Airline Cuts Off Commissions for Online Ticketing Agencies
Continental Airlines on Wednesday abruptly stopped paying commissions for tickets sold on the Internet, raising the specter that other major airlines will follow suit and hurt the future of online travel companies.
Continental’s move triggered a sell-off in shares of online travel firms. Stock in Travelocity.com Inc., the market leader, took the biggest hit, falling 30%.
The decision by Houston-based Continental, the nation’s fifth-largest carrier, was not completely unexpected. Northwest Airlines Corp. eliminated online commissions in March. But analysts were surprised by the timing of Continental’s action.
“Clearly, it’s a bold move ... considering the shaky state of the travel industry,” said Lorraine Sileo, an online travel industry researcher for PhoCusWright Inc., a consulting firm in Connecticut.
“You would think the airlines would want to work with as many distribution outlets as possible right now to fill seats, not take them away,” she said.
But Sileo did not view Continental’s action as a serious threat to online travel firms, saying she believed Web operators will strike deals with airlines that will enable them to do bookings and charge fees.
Even before last month’s terrorist attacks resulted in massive cutbacks in air travel, the nation’s airlines were trying to cut ticket distribution costs. The week before Sept. 11, all of the major carriers lowered travel agents’ commissions for the sixth time since 1995, to 5% or a maximum of $20 per ticket sold.
The latest decline in air travel has further forced airlines to slash costs, including reducing flights by roughly 20% and laying off huge numbers of employees.
The three largest airlines--Delta, United and American--declined to say Wednesday whether they would duplicate the moves by Northwest and Continental.
Clearly investors are concerned that will happen. Shares of online travel firms had been recovering in recent weeks as business began rebounding more quickly than expected.
But one analyst, Mark Rowen at Prudential Securities Inc. on Wednesday downgraded the stocks of Travelocity and Expedia Inc. after Continental’s announcement.
Shares of Travelocity, which is 70% owned by Sabre Holdings Corp., closed at $14.07, down $5.83. Expedia Inc., the No. 2 online travel firm, closed at $28.46, down $3.37, or 11%. Priceline.com Inc. closed at $3.97, down 2 cents. All the stocks trade on Nasdaq.
“The stocks are telling us there’s uncertainty there,” said Bailey Dalton, a senior travel research analyst with C.E. Unterberg Towbin in New York. “These companies are going to lose business.”
Others, however, said it’s equally likely that online agencies will respond by adding service fees to Continental airline tickets on the Internet, or negotiate special fees with Continental--presumably based on volume--without passing surcharges on to the consumer.
Michael Stacy, Travelocity’s senior vice president for consumer marketing, suggested as much in an interview Wednesday: “They are still on our site, but we don’t work for free.”
With Northwest, Travelocity tacked on a widely advertised $10 fee to all Northwest tickets bought from its Web site. Commissions on Internet sales are typically $10 per ticket.
Expedia also renegotiated its contract with Northwest.
Internet travel agents also may begin purchasing more discounted tickets directly from the airlines and sell them for profit on their own.
PhoCusWright’s research shows that 55% of all online ticket purchases are made through airline carriers’ own Web sites; the rest are sold by online agencies.
“The airlines want to divert the traffic that’s already online to their own Web sites,” Sileo said. “Continental has always been more outspoken about this goal than other airlines.”
For now, online agencies aren’t saying how they’ll respond to the latest cut in commissions. Officials at Expedia, Priceline and Orbitz, a fast-growing new player in the industry, all declined to comment Wednesday.
