etravel etourism newsletter  e-tourism newsletter
Issue 2001-6 - Friday, April 6, 2001

emarket news
e-market strategies
enewsletter sign up free


  Does Orbitz really hold the future of the eTourism sector in its hands? Figures at war  

This is what Jerry Hausman, economics professor at M.I.T (Massachusetts Institute of Technology), claims and his report is summarized in a 40 pages document that was displayed online on March 27of this year.

In its main themes, the report first points out that the five airline companies that decided to form the joint venture Orbitz supply 74% of US domestic travel, and this percentage should go up to 85% if the proposed consolidation of the sector really take place.

The study refutes the Global Aviation Associates report that was commissioned by Orbitz and deals with the position of monopoly the GDSs are supposed to have (see article eTourism).

Indeed, according to professor Hausman, unlike what Orbitz says, GDS fees would have increased less than airfares between 1993 and 2000. This is how airfares would have increased by 4.97% annually from 1993 to 2000, when Sabre's fees increased by 4.2% and Galileo's fees increased by 2.9%.

What's even more interesting is the fact that over the past six years, 1995-2000, the biggest GDS's operating margins would have fallen by 14%.

According to Hausman, this would be due to the fact that over the same period of time, even though computer costs might have decreased, the message volume that had to be dealt with for a single booking increased by 25% as far as the search for low fares is concerned, for instance. As a result, Sabre expects its data processing costs to increase by 30% this year.

We've got to remember that new functionalities, such as the electronic ticket, airline companies presently propose to their clients, increase the volumes of data the GDSs have to process.

If the GDSs appear powerful and should prove able, still according to Orbitz, to dominate the market and impose their own prices, which not seem quite so obvious in the Global Aviation Associates report, what about the other argument Orbitz used and put forward in an official way when the site was created: the fact that Expedia and Travelocity dominated the eTourism sector.

According to professor Hausman, the consolidated market shares held by Travelocity and Expedia would represent a total of 54% of independent Internet travel sales. And yet, as far as plane tickets are concerned, its combined share would fall down to 25% of all Internet ticket sales.

And yet, when you know what Internet ticket sales amount to, compared to the number of tickets that is sold offline, it seems rather difficult to say that Travelocity and Expedia already represent a big threat. Indeed, when you take into accounts all plane tickets sold both online and offline, the combined market share for Travelocity and Expedia would only represent 1.25% of total airline ticket sales.



The dominance of Travelocity and Expedia that Orbitz should counteract in order to defend consumers' interests was strongly denied by one of Orbitz' founders: Northwest Airlines.
You can easily imagine that when you find yourself in a dominant position, it proves easy to force your views upon your providers and customers. And yet, as soon as Northwest Airlines decided to cut down commissions paid to Internet agencies, we realize that these commissions rested in fact on airline companies' good will.



Please note to that matter that Expedia is not in the same position as Travelocity as Northwest and Expedia reached an agreement in April 2, 2001 and decided that Internet agencies will no longer get a commission on sales but will get a specific payment instead, as part of a global distribution agreement. Let's also specify that Expedia is in charge of developing Northwest Airlines' BtoC website, which brings this agreement much further than a commission on sales.

But I still think that before the end of 2001, online airline companies will have cut down the commissions they pay to Internet agencies, at least in the United-States. The day it happens, the online real power will indeed be on Orbitz's side and consumers might well see prices increase.

Even though Travelocity and Expedia might play an important role in the American eTourism sector, we still need to consider its role in context as a producer always prove so much more powerful than its distributors.

Don't you think that the fact that producers already have 85% of the American domestic travel and might well become distributors as well through a unique site that would be dedicated and totally dominated is much more worrying?

To that matter, Professor Hausman's statement goes much further as it estimates that should the Orbitz project really take place, it would cost consumers an extra $3.2 billion…

As far as I am concerned, I'd rather remain cautious, and maybe even doubtful, on the assumptions Mr Hausman made to calculate this amount.

Indeed, one of the key elements of his calculation is based on the fact that the Internet, as it allows airline companies to display specific prices on their web sites, outside the GDSs' database, caused a disruption of the prices and consumers are the ones who presently benefit from this.

The Orbitz system, as it will force airline companies to display their whole offer on Orbitz in a centralized way, will allow them to know in real time the prices which are displayed by every single company and will thus prevent inconsiderate discounts.

In my opinion, this disruption of the prices would have been settled in a short time anyway, due to the Internet tracking tools. What's more, it is not possible to create an economic theory on a temporary disruption by censuring a return to normality.

And this is even truer, as I am convinced that this disruption can only prove profitable to the biggest actors in the sector, which means that the weakest ones will disappear and that the market will consolidate itself…

To cut a long story short, should this disruption of the prices last, consumers would not be the benefit from it but, on the contrary, would end up loosing out, as the biggest actors would become even more powerful. Please note to that matter that the five current Orbitz' founders represent 74% of the American domestic travel today and will soon represent 85%, which cannot have happened by pure chance…

In order to be as objective as can be, let's also specify that Hausman's statement was commissioned by the ITSA (Interactive Travel Services Association, whose members include…Travelocity and Expedia), Southwest Airlines (that is not part of the Orbitz project) and the ASTA (American Society of Travel Agents).

The two opposite sites are presently at war through reports and this should prompt you to view the objectivity of their content with caution… This is the reason why I give you the opportunity to download each of them at the end of this article, so that you can make your own opinion.

As far as I am concerned, I think that the real power lies more in the producers' hands than in the distributors' ones.

When we saw how easily Northwest managed to cut down commissions to American and Canadian travel agent websites without prior notice, we can imagine the influence such decision could have, should the other airline companies decide to follow its example.

Should this happen, there is no doubt that companies that are still making great losses, as is the case for Travelocity and Expedia, would immediately find themselves in great difficulty. This proves that producers' strength is so much bigger than distributors' and I do not only mean actors such as Travelocity and Expedia. Indeed, how could online small actors resist to a joint action by airline companies aiming at suppress online commissions?

We cannot consider the threat that Orbitz represents lightly, as this new unique actor would control 85% of American domestic air travel.

But, as I already mentioned it as soon as July 2000 (see my article titled: "Orbitz: No Future?"), all these strategic considerations are presently neglecting a central point: how will consumers react to Orbitz?

We have already seen so many eCommerce gigantic projects, with huge budgets and great actors that still managed to collapse…

Consumers will no doubt have the last word.

Either Orbitz will prove to be a high-standard website that will manage to make up for lost time faced to its competitors and it will then be time to start getting worried, either the project will show such a lack of maturity online that consumers will refuse to trust this monopolistic group of airline companies and this will be the proof that Orbitz really lost its bet.

Please bear in mind the fact that in front Orbitz' promises of low fares, we have sites such as that perfectly manage to keep their promises.

This type of competitor is much more dangerous for Orbitz than Travelocity or Expedia.

And finally, we should not forget another important element for Orbitz' success…or failure: its shareholders.

Will the harsh competitors that can be found among Orbitz' shareholders keep on playing the game tomorrow? As some of them might feel tempted to go in it alone, even if they do it in a discreet way, would this not question a project that is more based on some apprehension about the future than on a real unity between its founders? Can't we think that the project might well blow off tomorrow under the pressure of its own capitalistic pressures?

Orbitz future does not appear quite as rosy as what its detractors seem to think and, in my opinion, the die is not cast yet.

One thing is for sure: it will prove a fascinating fight!

Sources :

  • Jerry Hausman study Massachusetts Institute of Technology, expedite by 'ITSA and ASTA.

  • Global Aviation Associates study expedite by Orbitz.




| Top | Home | eCommerce | eMetrics | eFocus | eIndices | Archives | Links |
| © Copyright | Privacy Pledge | Contact | Reports | eShopability Expertise |

The Last eTourisme Trends and Figures: Sign Up Free

eTourism Newsletter Web Site Editor: Luc Carton