Judge blocks Sabre, gives American Airlines a break

I guess it would make sense for American Airlines to turn to litigation. After all, this approach worked well against Orbitz.

Here’s the situation: the battle between airlines and online travel agencies escalated from the beginning of November – with American’s announcement that it would pull out of Orbitz – through the new year. The latest move was by global distribution system Sabre, which has made it more difficult for American’s fares to be found. Along the way, Expedia dropped American in a defensive move, and Delta pulled out of three smaller booking sites: CheapOair, OneTravel and BookIt.

The decision by Sabre to “demote” American Airlines had obvious business implications for the carrier, which is likely why it sought relief in the courts. As a result of a hearing held yesterday, Sabre has been blocked from limiting the visibility of American Airline flights, but there’s clearly more to come.

In addition to making it more difficult for customers to find American’s flights, Sabre also increased the fees it charges American, which would lead to an annual cost of $157 million for the airline.

Sabre maintains that it was within its contractual rights, according to an Associated Press report, while American believes the move was anti-competitive.

Five reasons why you’re wrong about American Airlines and the booking battle

Everyone seems to think this is about the passengers. It’s not. In true airline industry fashion, nobody cares about the customer.

Okay, now that I have your attention, an analyst note from Avondale Partners was sent to me last night. While most people don’t get excited about this sort of thing, I have to admit that I still do. Nerdy, maybe. Insightful … in this case, it definitely is.

The analyst note gets to the heart of the matter pretty quickly. What’s the deal with American Airlines and the online travel agencies (e.g., Orbitz and Expedia)? Well, here it is in five straightforward points:

1. It’s the economy, stupid: remember that saying? Well, it holds true here. According to Avondale Partners, many press accounts of the dispute “confuse the relationships of the players and miss the underlying economics driving the dispute.” Stop thinking about people and start thinking about how American can save up to $9 per ticket in fees.

2. American will lose before it wins: according to Avondale Partners, “AMR [the airline’s parent company] eventually prevails.” But, it’s going to take some time. Along the way, the analyst note explains, the airline will lose some of its online travel agency customers to its competitors. However, it continues, “should pick up the spilled traffic, given current loads.”3. Ultimately, it’s a break-even: AMR will wind up with the same amount of traffic it has now, Avondale believes, but it will come at lower net costs. Translation: for the same amount of passengers, American will make more money. For a business, that’s never a bad thing.

4. “I like to watch”: that seems to be what the other airlines are thinking. Avondale Partners believes they’ll jump on the bandwagon. As it is, Delta has already pulled out of three smaller online travel agenciesCheapOair, OneTravel and BookIt – though for slightly different reasons. When big, bold moves like this happen, you better believe that everybody’s thinking about it.

5. And, the folks with the most risk are …: it isn’t American Airlines, apparently. Rather, Avondale believes that Travelport and Sabre “have the most to lose,” though stock prices for online travel agencies, according to Avondale, “should continue to suffer from the press.” Translation: this won’t be fun for any of the parties involved for quite a while.

Here’s the full report:

Analyst Note From Avondale Partners Re AA Distribution, 1-6-11

American Airlines is talking to Expedia and Orbitz (about the WRONG stuff)

American Airlines isn’t giving up. Despite having pulled out of Orbitz and been booted by Expedia, the company says it’s still talking to the two online travel agencies and is hopeful for a resolution. According to Dow Jones, these are “active discussions” and that American Airlines is “comfortable” with booking results.

Nonetheless, American is still betting on Direct Connect as its preferred way to distribute inventory. Dow Jones explains:

“Ultimately we will see all travel agency volume going through Direct Connect,” Garner said, referring to the American distribution system at the heart of its dispute with parts of the industry. That would include the GDS providers, whose contracts with American are due to expire later this year.

What makes this interesting is the fact that American isn’t backing away from its primary reason for pulling out of Orbitz … which triggered the defensive move by Expedia. So, the words strike me as vapid, since the major issue isn’t being addressed (at least not in public).

There is a rumor that Priceline has signed on for Direct Connect, but all involved are keeping their lips sealed.

Can travel booking sites endure the airline onslaught?

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]

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.