Can travel booking sites endure the airline onslaught?

by Tom Johansmeyer on

American 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 suspends sale of American Airlines flights [BREAKING]

by Tom Johansmeyer on

I just heard from a spokesman for Expedia a few minutes ago that it has suspended the sale of flights by American Airlines. Expedia revealed the following to Gadling:

“We have been unable to reach an agreement with American Airlines due to American Airlines’ new commercial strategy that we believe is anti-consumer and anti-choice. American Airlines is attempting to introduce a new direct connect model that will result in higher costs and reduced transparency for consumers, making it difficult to compare American Airlines’ ticket prices and options with offerings by other airlines. American Airlines’ direct connect model is of questionable, if any, benefit to travelers, would be costly to build and maintain and would compromise travel agents’ ability to provide travelers with the best selection.

“As a result, the sale of American Airlines flights on our website has been suspended. We remain open to doing business with American Airlines on terms that are satisfactory to Expedia and do not compromise our ability to provide consumers with the products and services they need.

“We cannot support efforts that we believe are fundamentally bad for travelers. With or without American Airlines’ inventory, we have a robust supply base and broad array of choices for our customers and we continue to offer hundreds of flight options for the routes served by American Airlines.”

This follows Expedia‘s decision to hide fares by American Airlines in its search results and American’s move to pull out of Orbitz. Also, Delta has removed its inventory from CheapOair, OneTravel and Bookit.

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.

When airlines pull out of travel websites, who loses?

by Tom Johansmeyer on

It’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]

Which BIG airline just pulled out of three booking sites?

by Tom Johansmeyer on

As you’ve read here on Gadling, the battle between airlines and online travel agencies is poised to heat up. For the past few years, a dismal economy has sent many bargain-hunters to online travel sites with the hopes of finding fantastic deals and minimizing the pain in their wallets. Yet, with the travel market and the broader economy showing signs of recovery, airlines‘ brand power will gain momentum, and customers with more cash at their disposal will favor convenience and recognition over saving a couple of dollars. A battle for your money and your loyalty is brewing.

And, it’s just intensified.

Last month, American Airlines and Orbitz tangled over fees and the booking process, with the airline threatening to yank its inventory from the travel site, a threat on which it made good. After a temporary restraining order was issued, a judge ruled yesterday that American could pull its inventory from the online travel agency and ordered Orbitz to stop selling American Airlines tickets and displaying its fares.

Now, Delta‘s getting in on the action.

The airline has yanked its inventory from a handful of smaller online travel agencies, Aviation Week reports, including CheapOair, OneTravel and Bookit as of last Friday. So, if you’re hunting for cheap tickets on these sites, you won’t run into Delta any more. Aviation Week observes that it appears to be “part of a partial shift in its distribution strategy,” and notes that it seems different from American’s move with Orbitz.For Delta, the decision looks like it’s part of an effort to consolidate around larger online travel agencies, while American is targeting agencies directly, rather than using an intermediary to reach another intermediary.

While the means may be different, the objective appears to be the same. With a shift in the economy, airlines have a bolstered position in the marketplace, and this is likely to give them a bit more weight in dealing with online travel agencies and in reaching consumers directly. For American, it seems like a play to reduce costs and increase efficiency – as it is for Delta (though through different means). Ultimately, however, Delta wants more direct action from consumers, which reduces its sales costs and increases profits, which is what differentiates its decision from that of American.

According to a statement by Delta in Aviation Week, “Delta is being more selective in our use of online travel sites in the future as we continually work to improve our online distribution strategy.” The company adds, “We continue to make significant investments in delta.com to make it an industry-leading travel site, and we believe that delta.com will become the preferred online site to book travel on Delta.”

A representative from CheapOair was not available for comment.

I asked Douglas Quinby, Sr. Director, Research, at travel industry research firm PhoCusWright, his thoughts on Delta’s decision, and his reply was pretty striaghtforward: “The only surprising thing about this move is that it has taken this long.” He explained, “U.S. airlines have impressively restrained their appetite for growth (i.e. capacity) on the back of a (more or less) recovering economy. With clear control of their inventory, airlines have already started rationalizing distribution, and the weakest links are first to get snipped. American may have jumped the gun a bit with Orbitz, but believe me – we ain’t see nothin’ yet!”

So, what’s the net effect of all this? Do the actions of Delta and American suggest that we’ll be paying higher fares in the future because of behavior that doesn’t benefit the consumer? My bet is that the average fare buyer won’t see a whole lot of difference, especially given the share of sales already owned by the airlines via their own websites. The infrequent leisure traveler, especially, is losing an alternative … though it’s one that won’t be as important in a recovering economy.

[photo by boeingdreamscape]