The airline-owned travel sites are finally here. Orbitz, owned by five US carriers, has been up and running since June, while Opodo, owned by nine European airlines, is due to go online in December. Online agencies such as Expedia, Travelocity and e-bookers have enjoyed a relatively clear run over the last five years, but the airlines now aim to keep their growth in check. While it is still early days, with regulatory concerns still to be met, the new sites could swing the online balance of power towards the airlines. Yet fears remain that shareholder interest may wane in the face of the dot.com meltdown. With a similar site being launched by key Asian carriers, their success, or otherwise, will be keenly watched.

Orbitz fires up

Orbitz has got off to a promising enough start, even if it has not had everything its own way. The online travel agency set up by the five largest US airlines has met with strong opposition from low-cost champion Southwest Airlines as well as the attorneys general of 24 states. And while the venture received a temporary go-ahead from the Department of Transportation (DoT) in April, it still lacks formal approval from the Department of Justice (DoJ).

But in its first month of operation in June, the website sold over $60 million of travel services, including airline tickets, hotel rooms and car rentals. It also registered over 10 million visitors, says chairman and chief executive Jeffrey Katz.

These strong sales notwithstanding, Orbitz faces a number of challenges, including establishing a brand as it competes against well-entrenched rivals Travelocity, controlled by Sabre, and Expedia, established by Microsoft. If it is to attain profitability, as forecast, by 2003, it will have to deliver on its promise of superior customer service while keeping its cost structure down.

Orbitz owes its conception to American, United, Delta, Continental and Northwest Airlines, which jointly invested $145 million in its launch. The carriers view it as a low-cost alternative to Expedia and Travelocity, which, according to travel technology consultancy PhoCusWright, last year controlled 25% and 35%, respectively, of all on-line travel agency sales. According to Jupiter Media Metrix, of the total$245 billion US travel expenditure last year, some $13.9 billion was online.By 2006, online sales are forecast to account for $32 billion of a $303 billion total market.

According to Henry Harteveldt, an analyst with Forrester Research, the carriers believe Orbitz will benefit them because it "provides a cheaper way to sell travel than the other agencies". Specifically, Orbitz offers distribution costs that are 30% below those charged by other online travel agencies. "A $300, three-segment airline ticket sold through an online travel agency costs an airline $10 in commissions and about $4 for each flight segment booked in the global distribution system (GDS). Orbitz says it will rebate 30% of the GDS segment fees and charge a flat transaction fee that will be less than the $10 commission," says Harteveldt.

To qualify for these lower distribution costs, travel suppliers must become "charter associates" in Orbitz and give it their web-only fares and any publicly-filed promotional rates they offer other online travel agencies. Additionally, these associates must each give Orbitz the equivalent of $2 million in annual promotional support.

Thus, unlike rivals Travelocity and Expedia, Orbitz has access to the special weekly Internet fares that airlines have traditionally sold only on their own sites. Attorneys general from 24 states formally voiced to the DoT and DoJ their concerns about this potentially anticompetitive aspect of the company's business model, but their complaint was dismissed by the DoT.

Fast new technology

To maintain its low-cost structure and provide travellers with the widest range of fares, Orbitz employs new technology that it claims is faster and more efficient than GDS mainframe technology, and that lets it display fare and flight options in one grid on one screen. Each Orbitz fare search produces between 150 and 350 flight and fare options offered by all carriers serving the market, compared to what it says are less than 40 options from fewer carriers offered by its competitors.

Besides these comprehensive fare listings, the company is trying to differentiate itself from other travel agencies by offering customer service initiatives inspired, in part, by the experience of Katz who was formerly chief executive of Swissair and who previous to that oversaw the GDS division of Sabre.

For example, the web site carries practical travel information like weather and airport data. It also sends travellers various notices before departure, and encourages them to rate trips after they are taken.

Although there was extensive testing of such features before launch, the company has experienced glitches in customer service delivery, something Harteveldt warns could harm the company if not quickly resolved. An example of these kinks was the initially serious problem Orbitz had in handling customer service calls. Noting that it was receiving five times the volume of calls originally anticipated, Katz decreed that call centre staff be increased from 100 to at least 250.

Not surprisingly, Orbitz' chief rivals are not taking its entry lying down, even if they believe that they will continue to dominate the electronic travel arena.

Travelocity head Terrell Jones points out the potential for all online travel companies is great, as "90% of the people who come to Travelocity do not buy from us, and 70% of that 90% do buy travel, from an off-line agency or from suppliers."

However, he further states that his firm's diversification will hold it in good stead. Travelocity, he says, offers travellers a wider range of services - like unique shopping tools - than Orbitz. Travelocity also has agreements with Yahoo and AOL that give it direct access to millions of potential travellers its rivals do not have.

Jones also says that Travelocity derives its revenues from more sources than Orbitz. For example, one-fourth of Travelocity's income is generated by advertising, with additional income coming from pacts with hotel consolidators and tour operators.

By contrast, Katz states that 70% of Orbitz sales so far have come from airline ticket sales, a number he predicts will remain constant. He says Orbitz will derive its income from commissions and similar fees paid by travel suppliers; limited advertising and sponsorship fees; and, ultimately, connection fees which it will receive from suppliers that by-pass the GDS and deal with Orbitz directly. He also says the company aims to account for between 20% and 30% of all US online travel agency sales by 2003 - a key ingredient in its becoming profitable.

Despite Travelocity's advantages, Jones is certain Orbitz will be successful. "This is a huge space; one-third of all US e-commerce in January was travel. I think there's room for more than two travel agencies online."

Richard Barton, chief executive at Expedia, is less sanguine about the prospects for Orbitz: "We're really focused on what the customers want, not what the owners want. We're totally focused on helping our customers make and take better trips, not just on buying airline tickets. We have a long-term, sustainable business model backing up our proposition; I don't think Orbitz does."

Beyond these competitive rivalries, the company faces numerous other challenges. "Orbitz is at a significant competitive disadvantage because it is late to the party," suggests Robert LaFleur, an analyst with Bear Stearns. "No one knows what an Orbitz is. To place that in the minds of customers is a monumental undertaking." The company will spend $100 million on sales and marketing in its first year.

For his part, Katz sees the major challenge as "making the economics of a dot.com company work". He adds: "Fortunately, our two biggest competitors have shown that in travel you can make money. If we do a good job for consumers, chances are good we'll get there, too."

Another unknown is the possibility of action by the US Government to either shut down Orbitz or make it change its business model. When the DoT announced its decision not to prevent the Orbitz launch, it also required the company to report on the implementation of its business model six months after start-up, and warned it would take action if Orbitz "conducts its operations in a way that violates antitrust laws or principles."

Meanwhile, the DoJ is continuing its ongoing investigation of Orbitz, while some of the consumer groups that had protested the Orbitz start-up to the DoJ are also monitoring it. Tam Ormiston, Iowa's deputy attorney general who participated in efforts by state attorneys general to modify Orbitz' business plan, declined to comment on what this group is now doing.

Also unclear is what impact, if any, a suit filed against Orbitz in May by Southwest in the US district court might have. Southwest claimed Orbitz was misrepresenting its schedules and fares without obtaining its permission; the airline subsequently removed the pricing and scheduling information Orbitz had used from the Airline Tariff Publishing Corp, which made it impossible for Orbitz to list any Southwest data.

Longer term, it is uncertain what kind of ongoing support Orbitz will receive from its original airline investor/owners. Harteveldt warns that if current economic conditions turn into a "substantial recession, I wonder if the airlines, their employees and boards will continue to fund Orbitz when they lack budgets for their own marketing and technology initiatives."

A further question is over whether Katz can raise the $100-150 million he says Orbitz needs to sustain growth and attain profitability. He says he will approach Orbitz' five owners as well as other travel companies and financial investors.

One observer, Niklas Andreen, a Stockholm-based vice president with Adcore Strategy, is sceptical that the fund-raising efforts will succeed, given the current state of the market for technology stocks, especially initial public offerings (IPO). "It's doubtful the airlines will put more money into Orbitz, because their original motivation was to make a quick buck from an IPO, and prospects for a potential IPO are looking more and more remote. If the founding shareholders aren't prepared to invest more, why should a hotel company? And venture capitalists have turned off the tap," he asks.

Source: Airline Business