Airlines Take To The Internet

Dec. 21, 2004
Online booking, a boon to travelers, also provides big savings for carriers.

Every 20 years or so, a transformational movement sweeps the airline industry. In the late 1950s it was the technological leap from piston-driven propeller aircraft to jets. In the late 1970s it was deregulation. And now, in the late 1990s, it's the industry's rapid adoption of the Internet. How rapid? As recently as five years ago the only way you could book an airline ticket was by telephoning an airline (several airlines if you were comparison shopping), waiting in line at one of its ticket counters, or contacting a travel agent or travel "consolidator." Now you're increasingly likely to make the booking on your computer -- either directly on an airline's own Web site or through one of the proliferating third-party online travel agencies such as Microsoft Corp.'s Expedia Travel, Sabre Group Inc.'s, Inc., Inc., or Preview Travel Inc. Indeed, the number of travelers who use the Internet for travel purposes skyrocketed to 70 million last year from 29 million in 1996, reports Jupiter Communications, a New York-based media-research firm. Revenues from Internet bookings, which totaled $276 million in 1996, tripled to $827 million in 1997 and will top $3.2 billion this year, Jupiter says. By 2002 the figure is projected to reach $8.9 billion. Jupiter and other analysts foresee online booking, which so far has become widespread only in the U.S., accounting for as much of 10% of airline travel by 2003. This year the share is expected to hit 4% -- up from 2% last year, 1% in 1997, and 0.5% in 1996. For consumers, booking air travel through the 'Net simplifies the tedious task of researching fares and schedules, and saves time. "Clearly, the Web is revolutionizing the way that consumers plan and buy their travel," says William S. Norman, president and CEO of the Travel Industry Assn. of America, Washington. "This medium can supply consumers with unprecedented amounts of travel information and images, while simultaneously serving as an electric storefront." For airlines the benefits of the Internet are even more compelling. "It affects their bottom line," declares Julius Maldutis, veteran airline analyst at CIBC World Markets, a New York investment firm. "It helps them reduce their dependence on travel agents, which is a major priority for them. It not only reduces their distribution costs [the cost of commissions, advertising, promotion, ticket processing, and related expenses], but it also is a very efficient vehicle for selling seats that normally never get sold via special promotions, sales, or auctions." Overall, believes Glenn D. Engel, airline analyst at Goldman Sachs Investment Research, New York, use of the Internet can shave distribution costs, which now represent 15% of airline expenses, to less than 10%, and "meaningfully lift" airline profit margins by 2001 or 2002. "Little wonder," he writes, "that airlines are salivating at the prospects for greater Internet penetration and are investing heavily in online technology." Attesting to the savings potential are figures cited by William Spillman, senior director of product distribution at America West Airlines, a subsidiary of America West Holdings Corp., Tempe, Ariz. Bookings made through travel agents cost airlines an average of $23, he indicates. Those made through online agencies average $20, and those made through airlines' call centers, $13. In contrast, the cost of a booking on airlines' Web sites is only $6. "In the long-term -- hopefully within four or five years -- airlines want to attract 30% to 40% of their bookings on their own Web sites," says Spillman. Currently, the percentage is between 10% and 15%. Eager as airlines are to boost their own Web-site bookings, they insist they're not in competition with the third-party online agencies. "They provide one more channel that makes it easier to book a ticket with our airline," reasons Bill Mapp, Internet director at Houston-based Continental Airlines Inc., whose Web site,, has been ranked No. 1 in customer satisfaction two consecutive years by NPD Online Research, a marketing-research organization. Continental and several other U.S. airlines, in fact, are selling tickets through Priceline, an Internet retailer that lets customers submit bids for airline tickets online. By so doing, however, these carriers are cannibalizing their own sales, criticizes Robert Crandall, former chairman and CEO of AMR Corp. Inc., parent of American Airlines. "I don't know why any airline would choose to make seats available off-tariff," Crandall said in a recent Chicago speech. "If you start selling $90 seats, everyone's going to want $90 seats." For their part, the third-party online agencies also don't consider themselves at war with the airline Web sites. "We serve different markets," explains Terrell B. Jones, president of Travelocity, the Ft. Worth-based online service that claims to be the most-frequently visited travel site. The firm reported $128 million in sales for the first quarter 1999, a 156% rise from a year earlier, and has sold more than 3 million airline tickets online since its start-up in March 1996. "The online Web sites of the carriers are focused on frequent travelers, who tend to be loyal to particular airlines," says Jones. "Our customers are 'shoppers' -- leisure and vacation travelers who take an average of 212 trips a year. "The travel market is so big -- some say it's the biggest industry in the world, at $3 trillion plus -- that there's a lot of room for everybody." That statement applies even to travel agents, often thought to be a disappearing breed. But their role is changing. Their traditional bread-and-butter business, the physical writing and delivering of airline tickets, is giving way to electronic ticketing. As evidence, Jones reports that 65% of Travelocity's tickets are electronic. And United Airlines announced in June that for the first time more of its customers used e-tickets than paper tickets. To survive this new electronic environment, travel agencies "have had to make fundamental changes in the way they do business," acknowledges James Ashurst, communications manager for the American Society of Travel Agents, Alexandria, Va. Rather than rely on commissions from airlines for revenue as they have in the past, he says, agencies increasingly are moving to a fee-based system, working for and being compensated by the client. Although an increasing number of travelers are conducting preliminary research online, he adds, "studies show that they prefer to make their purchases with agents they know and trust. An educated customer is not a threat to the future livelihood of the travel-agency community." Travel agents still book 80% of all airline tickets, Ashurst points out. He notes, too, that travel-agency sales topped $126 billion in 1997, up from $101 billion in 1997. And despite cuts in airline commissions from 10% to 8%, 76% of agencies were profitable during the year. Airlines may contend they are not in competition with travel agencies or the online services. But perhaps they should be, implies Michael Zea, a Washington-based principal in the aviation practice of Mercer Management Consulting. "Most airlines," he observes, "use the Internet merely as an extension of their traditional promotional activities rather than to seek new revenue -- and shareholder value -- from potential e-business." Zea praises U.S.-based airlines for being far ahead of their foreign competitors in their use of the Internet. Still, he says, U.S. carriers "are only in the beginning stages" of fully capitalizing on the medium. "If they don't move quickly, they'll lose an opportunity that won't be here long. New players will emerge and steal the initiative from them." Zea suggests that airlines become travel "infomediaries," not only using their Web sites to enable consumers to book hotels and car rentals, but also to become search engines for much broader travel-related topics. For example, he says a fly-fishing enthusiast might search an airline's site for flight information and find a list of ideal fly-fishing locales, available ground transportation, and fly-fishing vacation packages. The site also could feature ads for fly-fishing books and publications, fly-fishing equipment, and related Web sites. Right now, no airline is going that far. Most take the position of America West, whose Web site is only 15 months old. "We agree that offering auxiliary services through our Web site is a source of potential revenue opportunities," says Spillman. "Some day we may do it. But our No. 1 priority is to meet the demands of our customers. And currently we're not getting a lot of requests for services beyond what we're offering now."

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