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

American Airlines talks to Expedia and OrbitzAmerican 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?

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 suspends sale of American Airlines flights [BREAKING]

American Airlines ExpediaI 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.

Lies, discrimination and combat: American Airlines claims sales increase post-Orbitz

American AirlinesYesterday, American Airlines announced that it was thanking its customers for their continued loyalty to the airline. It was a fairly predictable move, following the airline’s decision to pull out of Orbitz … which was followed quickly by Expedia’s making it more difficult to find American Airlines fares.

At the same time, the company engaged in a bit of chest-thumping – again, expected in this environment – claiming that overall ticket sales are up year over year since December 21, 2010, when it yanked its flights from Orbitz. Two days later, according to the statement, Expedia.com began discriminating against American’s flights and schedules by listing them lower in the search display than those of other airlines.”

“Our results to date show that consumer choice is alive and well and that our customers continue to have thousands of options to purchase American’s competitive fares and convenient schedules,” said Derek DeCross, American’s Vice President and General Sales Manager. “It is also clear to us that other online travel sites and traditional travel agencies are capitalizing on this market opportunity to gain business. Beyond that, we want to thank our customers and travel partners for their continued loyalty and support. We appreciate your business.”The airline says it’s committed to a wide range of distribution channels, as DeCross added, “Traditionally, airline products have consisted of different flavors of airfares. In the future, however, we envision the world of travel evolving into a much wider variety of products and services beyond fares. Our direct connection will help travel agencies help their own customers by giving them access to customized choices and delivering the best value to travelers. We do not envision a future in which we only sell to our customers through our own branded website. Our goal is to have broad distribution channels and choices for our customers, with our products and services delivered efficiently and without unnecessary costs flowing through the process.”

Okay, so that’s one side of the story. Fortunately, the Business Travel Coalition has weighed in with some comic relief another perspective. In a dramatic statement, written in a style I’ve only seen offered seriously by the Korea Central News Agency, the coalition says, “American Airlines’ (AA) press release distributed this afternoon [referring to December 29, 2010] regarding increased bookings since it pulled its fares out of Orbitz, and had its fares presentation downgraded in Expedia, has a hole in it large enough to fly an Airbus 380 through.”

According to the Business Travel Coalition, the bump in sales is attributed to the fact that American Airlines emailed a special offer to Orbitz customers that included a 20 percent discount on fares purchased before the end of the year on aa.com – which, if nothing else, is a savvy marketing move. Expedia customers received a 15 percent discount with the same timeframe.

Of course, the statement ratchets up the intensity a bit, saying these “targeted sales initiatives [were] instituted just after the combatants’ actions were taken.” Gotta love it: “combatants.”

In fairness, I characterized the struggle using war imagery as far back as December 6, 2010, when it was clear that a significant struggle between the airlines and online travel agencies was brewing.

So, the Business Travel Coalition continues, “In such a price-sensitive environment for consumers, discounts of this magnitude no doubt increased AA’s bookings likely masking the true negative impact of its actions and business predicament. Indeed, these discounts represent the price AA now has to pay to maintain market share.”

And now it’s time for the reality check: everybody’s posturing. And, it’s obvious. American is eager to show that it made the right move in a contentious marketplace that’s only going to become more so. The Business Travel Coalition has made its near-term mission the push for American to return to the online travel agency fold in a manner consistent with the rest of the industry. Both sides want to show that they’re right, and we get to watch.

Is American Airlines making a “reckless rodeo bet”?

American AirlinesAmerican 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]