Travel Sites Look to Offer More.......As Their Commissions Shrink
By LYNN COWAN
Dow Jones Newswires
With air fares rising and computer-savvy consumers surfing the Web, on-line travel sites seem like the best new business idea in cyberspace.
But virtual travel agencies aren't seeing the same returns as airlines because they are starting up amid a diminishing pool of commissions and stiff competition from the carriers' own Web sites. That's left the companies increasingly turning toward other income sources, such as advertising, cruises or car-rental commissions, in their quest for profitability.
"The dominoes started falling in July of 1996," said James Horntahl, founder and chairman of the Preview Travel on-line booking site, referring to a round of airline commission cuts that began two years ago. "It's not anyone's job to make us profitable, but this will hurt competition. It will make it prohibitive for new companies to enter the market."
Most on-line travel companies were built over the past four years around airline bookings that at one time provided commissions of 10% per ticket. In 1995, the commissions were capped at $50 for any type of travel agency, whether it was housed in a storefront or on a computer screen. In July 1996, on-line travel companies' commissions were cut by most airlines to 5%, followed by a cut to 8% for traditional storefront travel agents in September 1997. In the past few months, UAL Corp.'s United Airlines and AMR Corp.'s American Airlines instituted a cap of $10 per on-line transaction, a level that providers say barely covers the costs of issuing a ticket.
So far, none of the major travel sites is producing a profit, and earnings probably won't surface for 18 to 24 months at a minimum, said Mark Hardie, a senior analyst at Forrester Research's entertainment and technology group.
Virtual travel sites such as Mr. Horntahl's site, TheTrip.com, face growing competition from the airlines' Web pages. Airlines can dangle extra incentives unavailable to on-line agents, such as bonus frequent-flier miles for booking on their proprietary sites, or special deals on last-minute bookings for seats that will otherwise go unfilled.
Web sites in general average 5.2 sales per 100 hits, said Maria LaTour Kadison, a senior analyst for Forrester's on-line retail strategies group. By comparison, Continental Airlines Inc.'s look-to-book ratio is "much better," said the airline's staff vice president of sales and distribution planning, Steve Cossette. Although Mr. Cossette said the carrier will not disclose the actual ratio, it is selling $1 million in tickets each week through its Web site, or about 1% of its business. Delta Air Lines Inc. estimates that 2% of its tickets are booked on its site. And both airlines expect those percentages to rise by next year.
The growing appeal of airlines' proprietary sites is also reflected by studies of the market by Jupiter Communications. In 1996, the new-media research company found that 79% of the air tickets sold via the Internet went through an on-line travel agency site as a commissionable transaction. One year later, only 52% went through agency sites, said Nicole Vanderbilt, group director at Jupiter.
"I think it's happening for a couple of reasons," said Ms. Vanderbilt. "Consumers have a stronger brand loyalty to the airline companies than to on-line travel agencies. And there are frequent-flier incentives for doing it through the airline."
Airline ticketing accounted for the biggest slice of on-line travel sites' $911 million in revenue in 1997, according to Jupiter. Revenue is expected to jump to $11.7 billion by 2002, but the amount generated by airline commissions is seen slipping to 59% from 84% as sites turn to other income streams for growth, Jupiter projects. Other booking sources, such as hotel reservation and car-rental companies, should more than double by 2002 from 1997 levels, Jupiter forecasts.
Neither Continental nor Delta would say how much extra revenue it could pick up by filling last-minute seats or would quantify the savings generated by eliminating commission payments and hours reservation agents spend on the phone with customers. But commission costs are the third-largest expense for airlines, behind labor and fuel, so a minimum savings of $10 per ticket on increasing volumes of noncommissionable transactions is sure to benefit the carriers.
"It does represent a cost savings -- as volumes continue to grow, we will get some economy of scale," said Continental's Mr. Cossette. "We still are seeing some people who are booking on-line and calling to confirm the ticket. So we're still seeing some double-checking."
Because airlines remain a significant revenue source, Web-site owners aren't eager to do battle with the major carriers. A group of sites formed the Interactive Travel Services Association in early April to give the disparate Web industry a unified voice. One of the group's primary goals is education -- as in educating their suppliers and consumers about what they do and how labor-intensive it can be.
Most members say they understand that airlines need to save costs where they can, but they aren't happy about being on the losing end of the deal.
"We understand airlines are trying to control distribution costs," said Ken Swanton, vice chairman of Internet Travel Network. "But we're investing a lot in emerging technologies."
Josh Herst, group product manager at Expedia, Microsoft Corp.'s two-year-old travel Web site, said AMR knows how difficult it is for a Web site to make money on such low fees, because it's the majority owner of Travelocity.
"It's very puzzling: They know that's not an economically viable level, and we can actually lose money on that," Mr. Herst said. "Ten dollars does not recognize or compensate for the service that Expedia adds to the distribution channel. Expedia is not run by robots."
But Microsoft receives little sympathy within the on-line industry, which believes the Redmond, Wash., software giant generated the idea of commission cuts. On-line companies have accused Microsoft of agreeing to lower commissions in its quest to gain more business from some airlines, only to see the cuts race beyond its control and extend to most major carriers and every on-line provider.
Mr. Herst denied that Microsoft was the cause of on-line agencies' woes.
"No, we did not initiate the commission cuts," he said. "Airlines are the ones making their decisions on their pricing."
David Wallis, chief executive of Travel Guide Software in Baltimore, a software provider to the industry, said he had the impression that Microsoft viewed the cuts as inevitable and might have been surprised by how savvy airlines can be when it comes to trimming costs.
"I don't think they did anything that would not have occurred anyway," Mr. Wallis said. "It's possible they didn't realize coming into this industry what kind of impact [the cuts] would have."
Mr. Hardie, Forrester Research's entertainment and technology group senior analyst, shares Wallis' view.
"I'm not sure it's Microsoft's fault -- if not Microsoft, it would have been IBM or Netscape," Mr. Hardie said. "And it's not so much airlines being mean. Competition is fierce, and this is a new channel opening up."
Industry researchers are advising Web sites to stop focusing on the airline cuts and instead look for other ways to make money. Suggestions include increasing site traffic, adding business from cruise lines, hotel and rental-car companies, and generating more income from advertisers on their sites. Among the ideas that Forrester's Ms. Kadison recommends is convincing newcomers that their transactions are secure by selling them items that are smaller than, say, a $2,000 vacation package the first time around.
"If you're looking at a vacation package, that's so much money, and the risk of dissatisfaction is so great," Ms. Kadison said. "One way an on-line service can get you to test them out without committing your sanity is to offer low-cost things like travel guides. That's how customers start to buy on-line. They toe-dip. You want to give them easy ways to toe-dip."
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