The Airlines vs. Expedia and Travelocity

Call it a thunderbolt from the skies. On Oct. 24, Continental Airlines announced it would stop paying commissions on ticket sales by independent online travel companies such as Travelocity and Expedia.
That could savage these outfit`s bottom lines. Worse, it could signal a wave of airlines rescinding commissions to online indies.
JetBlue CEO David Neeleman sees Continental`s decision to end commissions to online travel outfits as the start of an industrywide trend

The Street reacted quickly and harshly. Shares of Travelocity (TVLY ) and Expedia (EXPE ) plummeted 29.3% and 10.6%, respectively, on the news, and analysts rushed to downgrade both stocks. Another big travel player, Priceline (PCLN ), was less affected because it will continue to get commissions for its seats, which are sold without competing directly with the airlines. Still, Continental`s maneuver could bode ill for Priceline, since the airlines have their own vehicle to do the same thing, a company called Hotwire.

The turn of fate was especially unfortunate for the independents, considering that they have staged a mild rally since the September 11 attacks on the World Trade Center and the Pentagon. Traffic and bookings at such sites as Travelocity and Expedia has rebounded far more quickly than for the broader travel industry.

But Continental`s move came as no surprise to David Neeleman, the brash CEO of upstart airline JetBlue. In a nutshell, Neeleman thinks the online travel companies face a squeeze over the long haul. He shared these thoughts in an interview with BusinessWeek Online Technology Editor Alex Salkever on Oct. 24. Here are edited excerpts of their conversation.

Q: Even before Oct. 24, you told me point-blank that online travel is a stand-alone business that doesn`t have much of a future.

A: I think their upside is limited. I think they will survive indefinitely. I just don`t think they`re going to have growth, and I don`t think they`re going to have major profitability.


Q: What makes you think that?

A: The airlines are under tremendous pressure to lower costs, so [until now] it has made a lot more sense for them to slough a lot of their ticket sales off with someone else, such as Expedia, Priceline, or Travelocity. Of late they haven`t done that. They`ve tried to create their own e-mail distribution lists and their own Internet sites and their own company, like Orbitz, to sell their product in different ways. It`s clear they don`t want Expedia or Travelocity to become a major force in the business. And when your supplier doesn`t want a company to become a major force in the travel business, I don`t think it will happen.

Q: What would be some of the parallels between the fate of the brick-and-mortar travel agencies, and companies like Expedia and Travelocity?

A: In terms of commissions on ticket sales, the airlines can keep squeezing and saying, “O.K., we`ll only pay $10 a ticket,” or whatever.

The margins of online travel companies are already at a low level. They could go rock-bottom or disappear entirely. So I just don`t see any growth in the business. There will be lots more traffic going to the online sites, though, as the brick-and-mortar guys go out of business and the airlines can`t actually take the volume of phone calls.

Then people will be forced to go to online travel sites. But the way that it has gradually been happening is that airlines are moving more and more people to their Web sites and running deals on their own Web sites that you can`t get either through the brick-and-mortar guys or through the online travel companies.

Q: Do you think the federal government might be concerned that the airlines will control both the distribution and retail point of sale?

A: No, because I think there`s enough competition among the airlines that it doesn`t have a bearing. As far as what the consumer pays, the government is far more concerned about…making sure there`s enough competition in that market. As far as the online travel business, I think [the government] could care less.

Q: What about other items, such as hotels, which are a growing portion of the profitability for Expedia and Travelocity? Couldn`t that carry their business?

A: Hotels are going to start creating a hotel version of Orbitz themselves and say, “, come and buy it here—you can get it cheaper than these other guys.” The technology is there, and the distribution is there, so why should hotels allow someone else to make all that money when they can do it themselves?

Q: What about airlines like your own, Jet Blue? You guys try to sell as much as you can directly from your Web site. That`s something big airlines have had trouble doing.

A: First of all, it`s easy to book on our site…. On Delta`s site, I have to be a frequent flier and have a frequent-flier number to book a reservation. Even if I`m booking my 4-year-old daughter, I have to have a frequent-flier number. So I have to go get her signed up in the Sky Miles program, and it takes so long…. These are all impediments to what they`re doing, and I think they just have to make it easier as time goes forward.

Q: Will Continental`s decision kick off a wave of commission eliminations?

A: That`s been the pattern in the past. Expedia and Travelocity could say they are going to charge customers to purchase Continental tickets. But if everyone does it, they will end up with an across-the-board surcharge. That could drive travelers to buy tickets direct from the airlines.

Q: I know the airline industry has been in turmoil since September 11. How is JetBlue doing?

A: We are coming back very well. We are still launching new routes and building our business. We will start twice-daily flights between Washington Dulles and Fort Lauderdale on Nov. 28, and we hope to expand our California service. Our load factors haven`t completely recovered yet, but we are getting back toward profitability and should be there soon. Also, we were the first airline to install secure cockpit doors. They are bulletproof Kevlar. So if you fly with us, no one`s getting in the cockpit except for the pilot.