remember: airline seating isn’t a buffet.


The advice given by ABC News writer Lesley Carlin was on point, indicating that a passenger is entitled to the space she pays for, no exceptions. I was heartened to see her assessment, “Airplane seats are, quite simply, ridiculous,” which though obvious, needs to be restated routinely.

Carlin explains:

But, still, despite the underlying issues with the seats, when you buy a ticket, you’re buying a particular amount of space on the plane. It’s not fair for someone else to usurp some of it. If you live in an apartment and buy a Christmas tree that turns out to be too tall, you can’t just cut a hole in your ceiling and let some of it poke into your upstairs neighbor’s place, right? That’s exactly what the passenger leaning into your space was doing, and that’s not cool.

So, would you eat from a stranger’s plate … without asking?

[photo by InfoMofo via Flickr]

Christmas list: five things I want from the airlines

by Tom Johansmeyer on

‘Tis the season, right? Regardless of beliefs, we’re all secretly wishing for something, even if we’re not hoping for a big fat guy to slide down a slim chimney to deliver it. And, I don’t think I’m unusual in having my own list of wishes. I’m not so naïve as to think the airline industry will turn my Christmas list into its New Year’s resolutions, but I can always dare to dream!

So, here it is – air travel industry, take note. I want five things I want for Christmas.

1. Name change: stop calling me a passenger, and start calling me a customer. I know, I know … I’ve asked for this before. Pay attention: I’m still asking for it. Without me – and a lot of people like me – you wouldn’t have had such a fantastically profitable year in 2010. Don’t get me wrong: I’m not begrudging you the profits. In fact, I want you to be profitable (I am a capitalist after all). Just show me that you realize I’m the guy spending, and extend this courtesy to everyone else who does.

2. Be realistic: I know there are some things you can’t control, such as weather and the TSA. But, there are plenty of ways you can improve. Take a long, hard look at your operations, and make some tough decisions. It’s not easy to admit your shortcomings, but in the end, doing so will benefit everybody (even you).
3. Add a clause: every frequent traveler has heard it said by a flight attendant: “Our primary job is safety.” We know this … good god, do we know this. I’m asking for a simple statement to be appended to that: “but we’re also committed to service.” Now, put it all together:

“Our primary job is safety, but we’re also committed to service.”

That sounds incredible. I could definitely get on board with that kind of thinking. And what does it cost the average flight attendant? Six extra words. The whole thing could be pushed out on Twitter, with plenty of room for hashtags and retweetin!

4. Leg room: okay, I know I’m getting greedy on this one, but I’d really love a little more. I’m not a tall guy, and I still feel cramped.

5. More a la carte pricing: maybe I’m the only guy out there who’s a fan of getting nickel and dimed … but I like choosing which nickels and dimes. I’d much rather pay only for what I use. Let the other guy pay for his own damned sandwich.

[photo by morberg via Flickr]