Airlines put squeeze on Web travel agencies

By Greg Sandoval
Staff Writer, CNET News.com
March 14, 2001, 4:00 a.m. PT

The airline industry wants to put Web travel agents out of commission.

The announcement two weeks ago by Northwest Airlines and KLM Royal Dutch Airlines that they would stop paying commissions to Internet travel agencies may only be the beginning, analysts say.

"By the end of the year, all airlines will be at zero commission for online travel agencies," predicts Forrester Research senior analyst Henry Harteveldt.

That would present online travel agencies with two unsavory choices: Either make up lost commissions by charging service fees--which could hurt their competitiveness--or maintain prices and watch profit margins shrink. Expedia and Travelocity.com, the two largest online travel agencies, would stand to lose 25 percent of revenue if all airlines followed Northwest and KLM, according to industry estimates.

The battle lines became clearer in the last year, when the airlines sold more tickets online on their own Web sites than through online travel agencies after making significant investments in technology and customer-loyalty programs. The airlines have also benefited as Net travel agents have shifted their attention beyond airline ticketing into more profitable areas such as hotel rooms, rental cars and vacation packages.

The latest moves to cut commissions are part of a protracted campaign by the airlines against travel agents in general. In recent years, most major airlines have whittled away at commissions paid to traditional travel agencies. Delta Air Lines began the trend in 1995 and was followed by United Airlines two years later, both moves that prompted other airlines to follow suit within days or even minutes.

The stakes are high for both industries. Despite the market downturn, online travel has emerged from the dot-com wreckage as the most successful e-commerce sector,

The airlines say it's more cost effective for them to sell their own tickets. Web travel agents disagree, citing studies showing that many of the airlines' sites lacked dependability, ease of use and customer service.

"We are able to pass on savings to consumers and fill seats for our suppliers," said Suzi LeVine, spokeswoman for Bellevue, Wash.-based Expedia. "And that's what the suppliers want: more heads in beds and butts in seats."

Sabre Holdings-controlled Travelocity responded quickly to Northwest's decision by imposing a $10 service charge on all Northwest and KLM tickets. But Al Comeaux, spokesman for the Fort Worth, Texas-based travel company, said he doesn't expect a flood of other airlines to follow.

"The other airlines, which include direct competitors to Northwest, have indicated that they don't plan to match the policy," Comeaux said. "We know from our discussions with other airlines that they see us as a low-cost distribution channel."

There may be other reasons for airlines to move cautiously. Members of Congress quickly denounced the move by Northwest and KLM and cautioned regulators that the airline industry is bent on eliminating competition.

In a letter sent to Attorney General John Ashcroft, Reps. Bill Lipinski, D-Ill., and Rick Boucher, D-Va., said Northwest should be monitored for possible antitrust violations.

"For several years, airlines have methodically reduced commissions paid to independent distributors of airline tickets," Lipinski said. "This is obviously an attempt to weaken and eventually eliminate independent third-party distributors."

Richard Barton, chief executive of Microsoft-backed Expedia, said the latest move to cut commissions will definitely hurt Expedia's bottom line. "We are not a charity. We are in the business to operate profitably," he said.

That goal--to become profitable--has been an elusive one for both Expedia and Travelocity. Expedia, which reported a $2.6 million loss in the last quarter of 2000, said it expects to reach profitability in 2002. Travelocity expects to see profits by summer after it easily beat analyst expectations for the fourth quarter by reporting an operating loss of $900,000, or 5 cents per share, instead of 14 cents per share.

At least some consumers warn that they expect Northwest and other airlines--not the online agents--to suffer from the move to cut commissions. "People will start ignoring the $10 surcharge or go with other airlines through Travelocity!" said one post on Yahoo's message board last week.

"The big advantage that the online travel agents have over the airline Web sites is that consumers believe that the travel agencies offer the best prices," said Kate Rice, an analyst with PhoCusWright, a research firm that studies online travel companies.

Rice said the agencies also have options where commissions are concerned. They could negotiate to buy large blocks of tickets on specific travel routes for discounted rates and then be allowed to sell them for whatever price they could get for them, Rice said. Expedia is already offering similar deals.

"These agencies can set their own prices this way and build their own margins," Rice said. "The airlines won't sell tickets on every route, but they will for routes they need help selling. Doing business with the online guys in this fashion is in the airlines' best interest."