2 Airlines Say Travel Sites Must Fly Solo

Mar 01 2001

Northwest Airlines and KLM Royal Dutch Airlines announced late Wednesday that they will eliminate Internet commissions, sending shares of online travel sites Travelocity.com and Expedia into a downward spiral.

In a brief statement of just 56 words, the two carriers said effective Thursday they will no longer pay the 5 percent commission, capped at $10, that online travel agencies had been charging. Northwest currently books between 4 percent and 5 percent of total revenues on third-party Internet travel sites, and between 6 percent and 7 percent of sales on its own Web site, according to Al Lenza, the company's VP of distribution and e-commerce.

Travelocity, based in Fort Worth, Texas, quickly countered with an announcement that it will charge a $10 service fee on all Northwest and KLM tickets starting Thursday. Expedia has not yet decided to change the way it does business with the airlines, said spokeswoman Suzi LeVine.

CIBC World Markets and Legg Mason responded by downgrading Travelocity and Expedia from a "strong buy" to "buy" and "strong buy" to "market perform," respectively. Paul Keong, a travel analyst with CIBC World Markets, said he still believes that the two companies are "attractive long-term opportunities" but downgraded them based on shorter-term uncertainty and confusion.

"We have always maintained that travel agents must prepare for a zero-commission world," Keong said in a report released Thursday. But the timing is much earlier than he had expected. He also expressed surprise that the airlines were punishing the Internet travel agencies and not changing its policy with traditional travel agencies, whose commissions are even higher.

Travelocity shares fell 32 percent to $15.13 in early afternoon trading, while Expedia fell nearly 17 percent to $13.

Travelocity, which is 70 percent owned by Sabre , is exposed by the commission cut more than Expedia. That's because Microsoft -backed Expedia more frequently negotiates exclusive rates with airlines, explains Lorraine Sileo, an analyst with online travel research firm PhoCusWright.

Both companies have been increasing their non-airline revenues to reduce their exposure to such moves by airlines. Airline commissions currently make up 25 percent of Expedia's revenues, according to LeVine.

"We do think other airlines will follow," says Sileo. By eliminating the commissions, the airlines are saying, "I just want more [revenue] to come my way," Sileo adds. But she acknowledges it also sends a message that the airlines see little value in the online travel sites - a view she does not share.

And yet in a move that seems to contradict this view, the airlines are creating their own online travel agency in another attempt to reduce business going to third-party sites. Last month, they quietly began a beta test of their own online travel agency, Orbitz, which has financial backing from American Airlines, Continental Airlines , Delta Air Lines , Northwest Airlines and United Air Lines. It is scheduled to launch officially in June.

"This [the Northwest move] should come as no surprise since the major airlines are using their market power to control the distribution of airline tickets through their Orbitz joint venture, and airline operations through upcoming mergers," Ed Rothschild, a spokesman for the Interactive Travel Service Association, a trade group representing independent online travel service companies, said in a statement. "This can only lead to higher prices for the traveling public."