Orbitz rivals cry foul

special report No longer a struggling start-up, the online travel site is once again attracting the attention of federal regulators as rivals claim Orbitz is a monopoly.

9 min read
Orbitz rivals cry foul, claim monopoly in air travel

By Rachel Konrad and Greg Sandoval
Staff Writers, CNET News.com
April 11, 2002, 12:30 p.m. PT

Mark Britton is on red alert.

In a plea to the federal government, the senior vice president of Expedia outlined a path showing how archrival Orbitz could create an illegal monopoly as an online travel site owned by the major airlines, with exclusive access to the cheapest fares of 43 carriers. Orbitz is already far along that path, he said, and the last step "is not far behind."

"Orbitz's anti-competitive effects have already begun to take hold, and the stakes are too high to let them spread any further," Britton, who is also general counsel of Expedia, wrote in the open letter to Transportation Secretary Norman Mineta in December. "Consumers and the independent agents who negotiate on their behalf have everything to lose."

Although the Transportation Department cleared Orbitz in an initial review more than a year ago, on April 1 its Office of Aviation and Internal Affairs filed a new report on the company, which rocketed to the No. 3 position among travel sites after Expedia and Travelocity.com since it began selling tickets in June. The department's inspector general has 90 days to review the report and issue his own findings on whether Orbitz is exploiting any unfair advantages.

At stake is no less than the entire competitive landscape of the $31 billion online travel industry, one of the fastest growing niches of e-commerce. Whatever federal regulators decide will have consequences for all consumers who use the Web to shop for and purchase airline tickets.

"The DOT doesn't want the airlines to get together to price fares, and that's the big concern with Orbitz," said Ken Button, professor of public policy at George Mason University and an expert in air transport economics. "As long as the airlines don't exploit this, Orbitz is to everyone's advantage. But if Orbitz took control and then became the only way to buy tickets--and there is that potential--it could push fees up too high."

In its defense, Chicago-based Orbitz points to the companies that create and maintain the massive databases of flights and prices needed to sell tickets. Orbitz CEO Jeff Katz said these database companies, such as Sabre, Galileo, Worldspan and Cendant, have historically held the airlines hostage and charged huge fees for their reservations systems. They are responsible for increasing fees that resulted in ticket price hikes of roughly 10 percent each year for the last 10 years, he said.

Travel agencies for decades have paid for services provided by computerized reservation systems. Sabre Holdings, the nation's largest such system, owns 96 percent of Travelocity. Orbitz executives bill their company as an alternative to Travelocity and Expedia, which receive compensation from airlines that are similar to commissions long imposed by brick-and-mortar travel agencies.

Click here to Play Runway clear for Orbitz
Jeffrey Katz, CEO, Orbitz
May 8, 2001

The airlines pay $15 to $17 in booking fees to the reservation systems for each ticket sold--about $1.7 billion a year for all airlines in the United States. With Orbitz, the airlines get some of the booking fees back in the form of rebates, Katz said, cutting their transaction costs by 30 percent, or $10.50 to $12 per ticket. The airlines then pass some of the savings to consumers.

"I have to laugh when I hear (Travelocity and Expedia) accuse Orbitz of things that don't come close to the egregious practices Sabre was accused of," a former Federal Trade Commission official said. "They offered agencies huge rebates if they met sales quotas. These agents would then be pushing the airline that Sabre wanted instead of finding the passenger the lowest fare. The DOT tried to regulate biasing, but it was tough to prove."

Creating a monster
If the airlines feel a sense of betrayal about these reservation systems, it would be understandable; the carriers actually created them. American Airlines created Sabre in 1964 and owned it until the mid-1990s; United Airlines created the company that eventually became Apollo, and Delta Air Lines created the precursor to Worldspan.

The airlines divested themselves of the reservation systems amid government inquiries into the potential for price collusion or other monopolistic abuses--concerns that seem to echo those voiced about Orbitz today.

The creation of Orbitz "affects the public at large because the public at large doesn't have the access to the variety and diversity of fares that they would through multiple Web sites, and that's bad," said Bob Kneisley, associate general counsel for Dallas-based Southwest Airlines, which refuses to participate with Orbitz and instead sells tickets through Southwest.com. "It's bad anytime competitors get together to combine to eliminate competition."

But several independent analysts say longtime rivalries among five airlines that founded Orbitz would prevent large-scale price-fixing.

"Washington is most concerned about the potential for collusion," said Henry Harteveldt, senior analyst for Forrester Research. "But will it happen? No. I don't think that the airlines are intellectually capable. They're just not that coordinated."

Not-so-friendly skies
Animosity toward Orbitz began in 2000, when United, American, Delta, Northwest Airlines and Continental Airlines invested $145 million in a venture known as "T2"--rumored to stand for "Travelocity Terminator," a project designed to unseat the Fort Worth, Texas-based agency that at the time was the largest online travel company.

Orbitz began selling tickets in June, and by February it had topped $1 billion in revenue. By contrast, it took Seattle-based Expedia, which debuted in October 1996, about four years to reach $1 billion in annual revenue. It took Travelocity, which debuted in March 1996, about three years.

Related story: Southwest soars solo The quick success alarmed rivals, who attribute much of Orbitz's gains to its "most-favored nation" status, a designation that guarantees that the company gets the airlines' lowest prices on many fares. Expedia's Britton and other opponents want the government to abolish this so-called MFN clause.

"They already are the third-biggest site," said Antonella Pianalto, executive director of Interactive Travel Services Association, a Washington-based trade group whose primary members are Expedia and Travelocity. "It took years for Expedia and Travelocity, and Orbitz did it in a couple months? If they are competing on customer service and technology, why do they need exclusivity?"

Orbitz lists fares by price or time, but it may not include fares of airlines that don't participate in its program, such as Southwest and JetBlue Airways. Orbitz charges a $5 service fee on all fares. Last week, it began charging an additional $5 fee on fares from America West and Air Canada when those companies stopped paying Orbitz a commission fee. Since then, Air Canada has reached an agreement with Orbitz and the fee has been lifted.

Well beyond infancy stage
"Now we're seeing Orbitz in practice...rather than in theory," Expedia spokeswoman Suzi LeVine said. "This is not a little start-up without revenues anymore, and certainly the most-favored nation clause is going to be a key element in the investigation."

Orbitz's CEO says its arrangements with the airlines are no different from those of Travelocity and Expedia, which also cut pricing and marketing deals with carriers. Airlines can pay the agencies to place their fare listings higher on a Web page or make them the first ones seen by customers even though they may not be the lowest priced. If airlines refuse to pay fees, they risk being shut out of sites altogether.

One day last month, Expedia changed the way it displayed fares for United flights after the No. 1 carrier said it would stop paying commissions. Expedia customers had to go to another page to get United's prices, even if they were the cheapest or most convenient on selected routes. Few consumers took the extra effort, and United sales plunged until the airline reversed its decision on commissions and Expedia resumed stating fares in less than 24 hours.

Orbitz says its larger competitors have effectively blocked it from the largest online advertising arenas, relegating it to smaller sites and forcing Orbitz to spend millions on expensive print and billboard ads. Travelocity negotiated a deal to be the exclusive Web travel advertiser on America Online and Yahoo, while Expedia has a lock on Microsoft's MSN, Amazon.com and others. (Microsoft built Expedia and owned a controlling share until agreeing to sell it to USA Networks in June.)

"If that's not unfair competition, I don't know what is," Orbitz spokeswoman Carol Jouzaitis said of the lopsided advertising.

Consumers: Turbulence ahead
Regulatory issues aside, it's difficult to determine which company offers the best deals. Few independent studies benchmark speed and price. On a given day, any of the sites could have the cheapest fare--or the cheapest fare could come from nonmember airlines such as Southwest.

Another factor is convenience. Orbitz often finds the cheapest ticket, but it doesn't consider frequent flier affiliation or other preferences. Passengers who buy through Orbitz can't reserve a seat online--a feature that Travelocity and Expedia have offered for more than a year.

Still, airlines around the world want to replicate Orbitz. Opodo began operating in Europe late last year, backed by nine European flight operators: Aer Lingus, Air France, Alitalia Airlines, Austrian Airlines, British Airways, Finnair, Iberia Air Lines of Spain, KLM and Lufthansa German Airlines. Zuji hopes to launch later this year and serve Asia with flights from Air New Zealand, Qantas Airways and Singapore Airlines.

Although it's unclear how consumers will fare, travel industry veterans say the biggest losers will be small to midsized travel companies--those that don't specialize in cruises or other niches and can't compete on price. Expedia and Travelocity promote rental cars, hotels, cruises and packages, but roughly 90 percent of revenue in the leisure business comes from airline tickets.

"Agencies will pick their niches--safaris, luxury hotels, youth-oriented singles tours, family vacations," PhoCusWright analyst Lorraine Sileo said. "They'll need to slice and dice it, consolidate or die. Carlson, American Express, Travelocity, Expedia--they'll remain. The other 30,000 travel agencies in America will have a tougher time." 

Despite the controversy surrounding Orbitz's business practices, the site does not consistently produce the cheapest fares. In a recent search, Travelocity and Expedia offered the best prices for round-trip tickets from San Francisco International to Detroit Metropolitan Airport in July. Travelocity even alerted the customer to a dramatically cheaper alternative from a nearby airport.

Cheapest fare: $324 on American and Northwest, requiring a change from an American plane to a Northwest one in Chicago and vice versa on the return trip.

Cheapest nonstop fare: $338 Northwest.

Midway through the search, Travelocity notified the customer of a Spirit Airlines nonstop flight from Oakland, Calif., to Detroit as a lower-cost alternative at $256.50. (From downtown San Francisco, Oakland's airport is a 20-minute drive--about the same as to San Francisco's airport.) Travelocity was the only site to volunteer this information during a basic search.

Cheapest fare: $324 American, requiring plane changes in Chicago each way.

Cheapest nonstop fare: $338 Northwest.

Cheapest fare: $329 on United and American, requiring a change from a United plane to an American one in Chicago and vice versa on the return trip.

Cheapest nonstop fare: $343 Northwest.

Spirit Airlines:
Cheapest fare: $119 each way, or $238 round-trip from Oakland to Detroit.

Bottom line: Fares on Spirit's own site were $18.50 less than Travelocity's fare for the same flight, $86 less than connections through Chicago, and at least $100 less than Northwest nonstop flights from any online agency.


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Editors: Mike Yamamoto, Noel Wilson, Lara Wright, Desiree Everts
Design: Jeff Quan
Production: Mike Markovich