Online travel is an odd beast. For customers, it often means cheaper airfares, more travel options and the ability to book a vacation while you finish a midnight snack. Now some of the most successful names in the business are embroiled in a fight about who’s the biggest, the baddest and the best. And everyone thinks they’re the underdog.
There aren't many real underdogs, of course. Expedia, which now has $1.1 billion in bookings per quarter, was founded by Microsoft, which is a partner, with NBC, in MSNBC. Travelocity, owned by travel systems giant Sabre Holdings, clears nearly $900 million per quarter.
But perhaps no one has more heralded parentage than Orbitz, the privately held Web portal founded by five of the biggest U.S. airlines: American, Continental, Delta, Northwest and United.
Orbitz has at times been lauded as the airlines’ effort to undermine their own traditional fare structures. But other online travel businesses have long made the case that Orbitz wants to have it both ways: serving as a low-fare discounter while taking advantage of its airline ties to undermine competitors. This fight has dragged on for over two years now, with continuous pressure on Congress and federal regulators to examine ownership issues.
Fair fares?
Orbitz’s role as an engine for lower fares is well documented. But worries linger about its owners, who control perhaps two-thirds of the airline seats sold in the United States. Its critics worry that the rush to bargain-basement fares are meant to drive out rivals — and, in a replay of tactics employed in the days after deregulation, when the competition is gone, fares will get jacked up.
“Sharks can only do one thing because that’s what they know how to do,” says Jim Conran, chairman of Travelers First, a coalition of consumer groups. “Clearly the airlines do have a bias in who you should pick. They want you to buy their tickets.”
The irony is that some of the fiercest criticism of Orbitz comes from companies that once shared the same corporate parentage. The Sabre computer reservation system (CRS), was owned by AMR, Inc., American Airlines’ parent company. The Galileo booking system, now owned by Cendant Corp., was founded in part by United. Adding to the complexity, Sabre owns Travelocity and Galileo owns Cheaptickets.com and Lodging.com — all of which compete with Orbitz for an online market expected to be worth $16 billion to $19 billion in revenue this year.
And, their argument goes, if Orbitz can squeeze others out of the business, it stands to take a larger slice of that pie while consumers’ advantages in a competitive market are rolled back.
Grab for deals
So is Orbitz using its corporate parentage to guarantee itself the best fares and squeeze its rivals? The search for an answer focuses on the industry practice of preferential airfare offers. Most travel retailers have access to all the same flights. But they can’t all sell them at the same price, because some retailers strike individual fare deals with airlines. Some of these, known as “most-favored nation” or MFN deals, guarantee a retailer the lowest fare an airline offers anyone else.
Orbitz has MFN arrangements with its five parent airlines, offering steep discounts on booking fees if they give Orbitz access to their lowest fares.
Those deals leave rival travel sites feeling edgy. Because Orbitz’s five founding airlines agreed to the MFN deals, and Orbitz has since signed on dozens of other carriers, it can match most fares available anywhere on the Web — even those on an airline’s own Web site. With so much pressure on pricing, competitors argue, airlines would rather pull their cheapest seats than make them so readily available.
“It’s something that has clearly hurt competition in the marketplace,” says Dawn Lyon, vice president of communications for Cendant’s Travel Distribution Services Division, which owns Galileo and its Web outlets. “It prohibits us from working with airlines in good faith in negotiating deals that meet their needs.”
Rivals like Galileo’s Cheaptickets have no issue with making deals: In a competitive market, they want every chance they can get to differentiate themselves. But they argue that they can’t get their own preferential deals with airlines because Orbitz’s collective MFN deals — which always include the nation’s biggest airlines — serve as a brickbat to beat down any other agreements.
“They have that right individually,” says Antonella Pianalto, executive director of the Interactive Travel Services Association, which represents Expedia and other Orbitz competitors. “The problem is they shouldn’t have that right collectively.”
Orbitz acknowledges the original MFN deals with its five founders were negotiated as a block, but insists all the dozens of smaller airlines that join in the agreement are given the same treatment. More to the point, it argues, the airlines were driven to a low-fare-for-all system because travel sites — before Orbitz — negotiated exclusive marketing deals with some airlines and locked others out.
“They were biased,” says Carol Jouzaitis, Orbitz’s vice president of corporate communications. “They’ve always been biased. They’re biased to this day.”
Scrutiny in Washington
Whether exclusive deals qualify as bias or simply good business sense may be a matter for regulators, but after two years of scrutiny, the government seems unwilling to step in.
On Capitol Hill, several subcommittees held hearings last term on the potential for anticompetitive practices, but no legislation emerged. Sen. Patty Murray, D-Wash., whose constituency includes Expedia, put language in a bill that prompted the Department of Transportation to investigate Orbitz’s pricing. DOT conducted reviews last year and concluded that Orbitz’s distribution of low fares was a net benefit to consumers — assuming the online industry remained competitive.
Congress’ enthusiasm seems to have ebbed for probing Orbitz, as well as other industry-run retail channels, such as Travelweb, an Orbitz-like system owned by five major hotel chains. But at least some scrutiny is likely to remain.
“I am still carefully following the issue,” Rep. Cliff Stearns, R-Fla., chairman of the House Subcommittee on Commerce, Trade, and Consumer Protection, told MSNBC.com in an e-mail. Stearns said he may hold additional hearings on Orbitz and other industry-owned sites, saying they “deserve close scrutiny to ensure that they do not pose a threat to competitiveness and harm consumers.”
The Justice Department’s antitrust division also continues to keep an eye on Orbitz, though in recent comments to DOT they argued that MFN contracts can be “an efficient contracting practice” so long as they allow fair market pressures and don’t allow airlines to strong-arm their distributors. DOT, which must approve MFN contracts, seems likely to keep them in place — though it also plans to “continue watching ... and will take action if that becomes necessary,” as it said in a recent proposal to overhaul rules governing reservation systems.
'Get it over with'
Despite Orbitz’s rising star, it remains just one piece of airlines’ overall online strategy. Each carrier maintains its own Web site as a booking tool — and each spends extra cash to differentiate themselves, such as Alaska Airlines’ recent offer to chop $10 off any fare booked on its site. Plus, with Expedia and Travelocity occupying the No. 1 and No. 2 positions in the online travel world, consumers who buy online are clearly spreading their cash around.
“Every month the finance departments of every airline in the U.S. send big checks to Expedia, Travelocity and Orbitz,” says Henry Harteveldt, a travel industry analyst for Forrester Research. “I think the airlines have woken up and recognized that all these agencies offer value to them.”
Harteveldt also notes that Orbitz’s percentage of ticket sales on its parent airlines fall short of their overall market share — one sign that Orbitz sells plenty of other airlines’ tickets, and its owners are still sell plenty of their own tickets elsewhere.
For its part, Orbitz is tired of the fight, and hopes the Justice Department and others wrap their investigations soon. After two years, they suggest, there aren’t many stones left unturned. “If you want to shut us down, if you’ve got the goods on us, have at it,” says Jouzaitis. “Just get it over with.”
But one other big issue remains. Airlines aren’t the only ones who have been regulated. The CRSs, which handle flight schedules and bookings, also face strict rules on how they do business precisely because they were once owned by ... the airlines. They claim Orbitz not only wants to dominate the online world but to use its airline ties to eat away at their business. So opens yet another front in the battle.
... How reservation systems, and the online sites that use them, have become the focus of a nasty debate in Washington and throughout the travel industry.