Think tank defends Orbitz

The Cato Institute, known for its extreme free-market economic stance, releases a white paper praising the controversial online travel company.

3 min read
Orbitz doesn't violate antitrust laws, the government should let it operate according to its current business plan, and competitors should stop carping about the start-up's success, according to a report from a libertarian think tank.

The Washington-based Cato Institute, known for its extreme free-market economic stance, released a white paper Tuesday afternoon praising the controversial online travel company for its "comprehensive and unbiased information on schedules, fares and seat availability." Orbitz rivals Travelocity.com and Expedia sharply rebuked the report, which blasted them for "trying to use the antitrust laws as a barrier to changes that will benefit consumers."

The institute's endorsement comes as the inspector general of the Transportation Department reviews Orbitz's business practices--the second time the company has come under government scrutiny since its founding in 2000. The U.S. Department of Transportation, Inspector General Ken Meade and the Senate Commerce Committee determined last year that Orbitz did not violate antitrust regulations at the time, allowing the company to proceed with business plans.

The inspector opened a second review April 1, and he has 90 days to issue his own findings on whether Orbitz is exploiting any unfair advantages.

A growing number of politicians, as well as executives from Orbitz rivals Expedia and Travelocity, are criticizing the Chicago-based company, which has emerged as the fastest-growing travel site on the Internet. United Airlines, American Airlines, Delta Air Lines, Northwest Airlines and Continental Airlines invested $145 million to found Orbitz in 2000--at the time a venture known as "T2" and rumored to stand for "Travelocity Terminator."

Orbitz, which has a lock on some of the cheapest fares sold online, began selling tickets in June, and by February it 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 Fort Worth, Texas-based Travelocity, which debuted in March 1996, about three years.

Politicians and rivals are most concerned about Orbitz's "most-favored nation" status, a designation that Orbitz has with its partner airlines that guarantees that the company gets the airlines' lowest prices on many fares. Opponents want the government to make Orbitz remove the clause from their contract with the airlines, which they say gives them an unfair advantage.

Suzi Levine, director of product marketing for Expedia, said the Cato report mischaracterized the anger that competitors harbor toward Orbitz. She said Expedia is pushing for the government investigation not to eliminate or hinder a rival but to ensure that all players in the growing e-commerce niche have equal access to airlines' fares.

"We have no issues having another competitor in the marketplace," Levine said Tuesday. "What's anticompetitive are the agreements they created with the airlines, in which they unconditionally receive deals that the airlines aren't willing to make available to Expedia and other companies."

The Cato Institute, which published the report in conjunction with the Washington-based Competitive Enterprise Institute, argued that Orbitz could change the competitive landscape of the industry--and that consumers would benefit from the transformation.

Attorney and Competitive Enterprise Institute Senior Fellow James V. DeLong, who wrote the report for the Cato Institute, said that Orbitz's business structure helps minimize the amount of money that some of the middlemen now involved in ticket buying take from consumers. Orbitz, which also charges a $5 fee on many fares, consolidates fares from all its partner airlines so that consumers can see all available fares for a certain trip.

"The travel agent practice of steering customers to the highest-bidding airline--unbeknownst to the traveler and despite the availability of cheaper or more convenient flights--is evaporating," the report stated.

It's unclear how much influence the report will have among legislators and travel industry veterans. The Cato Institute is known for its extreme free-market philosophy, and it regularly supports companies that many Americans deem anticompetitive. In 1999, for example, Cato Institute Senior Fellow Robert A. Levy dismissed the government's sweeping antitrust crusade against Microsoft as "rubbish."

But Orbitz spokeswoman Carol Jouzaitis said the Cato study "sounds reasonable." DeLong contacted Orbitz earlier this year for statistics on airfares and other data, she said, and he did not merely write a report to tow his libertarian line. Except for providing data to DeLong, Orbitz was not involved in the report, Jouzaitis said.

"Where are the think tank studies supporting our opponents?" Jouzaitis asked Tuesday.