Online travel sellers are locked in bitter battle with traditional travel management companies for the high-end business traveller
As online agencies square up to the long-standing players in corporate travel, the carriers themselves are looking for tactics to draw business travellers to their own websites. US online giants Travelocity, Expedia and Orbitz have each rolled out products aimed at the business and corporate travel market, and each is gaining loyalty. As they do, giants such as American Express have mounted campaigns to stress their service offerings, stressing their relative savings and efficiencies.
Corporate customers, though, are using both, playing the rivals off against each other in some cases. Business Travel Coalition chairman Kevin Mitchell says corporate travel managers have found the online companies to be "serious players, continuously improving their products, and positioned for growth". Airline managers cannot simply be indifferent as to which distributes their product, says Thom Nulty, the former Navigant International president and chief executive. This is not a point of pride of authorship for airlines, which developed online distribution only to see it become the core of yet another middleman's business. Nulty, now a consultant, warns: "Over the longer term, the airlines have to be concerned that, as the online travel agencies grow, they have created a monster that will add a barrier between the users they want and their own websites."
For now, though, the carriers seem to be watching the battle unfold. And a battle it is, because the online entrants cannot just lay claim to the $90 billion corporate market, which should reach $95 billion by 2006, according to consultancy PhoCusWright. The well-known and long-standing names in corporate travel - such as American Express and Carlson Wagonlit - may have been caught off guard as the leisure-travel business went by and large online. They will not let that happen again.
Mark Mahaney, a San Francisco-based consultant with American Technology Research, says: "We will certainly see a strong response from the travel management companies as they fight back." They do not, he says, want to see a repeat of the way they lost so much of the leisure travel market to the onliners.
Online companies started to pursue large US customers only two years ago, but have already achieved some impressive wins. Burger giant McDonald's left Carlson Wagonlit for Orbitz last fall and is estimated to have a travel budget of $15-20 million. Sabre's Travelocity has clients such as Computer Associates that spend $50-75 million each year on travel. Expedia Corporate Travel has enlisted some 1,500 business clients, while Orbitz has perhaps 1,200 and Travelocity several hundred corporate customers. Travelocity rolled out its business unit only in August 2003, and has already redesigned the site once.
Online advantages
Steve Tracas, head of Orbitz for Business, puts the case this way: "We are an online agency, just that. And we are built for that, as opposed to an off-line agency that just happens to have a booking tool." Orbitz launched its business unit in August 2003, and Tracas, the former head of marketing for US Airways, joined in June. He says: "Even if your company has a travel management agency, people still go home at night and surf the web. We think they use Orbitz. So corporations want a balance between hand-holding and control."
Orbitz has lured some major customers away from traditional travel managers in addition to McDonald's. It took the Knight Ridder account away from a South Florida-based agency after the publishing chain found that about one-fifth of its employees were booking online but outside of the designated agency. Since Orbitz for Business took over, Knight Ridder travel manager Ellen White says: "I was surprised how many employees told me that they were pleased to have permission to use the online agency they were already using."
Self-booking has a certain advantage for corporate travel departments, says Tracas: "When people see the ticket prices on the computer screen, they often turn to lower-cost options in a phenomenon called 'visual guilt'." This suggests the inherent strength of the online approach. By their nature, the onliners seem more suited to the way people want to buy travel, while the traditional travel management companies seem to know more about the way airlines, hotels and car rental companies want to sell it.
When business travel in corporate programmes reaches $94.8 billion by 2006, online transactions will represent $36.5 billion, or 38.5% of total corporate bookings. Of the $80.9 billion in transactions carried out in 2003, 23% were online, PhoCusWright estimates.
Europe follows suit
Europe is the next hot area for online booking adoption. Some 40% of American Express travel managers said in a recent survey that they see Europe catching up next, and Erik Blachford of Expedia parent InterActive Corp Travel sees Europe lagging behind by perhaps four years but notes a tight correlation in trends. Amadeus, the dominant European distribution system, sees online catching up with a 39% growth rate and has taken control of Opodo, taking on 55.4% of the service and injecting fresh capital into the venture. Expedia is getting into the European corporate market with the acquisition of Egencia, a French site.
Lorraine Sileo, PhoCusWright vice-president and online travel consultant, says some of the claims by business-oriented online agencies may be overly trumpeted. Their volume, she says, "is minor but it is growing - they are all going after the same accounts". For instance, Expedia Corporate Travel is on course for $750 million in bookings this year after launching in November 2002. Blachford said at a recent investor presentation that the unit's "adoption rate has exceeded our expectations with 1,500 companies signed up and maybe $750 million by year-end. I thought we would meet more resistance."
Pam Arway, executive vice-president of American Express Business Travel and chief of its North American corporate unit, says the visibility of online competitors does not worry her. "I don't lose sleep over it, not a wink." American Express accounts for 40% of global online corporate bookings and wants to move more of its corporate business online. Of its US transactions last year, 30% were online. In bids where American Express competed against online agencies this year, the agency won 52 and lost three clients. Twenty-one of the 52 new clients had left an online travel agency for American Express.
Arway insists that reporting functions, alerting services and other features and services are part of a calculation that leads to total transaction costs. Kurt Ekert, chief operating officer of Cendant-owned corporate travel agency Travelport, says the real question is the value proposition - how much it saves. "The online entrants do not really have the technology or the infrastructure to manage the corporate accounts, the $3 million-and-up account. Not all distribution outlets are created equal," he says.
From an airline perspective, that is very much the point. Distribution outlets, online or not, are costs, not revenue, for airlines as long as they remain in the control of third parties, whether they are Expedia, American Express, or a discount site. Until airlines have direct control of distribution, they will be paying others. Jeff Katz, head of Orbitz and one of the architects of the online industry, says of the airlines: "They'd love to have all the business direct. But just look at what they are spending to get people to buy direct. On a 1,000-mile trip they are spending maybe $15 a ticket to get to you. Even JetBlue is spending heavily, perhaps $3 to get you to call."
Low-cost online
Like JetBlue, most low-cost carriers book the majority of their tickets on their own web sites. Independence Air, the new incarnation of Atlantic Coast, tops the industry, with 90% of bookings coming from its own website. By contrast, Northwest sells 16% of its tickets at its web site, and 60% via the global distribution systems (GDSs). The telephone reservation centres account for 22% of Northwest tickets, and airport ticket counters 2%. Its city centre ticket offices, like those of most US majors, are gone.
Michael Parks, senior vice-president and general manager of worldwide distribution for GDS Worldspan, says: "The airlines would ideally like everything to be direct, but recent history suggests that this may be easier to talk about than to do." For instance, in early 1999 Delta began adding a $1 surcharge to tickets not booked through its web site. The carrier quickly reversed its decision, but the move had historic resonance as the industry began seeking to build on the ongoing series of commission cuts to travel agents.
Then, two years ago, American Airlines introduced EveryFare, which essentially traded access to web fares in exchange for agencies absorbing some of American's GDS costs. As Parks notes, the GDS response was to negotiate a series of bilateral agreements with the major airlines that traded full content for discounts off segment fees.
But these deals, usually under the rubric of a direct connect agreement (DCA), last only until 2006 or 2007. Jay Campbell, editor of online site businesstravelbeat.com, says: "The GDS companies had better sort this out, because these DCA-type agreements are not permanent. Most run out in 2006, when the big network carriers are bound to explore emerging alternatives."
America West, American, Delta and Northwest also offer corporate sites. Other major airlines, like Continental, are trying to entice customers to their websites by offering special online discounts. Continental has issued a lowest-price guarantee on its website, offering customers a special discount if they manage to find a lower fare anywhere else. Swabiz.com, a Southwest Airlines proprietary website, is used by about 40% of the Fortune 500. JetBlue also has moved into this arena with its CompanyBlue.
The battle to control distribution and lower costs came to the fore in late summer, when Northwest announced it would charge ticketing fees that pass costs on to travel agencies and consumers when they do not book directly through the northwest.com site. Its widely debated move - an attack on both online competitors and on the GDS providers - came less than a month after Transportation Department rules on the GDS systems expired and was the first major move in the deregulated environment, says Campbell, a veteran observer of travel distribution.
The new charges include a $7.50 per roundtrip "shared GDS fee" on tickets issued through a GDS by both traditional and online travel agencies in both the USA and Canada. Northwest said it would continue to absorb $5 of the $12.50 average fee it incurs for each domestic booking in a GDS. Tim Griffin, the airline's executive vice-president of marketing and distribution, said low-cost rivals Southwest and JetBlue inspired the change. He expects the new fees will cut $70 million from annual distribution costs, which last year included $180 million in GDS fees. "GDSs take a significant portion of the fees that they collect from airlines and give back up to one-third of them to travel agents as an incentive for subscribing to the GDS services."
Within weeks, a firestorm of protest from agents and others forced Northwest to rescind the fees on travel agent bookings made through GDSs. But significantly, the fees to consumers - $5 or $10 - remain, and have been adopted by American, Continental and United Airlines, and US Airways. The reversal came after 10 days of sharp criticism from GDS companies, some of which took advantage of deregulation and announced they would react. Some gave Northwest an unfavourable screen-display ranking, or "biased their displays" to make it harder for customers and agents to find Northwest offerings; others listed Northwest fares including the $7.50 return trip fee to make the fare seem higher to a casual shopper.
Direct website traffic
Despite its partial retreat, Northwest's move was a stark sign of the commitment by major airlines to change distribution economics by pushing corporate and agency clients to use carrier websites and other lower-cost, direct-connect technologies. That commitment, says Mahaney, will lead to vigorous campaigns to attract direct website traffic and bring in distribution alternatives.
One alternative that Northwest and six other carriers endorsed is G2 SwitchWorks, the work of Orbitz architect Alex Zoghlin. He aims to create True Connect, a network of direct connections between suppliers, corporate clients and agents, offering "100% automation". Continental e-commerce director John Slater says: "Rather than simply shifting existing distribution costs between the airline and the agency, G2's True Connect is a new technology that removes costs from the distribution process." Lorraine Sileo, the PhoCusWright consultant, is taking Switchworks "very seriously", along with other such developments. She says: "The handwriting is on the wall." n
REPORT BY DAVID FIELD IN WASHINGTON
Source: Airline Business
