Travel is one of electronic commerce's biggest potential moneymakers, but the fledgling industry says its growth is being stunted because airlines keep cutting commissions to online agencies.
Jupiter Communications predicts that online travel services could generate $9 billion in revenue in five years, up from $276 million last year. The service provides everything from planning and tourist information to complete reservation systems that let travelers book their own flights and hotel rooms.
Because more of the work will be automated or under the control of the user, the airlines think that migration to online services can save them money. They argue that if online travel agents do less themselves, then the airlines should be free to pay them less. Needless to say, the agencies themselves don't agree.
Last Thursday, United Airlines quietly cut the commission paid for booking online tickets to $10 per booking. That's down from the ten percent that United pays traditional travel agencies, with a $50 maximum per ticket. Since the average cost of an online ticket is estimated at close to $350, that puts the commission at less than four percent, the online agents complain.
The cuts keep getting deeper. United's move comes after Northwest and Continental cut the online commission to five percent, with a $25 cap, and American announced a maximum commission of $15 per ticket. Industry sources say that USAirways is considering a four percent commission for online bookings but the company didn't return phone calls.
Spokesmen for United and Continental contend that the lower rate is justified because online customers typically handle their own itinerary planning, pricing, and ticketing, without the assistance of travel agents.
But the online agents say that the airlines are underestimating the cost of providing their service and potentially grounding an industry that is not yet taken off.
"This is a young, newborn market segment that many have said is the largest single online commerce potential," said Preview Travel chief executive Jim Hornthal, one of the leading executives in the nascent industry. "But this is going to chill the channel."
Preview Travel, for example, says it has spent millions of dollars building a consumer-friendly network to book flights.
Industry executives also complain that airlines are trying to persuade travelers to use carriers' own Web sites to book flights instead of going through online agencies. The airlines deny this charge.
Regardless, the cuts are starting to take their toll.
One online pioneer, PCTravel, recently shut down its electronic booking service, largely blaming the recently cut commissions. "The revenue was being reduced, and the expenses were being increased," George Newsom, president of PCTravel, said today.
As previously reported, PCTravel called for a boycott against Northwest last summer after the airline lowered online commissions.
A visitor to Newsom's site now is greeted with the message: "The services provided by the PCTravel airline reservation center are temporarily unavailable." Newsom says he'd like to resurrect the service but with a different business plan that he hasn't yet finalized.
The agencies are banding together now to protect themselves. Preview Travel, Travelocity, Microsoft's Expedia booking service, and others are in the midst of forming a trade association to represent their interests.
Others are announcing partnerships to share their reservation technology, thus decreasing investment costs for both companies. The Internet Travel Network and TravelWeb for example said today they would use each other's technology for online bookings. The deal will extend both companies' reach in online air and hotel bookings.