Commentary: Orbitz, the site, the strategy

8th Jun 2001

After 18 months, umpteen government and Congressional hearings, two dueling economic studies and hundreds of speculative articles and debates, Orbitz has finally launched.
So, after all this unrivaled scrutiny and ballyhoo, what are consumers finding at this site of all sites? Orbitz has a graphically clean, appealing look. It also does a good job presenting a large amount of information in an easy-to-digest manner. But, are those fares the lowest out there?
While some members of the media have praised Orbitz` ability to produce lower fares than other sites, we decided to put it to the test. It took this reporter, an enthusiastic, multi-channel shopper, several days to find a fare on Orbitz that was lower than those offered by Expedia and Travelocity. Generally speaking, the Orbitz fares were just a few dollars higher than those on the top two sites (although in one instance Travelocity had a significantly lower fare). But these are merely anecdotal results.
Orbitz itself is quoting a study by Arthur Andersen, the independent auditing firm, which found that Orbitz was able to meet or beat Travelocity and Expedia fares 80% of the time. Arthur Andersen looked at the top 100 domestic routes. It begs the question, how many times did Orbitz actually beat its two rivals as opposed to finding the same fares that they produced? Meanwhile, another study contradicts the Andersen conclusion. Pacific Crest, the investment bank that focuses on technology, communications and commerce, did its own pricing audit and found that Orbitz failed to deliver on its key value proposition.Orbitz ranked last when compared to Expedia and Travelocity on price (see related story on Orbitz` pricing.) The debate and the PR wars will continue.
What is clear is that Orbitz does a credible job (using its customized ITA Software) of finding low airfares, including all Web fares. It also gets access to the non-published fares that its competitors negotiate with airlines. This is a major coup for Orbitz. Travelocity and Expedia have increased their low-fare offerings (both offer non-published fares from more than 20 airlines), and these fares are the staple of Cheap Tickets` product. OneTravel and other discount sites also offer such deals.
Unpublished fares are common in the travel industry. Airlines negotiate these fares with travel agencies, both online and offline, and with corporations in order to increase business on certain routes, reach potential new customers, or in exchange for promises to increase share. These agreements are extremely fluid but are increasing as sophisticated tools are developed for managing these fares. Access to its competitors` private deals is an enormous - and potentially disturbing -competitive edge for Orbitz. Access to special fares is also essential to the Orbitz business plan. Orbitz wants consumers to believe they need to visit just one site in order to find the best fare to fit their needs. If Orbitz does not have access to the non-published airfares available on other Web sites, it misses an important competitive edge.
Even with access to those airfares, Orbitz will still need a far more effective search engine than Expedia and Travelocity to find low fare combinations for consumers. This will be difficult to accomplish since they have been improving their own search technologies. After four years of development, Expedia`s ESP does an admirable job of finding good fares, especially when coupled with its low, negotiated prices. Travelocity`s GoodBuy and Dream Fares (which allow consumers to see a variety of destinations to which they can fly at a certain price) also give travelers creative ways to find the right fare for them. And then there is opaque pricing—pioneered by Priceline and now offered by Hotwire as well as Travelocity and Expedia. Orbitz does not have access to these opaque fares. There are many Web sites offering innovative ways for consumers to save money on their air travel. Orbitz has set a very high bar for itself.
Another key tenet of Orbitz` business plan is customer service. It recognizes how unpleasant air travel is today and is devoting an entire department to tracking its customers` travel. It plans to e-mail customers before they leave on every trip to reassure them that their flight is on time and to page them or e-mail them if it is not. Nice touch—and one that is a modified version of what both Travelocity and Expedia have been using for years.
Both Expedia and Travelocity use multiple channels to notify their customers of events that could disrupt their travel. Travelocity uses pagers and e-mails; Expedia uses e-mail, telephones, PDAs and Web-enabled phones. Orbitz` innovation is to e-mail its customers no matter what, which, considering that its target is the infrequent traveler who may appreciate that sort of reassurance, may be something the market desires. It will be interesting to see if Travelocity and Expedia introduce such all-is-well reassurances.
Expedia and Travelocity recognized the value of customer service long ago. Travelocity has a customer service staff of about 1,000. It has made it a mission critical function and requires all employees—not just those in customer service—to listen to multiple customer calls each month. Expedia, too, has put a high priority on customer service, doing things such as telephoning clients and offering options should a hurricane, strike or other event threaten to disrupt a trip.
Finally, Orbitz has built its business plan on being a low-cost Web site. It expects to save money on marketing because its partner airlines will provide as much as 20% of Orbitz` marketing spend through in-kind promotions. That means putting Orbitz posters in airline waiting rooms, inserting information about Orbitz in frequent flyer mailings, putting the Orbitz logo on cocktail napkins, etc. It has 160 employees (compared to Expedia`s 661 and Travelocity`s 1,300), cutting its staff costs (although it outsources many functions that Expedia and Travelocity perform in-house, to varying degrees). Orbitz also claims to have lower technology costs than its competitors, but technology is not a top cost for travel Web sites. For example, TravelocityÁ`s first quarter results show that it spent about $35 million on selling and marketing and $5 million on technology and development.
Orbitz already is providing airlines with a lower cost distribution channel because it uses its own search technology to find fares instead of its GDS, Worldspan. Because it only uses Worldspan for booking and not for fares and schedules, it can negotiate rebates from Worldspan, which it plans to pass on to the airlines. It also plans on building direct connections into major airline res systems, thereby bypassing the GDS altogether and further reducing those costs. That makes it very attractive to airlines; Delta, one of the owner airlines, said that Orbitz is its lowest-cost channel outside of its own Web site. Will that move Expedia and Travelocity toward similar GDS bypasses, partial or total? (Expedia already does not always use a GDS for some of its bookings -none of its hotel and air bookings done through Travelscape, which it acquired last year, go through a GDS).
There is certainly plenty of room for a new entrant in the online travel world. PhoCusWright projects that U.S. online travel sales will grow by 58% in 2001, to $23 billion. But that still accounts for just 10% of all travel sold. The online travel market has plenty of room to grow. Orbitz has launched with an attractive platform and a provocative business strategy. It means more competition in the marketplace - and that`s good for consumers.
However, Orbitz is the offspring of airlines, an industry with a high level of testosterone whose business practices can be highly aggressive. Aggressive business tactics and fair play are not necessarily mutually exclusive—but they can be. And that`s why the industry and regulators are well advised to keep a close watch on the airline-backed Web site, to insure that it uses its considerable intellectual and creative resources to contribute to a marketplace that is a winner for both suppliers and consumers.


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