MIT economics professor blasts Orbitz

2nd Apr 2001

In a continuing battle where the ammunition is press releases, white papers and academic studies, Orbitz has been dealt a major blow by an economics professor at the prestigious Massachusetts Institute of Technology. In a report issued this week, MIT Professor Jerry Hausman concludes that Orbitz will be the “market power ringmaster” forcing airline customers to pay an additional $3.2 billion in higher airfares.
Hausman`s study was financially supported by the Interactive Travel Services Association (ITSA), Southwest Airlines and the American Society of Travel Agents (ASTA), three of the more vigorous opponents of Orbitz.
Hausman said the result of Orbitz will be reduced competition among Internet travel sites, higher airfares, and reduced innovation. Further, he said, the yet-to-be-launched Orbitz will be anti-competitive and the harm to consumers will not be offset by any demonstrable pro-competitive benefit.
“The likely resultant monopoly power over Internet ticket distribution will cause significant consumer harm by eliminating or harming the sources of the most important price discipline and innovation over the last few years—low-fare carriers and multiple-airline independent Web sites,” Hausman writes. He states flatly that the airlines are collaborating in an attempt to gain control of Internet ticket distribution.
In the fast moving world of e-commerce, Orbitz has had a particularly long gestation and is now scheduled for launch in June. The Orbitz site, now in beta testing, was formed in 1999 under the code name T2 (“Terminate Travelocity”) by the five largest U.S. airlines, United, American, Delta, Northwest, and Continental. The joint venture of these airlines is intended to combine their now separate Internet ticket distribution structure. Critics of Orbitz note that these five airlines supply 74% of U.S. domestic travel, and this figure would increase to about 85% if proposed mergers are approved.
The government “should act now to prevent the largest U.S. airlines from launching in full a competitive collaboration that will confer on its members the power to increase prices and reduce innovation,” Hausman wrote. “Intervention would preserve the consumer welfare gains resulting from the advent of independent, multi-airline Web sites, from low-fare airlines, and from those gains associated with traditional, off-line travel agencies.”
“Internet ticket distribution is currently very competitive with airline Web sites, independent Internet travel agencies, and Web sites associated with traditional travel agencies all competing for customers,” Hausman said. “The Orbitz agreement contains a prohibition against competitive advertising on the Orbitz airline booking path, which effectively will eliminate heightened attention to special fares or discount carriers.”
In his study, Hausman urges the federal government to “act now either to prevent the continuing Orbitz launch, or to prevent Orbitz from restricting airlines from distributing whatever fares they want, in whatever manner they want, through whatever channels they want.”
Within hours after ITSA released Hausman’s study, Orbitz issued a press release dismissing it as lacking credibility. “The ITSA-financed study is nothing new, just a repackaging of the same misinformation and distortions ITSA has been spreading for months. This study is a last-ditch attempt to thwart what the travel global distribution systems fear most: superior technology that gives better information and access to low fares directly to consumers,`` said Gary Doernhoefer, an attorney for Orbitz. “ITSA and its GDS sponsors have been nothing but vocal in their desire to protect the GDSs` excessive profits and a 70% market share in online third-party travel, at the expense of consumers.”
Hausman neither had contact with Orbitz nor asked Orbitz for any corporate documents, thus raising serious credibility questions, Doernhoefer said. “The paper further confuses the impact of airline mergers, which results in fewer competitors, with the electronic travel distribution channel, where there has been a lack of price competition for years. In doing so, the paper fails to recognize the consumer and marketplace benefits of adding a new Internet entrant designed to provide the first new competition to the GDSs since the 1970s.”



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