Here’s The Real Story Behind the Battle Between American Airlines and Expedia
American Airlines (NYSE:AMR) is currently at war with many of the web’s leading ticket deal sites including Expedia (NASDAQ:EXPE) and Orbitz (NYSE:OWW). American Airlines took its data off of Orbitz last month because it is attempting to promote a new business distribution model. It told Orbitz it was going to use its own in-house reservation system, Direct Connect, for booking flights instead of the global distribution system run by Orbitz’s parent, Travelport. Travelport acts as the middleman by facilitating the search for and booking of flights in return for a fee the airline has to pay to Orbitz for every flight booked.
Fees for all the online ticket sites add up for the airlines and they don’t like it. By eliminating the middleman, airlines think they will save a lot on commission fees and will then be able to offer lower prices to customers.
Online agencies generate about 17% of airlines’ total revenues, compared with 25% of revenue generated by the airlines’ own websites.
Delta (NYSE:DAL) also yanked its data from a few smaller online travel agents in the fall. Kevin Crissey, an analyst at UBS, wrote this week that airlines other than American are working toward the same goal of lower distribution costs and better ancillary revenue opportunities. He expects airlines to reduce their online travel agent distribution costs over time but perhaps not the way American is proposing.
Websites like Expedia (NASDAQ:EXPE) and Priceline.com (NASDAQ:PCLN) are expected to do OK even if airlines drop them because they have expanded into other services areas such as hotel bookings and car rentals. However, smaller sites which solely depend on flight data will not fare as well.
Standard & Poor’s analyst Scott Kessler said airline exits were not good for online travel agencies. American’s business amounts to about 5% of Orbitz’s revenues.
Though today American Airlines said it hopes it can reach a settlement with Expedia and Orbitz, analysts think this battle is far from over. Air travel outlook for 2011 is looking good so analysts believe airlines may feel that they have more leverage, but if a recession or any economic disaster comes into play, changing up a distribution strategy could be a bad move.
The online travel agencies will likely want their deals back in place before bookings turn hot again, right before the summer (July and August).
The online travel industry also has to worry about the game-changing Google-ITA (NASDAQ:GOOG) deal. The powerhouse search engine would be the main provider of flight data to airlines, travel agents, global distribution systems, flight comparison sites and technology companies.
Expedia is up today on talk of a solution, trading above $25.