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Commentary: Does Orbitz` regulatory green light mean a green bottom line?

It’s easy to imagine the thinking behind the Department of Transportation’s decision to okay the launch of the airline Web site Orbitz, despite the protests of existing online travel titans: “Oligopolist intermediaries accuse oligopolist suppliers of creating an anti-competitive instrument to reduce consumer welfare.”
Certainly, Orbitz’ opponents staged an impressive offensive against its launch; it is unlikely that any other company has undergone such rigorous scrutiny before actually going into business. The fact that Orbitz made it through that gauntlet is an accomplishment in and of itself.
The DOT’s decision strongly suggests that, at the very least, the agency believes that the launch of Orbitz will give consumers another Web site to shop in, and there’s nothing wrong with that. At the same time, to presume that it is inevitable that a new player will dominate a market simply because of the power of its backers is to ignore history. Just look at AOL, whose demise was almost universally predicted when Microsoft launched MSN. That said, Orbitz faces major challenges, some of them external, some internal.
First of all, all the publicity Orbitz has generated may have helped the airlines progress toward one of their goals—to reduce the transactions fees they pay the GDS. The airlines have long considered these fees burdensome—which is somewhat ironic since airlines created the GDS and their fee structures. Additionally, Orbitz investors Northwest and Delta are also Worldspan owners—why don’t they push Worldspan to lower segment fees?
Still, airline discontent with those segment fees makes it no surprise that Orbitz’ ultimate strategy is to operate as a GDS bypass. Short term, however, it must use a GDS—Worldspan—to do business, but it will rebate part of Worldspan’s transaction fees back to the airlines. Orbitz’ short- and long-term plans could goad the GDS to accelerate the restructuring of their fees and services.
But, what does Orbitz mean for consumers? Yes, it will be another place for them to shop—and that’s good. But, it is unlikely that Orbitz will offer consumers better deals than those already available to them on existing sites. Obviously, Orbitz does have exclusive access to published rates, but that is a limited advantage. Exclusivity is at the discretion of the airlines, which are facing tough times. Five of the six major carriers posted first quarter losses. Business travel is falling, labor and fuel costs are rising. In order to drive volume against yield management engines, airlines cannot afford to market attractive fares on just one site—and a fledgling site at that. They need to be wherever consumers are buying airline tickets—online and offline.
Still more significant is the fact Orbitz’ existing competitors already offer consumers an arsenal of lower-than-published fares. Online agencies are negotiating directly with suppliers, taking inventory risk and using stealth pricing by bundling heavily discounted components into a package with a single price—thus protecting suppliers’ published rates.
Then there’s the “loyalty component” of branded airline travel. Frequent flyer junkies are willing to pay a few dollars more to earn points or qualify for a companion ticket or some similar offering. That means the definition of a better deal is not one limited to dollars and cents but can be influenced by other factors.
This begs the business question for Orbitz: if it is not going to generate advertising revenue and its competitors are already offering consumers lower non-published fares, what is its unique market advantage? Orbitz has promoted its unbiased and extensive published rate search software. Yet, that software is commercially available to anyone else who wants to buy it—and other online agencies have. Also, its online competitors have search software that may already be as good as what Orbitz has, particularly when combined with better deals. Does it really matter if the fare is published, as long as it’s lower or delivers some other benefits?
On top of that, Orbitz needs more money in order to develop complex GDS-bypass software and to fund the multi-million dollar marketing campaigns it needs to conduct if it is to compete with Expedia and Travelocity, who are spending tens of millions of dollars on marketing annually.
The airlines could, of course, put more of their own money into Orbitz. But, besides the fact that they need to put their money into profitable operations, additional airline investment in Orbitz would heighten existing anti-trust concerns. If anything, the airlines need to reduce their holdings in Orbitz. So, who else would put money into Orbitz? New investors are likely to be skittish about online ventures in general. And Orbitz comes with some daunting baggage. First, there’s Congressional and regulatory scrutiny—the Department of Justice is continuing its investigation of the venture and DOT promises to take another look in six months to make sure Orbitz is playing fair. There are plenty of other non-owning airlines and competitors likely to call “foul,” legitimately or not.
And Orbitz proposes to do battle with Expedia and Travelocity, two titans of the online world which have entrenched market positions and deep-pocketed backers highly committed to the online travel space and which are already claiming profitability. Simultaneously, the GDS are rapidly remaking themselves and their technology, restructuring services and rationalizing their fees, moved by the same elements of change that spawned Orbitz. Case in point: Sabre selling off its general IT outsourcing business EDS to free up Sabre’s resources for its new core competency: travel marketing and distribution.
It’s probably a good idea not to trust an organization whose directors are competitors. As Adam Smith noted, “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public….” Those sitting around the Orbitz board room are still competitors and will find a way to compete on price. The concern should be for airlines not in the room.
Practically speaking, detecting collusive activity is difficult. Boxers are told, “no kicking, biting or hitting below the belt.” A referee is in the ring plus three judges are at ringside, yet violations sometimes go undetected. Now imagine monitoring rule compliance in an industry where millions of price changes occur monthly and the availability of those rates changes by the second. It’s probably better for the DOT to focus on Orbitz’ effects on non-owning airlines. At least they’ll call “foul” for a blow below the belt.
What’s it all mean? Orbitz’ management has a big job internally, getting its airline backers, fierce competitors in the open market, to agree on strategy, objectives and corresponding funding. And it’s got to be able to do that, because it has little room for error once it is fully up and running. Otherwise, Orbitz could find that while the regulatory light might be green, its bottom line might not be.