With the online travel site under antitrust review by the Department of Justice, general counsel Gary Doernhoefer says criticism by detractors is more motivated by competitive envy than by the facts.
A licensed pilot and former chief attorney for American Airlines, Doernhoefer is general counsel for Orbitz, the online travel site that's under antitrust review by the Department of Justice. Meanwhile, executives at rivals like Expedia, Travelocity and the Interactive Travel Service Association, the trade association for the online travel services industry, are crying foul. They say that Orbitz, created in October 2000 by United Airlines, American Airlines, Delta Air Lines, Northwest Airlines and Continental Airlines, is growing rapidly only because it exploits anti-competitive distribution agreements with more than 40 member airlines. They want Orbitz to change those contracts and let go of its exclusive access to steeply discounted Web fares.
But Doernhoefer, who says the Chicago-based company will sail through the investigation, expected to conclude by the end of the year, dismisses rivals' complaints as "whining." Also, he says he is "not particularly troubled" by the company's unprofitable status as it contemplates raising $125 million in an IPO. Doernhoefer talked to CNET News.com about how the Internet has revolutionized the travel industry, and why travel agents, airlines and the computerized database companies that keep track of airfares need to learn the "new game" of online travel.
The Department of Transportation concluded two weeks ago that Orbitz has helped competition but could later "harm" competition in the airline industry. What did you think of the report?
We thought the DOT report was largely positive. If you read the document carefully, it's clear they found some very positive, affirmative things: Orbitz has increased competition, provided a low-cost distribution channel to the travel industry and has gained substantial acceptance and executed on its business plan. It did, however, put the spotlight on the Justice Department outcome by saying that they were deferring on some findings until the Justice Department completed its review.
What do you think the Justice Department report will say?
The Justice Department has continuously been engaged in a review of Orbitz for more than two years. We're pretty confident in a positive outcome. We're presuming that if there were anything terribly wrong with our business model, the Justice Department would have taken action long before now. We think we're in the process of winding up...hopefully by the end of the year.
A number of publications, including Consumer Reports and Business Week, have conducted surveys recently and determined that Orbitz is not consistently offering consumers the lowest prices. If you have access to Web fares that no other carriers have, why isn't Orbitz the low-price leader?
Consumers clearly get a better deal through Orbitz for a lot of reasons, aside from price, one of them being access to Web fares. We also provide a better shopping experience. The site's easier to use because we provide our data on a matrix display, and the back-end technology is industry leading. It's an unbiased atmosphere, so you don't have to worry that one airline is being pushed.
From our studies, it's true that the gap (in price between Orbitz and rivals) is closing. But we still hold the lead. We also return to the consumer more options. You do a search on Orbitz and you may have more than 200 flight combinations. The competition may have only 20.
|"Nothing about the charter association agreement is exclusive."|
Orbitz rivals seem most inflamed about the company's "most favored nation" (MFN) relationship with the airlines: Orbitz is the only site, other than the airlines' own sites, where consumers can purchase Web fares, often the lowest priced seats available. If the federal government required Orbitz to take out the MFN clause, would Orbitz survive?
Absolutely. We could survive easily. I know our competitors have suggested that's all that's necessary is to eliminate the MFN provision. But all this discussion about MFN circles around two paragraphs that allow us to do a very straight-forward bargain with the airlines: We offer them lower costs in return for the right to carry all of their inventory.
But doesn't Orbitz have an exclusive deal to carry Web fares, while its rivals are blocked from carrying those fares?
Absolutely not! It doesn't say that, never has said that and is simply untrue. Nothing about the charter association agreement is exclusive. At any time, our competitors could have easily lowered their costs to meet or beat the prices we offer. It's finally happening now, after months of their just whining about it...The agreement never was exclusive--that was one of those urban legends.
Most traditional travel agents book tickets through computer reservation systems (CRS), databases used to compile flight and price information worldwide. The airlines are now bypassing CRSes--and their booking fees--by selling tickets on Orbitz, which charges its own fees. Are CRSes doomed?
CRS is not an efficient tool for the travel agent anymore. They either need to restructure the CRS business and lower the cost, or they're going to be replaced by new technology.
How is Orbitz different from a CRS, and can Orbitz exist with CRSes?
I think the CRSes will continue to exist, but they'll have to become more competitive. What happens today in the CRS business that's so peculiar is that the largest travel agents are paid by the CRS to continue to maintain the use of the CRS. The smallest travel agents have to pay the CRS for the privilege of using the service. The airlines are the ones funding this strange compensation structure where the big get bigger and the small get punished. So the structure is broken and is not serving the industry anymore. The practice of bribing the largest agents into using a CRS has to be eliminated. If you take that bribe out, the CRS could be competitive--and the travel agents could choose the best system that meets their needs.
Does the Internet spell the end of the conventional travel agent? Does Orbitz?
Frankly, the savvy travel agents aren't troubled by Orbitz. They see it as change that was inevitable. They are adapting to use the Internet--be it Orbitz or anyone else. The trouble is the inability to shift away from the CRS. They're prevented from doing that because of the agreements of the CRSes.
From your perspective, how has the Internet changed the travel industry?
It's introduced a whole new set of issues that the in-house lawyer didn't have to worry about. We have issues from privacy to screen scraping: Can a Web site operator lawfully prohibit another site from taking an excerpt of the data? Is that a trespass?...It's a whole new set of issues.
|"Frankly, the savvy travel agents aren't troubled by Orbitz. They see it as change that was inevitable."|
Why would anyone go to a travel agent--and pay their fees--when they can get the information just as quickly online?
For some travelers, they will never use a travel agent. They'll find the measure of control and choice the Internet provides very attractive. But for other consumers, even for several generations, the amount of advice and the personal touch you get from an agent will still be attractive--even if you have to pay for it.
If you're spending two weeks in Greece with four days in a ship and five days on the islands and you want a rental car, you're going to go to a travel agent and pay that agent for the service. It will be a long time before the Internet can replace that research that another person can do for you.
How will Orbitz serve end-of-the-line customers when a majority of board seats will be occupied by executives from the founding airlines, including United and American? Don't the airlines' agendas often conflict with those of the consumer?
The board structure makes a lot of sense in that in the distribution business you need to serve both the supplier and consumer. Having substantial participation by the suppliers is a positive thing. It ensures that we're in touch with the supply side of the business; we know what their interests are and can build a product that serves them well. And we know that if we don't get a lot of consumers to use the Web site, we are of no value at all.
Wall Street analysts have criticized Orbitz for its lack of a so-called merchant model--a system, where the company buys blocks of airplane seats or hotel rooms at steep discounts and sells them to individuals to make large profits, a la Expedia. Has Orbitz shied away from this model because it's not as lucrative to the founding airlines? Is this the first of what could be many conflicts for the company because of the board structure?
It's just not true. We've only been around for a year. How long did it take Expedia to get into the merchant model? They didn't get into it their first year, either. With 190 employees trying to be lean and mean, you can't do everything at once. We'll get there. If Expedia's worried about it--they should be.
Orbitz filed in May for an IPO, but the company is still unprofitable--even though larger rivals were profitable nearly from their start. Is the IPO a last-ditch effort to raise cash? How do you sell it to investors who are wary about any company whose business model hinges on the Internet?
We're in the process of an IPO and have some constraints on what we can say. I can't get into our cash position. It's information we have not provided to the public. But...Orbitz has pretty consistently executed on its business plan. Our cash flow losses have decreased consistently from our launch. We're not particularly troubled by where we are.
Most dot-coms were founded by relatively young people and have relatively little structure and few rules. What's it been like to work for a dot-com backed by the nation's largest airlines--and under multiple government antitrust investigations?
(Long pause.) The company had from the outset a very clear, very defined goal: to inject new competition and lower costs into the travel distribution business--to serve the consumers and suppliers better. My sense is that the rest of the company outside of general counsel had that target focus from the beginning.
What's it been like for you?
For me, the general counsel, it was slightly different. The investigations meant we had to be more cautious, more careful about how we conducted business, how we handled board meetings. All of that required more attention to detail. There were guidelines that were issued in 2000 by the Federal Trade Commission and the Justice Department jointly that expressly addressed how to conduct a collaboration among horizontal competitors; it was clear that the formation of Orbitz was done with a careful eye to those guidelines.
If you could do it all over again, would you try to placate your rivals, the CRSes or travel agents? Do you have any regrets about how Orbitz has evolved?
The only regret I have is we should have called the provision something other than "most favored nation." It's not an MFN. It's an assurance of inventory in return for low costs. It should have been called the "access to inventory" clause.