A New Modem of Travel
When Vitaly Shmatikov, a 24-year-old Russian graduate student at Stanford University, went looking for a place to spend the Thanksgiving break, he didn’t go to a travel agent. Instead, he spent an evening browsing through Expedia, Microsoft’s online travel site, and booked his air ticket to Phoenix and rental car online.
“Travel agents don’t have an incentive to find you the best price,” Shmatikov says. By exploring all the available options online, he says, “I saved myself a lot of money.”
With people like Shmatikov flocking to online travel sites, analysts are now predicting travel will emerge as one of the key forces driving commerce over the Web.
“The difference between the information you can get on the Web versus what you can get from a travel agent is enormous,” says Seema Williams, an associate at Forrester Research. The Cambridge, Mass. based market research firm recently predicted that online travel bookings would grow from $650 million this year to $7.4 billion by 2001.
But exactly how the Internet will ultimately restructure the travel services industry remains unclear. Airlines are eager to keep a major chunk of the savings from increased efficiencies to themselves. Earlier this year they cut commissions to online travel sites by half to 5%, and many are aggressively promoting their own travel sites.
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In the meantime, airlines are also squeezing traditional travel agents, with many slicing commissions from 10% to 8%, on top of a $50 cap for domestic airline tickets imposed in 1995.
Hardest hit by the commission cuts will be the hundreds of small online travel sites and the thousands of small “real world” travel agencies. The beneficiaries will most likely be the four or five online “mega-sites” that are capable of making up for the slimmer profit margins by generating more volume in flight, air and car rental bookings.
In a travel business split among 22,000 travel agencies with average bookings of just $3 million each, large online travel agencies could emerge as powerful new players with the clout to offer better fares and vacation packages.
Expedia alone expects to book about $100 million worth of travel this year and could do as much as $1 billion in two to three years, according to Erik Blachford, product manager for Expedia (https://www.expedia.msn.com).
Most large online travel sites use the same reservation services available to their travel agents. That means each of the 1 million or so changes made daily in airline fares and schedules are instantly available to the consumer 24 hours a day on dozens of travel sites--though travel vendors that don’t participate in the main travel agent systems can’t be booked through the online services either.
The large mega-sites go one better by offering sophisticated software that makes it easy to find the lowest fares and to book air, hotel and car rentals on the spot. The best sites will even allow customers to pick their seats on the airplane and print out maps and other information about their travel destinations. Tickets are automatically generated and mailed to the customer.
Making travel arrangements online, however, is hardly without its hazards. Online travel forums are filled with complaints from travelers about how online services have failed to deliver tickets in time or at the best fare.
And the airlines don’t intend to let the mega-sites dominate cyberspace. When United Airlines launched its Web site last month, complete with information on frequent flyer miles, flight delays and gate information, it was just the latest of several major airlines to invest heavily in online systems.
“Our research has shown us that a significant number of travelers would prefer to buy directly from us,” says Mark Koehler, director of electronic distribution at United Airlines. “We want to become a one-stop shopping site for them.”
United offers customers the same booking opportunities as the mega-sites, including information on fares of other airlines, but it offers strong incentives for customers to choose United. Passengers now get 1,000 bonus miles each time they make a round-trip reservation through United’s Web site (https://www.ual.com).
Next month, United will begin offering sharp discounts for last-minute reservations to certain destinations where there are empty seats available--a tactic American Airlines uses on its site with great success.
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But with the exception of the few travelers committed to using a certain airline, analysts believe most travelers will continue to use a few brand-name mega-sites to gather information and make their bookings.
Travel sites best positioned to maintain a strong presence may be those with deep pockets, such as Microsoft’s Expedia and American Airlines’ subsidiary, Travelocity (https://www.travelocity.com). The Internet Travel Network (https://www.itn.net), for its part, focuses on designing sites for large companies--including United Airlines--and taking a few dollars on each transaction made on those sites.
Preview Travel (https://www.previewtravel.com), one of the most ambitious start-ups, recently spent heavily to assure a presence in some of the most trafficked areas of cyberspace: The company has committed to paying at least $32 million to America Online and $24 million to Excite over the next five years in exchange for being the exclusive travel provider.
That amounts to a big roll of the dice, considering that the company lost $5.6 million in the first nine months of this year on revenue of $10 million, generated by $54 million worth of bookings.
Another beneficiary of the trend toward online sales will be companies like Pegasus Systems that offer hotel reservation systems both to travel agents and to online travel sites. Pegasus handled 78,000 online bookings in the third quarter of this year (worth roughly $16 million to its hotel clients), triple the number in the first quarter of the year.
Since two-thirds of all hotel customers make their reservations directly, usually over the phone, Pegasus Chief Executive John Davis figures it’s a simple step to persuade them to make the purchase online.
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That’s good news for major hotel chains like Best Western and Hyatt--not just because they happen to be shareholders in Pegasus, but because the cost to them of hotel bookings made online is just $2 per transaction, one-sixth the cost of reservations made through their toll-free phone services, Davis says.
“Our main competition is the telephone,” says Davis, who, as founder of 1-800 FLOWERS in 1979, has intimate knowledge of the phone distribution business.
Although the travel sector as a whole is growing rapidly--accounting for some $470 billion in sales worldwide last year--and online booking today still represents only a tiny niche, many travel agencies are likely to have a hard time adjusting to the new order.
Many are already charging fees to make airline bookings in response to lower commissions.
Travel Store Inc., a Brentwood-based chain of travel agencies that began charging a $10 fee on air tickets that cost less than $250 when its commissions were cut in 1995, recently added $10 transaction fees for cancellations and schedule changes.
Wido Schaefer, Travel Store’s president, says he knows that will drive away customers who make lower-cost travel arrangements, but he says, “We can’t make money on the traveler spending $59 to go to Vegas.”
But Schaefer figures customers making more significant travel arrangements, including vacation packages, will continue to use travel agents.
“They still want someone who can be blamed if something goes wrong,” Schaefer says.
When it comes to customer service, in fact, online travel services still leave something to be desired.
Using Expedia, Miguel Cruz of Hartford, Conn., located a $561 flight that the system told him was the cheapest flight available to Amsterdam over the Christmas holidays. But when he tried to make a reservation, the service mysteriously rejected his credit card. A good thing, as it turned out. Looking through a local newspaper, he found a $277 flight to nearby Brussels during the same time frame.
Nicole Carlson of San Jose also had a credit card authorization problem when booking a flight to Vancouver through the Internet Travel Network for a Christmas vacation. In Carlson’s case, however, the travel service never bothered to tell her of the problem.
By the time she found out, it was too late to get the special discount fare, and the Travel Network refused to take responsibility for the error. In the future, Carlson says, “I’ll use the online services to check fares, but I’ll make the reservations directly with the airline.”
Such customers are a major problem for travel sites, which must pay their computer reservation system providers 10 cents every time a customer looks up a fare, but which get no commission if the customer books directly with the airline.
Few doubt that the travel sites will improve their service over time. ITN is working on using artificial intelligence to help customers set up travel plans that involve complex routing. Expedia and Preview will send an e-mail message when flights to a customer’s favored destination come down in price.
As service for the online sites improves, they will begin offering more complex travel packages that compete more directly with travel agents.
Consider cruises. Rosenbluth Vacations, one of the larger providers of vacation travel, is boosting its online presence by giving online customers the 10% discount the company would normally get as a commission on the sale of cruises. Instead, it charges a graduated fee that amounts to $60, for example, for a cruise that costs $1,000 to $5,000.
With that kind of ability to discount prices, online services will eventually win over travel agencies hands down, says Bruce Yoxsimer, who co-founded ITN in 1985 after he saw little future for his Menlo Park-based travel agency.
“It’s not a question of if, but when.”
