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Continental axes Web travel commissions

Investors flee the stocks of online travel companies such as Expedia and Travelocity after the airline says it will stop paying commissions on tickets booked on the Net.

Continental Airlines said Wednesday that it will stop paying commissions on tickets booked online "effective immediately," a move that could hurt Web travel agencies if other airlines follow suit.

The announcement spooked investors Wednesday. Expedia's stock closed at $28.34, down 11 percent from Tuesday's closing price of 31.83. Travelocity fell almost 30 percent from $19.90 to $14.07.

When airlines cut commissions their competition tends to follow. If such an event were to occur now it would threaten an important source of revenue for the largest Web travel agencies, Expedia, Travelocity and Orbitz, said Lorraine Sileo, an analyst for research group PhoCusWright.

She estimated that the companies earn 25 percent to half their revenues from airfare.

"What the airlines are telling Web travel is, 'Why should I pay you to process a ticket on your Web site when I can do it myself?'" Sileo said. "The airlines want to complete Net transactions and not have to pay someone else to do it."

Representatives for Expedia and Travelocity declined to comment on Continental's decision, and an Orbitz spokeswoman said company executives were mulling over the airline's move.

Continental follows Northwest Airlines and KLM Royal Dutch Airlines, which eliminated Internet travel commissions in March.

An industry hurting
The move by Houston-based Continental comes amid one of the gloomiest periods in the history of the travel industry, especially for airlines, which have been hit hard since the terrorist attacks Sept. 11.

Many airlines have whacked costs by laying off massive numbers of employees, canceling flights, and doing away with in-flight meals.

Cutting the costs of online commissions, typically 5 percent of the airfare price with a $10 cap, may appear more attractive than ever to cash-strapped airlines.

"If the airlines have stopped offering food, can anybody be surprised that they're cutting commissions?" said Henry Harteveldt, a travel analyst at Forrester Research.

Consumers may also feel some of the heat. When Web travel companies see falling commissions, they often end up charging customers more for that airline's tickets.

For example, soon after Northwest and KLM stopped paying commissions, Travelocity imposed a $10 surcharge on those airlines' flights. Expedia swung its own commission deal with Northwest a month after the airline dropped Net commissions. Terms of the deal were not disclosed.

Airline sites vs. travel agencies
Even before Sept. 11, the airline industry was slumping. With airlines squeezing every nickel, they may have taken note of a competitor that has thrived without the help of online travel agencies.

Southwest Airlines, long considered a maverick in the airline industry, offers fares exclusively on its own Web site. Without other Internet sales channels, Southwest's Internet bookings accounted for 37 percent of sales, said Beth Harbin, a Southwest spokeswoman.

"Our customers have known for 30 years that they are going to get consistently low fares at Southwest," she said. "They don't need to do side-by-side shopping."

But Continental risks losing exposure on the Web, PhoCusWright's Sileo said. The majority of travelers who shop online buy their tickets from Web travel agencies.

"If others follow Continental, that doesn't mean customers will once again have to check every airline's site individually," Sileo said. "People want to go to one site for all airline information."

Regardless of whether other airlines follow Continental, Net travel agencies have been growing other segments of their businesses. Expedia has led this drive by investing heavily in its hotel and travel-package offerings.

"The important thing to remember here is that while the commission from airfare is an important source of revenue, it's not the sole source," Harteveldt said.