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The Starting Line: Orbitz cuts costs to profit

Tough times in the travel industry are prompting the online travel site to tighten its belt, a positive measure if it means hitting profitability sooner than expected.

Troubled times for the travel industry may end up making Orbitz profitable earlier than it expected.

New businesses like Orbitz dream about rapid success, but few achieve it and fewer do it after demand for their industry's product fell off a cliff. Yet Orbitz expects profits--at least on a cash basis--by the middle of 2002, or roughly a year after launching and around three quarters after the most catastrophic hijackings in the airline industry's history. That's also several months ahead of the company's original schedule, Orbitz said.

And if the company's new, earlier target is fulfilled, it will be largely because the reverberations of the airplane attacks convinced the company to become leaner.

"The belt tightening we've done in the aftermath of Sept. 11 means we're spending less money," said Carol Jouzaitis, Orbitz's vice president for corporate communications. "In an uncertain environment, you do the smart thing."

By itself, the idea of a profitable online business selling airline tickets is far from outlandish. In fact, operating profitability is the norm among the largest publicly traded players, at least on a cash flow basis.

Excluding noncash charges and one-time events, Travelocity, Expedia and Priceline.com reported third-quarter operating profits of $3.6 million, $13.7 million and $4.2 million respectively. All three are expected to earn anywhere from 5 cents to 67 cents per share, depending on the company, according to the latest analyst polls from First Call.

Travel became lucrative ahead of other industries because airline tickets turned out to be one of the few retail items embraced by Internet users. Unlike shopping for books in a superstore with plush couches and cappuccinos, or purchasing a car that can be test-driven on a street behind the dealership, buying travel services in the real world was never luxurious or tactile, so there's no "experience" to be lost going online. All that's left are the advantages of the Web, which is often cheaper, faster and easier than a travel agency.

"It's such a dynamic way of being a retailer for the travel market that online companies are taking big gobs of market share," said Bob Simonson, a William Blair analyst who follows travel and gaming companies.

Orbitz isn't a public company, so it doesn't have to disclose its financial figures. The company has seen business bounce back from the terrorist-caused slump much faster than expected, Jouzaitis said.

Critics argue that Orbitz has an unfair advantage because it's a joint venture of several airlines. Federal regulators are investigating Orbitz on antitrust issues, but no action has been taken yet.

Orbitz counters that its success stems from a more efficient system for ticket searches. And the company says it's simply more efficient as a whole than its rivals.

The company slashed its expenses "significantly" soon after Sept. 11, Jouzaitis said. So did its peers. Travelocity's operating margin was 4.6 percent in the third quarter, compared with 3.8 percent in the second. Operating margins for Priceline.com and Expedia fell slightly over the same period, but not as much as some observers expected.

Orbitz's cost-reduction moves, including 17 job cuts, were made immediately because no one knew how the travel industry would react. "When consumer demand for travel contracts, the smart thing to do is rein in your marketing expenditures," Jouzaitis said.

It's the prudent thing to do--especially if you didn't know there would be a quick rebound.

Although airlines report their passenger loads have fallen dramatically since the attacks on the World Trade Center and the Pentagon, Travelocity and Expedia recently said bookings in the first half of October were at least 80 percent of pre-attack volume.

Priceline.com reported that during the last week of September, airline-ticket unit sales were at 72 percent of the level before Sept. 11. Prudential analyst Mark Rowen estimates Travelocity, Expedia, Priceline.com and Hotel Reservation Network saw combined gross bookings in the third quarter of $1.6 billion--down 14 percent from the second quarter, but up 18 percent year-over-year.

Nielsen/NetRatings' latest figures indicate that Orbitz's share of traffic on travel Web sites rose to 17.2 percent in October from 11.3 percent the month before. That's not necessarily a true reflection of Orbitz's piece of the travel market, Simonson said. "It's a little hard to say that (the traffic figures) are accurate reflections of business," he said. "How many tickets did they sell?"

Orbitz isn't saying exactly how much revenue it's generating, but business did rebound to the point where the company believed it could stop bleeding cash by the middle of next year, several months ahead of schedule. Volume is still down "a bit" from pre-Sept. 11, but it did come back sufficiently strong that company executives had a "philosophical discussion" about whether to roll back its cost cuts or move up its profit target by several months.

Executives decided that becoming profitable sooner than originally expected was the safer thing to do. The Internet bubble's collapse highlights the need to stem losses as soon as possible, especially for a company trying to appeal to investors--both current shareholders and potential ones that might be eyeing an initial public offering, Jouzaitis said.

"Wasn't that the lesson of the whole dot-com crash?" she asked rhetorically. "We're a start-up dot-com. We own stock options, so we want the company to be profitable."