The online travel market has started to recover from the repercussions of 11 September, but agencies are going to have to adapt if they are to attract travel bookings from an anxious public

Although business has greatly recovered for US online travel companies since 11 September, their long-term future is hardly assured. According to Terry Jones, president of Travelocity, his agency's bookings as of mid-October were back to 70-80% of pre-attack forecasts. His counterpart at Expedia, Rich Barton, says that, as of late October, his company's booking levels were 80-85% of pre-crisis levels, meanwhile Jeff Katz, president of Orbitz, states that his company's sales were "well above business plan".

Paul Keung, a travel analyst with the CIBC bank, believes one reason for the upturn is that leisure bookings began to recover in late October, stimulated by the airline fare sales. "Approximately 70% of Expedia's and Travelocity's bookings are leisure trips," Keung says. Katz notes that the majority of Orbitz's bookings also come from leisure travellers, with business passengers making up at most only 30% of its customers.

What has changed for these companies in the wake of the 11 September attacks is the way they do business. Executives say they have increased the information they provide on their websites to help answer customers' questions about travel, the logistics of which have changed significantly, particularly for air travel in the USA.

Travelocity and Orbitz have also both reduced costs and cut staffing levels. Travelocity has shut down a call centre and cut its management staff by 10%, and Expedia has reduced its marketing budget. For its part, Orbitz cut its staff by 10% and has also reduced its marketing costs by "up to 50%", says Katz.

Another development that might affect cost structures is the late October announcement by Continental Airlines that it would eliminate commissions paid to online travel agencies. Previously, Continental had paid such agents 5% of the ticket price, with a $10 cap. This follows a similar step by Northwest Airlines in February. Travelocity responded to Northwest's move by imposing a $10 service fee for Northwest tickets, something it has not yet done for Continental.

Industry observers predict that the Continental/Northwest move will be matched by other carriers. According to Keung, airline commissions represent less than 25% of Travelocity's and Expedia's revenues. He says: "Base air commissions as a percentage of revenue have consistently declined because these companies continue to focus on non-air travel and merchant revenues, particularly hotel and holiday package bookings. Long term, we expect these revenues to be replaced with $10 service fees, higher GDS [global distribution system] rebates and incentive commissions from airlines."

Observers say some online travel companies are more at risk from the events of 11 September then others. Hotwire, Orbitz and Priceline are seen as especially vulnerable.

Henry Harteveldt, an analyst with Forrester Research, believes Orbitz is in for a particularly rough ride, since it "faces a unique challenge: it can no longer count on its airline founders for the same level of backing. Because their whole marketing budgets have been decimated, this will affect Orbitz's ability to get out there."

By contrast, he believes that as Travelocity and Expedia are public companies, "they can raise money and extend their brand". Similarly, Keung believes Orbitz and Hotwire, also owned by several major US carriers, "could struggle" in the foreseeable future. "Unlike Expedia and Travelocity, these sites still burn cash and may require additional funding by the airlines, which are already facing record losses, liquidity crises and potential bankruptcy," he adds.

Harteveldt also thinks Hotwire and Priceline - which identify airlines only after tickets have been purchased - could face unwillingness on the part of travellers to meet that condition. To make their services more attractive, he suggests these companies need to "peel back a certain amount of the onion for those willing to pay an additional fee" - so that customers who pay more receive information on the carrier they will use.

Harteveldt also says that airlines need to revamp the way in which they sell fares on their own web sites. One option could be what he calls "mystery fares", where a carrier would identify origin and destination points and price, but only provide a vague window of arrival and departure times. "These could generate some incremental sales," he says.

But the bottom line, according to Harteveldt, is that the economy, which is "making people think twice before spending their money on discretionary travel", is the biggest issue facing online travel firms and carriers alike.

Source: Airline Business