NEW YORK—In the hunt to cut ticket distribution costs, airlines have made serious prey out of Internet travel companies.
On Wednesday, Continental Airlines, the nation`s fifth-largest carrier, stopped paying commissions for tickets sold online.
The announcement by Houston-based Continental, which mimics a move made last March by Northwest Airlines of Eagan, Minn., sent shares of online travel companies plummeting.
Shares of Travelocity.com Inc. skidded $5.83, or 29 percent, to $14.07 on the Nasdaq Stock Market, where shares of Expedia Inc. dropped by $3.37, or 11 percent, to $28.46.
The industry strategy to slice distribution costs was apparent in August, too, when the nation`s major carriers lowered travel agents` commissions on domestic air travel bookings for the sixth time since 1995.
Since last month`s terrorist attacks and the subsequent decline in air travel, U.S. airlines have aggressively trimmed overhead, laying off more than 90,000 employees and cutting carrying capacity by about 20 percent.
Passenger volumes remain about 30 percent below year ago levels.
After labor, fuel and aircraft, ticket distribution is the fourth largest expense for the industry, according to the Air Transport Association, the industry`s Washington-based trade group.
Commissions on Internet sales are typically $10 per ticket.
When Northwest eliminated its online commissions, Travelocity and Lowestfare.com added $10 to all Northwest fares to make up for the lost revenues.
Expedia renegotiated its contract with Northwest and has since been providing a range of services to the airline—from Web hosting to software licensing—for a fee.
Arthur Newman, an analyst at ABN Amro in New York, said airlines have been able to put the squeeze on Internet travel sites because more than half of online ticket sales now occur on carriers` Web sites.
He expects more than two-thirds of tickets purchased online to occur on airline Web sites by the end of next year.
“I think (the airlines) are in a position, with that much distribution controlled, to push down the prices,” Newman said.
In the future, Internet travel agents will have to become more dependent on the so-called “merchant model,” whereby they purchase discounted tickets directly from the airlines and mark them up for a profit on their own sites.
A spokeswoman for Travelocity said the Dallas-based company had no comment on Continental`s action.
Suzi LeVine, director of product marketing for Bellevue, Wash.-based Expedia, said: “We don`t disclose the terms of our agreements with our partners.”
Orbitz, the Internet travel company founded by American, Continental, Delta, Northwest and United, could benefit from the shift toward lower commissions.
For example, it is now $10 cheaper to book the same Northwest fare on Orbitz as opposed to Travelocity.
Without offering specifics, Orbitz spokeswoman Carol Juzaitis said the company would likely renegotiate its contract with Continental to get paid in some other fashion.
“We collect either a commission or fee for our services and we will continue to do that,” she said.