It’s time for yet another fun-filled fight in the world of airline distribution. In this episode, American and Orbitz can’t come to an agreement, so American has pulled it flights out entirely. US Airways flights go away on September 1. This isn’t the first time this has happened, nor will it be the last, but American comes from a position of strength now that it didn’t in years past.
There is a natural tension that has existed for many years between airlines and travel agents. It used to be that they loved each other. Airlines paid sizable commissions to travel agents, and travel agents were able to help airlines fill their airplanes. But as technology changed, airlines realized that it was easier and easier to distribute tickets directly to consumers. Commissions were slashed, and airlines started looking at travel agents more as a burden.
Online travel agents, in particular, have had a love-hate relationship with the airlines. See, online travel agents came on the scene as the internet took off. They provided a much-needed comparison service, and that attracted a lot of travelers in the early days, most of them price-sensitive. When airlines need to fill seats, it’s the online travel agents that can help with sheer volume. But airlines need less and less help just filling seats these days. That means they’re less reliant on online travel agents to fill the back of the bus, but they don’t want to cut the cord… if the price is right.
From everything I understand, this particular spat is really about economics and there’s not some underlying hidden issue. While published commissions have disappeared, agencies with heft like Orbitz still do get paid by airlines. They also get paid by the reservation systems they use. How does the reservation system get the money to pay them? They make the airlines cough it up. So really when someone books on an online travel agent site, the airlines are paying for it twice. The airlines have to look at the total amount and decide whether or not its worth the price to play.
Southwest long ago decided it wasn’t. You still won’t see a Southwest flight on any online travel agent site. It’s kind of funny considering Southwest is the largest domestic airline these days.
American thinks it can make sense at the right price. It likes selling through third parties because it does fill seats, but apparently what Orbitz wants too much. How could that change? Well, Orbitz could lower its rates, but there are other ways. It could try to improve the quality of the revenue it generates, though that’s pretty hard. Orbitz could, and should, start using direct connect technology to lower the cost to American.
Though it has been owned by Travelport (also the company that owns Apollo and Galileo reservation systems) for many years, Orbitz is breaking away from that. Travelport says it’s selling off its shares, and the agreement to run bookings through Travelport systems ends this year. Instead of working on direct connect (as, strangely enough, it used to do in the early days of its existence), Orbitz signed a deal with Amadeus. I’m sure Amadeus paid dearly for this, and again, where does that money come from? The airlines.
With apparently none of these things moving, American decided the only option was the nuclear option. It pulled its fares out.
Now, if you’re a traveler and you go to Orbitz, you aren’t going to see American or Southwest. That’s a pretty big chunk of the industry that you won’t see. Orbitz, however, is defiant. In a release, it said that there are “hundreds of airlines which are eager to capture the revenue American is choosing to forego.” There’s a big middle finger for you.
But is it really true? Sure, United and Delta can pick up some of the slack, but Orbitz becomes significantly less useful domestically. International is a different story, I suppose. That being said, if you really love using an online travel agent, then why not just use Expedia now? There is real risk for Orbitz.
There is also real risk for American, but it’s less than it probably would have been in the past. Before consolidation took hold, there were so many airlines out there you might not notice, as a consumer, that American had disappeared. But now, you’ll notice. At the same time, American has upped the percentage of traffic coming direct, so Orbitz really feels more pressure now than it would have in the past. The balance of power has shifted.
This only impacts the regular Orbitz consumer site, so there is no impact on the high dollar corporate market that uses Orbitz for Business. It also doesn’t create orphan travelers. If you had originally booked through Orbitz, you can make changes or get help directly from American. The airline is even waiving the phone reservations fee. That’s actually good news – the airlines tend to be much more helpful than online travel agents when it comes to changes.
In the end, it’s safe to assume they will come to some kind of agreement. After all, it’s in their best interests to do it. This time, however, American has more leverage than before, so you can expect that Orbitz will have to bend.
[Original arm wrestling photo via Shutterstock]