Remember the dream about how the Internet will change the world for travelers?
It went something like this: In the near future, Internet-based travel agents would harness the awesome power of new information technologies to scour the wired universe for the travel products that match your precise needs--airline tickets, hotel rooms, rental cars and more--at the lowest possible price. You'd be liberated from the tyranny of predatory airline pricing, of any one travel agent's limitations or self-interests, even maybe of the "hold" recordings played on airline, hotel and others' 800 numbers. Want a week at a beachfront cottage on the southern coast of France, including round-trip air, a seaside cafe and a skilled masseuse? How much you want to spend? $900? Wait one second . . . page loading . . . Click here to reserve, brother!
Well, wake up and smell the airline breakfast entree. That dream will not become a reality any time soon.
At least that's what struck me after spending three days in Phoenix at PhoCusWright '98, the online travel industry's biggest annual honchopalooza, now in its third year. The chiefs of the major online travel agencies--Preview Travel, Internet Travel Network, Travelocity and Microsoft Expedia--along with about 500 leaders from airlines, lodging companies, niche competitors, business partners and technology suppliers, gathered to preen, perform and ponder their futures. The place was scary with brainpower: Stanford and Harvard MBAs, Silicon Valley CEOs and plenty of folks with expensive eyewear and corporate-logoed polo shirts. Like a lot of people in the travel business, they looked as if they could stand to get out a little more often. (Interest revealed: Your correspondent was a speaker at the conference.)
The reason the online dream is dead, I discovered, is that the airlines want it dead. If online travel agencies were to succeed at finding customers the tickets they want at the lowest prices, they would quickly dominate the retail travel business--and squeeze much of the profit out of the passenger airline industry. The airlines are not standing by and letting this happen.
While airline reps at PhoCus Wright denied trying to put online travel agencies out of business, their actions make it difficult to infer otherwise. In one of those episodes of brow-raising coincidence that give anti-trust lawyers reasons to keep on living, most major airlines recently decided to cap the commissions they pay online travel agencies at 5 percent, or $10 maximum per ticket. The online agencies say this is less than it costs them to sell the average ticket (reportedly around $21). And they also point out that this $10 cap is even less than the airlines pay "real" ("face-to-face") travel agents, who themselves are squealing that the airlines' 8 percent/$50 commission caps on most round-trip domestic tickets are killing them.
Meantime, we learned, many major airlines are doing plenty to encourage their best customers to book online--but at their own Web sites, not the online agencies'. United has announced a bonus of 20,000 frequent-flier miles (nearly enough for a round-trip ticket!) to customers who use its Web site to book 10 trips in the next year. Northwest is luring frequent fliers to its Web site by making frequent-flier award travel bookable online. Delta has floated the idea of Net-only discounts for certain trips booked exclusively at its Web site.
So: Airlines are offering incentives for customers to book directly on their Web sites. And they are lowering commissions they pay to independent online agencies. You don't need a Stanford MBA, or even a Silicon Valley polo shirt, to connect these dots. Airlines want to sell tickets online to their most lucrative customers themselves--not via independent agents who may steer their best customers to a better deal.
So where does this leave companies like Expedia, Travelocity, Preview Travel and Internet Travel Network? Scrambling to figure out new ways to make money. (They are also contemplating legal and legislative action against the airlines, but trust me, you don't want to know the details.)
Most have decided to sell travel products that have higher commissions, just as "face-to-face" agents have, including package vacations and cruises. In this model, being adopted most aggressively by Preview Travel and Expedia, online agencies will create tools that help people purchase these more "complex" products electronically. Many people at PhoCusWright seemed invested in the idea that people will buy a cruise to Bermuda or a seven-day, six-night Hawaii package online, but so far there are few numbers to support this hope. Preview is the first service to permit online booking of cruises, and others say they'll soon be there.
Expedia has redesigned its page to highlight "special offers from our suppliers"--deals the fine print identifies as "advertisements" for which Expedia takes no responsibility. For now, this seems strictly a forum for "distressed inventory"--stuff suppliers can't unload at retail prices. Debut offers included cabins on the Disney Magic cruise ship, which are some of the most visibly distressed, and widely discounted, merchandise in the travel market right now, and "family" trips to Acapulco, a destination about 40 years past its peak and a hard sell to U.S. vacationers any time of year.
Expedia has also decided to declare itself MSN Expedia, as part of an effort to attract customers of Microsoft's many Web-based commerce sites. The assumption is that people who use other MSN Web sites to conduct online tasks--say, purchase a car, manage their bank accounts or collect news--might easily be persuaded to book their vacations on the one-click-away, in-the-family MSN Expedia. Interesting idea. The problem is, like most institutions in Late Empire phase, Microsoft appears to have become utterly unaware of its imperial excesses and vanities. Rich Barton, general manager of Expedia, gave a boosty presentation in which he referred to the network of disparate Microsoft Web sites as "city-states" being connected by "arterial roads" and "highways to the capital city" under the MSN brand name--a breathtaking metaphor for territorial domination, especially for a company under investigation by the Justice Department for illegal ter- ritorial domination. To his great credit, Barton did not extend the city-state metaphor by referring to Web customers as "serfs."
According to new research cited at PhoCusWright, only 18 percent of wired travelers actually buy travel products online--they tend to look on line but book via 800 number or conventional agent, creating what's called a low "look-to-book" ratio. As Microsoft executives spun it, this is evidence that online agents influence a huge amount of travel--and another good reason for travel suppliers to advertise on Expedia. But the other online agencies seemed more determined to urge consumers to "cross the chasm" into online booking. Most are working to educate people about how little risk it is to send their credit card information over the Web. Travelocity and Expedia are making marquee space available on their home pages to attack this problem.
But they also have to smooth the process of booking. (Fun fact: A typical non-productive session on an online travel service--querying various fares but not purchasing any of them--costs the agency around $4 in fees it pays to the (airline-owned!) computerized reservation services. This more than anything explains why all the big online agencies are losing money, despite increasing revenues.) The most aggressive move toward easier booking is from Travelocity, which made the startling claim that its new purchasing system will place just three (3!) screens between a flight request and purchase confirmation. Like most electronic products that sound too good to be true, the new version was described as being "in final testing." Meantime, Travelocity has streamlined its entire site for easier navigation.
Preview Travel announced that it will, in an attempt to draw customers to its site from the scattered provinces of electroland, allow any Web site operator to post Preview's best-of-breed low-fare ticker (and its middling travel news wire service) for free. Preview also announced plans to encourage regular site users who don't book at the Preview site with unnamed incentives to make an initial online purchase. Internet Travel Network, meanwhile, announced several new partnerships to sell or lease its booking tools. United recently took a big (though not a majority) stake in ITN, making it the second online agency (along with Travelocity) to lie down formally with an airline.
If I were in a position to advise your basic PC-owning householder about what to expect from online booking sites in the future, I'd say to expect airline sites to offer harder-to-resist incentives to book there. I'd say to expect online agencies to push more packages and cruises, even as your priorities remain a cheap airline ticket and clean hotel room. I'd say to expect airlines or big travel agencies eventually to absorb the independent online agents.
But I'd tell folks to hold out some hope for, of all things, the upcoming recession. Nobody said any of this on the record or even onstage at PhoCusWright, but many talked about it in the sunny courtyards just outside the conference hall. The thinking goes like this: Right now, with the economy still running well and planes flying nearly full, airlines can afford to dictate the terms to its agents. But when a downturn comes, travel is one of the first industries to suffer. How will airlines fill all those empty seats, especially with recession-pinched consumers trying to save every dollar?
"Sometime next year," one hopeful entrepreneur told me with a knowing smile, "the airlines may decide that they really do need us after all."
© Copyright 1998 The Washington Post Company
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