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Ticket squabble besets Net travel industry

U.S. airlines and online travel agencies, each armed with their own research, drop PR bombs on each other as regulators mull whether airline-formed Orbitz unfairly threatens competition.

U.S. airlines and online travel agencies are dropping public-relations bombs on each other as federal regulators prepare to report on whether an airline-formed Web travel site unfairly threatens competition.

The airlines and the big online travel companies, armed with their own research studies, are pleading their cases to the flying public, each claiming that the other will cost travelers billions of dollars in service fees for every airline ticket they buy.

The fight is centered on Orbitz, the Web travel company created by American Airlines, Delta Air Lines and Continental Airlines, among others. Orbitz hopes to snag a share of the burgeoning online travel sector, which is led by the likes of Travelocity and Expedia.

Caught in the middle is the traveling public, who could end up paying more to fly. And according to Internet research company Forrester Research, the online travel sector the players are vying for will be worth $29 billion by 2003.

Critics of Orbitz, which would act as an agency representing more than 30 foreign and domestic carriers, say the company would encourage price fixing by the airlines and that the venture is part of a plan to wipe out rival Web travel agencies. Orbitz, expected to launch in June, is being investigated by the U.S. Department of Transportation and the Department of Justice.

Meanwhile, the attacks and counterattacks between the airlines and the Web travel companies are mounting. This week, the Interactive Travel Services Association, a trade association bankrolled by Expedia and Travelocity, issued a report that said Orbitz could "chill competition" and result in consumers paying $3.2 billion more each year in extra fees.

The ITSA's report came after a study subsidized by Orbitz that said Web travel agents cost travelers $1.7 billion annually in higher ticket prices. Orbitz says the Web's middlemen charge the airlines $15 on every round-trip ticket, costs that are then ultimately absorbed by the consumer.

see special report: E-travel's unfriendly skies However, Orbitz will allow the airlines to shave those costs and pass the savings on to travelers, company spokeswoman Carol Jouzaitis said.

"We're bringing the cost efficiencies of the Net to eliminate unwanted and unnecessary fees," Jouzaitis said.

But Jeffrey Goodell, Travelocity's vice president of governmental affairs, disagrees. He says consumers will see savings only until the airlines have ground down the competition.

"There is no question that Orbitz is a part of a broad strategy by the airlines to reclaim the distribution channel from independent distributors," Goodell said, adding that without competition, there is no incentive for the airlines to lower ticket prices.

Some analysts agree, and point to a long-standing practice by the airlines of cutting back or eliminating commissions paid to travel agents, online or offline. Northwest Airlines and KLM Royal Dutch recently decided to eliminate paying commissions to Web travel agencies.

How do you buy your personal travel?

  1998 1999 2000
  Use a travel agent     55%     47%     39%  
  Call airline     33     30     29  
  Book online     10     19     27  
Source: PhoCusWright
"By the end of the year, all airlines will be at zero commission for online travel agencies," Forrester Research senior analyst Henry Harteveldt said earlier this month.

Orbitz counters that although it is owned by the airlines, it will operate as a separate entity and sell published fares just as the other Web travel companies do. "There is nothing in our model that allows us to fix prices or receive unfair advantage over our competitors," Jouzaitis said. "We will outperform them because our search technology is better than theirs."

Web travel agencies have opposed Chicago-based Orbitz since the airlines announced the venture in November 1999. Many of its opponents say if Orbitz is allowed to operate unchecked, the airlines will be in total control of their products' distribution, allowing them to set prices artificially high.

Part of the reason for the dueling research studies could be an attempt to sway lawmakers. Both sides of the debate have stepped up lobbying efforts in Congress, and the conflict promises to turn into a bruising political fight. Others that have weighed in with concerns about Orbitz include almost 30 state attorneys general, Southwest Airlines, several consumer groups and the American Society of Travel Agents.

Kate Rice, an analyst with PhoCusWright, a Sherman, Conn.-based online travel research company, said the Web travel agents have a right to be concerned.

"The scrutiny of the airlines' site is fair because the airlines have a long history of banding together to run off competition...and there are plenty of examples of airlines practicing predatory pricing," Rice said.

This conflict between the two sides, however, is not a tale of the airlines trying to bulldoze small competitors. The fight is closer to a battle royal between online travel's rich and famous.

Microsoft owns a majority share of Bellevue, Wash.-based Expedia, and Fort Worth, Texas-based Travelocity is backed by computer reservation behemoth Sabre Holdings. The two companies' combined sales account for 70 percent of all airline tickets bought online, according to PhoCusWright.

"How can we harm competition when there isn't any?" Orbitz's Jouzaitis said. "Expedia is owned by Microsoft, a convicted monopolist, and Travelocity is run by the largest reservation system. They have the sector locked up to themselves. All we are is a new competitor in an area that desperately needs more competitors."