Will Orbitz Suck the Air Out of Travel Sites?

The major airlines' e-ticket service is cleared for takeoff, under the watchful -- and worried -- eyes of regulators and rivals

Airports may be snarled, delays may be commonplace, and the air-traffic control system may be overtaxed, but one area of the travel industry is flying high: online reservations. E-travel is one of the few businesses thriving on the Web. Most airline sites have seen their online bookings double in the past year, while Web travel agents such as Travelocity (TVLY ) and Expedia (EXPE ) exceeded earnings expectations for the first quarter -- never mind the economic downturn. Forrester Research predicts that the percentage of airline tickets booked online will swell from 4% today to 12% by 2003, turning a $12 billion industry into a $30 billion industry in four years.

Small wonder a huge battle is brewing over the June launch of Orbitz, the e-travel site jointly owned by American, United, Northwest, Delta, and Continental Airlines. Despite an outcry from consumer groups and from other e-travel sites, the Transportation Dept. has given Orbitz the green light to launch, with the caveat that trustbusters issue a review of the site's operations in December, 2001.

For the past year, the Justice Dept. has had an ongoing investigation into whether allowing the major airlines to cooperate on ticket pricing is an invitation to collusion. Travelocity and Expedia -- the largest players in the e-travel marketplace -- fear that a site owned by airlines could cut them out of certain fares and stifle competition.


  A look at Orbitz' business model suggests that e-travel sites and regulators have plenty to worry about. To offer fares on Orbitz, airlines must sign a contract agreeing to give the site its lowest published Internet fare. That doesn't mean an airline can't offer the same price to other travel sites, they just have to give it to Orbitz, too. Seems fair.

But here's the catch: Participating airlines must also agree to either spend a fixed amount of money to market the site each year or give its lowest Internet fares exclusively to Orbitz. That contract clause has many e-travel execs losing sleep. "If Orbitz goes forward, there will be no incentive for an airline to cut deals with sites like Travelocity or Expedia," says Bruce Charendoff, chief lobbyist for Travelocity.

As Orbitz gains name recognition, competitors fear that the airlines might stop offering their tickets on other sites altogether. Why? Orbitz's advanced booking engine runs on a high-end server, as opposed to a mainframe computer, and it leapfrogs the technology being used by other bookers. Most airlines pay up to $3 million a year in fees to offer their flights on other services, so they'll gladly slash their booking costs by as much as one-third simply by using Orbitz only, rivals charge.


  Not everyone is so sure Orbitz will trample the competition. Travel sites such as FareChase and SideStep are gaining in popularity by offering a tempting alternative to searching the various e-ticket sites. They do it for you, trawling the Internet for the lowest fares. Now, Travelocity and Expedia are getting into that game, boosting investments in their own Web-scouring technology. "Companies have invested a lot of money in this, and they aren't going to sit back and let Orbitz dominate this market," says Fiona Swerdlow, vice-president of the e-travel division at Jupiter Media Metrix.

And not every airline likes the idea of a ticket-booking site run by the Big Five. Southwest Airlines says the venture is inherently anticompetitive and is refusing to participate. Southwest already books a large fraction of tickets on its own Web site, but so do many other airlines that are entering into the Orbitz agreement. It's unclear how carriers who sign with Orbitz will benefit from continuing to operate their own independent sites. So far, 35 airlines have committed to Orbitz, including the five major carriers.

It's all enough to give trustbusters and consumer groups cause for concern. Twenty-three state attorneys general and 12 national consumer groups have asked the Justice Dept. to step in now and stop Orbitz' launch. Some are threatening to start antitrust actions of their own.


  "If the five major airlines control the ticket-distribution system, there's the prospect of comfortable competition, where airlines do not feel the need to compete aggressively," says Iowa Attorney General Tom Miller. Adds Albert Foer, president of the American Antitrust Institute: "In the long term, we could end up with three major airlines and no independent travel agency to help consumers navigate the best terms for travel."

In 1990, Justice launched a probe into whether airlines exploited a database to collude on prices. And the government is pressing a civil lawsuit examining whether American Airlines used predatory pricing tactics to drive out low-cost competitors at Dallas/Fort Worth International Airport. "Airlines have done some pretty lousy things in the past. You can't help but be skeptical," says Richard Copeland, president of the American Society of Travel Agents.

Travelocity, which is owned by computer-reservation system giant Sabre Holding, and Expedia, which is owned by Microsoft, have teamed up to form their own Washington lobbying organization. They're pushing lawmakers to clarify how antitrust rules apply to the Internet. But chances are, Orbitz will be up and running long before the issue takes center stage in Congress.


  Few deny that Orbitz still faces an uphill battle, at least in the short term. Participating airlines will have to spend millions of marketing dollars to catch up with e-travel sites that have been aggressively promoting their services for three years or more. Besides, Expedia and Travelocity already have extensive marketing agreements with giant Internet portals like Yahoo! and AOL.

So far, the major airlines have poured $50 million into the venture, but analysts say more will be needed to compete in today's cutthroat e-travel market. Expedia and Travelocity have another advantage: They both went to the public trough when the stock market was soaring and have plenty of cash on hand. Funding for Orbitz will likely have to come out of the airlines' budgets, since venture capital has largely run dry. "Orbitz was conceived when there was a lot of money out there for dot-coms. It doesn't have it made in the shade," says Kate Rice, a senior e-travel analyst with PhoCusWright, an online travel research company.

Officials for Orbitz dismiss the critics' griping. They say the site is all about fair competition and consumer choice, two things the online travel industry could use more of. "What consumer groups aren't pointing out is that sites like Expedia and Travelocity have improved in the last month, just because Orbitz is coming," says Stacey Spencer, marketing analyst with Orbitz. And in fact, many flyers surely will find convenience in a one-stop site that can virtually guarantee they're getting the lowest fare on the Internet.

Still, when competitors that own four out of every five seats booked on U.S. airlines agree to work together to offer the lowest online prices, it's enough to make other e-travel sites, trustbusters, consumer groups, and Congress very nervous.

By Nicole St. Pierre in Washington

Edited by Douglas Harbrecht

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