Who Wins in the Dispute Between Airlines and Online Ticket Sites?

There's more sparring lately between the U.S. airline industry and the online travel reservations sites. The most recent round involves American Airlines (AMR) and US Airways (LCC). Both legacy carriers recently signed new agreements: American with Priceline (PCLN) and US Airways with Expedia (EXPE)

The latest twists in this saga began in November. That's when American told Orbitz (OWW) -- one of the largest online travel agencies -- of its plans to terminate their contract in December. Travelport, the global distribution system (GDS) company that owns 48% of Orbitz, tried but failed to block American's move. Then Expedia, the largest online agency, announced it would not renew itscontract with American, which expired on Dec. 31.

The current bottom line for the air traveler? When you next search Expedia and Orbitz for flight information, you'll find no data about American.

A New, More Specific Technology

At issue for both online agencies regarding American is the "direct-connection" technology the carrier is developing. That technology, still in its early stages, will eventually display fares according to a traveler's individual needs -- such as a preference for priority seating -- rather than use the current system of listing fares by price and schedule.

Although airlines stopped paying commissions to many travel agents in the 1990s, most carriers continue to rely on GDS databases to help travel agents sell tickets. Airlines pay booking fees to the GDS's, which then return part of those fees to travel agencies.

American's goal with the new technology is to reduce distribution costs and gain greater control over the marketing of its tickets. That technology also will allow the airline to bypass the global distribution systems and avoid paying the systems' fees, which in turn will deprive travel agencies of income they had received from sharing those fees.

Getting Access to Inventory

Orbitz and Expedia have refused to cooperate with American on the use of direct-connection technology -- but that's not the case with Priceline .

Henry Harteveldt, travel analyst for Forrester Research, suggests that Priceline opted to cooperate with American because the two companies "have a unique relationship." If Priceline didn't agree to American's terms, he says, the online company wouldn't get access to inventory that Priceline could offer under its "name your own price" scheme.

Priceline, he adds, "was motivated to preserve the value overall of the relationship. It feels it's more profitable to do this than to rely on rebates from the global distribution systems."

Derek Kerr, chief financial officer of US Airways, says his company agrees "in principle with what American Airlines is doing. And that is important to lower our distribution costs." Speaking during US Airway's fourth-quarter conference call last week, Kerr said the reality is "that the technology landscape has evolved really over the last three decades, and the GDS and distribution environment, much of it had stayed stuck in legacy systems that were really built 30 years ago. And that needs to evolve and get to lower costs. . . . What we need to do is more quickly innovate and sell new products."

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In a recent press release announcing the US Airways/Expedia agreement, the companies said the deal involved the airline committing "to offer all of its content to Expedia through the global distribution system model. In addition, Expedia has committed to working with US Airways to enable the distribution of its Choice Seat product (offering customers the benefit of purchasing window or aisle seats toward the front of coach class) through new channels, including the Expedia online travel marketplace."

Douglas Quinby, senior director of research at the travel industry research firm PhoCusWright, believes the terms of this new agreement would potentially let USAirways book flights through a GDS, and book optional services and fees by another method, perhaps similar to American's direct-connection technology. "They're trying to figure it out," he says.

A Mix of Online Ticketing Scenarios

Long-term, he predicts, "there's going to be a real mix of different types of scenarios, some direct connections between travel agencies and airlines, some connections with agents via GDS's, and hybrids like US Airways and Expedia."

In the meanwhile, Henry Harteveldt thinks American's disputes with Orbitz and Expedia are creating a windfall for competitors like US Airways and United.

American's rivals "realized that by selling through travel agencies, they're making themselves easy to shop and more customer-friendly brands," he says -- adding that American's absence on Orbitz and Expedia must be creating "some financial hit."

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