Going After Online Plane-Ticket Buyers

Websites such as Priceline.com (PCLN), Orbitz Worldwide (OWW), and Expedia (EXPE) disrupted the airfare booking business and became multibillion-dollar companies by serving as self-help travel agencies for the digital era. Now their industry is entering a patch of turbulence. With Google's (GOOG) $700 million purchase of ITA Software receiving regulatory approval in April, the search giant has gained control of a company that produces much of the flight data other sites rely on. Google is now developing "exciting new flight search tools for all our users," according to a company blog. Meanwhile, carriers such as American Airlines (AMR) and Delta Air Lines (DAL), eager for more control over customers and pricing, have pulled their flight listings from some third-party travel aggregators.

"There's gonna be a change as to who the middlemen are," says Adam Goldstein, co-founder of Hipmunk, one of a number of startups launching themselves into the choppy skies of online travel booking. While Hipmunk hopes to set itself apart by better predicting which flights users will book, others are linking up with social networks like Facebook or tools like Google Earth to give travelers more information—and more personalized information—than they can find on top travel sites. They're vying for a slice of the online consumer airfare market, worth $45 billion last year in the U.S. and set to grow 14 percent over the next two years, according to Forrester Research (FORR). "The companies that were once the pioneers and innovators are lagging behind a new generation of creativity," says Henry H. Harteveldt, a travel analyst at Forrester. Brian Hoyt, a spokesman for Orbitz, says "we are constantly innovating," pointing to the company's iPhone (AAPL) and Android apps, among other features.

Hipmunk's innovation is the "Agony" button. While other travel sites prioritize low prices above all else, Hipmunk's tool, introduced in August, weeds out excessively long trips or those with out-of-the-way connections and ranks results according to convenience. "Just about everyone who buys travel online would be willing to spend $5 or $10 extra to avoid a connection," says Goldstein, who co-founded Hipmunk last year after graduating from the Massachusetts Institute of Technology.

Getting flight rankings right is a business imperative for Hipmunk, since the company makes most of its money from commissions earned when users buy tickets. When Goldstein tinkers with the code underlying the agony filter to give more weight to price, duration, or number of connections, he watches whether the change increases the percentage of visitors who select one of the first three flights that appear in search results. Goldstein says he's exploring a customized agony button that would take into account user preferences for (or abhorrence of) certain airlines and airports.

Greater accuracy could give Hipmunk an advantage over competing search sites such as Kayak.com, which relies more on advertising dollars than booking fees for revenues. That site, which filed for a $50 million initial public offering in November, has less incentive to focus on creating a user-friendly, efficient flight search tool as a result, says Steve Huffman, another Hipmunk co-founder. "The big advantage we have over them is our users like us," deadpans Huffman, who previously co-founded the social news site Reddit. "I don't mean that in a condescending way, but it's true." Paul English, the chief technology officer at Kayak, says ads help some users discover new options. "I challenge you to find any tech company that is as intimate with their customers as we are," he says.

Some of the others in the new generation of travel sites hope they can win customers by offering more specific, personalized experiences. "There's never been more travel information online," says Travis Katz, co-founder of Gogobot, which uses information from Facebook to help people select hotels based on their friends' recommendations. "But everyone's tastes are different."

The bottom line: Startups hope to earn a slice of the $45 billion online ticket-buying market by offering smarter, more personalized travel searches.

    Before it's here, it's on the Bloomberg Terminal.