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Net firms, airlines near head-on collision

Internet travel companies and the major airlines are on a head-on collision course in cyberspace, and the fate of Expedia's IPO could be key in predicting the outcome.

Internet travel companies and the major airlines are on a head-on collision course in cyberspace.

Although Web agencies have been battling with traditional travel companies for some time, a confluence of events could create the most turbulent competition to date for online ticketing.

Key to predicting the outcome of this fight could be Microsoft's public spin-off of Expedia on Wall Street today. Shares of Expedia surged on their market debut, rising more than 280 percent in heavy trading on the Nasdaq. Yesterday, the company priced its shares at $14, surpassing the expected range of $10 to $12 for its initial public offering.

The airlines are counterattacking such encroachment onto their territory with online initiatives of their own. United Airlines, Northwest Airlines, Continental Airlines, and Delta Airlines said yesterday that they plan to launch a joint travel site in the first half of next year, announcing the move just one month after Travelocity and Preview Travel--Expedia's top two rivals--disclosed that they are merging to form the market's No. 1 site in terms of customers and sales.

What the companies are jockeying over is one of the most popular and lucrative areas in e-commerce. Research firm Jupiter Communications projects that online purchases of leisure and unmanaged business travel will grow from $2.2 billion last year to $17 billion in 2003. The latter figure represents about 10 percent of the total market for such travel.

Expedia is the current leader online, but that appears to be changing. According to Jupiter, Expedia, Travelocity, and other online travel agents accounted for about 79 percent of consumer and unmanaged business travel sales online in 1996, with online travel suppliers such as airlines and hotels making up the remainder. By last year, the ratio had closed to about 50-50, and Jupiter digital commerce analyst Melissa Shore said travel suppliers will account for an increasing percentage in the near future.

Expedia
at a glance

HQ: Redmond, Washington  
Chairman: Greg Maffei  
CEO: Richard Barton  
Employees: 149  
Annual sales: $39 million  
Annual income: ($20 million)  
IPO: November 1999  
Ticker: EXPE  
Exchange: Nasdaq

More:
Expedia quotes
Expedia news

Source: Bloomberg 11/10/99

One of the things that travel suppliers such as Delta have going for them is brands that are well-known and trusted, Shore said. And the suppliers have been dropping the commissions they pay to travel agents online and off, squeezing the profit margins of sites such as Expedia and forcing them into other areas.

Gomez Advisors e-commerce analyst Krista Pappas said the new multiairline site will rachet up the competition for Expedia and Travelocity and may limit their access to the airlines' popular discounted fares.

"This puts another major squeeze on the Internet travel agents," Pappas said.

Already, Expedia faces a significant challenge from chief rival Travelocity, especially after its merger with Preview Travel. Horizon Research Group analyst Fredrik Tjernstrom said Expedia's site is easier to use than Travelocity and provides a "friendlier experience" for consumers, but Travelocity will have nearly twice as many customers as the Microsoft spin-off after the merger.

That market leadership will bring several advantages, including better access to finances, more attractive deals with travel suppliers, and a greater share of new customers.

"In the short term, typically you see the top player taking a disproportionate amount of business," Pacific Crest Securities analyst Steve Weinstein said.

Still, Microsoft is never one to be ruled out. In a July report, Forrester Reseach named Expedia among its top travel sites and projected that lower-tiered competitors would consolidate or disappear.

At the very least, Expedia is expected to share the bulk of the business with Travelocity over the next two years--a projected success that Horizon analyst Tjernstrom attributes in large part to Expedia's relationship with Microsoft.

"They have the Microsoft Network behind them," he said. "I'm sure Microsoft's backing will be beneficial."